Private investment and donations versus government aid to Africa

Well-intentioned governments of developed nations who extract money from their taxpayers to hand over to the governments of developing countries generally do more harm than good. Economist Peter Bauer pointed out half a century ago that much of the so-called aid to developing African countries was being used by recipient governments to subjugate their own people. Yet after five decades of failed aid, donor governments keep on undermining the very development they are attempting to promote.

Donor nations may attempt to ensure that aid is spent on health care, hunger relief, poverty reduction or some other desired relief work. They may also receive solemn pledges from recipient governments on the proper utilisation of aid money but once the money is thrown into the budget pot of the recipient government, the aid frees other resources for spending on things like arms and ammunition.

Overcoming the ‘diversion of funds’ problem in government-to-government aid appears insuperable as long as developing-country governments regard oversight as interference in their internal affairs. However, people-to-people non-governmental aid would solve the oversight problem and have many other additional benefits.

Donor nations could leverage earmarked aid funds by a multiple of three or four, depending on their tax rates, by allowing tax deductions to their own corporate and individual taxpayers for investments and philanthropy in designated developing countries. In other words government-to-government aid could be converted into a larger amount of citizen-to-citizen aid.

Poverty relief would be real, identifiable and quantifiable if made by private organisations and individuals. Investments and donations in recipient countries would go directly to areas where they would make the most difference in providing jobs and relieving poverty. Bureaucrats would not absorb a large percentage of the funds in administration costs and buying guns with donor money would be out of the question.

Private investors and donors have a personal interest in ensuring that their investments are productive and their donations used for their intended purposes. They consequently oversee the process more efficiently than their governments are capable of doing. Investors reduce poverty by investing their capital in the production of goods and services – tax breaks and diplomatic support from their home countries could reduce the risk of investing in under-developed countries and provide incentives for them to do more of it.

Instead of having anonymous flows into the coffers of recipient governments, aid to developing countries would become personalised – the recipients of donations and employees of investing firms would be able to put faces to their benefactors. As a result of such personal contact, demands for aid now directed at governments would become invitations directed at investors and requests to private donors, completely changing the nature of the process. Most importantly, direct interaction between individual donors, investors and the citizens of developing countries would occur, contributing significantly to good relations between nations.

The Millennium Development Goals (MDGs) list eight goals and eighteen target objectives to reduce poverty, malnutrition and ill health. A ‘global partnership’ is envisaged, coupled with the exhortation that ‘while success depends on the actions of developing countries, which must direct their own development, there is also much that rich countries must do to help.’

MDG 8, which is the last goal on the list, is mainly aimed at developed countries and calls for ‘an open, rule-based trading and financial system, more generous aid to countries committed to poverty reduction, and relief for the debt problems of developing countries.’ The goal ‘also calls for co-operation with the private sector to address youth unemployment, ensure access to affordable, essential drugs, and make available the benefits of new technologies.’

Two aspects of Goal 8 need to be recognised. The first is that government-to-government aid has failed abysmally. Despite billions of dollars spent, it has not brought about the outcomes contained in the rhetoric used by both donor and recipient nations to justify the aid. The second is that despite this failure, the goals and target objectives as formulated continue to expect governments to be the primary agents for ridding the world of poverty, disease and all the social ills that accompany them. There is no recognition that it is private firms and individuals that are, always have been, and always will be, responsible for reducing their own poverty and that of others.

The private sector, meaning all people not in government (to the extent that they are not prevented from doing so) provide all the jobs, all the money governments spend, all the essential drugs, all the new technologies, and everything else required by consumers. If governments were to concentrate on their legitimate core functions and leave the business of business to the people, economies would function more efficiently, consumer needs would be met more effectively, and poverty would be rapidly reduced.

The most effective way to address all the MDGs is therefore to leave the delivery of aid in the hands of private firms and individuals from developed countries, whose governments should refrain from taxing monies utilised by their citizens for investment and philanthropy in developing countries. Citizens of developing countries, on their part, must develop institutions such as property rights, the rule of law, and freedom of exchange to sustain wealth-creation, which is the other side of the poverty-reduction coin.

Given the right conditions and incentives, citizens of rich countries will reach out to the less fortunate of Africa to help them create the necessary institutions needed to support poverty-reduction. They will co-operate with them for mutual benefit and lend an empathetic hand to alleviate the worst consequences of African poverty.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/21 December 2004 - Policy Bulletin / 13 October 2009
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