The Shackled Continent

by Robert Guest

  Aid is supposed to help the poorest but often doesn’t. The adage that foreign aid is a transfer of wealth from the poor in rich countries to the rich in poor countries is often true. A typical poor African country receives aid equivalent to about 10 percent of GDP, but the poorest fifth of the population disposes of only 4 percent of GDP.20 In other words, a lot of the aid is paying for conferences at five-star hotels, study trips for MPs to Washington, and Toyota Landcruisers to ferry aid workers around.

  For the foolish – advice

  Can aid persuade bad governments to shape up? Probably not.

  In the 1960s and 70s, many donors believed that statist policies, of the sort practiced in Zambia, were the quickest way to develop. So several African countries were actually paid to adopt policies that impoverished them. From the early 1980s, the failure of these policies was hard to ignore. So the IMF and World Bank started to make assistance conditional on more laissez-faire policies – “structural adjustment,” in the jargon.

  This has not been terribly successful either. African leaders, on the whole, distrust the IMF and the World Bank – understandably, given these institutions’ policy flip-flops. More important, few African leaders like markets or the idea of spending within their means, and donors have discovered that it is virtually impossible to force governments to implement policies they do not like. They often agree to cut subsidies, tackle corruption, or whatever in return for loans. But as soon as they have cashed the aid check, they tend to backtrack.

  The Kaunda government in Zambia, for example, had to beg the IMF to bail it out in 1985 and again in 1989. Both times, large amounts of cash were exchanged for promises to keep spending under control and to liberalize the economy.21 Both times, the government broke its promises. This should not have come as a surprise. Neither Kaunda nor many of his officials wanted to reform. They passionately believed that the state should direct the economy and expected the copper price eventually to recover and plug the hole in the budget. It didn’t.

  In the 1990s, donors sent mixed messages to Zambia. Bilateral donors such as Britain and the Nordic countries made much of their aid conditional on the Chiluba government behaving democratically. The World Bank and the IMF emphasized instead the need to stick with free-market reforms. Bilateral donors cut aid when, for example, Chiluba had the constitution changed to bar his only serious opponent – Kaunda – from contesting the 1996 presidential election. The Bretton Woods institutions only protested when, for example, the privatization of the copper mines was delayed once too often.

  Neither type of threat did much good. In economic matters, attaching conditions to loans made the Zambian government what one writer called a “receiver of policy, rather than an initiator.”22 Ministries devoted their efforts simply to meeting the letter of donor conditions rather than energetically pursuing the spirit of free-market reforms. They also fiddled the numbers to make it look as if they were keeping promises when they weren’t.

  Similar stories can be told of other countries. Daniel arap Moi, who ruled Kenya for nearly a quarter of a century, used to promise one thing to donors and the opposite to domestic interest groups. Even when recipients blatantly flout aid conditions, donors often hand over the money anyway, fearing that to refuse might spark an economic collapse.

  According to the World Bank, “reforms rarely succeed unless the government is genuinely convinced that the reforms have to be implemented and considers the reform programme its own.”23 Richard Dowden, my former colleague at the Economist, expressed it more trenchantly: “If you give money to a recalcitrant junkie, he will waste it.”24

  As a rule, elected governments are more likely to implement reforms than unelected ones, as voters who keep on getting poorer will protest at the polls. And new regimes are more likely to reform than old ones: governments, like people, get set in their ways.25

  For countries with foolish governments, large-scale monetary aid is wasted, so the best approach is to offer ideas instead. The architects of successful reforms in Indonesia in the 1970s, and in several Latin American countries in the 1980s and 90s, were largely educated abroad, often at donor expense. The crash course in market economics given to senior African National Congress members shortly before the ANC won power in South Africa in 1994 was crucial in helping the new government to understand the importance of financial stability.

  In the meantime, perhaps the only valid reason for attaching detailed conditions to aid is to provide a scapegoat for governments that are trying to push through wise but unpopular reforms. If a minister who wants to privatize a loss-making airline can say that an IMF loan will not materialize unless he does so, it may be harder for unions to block the deal.

  For the virtuous – cash

  Donors usually like their money to be used for worthy things such as agriculture, education, and health. A high proportion of aid is disbursed for specific projects, such as irrigation or building schools. Since the schools are usually built and the ditches dug, donors are usually satisfied that their money has served the purpose for which it was intended. But often it has not.

  Most of the available evidence suggests that aid money is fungible – it goes into the pot of public funds and is spent on whatever the recipient government wants to spend it on. If donors earmark money for education, it may cause the government to spend more on education, or it may free up the money that the government would otherwise have spent on education to be spent on something else. If the government is benevolent, this may mean agriculture or tax cuts. If it is not, this could mean limousines for ministers and batons for cracking demonstrators’ heads.

  The important factor is not the donor’s instructions but the recipient government’s priorities. A study carried out a decade ago in Indonesia found that for every extra aid dollar earmarked for agriculture, public spending on agriculture increased by ninety-two cents.26 By contrast, a fourteen-country study published in 1998 showed that each extra aid dollar aimed at agriculture actually decreased total agricultural spending by five cents.27 So the uncomfortable answer to the question “What is all our aid money being spent on?” is “Who knows?”

  Many donors, if they put money into a road-building program that shows a return on investment of 100 percent, imagine that the return on their aid is 100 percent. But it may be that the government would have paid for the roads anyway, and the actual effect of the aid is to free up funds for a marginal project that would otherwise not have been carried out. The return on this project could be much lower. It could even be zero.

  This does not mean that donors should never finance specific projects. Sometimes the real value of a donor-funded dam or telephone network lies in the technology that is transferred and the advice given on how to operate and maintain the completed infrastructure.

  But the fact of fungibility suggests that the aid-giving process could be greatly simplified if most donations took the form of untied, unconditional “balance of payments support.” In other words, cash. Such support should go only to competent governments, and priority should be given to countries with lots of poor citizens.

  There are not many such countries. India and Vietnam probably qualify, as do Mozambique, Tanzania, and Uganda, although corruption is a problem in all five.

  Rich countries currently devote a miserable amount to aid. They may dig into their pockets to help tackle sudden, telegenic emergencies, such as floods in Mozambique or famines in Ethiopia (which is as it should be). But they have grown weary of funding the long slow struggle to help the bulk of the poor – the 2 billion or so who are not currently clinging to trees above raging floodwaters – grow a bit richer. Development aid to Africa withered in the 1990s, from $19 billion in 1990 to $14 billion in 1999, probably because rich-country taxpayers are fed up with bankrolling failure.28 If aid could be made to work, however, people in rich countries would surely be more generous. The necessary sums are, by rich-country standards, not very big.

  Donors should be both more generous and more select
ive. Countries that are genuinely trying to implement sensible policies should be given more money. Countries that are not should be offered advice but no money. Donors should be ready to help new governments if they seem earnest about reform.

  At the same time, however, donors should probably devote a smaller proportion of their aid budgets to helping individual countries and more to fostering the kind of technology that benefits poor people everywhere, such as vaccines. This approach has recently become more popular. Large though not yet adequate sums have been pledged to the UN-backed Global Fund to Fight AIDS, Tuberculosis, and Malaria, and charitable individuals, most notably Bill Gates, have supported some hopeful research into vaccines for diseases that afflict the poor.

  Most important, rich countries should open their markets to goods from poor countries. Trade has far more potential to reduce poverty than aid.

  The right to trade

  In the energy-sapping heat of Uganda, I watched women bent double to tend rows of flowers destined for export. They toiled and sweated long hours for a pittance so that pampered Westerners could buy roses all year round. Bono, the Irish rock star and conspicuous campaigner for worthy causes, was also watching. One might have expected him to protest at this scene of back-breaking drudgery. Instead, he said it represented “globalization at its best.”29

  He was right, of course. Growing flowers is hard work, but no more so than subsistence farming, which was the alternative; and it pays better. Everyone benefits: Europeans get roses in winter, and Ugandan rose-growers earn enough to put their children through school.

  This is the sort of thing that advocates of heartless global capitalism, such as the Economist, have been banging on about since the 1840s, but it is rare to hear a rock star make the same point, which is why I was following Bono around Uganda. I don’t normally chase celebrities, and my employer doesn’t normally publish interviews with them, but in Bono’s case we made an exception.30 The shades-wrapped rock star had ventured onto our turf, and we were actually quite glad to see him.

  It was in 2002, when a number of charities had started to notice that north–south trade is not always exploitative. Oxfam had just released a fat report on trade, which denounced rich countries’ tariff barriers against imports from poor countries and their subsidies for farmers. Christian Aid had also condemned northern protectionism. Few charities were yet calling for poor countries to reduce their own tariffs and subsidies, but it struck me as a good start that some realized that, as Bono put it, Africans “don’t want to spend the rest of their lives on the nipple of aid.”

  Bono was on a tour of Africa with, of all people, America’s treasury secretary, Paul O’Neill. It was an odd spectacle. O’Neill was a hard-boiled company-boss-turned-politician, who wore a dark suit and kept doing sums out loud and in public. Bono, by contrast, was a bit hazy with numbers and apt to say lyrical things in his soft Irish brogue that sounded beautiful but, on closer examination, meant nothing. “People say that politics is the art of the possible,” he lilted, “but I think it should be the art of the impossible.”

  I’m not going to mock the rocker. He’s a fabulously wealthy musical genius, and I’m not. More important, regardless of whether he understands the issues in much detail, he is uniquely able to publicize them. His ability to occupy magazine covers and television screens helped make the “Jubilee 2000” campaign for debt relief for poor countries such a success. And now he was fronting for a group of charities arguing that trade was at least as important as aid and that rich countries should tear down their trade barriers. That had to be a good thing.

  Africa has lots of fertile land and cheap labor, so it is ideally placed to grow food and sell it to rich countries. Cheap labor should also make Africa a good place to make simple manufactured goods, such as textiles. Unfortunately, rich countries have erected towering trade barriers to keep precisely these products out.

  Farmers in rich countries are especially well protected. In Western Europe, Japan, and (to a lesser extent) America, land and labor are expensive. Most things that French or Japanese farmers grow can be grown more cheaply in poor countries. Given the choice, thrifty Western consumers would probably buy a lot of groceries imported from the Third World. Western farmers know this and fear that it would put them out of business. So they lobby their governments for protection, which the governments seem happy to provide.

  Rich countries impose hefty tariffs on imported crops; these tariffs are high enough to keep all but a few bags of foreign grain from being sold in supermarkets in Seoul or Tokyo. As if this were not favor enough, farmers in rich countries also receive all manner of subsidies. Sometimes they are paid to grow stuff. Other times they are paid to stop growing stuff that they have grown too much of because they were paid to grow it. Because prices fluctuate, governments sometimes guarantee a floor beneath which prices will not be allowed to fall. When prices fall below this floor, the government buys up all the surplus milk or wheat or whatever, which brings prices back up again.

  Farm subsidies in rich countries are running at about a billion dollars a day. This is roughly equivalent to the entire GDP of sub-Saharan Africa. African farmers simply cannot compete. A huge potential source of profit is closed to them. What’s more, subsidies make farmers in rich countries produce more than rich-country consumers can eat. This surplus is often dumped on African markets, which lowers the prices that African farmers can get at home.

  When rich countries cut subsidies or tariffs, farmers in poor countries swiftly benefit. Those Ugandan flower-growers used to have to compete with heavily subsidized Dutch flower-growers whose prices they could only beat during the European winter. But as those subsidies were pruned, the Ugandans started to harvest all year round, and their country’s flower exports blossomed from approximately nothing in the mid-1990s to $16 million in 2001.

  Even so, compared with what Uganda could make selling peanuts to America if only they did not face tariffs of up to 164 percent, this is, well, peanuts. Ugandans who want to sell rice to Japan are hobbled because 93 percent of the market is reserved for Japanese growers. If they want to sell sugar to Europe, they must hack their way through a jungle of rules so thick that even experts cannot get through it. This is not an exaggeration. I called up Wyn Grant, an expert on European Union agricultural policy, and asked him to explain the sugar regime to me. He admitted that he couldn’t, not without referring to some heavy reference books. God knows how African sugar farmers cope. Even if they were to master the rules, they still face tariffs of up to 140 percent.

  In all, rich country protectionism costs poor countries $100 billion a year, or twice what they receive in aid. At any rate, that’s the suspiciously round number that Oxfam’s policy analysts calculate the damage to be, and I can’t find a better one. What Oxfam, Bono, and other charitable types fail to notice, however, is that northern protectionism hurts the north, too.

  Northern taxpayers lose out to the tune of those aforementioned billion dollars a day. Those northerners who eat food lose out, because they have to pay more for everything from bread to oranges. Among rich countries only New Zealand has taken the plunge and slashed agricultural tariffs and subsidies. As a result, New Zealanders pay half as much for the same basket of groceries as Western Europeans do. Bigger grocery bills particularly hurt the poor in rich countries because they spend a large chunk of their disposable incomes on food. Lawyers and lobbyists may not bother to read the price tags in the grocery store, but the jobless do.

  The only people who win are the farmers who receive the subsidies. In Europe and America the biggest subsidies go to the biggest farmers, so a lot of the people being helped are rich. The average American farm reports a net worth of $564,000, twice the average household’s. The needy recipients of farm subsidies include Ted Turner, the media baron, Scottie Pippen, the basketball star, and twelve of America’s 500 largest companies.31

  For smaller farmers, subsidies can make the difference between staying afloat and going bust. But
is that as kind as it sounds? The torrent of handouts does not seem to have made them happy: British farmers are 50 percent more likely to kill themselves than other Brits. In effect, we’re paying them to stay in a dying industry, instead of learning a new trade. I don’t know about you, but if my son asked me for career advice, I probably wouldn’t say, “Go work in a doomed industry, and here’s ten grand if you stick at it.”

  Agricultural protectionism – a pig that can’t be slaughtered

  Given the harm that farm protection wreaks, it is strange that nearly every rich government does it. There are several reasons. First, people worry about “food security.” They fear that if they cannot grow their own food they will starve if war breaks out and their imports are torpedoed. This is a fair point, with roots in the Second World War, when German submarines caused havoc with Allied ships. But it is greatly overstated. In the nuclear age, if France went to war with a country advanced enough to seize control of French shipping routes, the last thing anyone would be worrying about would be whether there was enough sugar to make almond croissants.

  Another argument is that farmers are the guardians of the natural beauty of the countryside and should be paid for this public service. Perhaps so, but if that is the excuse for farm subsidies, it would be cheaper and more effective to pay someone actually to preserve unspoilt fields and woodlands rather than paying to have them ploughed up and slathered with pesticides.

  The main reason that farm subsidies persist is the reason that all subsidies persist. The benefits are concentrated, but the costs are dispersed. The average rich-country citizen spends over $300 a year on farm subsidies but probably doesn’t know it.32 The price tag on a loaf of bread does not tell her how much cheaper it would be if foreign wheat could be imported without tariffs. No one ever asks her to press $300 into the palm of a California rice-grower. And even if she did realize where the money was going, it’s less than a dollar a day, so she probably wouldn’t organize a protest march about it. She’s too busy earning a living. For the farmers who pocket them, however, farm subsidies are the single most important political issue. To defend them, they will certainly hire lobbyists, organize protests, and dump piles of fertilizer on their senators’ front lawns.