Andrew M Mwenda: aid creates the wrong incentives for progress
Leading Ugandan commentator Andrew M Mwenda says there is little evidence to show that foreign aid provides impetus for economic growth in African countries
* Andrew M Mwenda
* guardian.co.uk,
* Thursday July 24 2008 16:41 BST
* Article history
The recent G8 Summit in Japan upheld earlier calls for doubling foreign financial aid to Africa as a solution to poverty on the continent. These calls are grossly flawed. Countries that have succeeded in getting the vast majority of their citizens out of poverty have done so by sustaining economic growth over many decades. The challenge for Africa, therefore, is how to generate sustained economic growth over generations. There is little evidence to show that foreign aid provides impetus for economic growth.
Over the last 40 years, Africa has received over $600 billion in foreign aid and debt relief. For most of this period, the continent sustained zero to negative growth; positive growth was only occasional and sporadic, depending on international commodity price fluctuations. Why has aid been antithetical to growth?
There are many reasons, including mismanagement and misallocation of aid resources, slow disbursement of aid monies and corruption. But the fundamental reason is that aid creates the wrong incentives for growth.
Governments matter for growth. They decide fiscal and monetary policies such as taxation and interest rates. They invest in public infrastructure that facilitates trade and commerce. They also build political institutions that mediate the relationship between public policies and private economic agents.
Growth is good for governments because it increases tax revenue. Revenue is an important political resource governments use to hold and retain political power. Ruling elites in Africa, for example, cultivate their 'political support networks' by bribing influential elites with jobs in the state and sometimes by building roads, schools and hospitals.
If the source of this revenue is the national economy, government would be driven by self-interest to listen to its citizens about policies and it would be necessary to increase the productivity of private enterprises. If this happened, government would be granting a voice in policy-making and policy orientation to those whose wealth it desires to tax – government would be democratic.
Good governance is therefore not a product of altruism but of enlightened self-interest. Foreign aid distorts the evolution of such a relationship. Rather than forge a productive relationship with their own citizens, governments find it more profitable to negotiate for revenues from abroad. This way, aid 'disarticulates' the state from the citizen.
For many years, governments in Africa sustained policies and institutional practices that hindered market exchange and private entrepreneurial initiative. This stifled growth, but it also undermined their ability to generate resources to pay for their political survival. Unable to raise money to pay the army and police to keep law and order and to buy off influential elites, many governments in Africa would have stared the spectre of regime collapse in the eye.
However, it is always foreign aid that has saved such incompetent governments from collapse. By providing them an external subsidy, governments in Africa have been able to retain power even when pursuing policies that impoverish their citizens.
Cut the aid, and many of them will be forced to pursue economic growth or pay the political price of their economic folly. Lähde
