by Jason Hickel
Structural adjustment – a form of free-market shock therapy – was sold as a necessary precondition for successful development in the global South. But it ended up doing exactly the opposite. Economies shrank, incomes collapsed, millions of people were dispossessed and poverty rates shot through the roof. Global South countries lost an average of $480 billion per year in potential GDP during the structural adjustment period. It is now widely acknowledged by scholars that structural adjustment was one of the greatest single causes of poverty in the global South, after colonialism. But it proved to be enormously beneficial to the economies of the North.
As structural adjustment forced open markets around the world, a new system emerged in the mid-1990s to govern the international economy. Under this new system – run by the World Trade Organization – power would be determined by market size, so the rich countries of the North would be able to enshrine policies to suit their own interests even if it meant actively harming the interests of the South. For instance, global South countries would have to abolish their agricultural subsidies, but the United States and the European Union would be allowed to continue paying subsidies to their own farmers, enabling them to undercut the market share of global South producers in the one sector in which they are supposed to have a natural competitive advantage. Today, power imbalances like these, enshrined in the Uruguay Round of the WTO, are estimated to cost poor countries at least $700 billion each year in lost export revenues.
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If we bring history back into the analysis, the story of global in-equality begins to take on a far more complex and even sinister hue. The whole idea that rich countries are the saviours of poor countries begins to seem more than a bit naive. The problem is not that poor countries are having difficulty hoisting themselves up the development ladder; the problem is that they are being actively prevented from doing so. The development industry likes to refer to poor countries by the passive adjective ‘underdeveloped’. But perhaps it would be more accurate to make the term a transitive verb, ‘under-developed’: to have had one’s development intentionally obstructed, undone or reversed by an external power. After all, as we will see, poverty doesn’t just exist. It is created.
Aid in Reverse
When I teach this history in the classroom, I find that it quite often makes some students feel uncomfortable. Yes, they reply, terrible things happened in the past, but we live in a fairer, more compassionate world. And for evidence they invariably invoke the aid budget, pointing out that rich countries give poor countries about $128 billion in aid each year.
It is a powerful idea. Together with grand claims about global poverty reduction and the assumption of methodological nationalism, the growing size of the aid budget sits right at the centre of the official development story. The idea of aid has been with us since at least Truman, but its continuing power in our world today is largely down to the efforts of one man: the American economist Jeffrey Sachs, former director of the Millennium Development Goals and special adviser to UN Secretary General Ban Ki-moon. Sachs, affable and good-looking – a refreshing departure from the stereotypical technocrat – has become the aid evangelist of our age and a kind of rock star in the process, bagging two appearances on Time’s list of the world’s 100 most influential people. His bestselling 2005 book, The End of Poverty, made a simple and compelling argument. Nobody is to blame for the continuing poverty of poor countries, he said. It’s just down to natural accidents of geography and climate and these can easily be overcome. If rich countries would just increase their foreign aid contributions to 0.7 per cent of GDP, we would be able to eradicate global poverty in only twenty years. All poor countries need is enough to pay for essential agricultural technologies, basic healthcare, clean water, primary education and electricity, and they’ll be on their way up the ladder of development.
What matters here is not the content of the proposal (with which few would disagree), but the story that it implies. Not only are rich countries not responsible for causing underdevelopment in poor countries, as Rostow once insisted; they are in fact reaching out across the divide with loving concern. Sachs’ ideas gave life to the aid narrative for a new generation and were celebrated by the governments of most of the world’s rich countries; indeed, many increased their foreign aid disbursements accordingly. The aid narrative was useful because it overrode any suggestion that Western powers were in any way responsible for causing the suffering of the South. The US and Britain had just invaded Iraq, at least in part in order to secure access to the region’s vast oil reserves, and the Bush administration had just helped topple the progressive government of Jean-Bertrand Aristide in Haiti and tacitly supported a coup attempt against Venezuela’s Hugo Chávez, continuing the long history of aggressive intervention that Eisenhower had set in motion in the 1950s. But the flow of aid would stand nonetheless as irrefutable proof of Western benevolence. It was a matter of perception management.
If we look more closely, however, even this dimension of the development story crumbles into incoherence. It’s not that the $128 billion in aid disbursements doesn’t exist – it does. But if we broaden our view and look at it in context, we see that it is vastly outstripped by the financial resources that flow in the opposite direction. By comparison, the aid budget turns out to be a mere trickle.
At the end of 2016, the US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics published some truly paradigm-shifting data. They tallied up all of the financial resources that get transferred between rich and poor countries each year: not just aid, foreign investment and trade flows, as previous studies have done, but also other transfers like debt cancellation and remittances and capital flight. It is the most comprehensive assessment of resource transfers that has ever been made. They found that in 2012, the last year of recorded data, developing countries received a little over $2 trillion, including all aid, investment and income from abroad. But more than twice that amount, some $5 trillion, flowed out of them in the same year. In other words, developing countries ‘sent’ $3 trillion more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $26.5 trillion – that’s how much money has been drained out of the global South over the past few decades. To get a sense of the scale of this, $26.5 trillion is roughly the GDP of the United States and Western Europe combined.
What do these large outflows consist of? Well, some of it is payments on debt. Today, poor countries pay over $200 billion each year in interest alone to foreign creditors, much of it on old loans that have already been paid off many times over, and some of it on loans accumulated by greedy dictators. Since 1980, developing countries have forked over $4.2 trillion in interest payments – much more than they have received in aid during the same period. And most of these payments have gone to Western creditors – a direct cash transfer to big banks in New York and London.
Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate. Think of all the profits that Shell extracts from Nigeria’s oil reserves, for example, or that Anglo American pulls out of South Africa’s gold mines. Foreign investors take nearly $500 billion in profits out of developing countries each year, most of which goes back to rich countries. Then there are the profits that ordinary Europeans and Americans earn on their investments in stocks and bonds they hold in the global South, through their pension funds, for example. And there are many smaller outflows as well, such as the extra $60 billion per year that developing countries have to pay to foreign patent owners under the WTO’s agreement on intellectual property rights (TRIPS) in order to access technologies and pharmaceuticals that are often essential to development and public health.
But by far the biggest chunk of outflows has to do with capital flight. GFI calculates that developing countries have lost a total of $23.6 trillion through capital flight since 1980. A big proportion of this takes p
lace through ‘leakages’ in the balance of payments between countries, through which developing countries lose around $973 billion each year. Another takes place through an illegal practice known as ‘trade misinvoicing’. Basically, corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions. Developing countries lose $875 billion through trade misinvoicing each year. A similarly large amount flows out annually through ‘abusive transfer pricing’, a mechanism that multinational companies use to steal money from developing countries by shifting profits illegally between their own subsidiaries in different countries. Usually the goal of these practices is to evade taxes, but sometimes they are used to launder money or circumvent capital controls.
Three trillion dollars in total net outflows per year is twenty-four times more than the annual aid budget. In other words, for every dollar of aid that developing countries receive, they lose $24 in net outflows. Of course, this is an aggregate figure; for some countries the ratio is larger, while for others it is smaller. But in all cases net outflows strip developing countries of an important source of revenue and finance that could be used for development. The GFI report finds that increasingly large net outflows (since 2009 they have been growing at a rate of 20 per cent per year) have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.
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What this means is that poor countries are net creditors to rich countries – exactly the opposite of what we would usually assume. But when we consider the aid budget in its broader context, we should look not only at outward flows but also at the losses and costs that developing countries have suffered as a result of policies devised by rich countries. For instance, when structural adjustment was imposed on the global South during the 1980s and 1990s, they lost around $480 billion each year in potential GDP. That’s nearly four times the size of today’s annual aid budget. More recently, imbalances in the World Trade Organization have caused losses of $700 billion per year in potential export revenues, outstripping the aid budget by a factor of six.
Comparing aid to various outflows (dark grey) and structural costs/losses (light grey).
But perhaps the most significant loss has to do with exploitation through trade. From the onset of colonialism through to globalisation, the main objective of the North has been to force down the cost of labour and goods bought from the South. In the past, colonial powers were able to dictate terms directly to their colonies. Today, while trade is technically ‘free’, rich countries are able to get their way because they have much greater bargaining power. On top of this, trade agreements often prevent poor countries from protecting their workers in ways that rich countries do. And because multinational corporations now have the ability to scour the planet in search of the cheapest labour and goods, poor countries are forced to compete to drive costs down. As a result of all this, there is a yawning gap between the ‘real value’ of the labour and goods that poor countries sell and the prices they are actually paid for them. This is what economists call ‘unequal exchange’. In the mid-1990s, at the height of the structural adjustment era, the South was losing as much as $2.66 trillion in unequal exchange each year (in 2015 dollars) – a hidden transfer of value that amounts to twenty-one times the size of today’s aid budget and dwarfs the flow of foreign direct investment.
There are many other structural losses and costs that we could take into account. For example, ActionAid reports that multinational corporations extract about $138 billion from developing countries each year in the form of tax holidays. This figure alone outstrips the global aid budget. Remittances sent home by immigrant workers are slashed by exorbitant transaction fees, costing families $33 billion each year. Global South economies lose about $27 billion in GDP each year because aid disbursements are so volatile, making it very difficult for them to plan investment and manage their budgets. Then there are forms of extraction that are more difficult to quantify, such as the 162 million acres of land (more than five times the size of England) that has been grabbed in global South countries since 2000. And then, of course, there are the damages that developing countries suffer due to climate change – caused almost entirely by rich countries – which are currently estimated to cost $571 billion per year.
The point here is simple: the aid budget is diminutive, almost ridiculously so, when compared to the structural losses and outward flows that the global South suffers. Yes, some aid goes a long way towards making people’s lives better, but it doesn’t come close to compensating for the damage that the givers of aid themselves inflict. Indeed, some of this damage is caused by the very groups that run the aid agenda: the World Bank, for example, which profits from global South debt; the Gates Foundation, which profits from an intellectual-property regime that locks life-saving medicines and essential technologies behind outlandish patent paywalls; and Bono, who profits from the tax haven system that siphons revenues out of global South countries.
This is not an argument against aid as such. Rather, it is to say that the discourse of aid distracts us from seeing the broader picture. It hides the patterns of extraction that are actively causing the impoverishment of the global South today and actively impeding meaningful development. The charity paradigm obscures the real issues at stake: it makes it seem as though the West is ‘developing’ the global South, when in reality the opposite is true. Rich countries aren’t developing poor countries; poor countries are effectively developing rich countries – and they have been since the late 15th century. So it’s not only that the aid narrative misunderstands what really causes poverty, it’s that it actually gets it backwards. Just as in Truman’s time, aid serves as a kind of propaganda that makes the takers seem like givers, and conceals how the global economy actually works.
Perhaps Frantz Fanon, the famous philosopher from Martinique and leading thinker of Algeria’s anti-colonial struggle, put it best:
Colonialism and imperialism have not settled their debt to us once they have withdrawn from our territories. The wealth of the imperialist nations is also our wealth. Europe is literally the creation of the Third World. The riches which are choking it are those plundered from the underdeveloped peoples. So we will not accept aid for the underdeveloped countries as ‘charity’. Such aid must be considered the final stage of a dual consciousness – the consciousness of the colonised that it is their due, and the consciousness of the capitalist powers that effectively they must pay up.
Frantz Fanon recognised that poverty in the global South is not a natural condition any more than is the wealth of the West. Poverty is, at base, the inevitable outcome of ongoing processes of plunder – processes that benefit a relatively small group of people at the expense of the vast majority of humanity. It is delusional to believe that aid is a commensurate, let alone honest and meaningful, solution to this kind of problem. The aid paradigm allows rich countries and individuals to pretend to fix with one hand what they destroy with the other, dispensing small bandages at the same time as they inflict deep injuries, and claiming the moral high ground for doing so.
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A few years ago I had the opportunity to visit the West Bank in Palestine. On one particularly hot afternoon, my hosts drove me down into the Jordan Valley to interview some farmers there about water issues. Along the way, bumping along a gravel track, we came across a huge white sign jutting out of the desert rocks. The sign announced a USAID initiative ‘to help alleviate recurring water shortages’ by adding a new well in the area. It was branded with the American flag and bore the proud words: ‘This project is a gift from the American People to the Palestinian People.’
A casual observer might be impressed: American taxpayer money offered generously, in the spirit of humanitarianism, to assist impoverished Palestinians struggling to survive in the desert. But Palestine doesn’t have a shortage of water. When Israel invaded and occupied the We
st Bank in 1967, with the backing of the US military, it asserted total control over the aquifers beneath the territory. Israel draws the majority of this water – close to 90 per cent – for its own use in settlements and for irrigation on large industrial farms. And as the water table drops, Palestinian wells are running dry. Palestinians are not allowed to deepen their wells or sink new ones without Israeli permission – and permission is almost never granted. If they build without permission, as many do, Israeli bulldozers arrive the next day. So Palestinians are forced to buy their own water back from Israel at arbitrarily high prices.
This is not a secret. It is happening out in the open, and the farmers I spoke to know it all too well. For them, the USAID sign only adds insult to injury. It’s not that they lack water, as USAID implies; it’s that the water has been stolen from them. And it has been stolen with US support. In 2012, just two months before my visit, the United Nations General Assembly adopted resolution 66/225, calling for the restoration of Palestinians’ rights to their own water. One hundred and sixty-seven nations voted in favour of the resolution. The United States and Israel voted against it.
I tell this anecdote not just as an example of how aid often misses the point, but to illustrate a much larger truth. Poor countries don’t need our aid; they need us to stop impoverishing them. Until we target the structural drivers of global poverty – the underlying architecture of wealth extraction and accumulation – development efforts will continue to fail, decade after decade. We will continue to watch the poverty numbers rise, and the divide between rich and poor countries will continue to grow. This is a difficult truth to swallow for the millions of well-meaning people who have been sold on the development story. It can be scary to grapple with the collapse of a core myth. At least it was for me. But it also opens up a world of exciting new possibilities, and clears the way to a different kind of future.