Bjørn Stærk blog - The Progress Party on development aid

Thursday December 30, 2004 by Bjørn Stærk

[The Progress Party's views on development aid, the minority opinion in a document by the foreign affairs committee at the Norwegian Storting, translated from the original Norwegian. I've cleaned up the parliamentary language a bit, ie. given it an active voice. Back to the blog: Egeland's stingy remark. -bs]

We would like to point out that the Progress Party has another view on government aid to developing countries than the majority of the committee. We share the majority's views on many of the goals of development politics. We have therefore agreed with the committee's remarks where this is possible, but have been unable to stand behind those views that support the current policy, where the quality of aid is measured in money rathern than in results.

There is nothing new about demanding a doubling of global aid in order to cut poverty in half. This doubling has happened many times, but poverty has continued to increase. Only during the last 10-15 years has there been a real reduction in the number of poor people, both in absolute and relative numbers.

There are two reasons to doubt the commandments of the catechism of development aid. The first is that rich countries for decades have strengthened the protectionism which prevents developing countries from increasing their exports and investing in their own development - as Norway did in the 19th century, and as Korea, Japan, Thailand and many other countries did in the 20th century. The damage protectionism does to developing countries is much greater than the aid they are given. The damage caused by the EU's protectionism is equal to the official aid of all the rich countries put together.

The other reason to doubt is the question of the nature of aid: does aid really create economic growth, and does it really lead to positive development?

The World Bank and other aid organizations believe that their presence in an underdeveloped country encourage private investments. Their presence "signals" that this is a country in development. It may have been correct in 1980 that aid also brought foreign investors, as the global financial market back then was small, (smaller than the amount of development aid), and heavily regulated. But today the private financial sector is 50 times the size of development aid. This capital is relatively shifting, and the number of private lenders to developing countries has increased dramatically.

This is even more obvious if we look at the countries that are the greatest recipients of loans and aid from the World Bank. China and India, for instance, have been large recipients of funds from the World Bank, (not least because they are populous countries that contain about two thirds of the world's poor). There is a lot of money involved, but compared to the GDP of these countries, it is only a marginal sum.

This fails to explain the large amount of capital that has flowed into these countries from private investors, nor the good development they saw in the 90's. Aid to China in 2000 was $3 billion, while direct foreign investments (FDI) were $39 billion. Foreign investments in the state of Bangalore alone were greater than the aid to all of India in 2000.

It is easy to understand the analysis behind India's decision to decline any more aid from 22 countries - including Norway.

We are perfectly aware that for many other countries the situation is not like it is in China or India, but the presence of the World Bank or IMF has not had any greater effect there either. Today, private investors know that the presence of development organization is no guarantee for the successful development of a country. Many have a well founded suspicion that it is in fact the other way around.

This is no mere detail in the aid industry's concept of its own role, it is central to the new-old theory of aid under strict conditions, and to the intellectual defense of development aid.

Many countries do not experience the promised effects, but discover instead that they are part of an operation which follows economic theories that went out of date in the 1960's. Funds go to projects that never succeed, (neither measured by the individual "technical" goals of the projects, nor through contributing to the development of the country), and the recipient countries build up great debts which demands both higher taxes, new loans, and large sums of foreign currency for repayments.

In most recipient countries, such as Zambia, development aid has not had the desired effect at all. Zambia has received extensive amounts of aid since the 1960's. This aid was meant to create growth, by making up for the country's deficit of financial resources. The simple theory is that poor countries are poor because their savings are too small to cover the need for investments. If development aid fills this "gap" between savings and investments, the "vicious cycle of poverty" will be broken, as everyone used to say. But development has not confirmed the theory that aid goes to investments which create growth. On the contrary. The open wound in the theory of aid is precisely this belief that aid creates growth through covering a financial deficit for investments.

If aid had lead to the expected results, Zambia would today have an average wealth of $20 000 per inhabitant. The reality is different: At the end of the 1990's, GDP per inhabitant had sunk to $500, lower than it was in the 1960's.

In Kenya, the same thing has happened, and aid has not lead to the expected results. If the theory behind development aid was correct - that it makes up for the financial gap between a country's savings and its need for investments - Kenya would today be as wealthy as Spain or New Zealand. Kenya today is poorer than it was 30 years ago, when large aid contributions to the country began.

Tanzania, Uganda, Ghana, Malawi, Nigeria, the Ivory Coast, Mosambik and other African countries have had the same experience. They're poorer today than they were before the decolonization of the 1950's and 60's. Few social indicators point to an improvement - most go the other way.

Development aid has helped to preserve political and economic structures which are everything but good for development. This is particularly true for the increased opportunities aid gives to corrupt regimes to stay in power. A positive spiral of development is all about giving people an incentive for productive behavior. Regimes with long experience in destructive politics are usually highly reluctant to attempt positive reforms. If aid to these countries increases - or is maintained at a high level - we loose opportunities to discipline them, and over time we erode their incentive to seek policies that further development.

There are many ways to investigate this. The British professor of economy Petter Boone made a study in the mid-90's of 97 countries that received aid over a 20 year period, and concluded that aid had not had any effect at all on the size of investments of physical capital (nor on economic growth). The studies Boone has performed point to the Samaritan's dilemma, that is, how can we know that the resources we contribute are used in the way they were intended? Local investments decrease at about the same rate as foreign aid increases. Aid makes it possible to free resources for other purposes than the aid was intended for.

Ever since the late 1950's, economists have been quite clear that it is not just the amount of investments that matter, but the quality. But the theory of development aid originated in - and is still based on - the antiquated models of investments that J.M. Keynes, Walt Rostow, Roy Harrod, Evsey Domar, Gunnar Myrdal and others formulated, and on which was built the entire philosophy of using aid to cover financial "gaps", the idea that growth is proportional to investments. Africa's problem was that the investments were made in machinery and industry which there was no knowledge of, nor any organization to run.

The idea behind these policies is that if a country has a good institutional environment, and a stable and healthy macro economy, ie. low inflation, open trade, and a low deficit, then development aid may contribute to strengthen reforms and further developments. Or as the World Bank writes in a report, be "the midwife of good policies". Bolivia, Ghana and Vietnam are examples of countries where these policies has succeeded in recent years.

But there is good reason to suspect the role aid has played in these countries. And the perspective has another weakness - it ignores the empirical data of development aid. Official aid has not been known to primarily assist countries with good policies. On the contrary, there is an established policy and an ideological culture which says that the countries one should support are the countries which, because of their poverty, need the aid the most.

According to a survey in a report from the OECD, only one of 41 low income countries which receive aid from the World Bank, had an institutional and macro economic environment which stimulates growth and development. (World Bank, 1998, "Annual Review of Development Effectiveness"). This is enlightening - donors base themselves on an economical theory and on empirical data which says that development aid can only be effective if particular policies are followed. And yet they continue to provide large amounts of resources for countries that do not follow these policies - and that will not change their behavior in the near future.

Because the donors of aid have failed to cause wealth through aid, they have attempted to make the recipients change their policies, and decide which reforms countries must go through in order to receive more aid. This has become an important subject in criticism of globalization in recent years. The goal of the so-called Washington consensus is that aid should be tied to reforms. Joseph Steiglitz, the former chief economist of the World Bank, and last year's winner of the Nobel Prize in economy, believes it is precisely demands of donors that destroy the opportunities poor countries have to develop.

This criticism looses its power when one considers documented empirical data. Of all the demands which have been made of poor countries, few have been taken seriously, even fewer been carried out. Those who have followed the intentions of the Washington Consensus have usually done so out of their own volition, and carried unilateral reforms of their economic policies much further than the "demands" in their agreements with the donors.

This is central to all aid. It is impossible to reform a country where the political regime is unwilling to carry out reforms. The Economist (August 19, 1995) described this reality a few years ago:

Over the past few years Kenya has performed a curious mating ritual with its aid donors. The steps are: one, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on economic reform and behaving in an authoritarian manner. Three, a new meeting of donor countries looms with exasperated foreign governments preparing sharp rebukes. Four, Kenya pulls a placatory rabbit out of the hat. Five, the donor are mollified and the aid is pledged. The whole dance then starts again.

The focus on the size of the aid budget is for those who primarily care about quantity over quality. It creates a false picture of the reality of aid, which hurts its long term credibility and willingness of people to continue to give aid. It maintains a picture of aid as the source of development, leads the governments of poor countries in the direction of the money bags of rich countries - instead of their own development inhibitive policies. Aid by itself can not create development. That is a great misunderstanding.

The problem with aid is perhaps not that it never worked well - but that we so seldom care whether it did.

Aid causes dependency. Little thought is given to the dependency of the recipient countries, only to the donors. It is curious that, despite all the mistakes that have been made over the last 50 years, aid has only created lasting wealth in a small number of cases.

Aid has - just as in the recipient countries - created a large group of people who depend on the continuation of aid, and who have a strong interest in protecting it against drastic changes. An ideological culture that has been created within the warm community of the establishment: More aid is always better than less, it is aid which creates development, critics lack a basic sense of solidarity, we represent the moral imperative. As journalist Jon Hustad wrote in Klassekampen on October 30, 2004:

Traditional Norwegian development aid is no great success. Help through corporative aid machines do little or no good for anyone else but those who make their living from providing the aid.

Despite our strong scepticism towards traditional development aid, and particularly state to state aid, we do not reject targetted aid for concrete purposes. But we believe that this must be done in a way which furthers development, and which does not support corrupt regimes and prevent necessary reforms. Emergency aid is something we have always prioritized highly. We consider the form of help which must be provided to fight HIV/AIDS as a form of emergency aid.

There is a need to focus our priorities, and be more targetted in our development work. We should go through voluntary organizations and various global funds to meet these challenges, instead of heavy and bureacratic UN organizations and a dedicated aid bureacracy.

In principle, no direct aid should be given from the Norwegian state to governments in other countries. Such state to state aid is a de facto acceptance of the recipient government. The recipient countries often have a problematic situation concerning democracy, human rights and corruption. Norway will do better if it helps the population through other channels such as organizations that work directly with people.

If one is to continue state to state aid, it should be under the clear condition that the countries make an effort to be democratic, respect recognized standards of human rights, and fight corruption. The government must respect various ethnic and religious groups, and contribute to peace in their own country and region. Countries which do not meet these demands, must immediately be denied Norwegian aid. Help should then be given through other channels, which do a better a job of preserving the needs of the people.

We would also like to point out that Norway may have other bilateral challenges relating to the recipient countries, such as problems connected with the return of asylum seekers who have had their applications denied. Norway should be able to demand, as part of an aid agreement, that the recipient government is cooperative also in these areas.