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Tuesday, 2 April 2013

Why is Foreign Aid Often a Waste of Money?


Why are so many people against Western aid being sent to Third World or to African countries? Is it because they are “mean-spirited” or “don’t like black and brown people”, as the pious liberal-left would have it?

No. It may be because people don’t like tax-payers’ money going into the bank accounts of the rich elites of Third World countries.  They don’t like corrupt regimes spending this money on palaces and race courses for the rich. They don’t like it going on ‘development projects’ that are more to do with Western developers getting some of the cash and the rulers indulging in projects that have no practical value (other than to spend it on themselves or to big-up their egos).

And why should we aid countries run by juntas, dictatorships and whatnot? When there are no democratic pressures on such people, then the economic benefits from these developments projects are rarely going to amount to much anyway.

This isn’t just the view of “free market fundamentalists” or people who are "tightfisted about aid". The peoples of these poor countries often agree with these analyses of the situation in their countries. For example, this is what one Cameroonian citizen had to say on the issue:

“The government tells us there is no money. But there is plenty of money coming from the World Bank and from France and Britain and America – but they put it in their pockets. They do not spend it on the roads.” (Quoted in Tim Harford’s The Undercover Economist.)

Of course there is corruption and self-serving people in the UK and in all other capitalist countries too. However, in a democracy there is a whole stack of things which will put a stop to the kinds of thing which happen all the time in aided countries. We have laws and regulations. Corruption and waste are discussed in the Commons and in the newspapers. Not everything is solved or rectified, of course, but at least there are systems in place to keep a fairly tight lid on things. Not so in most aid-countries.

The Aid Industry & Where the Money is Spent

The biggest industries in the third-world are often aid industries. The biggest capitalists are aid capitalists. Aid, and development projects, etc. are thriving businesses but often the only people who benefit are Western aid-capitalists and third-world elites – who may well sometimes conspire together. The Western aid-capitalists aggrandise their pious egos and the elites line their pockets (as the aid-capitalist often do as well).

For example, donor agencies - both tied to the aiding country and to the aided country – often actually require expensive aid-projects because the money they are given quite simply has to be spent. If it’s not spent that wouldn’t look too good. In fact if they didn’t spend all of the aid-money, they probably wouldn’t get any more. Thus they spend all of it as a matter of necessity. This results in that money being spent on useless projects or projects which are simply too costly for what they actually offer.

What is the lot of many countries that receive aid? Often the government steals the aid for itself – that’s after stealing money from its own people in the form of high taxes or even in more direct ways. Why aid a regime which rules over extreme waste and regulations that are not there to help the workers but are there as a way of rationalising various systems of bribes? (‘You don’t need to follow this rule if you pay me 100 pounds per month.’)

In a corrupt and/or repressive regime, no one really monitors the aid-money which is spent. The bigwigs and their friends both spend the money and benefit from the spending. If money is spent on education, for instance, staff are not recruited or paid on their merit, but on the rulers’ friends and relations. It follows, then, that if no one keeps an eye on the ruling class and the friends-who-spend, then there will be massive waste and much money will also be spent on various white elephants (i.e., Third World versions of Victorian follies).

If we forget about the self-serving nature of the aid industry on our side, it can also be the case that Western development projects are commissioned by people with no genuine interest in them. What they are interested in are the bribes and the career advancements which can often be the result of such projects.

Why aid Ethiopia, for example, when a businessman in that country could only start a business there after paying four years’ worth of his salary in order to get an official notice in the government’s various newspapers? That has now changed. When such corruption was partly rectified, by the evil World Bank, business registrations rocketed by around 50% straight away. Now they may be ready for aid.

Why the Aid in the First Place?

Take a hypothetical case of a businessman attempting to start a business in some poor African country.

This small businessman is considering an investment of $1000 in his new business. He’s expecting to make $100 a year on this investment. However, the leader of his country will take half of that $100 in tax, which will result in only a 5% profit on his initial $1000.

Take the actual case of Cameroon.

In 2009 the World Bank made some inquiries into the situation for prospective small businesses in Cameroon.

It discovered that in order to set up a small business, an entrepreneur must spend six months’ wages on “official fees” in order to do so. On top of that was the problem of getting the Cameroon courts to make people pay their so-far unpaid invoices – something that can take more than two years. However, the business has to pay the courts to render this service and that will cost him half the invoices’ value. On top of all that are the additional 43 separate legal and technical procedures; as well as the standard – in Cameroon – bribes.

All this red tape will discourage all new businessmen in the Cameroon and elsewhere. And the slow court procedures, when existent at all, will dissuade many people from investing and building because they know they won’t be protected very well – if at all – by the courts.

And precisely because of all this red tape, the waste, the regulations and the slow court procedures, bribes are often the only solution to get things moving in the small business worlds of the Cameroon and beyond.

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