Two decades ago, I wrote a piece for the Wall Street Journal Europe about the problems with foreign aid. I mentioned the then burgeoning scandal regarding the musical Sarafina 2 and the millions of rands that were wasted on an "AIDS education" play that no one saw, and which got the facts wrong.
I was soon contacted by my editors telling me the E.U. ambassador to South Africa was outraged and said it wasn't true, implying I made it up. But that journal of parliamentary debate, Hansard, faithfully recorded then Minister of Health Nkosazana Dlamini-Zuma assuring parliament they shouldn't worry about money being wasted on the play because it was E.U. cash.
The E.U. turned its anger from my article and instead was livid because millions in their aid was used on a project of little value without them being told it was happening. It later turned out Dlamini-Zuma had misled parliament as well and, in the end, taxpayers were trapped into paying the bills.
My critique of foreign aid didn't rest upon the Sarafina 2 debacle alone. It was just one of many examples. But the important points aren't the waste or misuse of funds but how they distort economic development.
Some years ago, David Osterfeld looked at the U.N.'s World Food programme and its response to 84 food emergencies. He found it took from 196 to 400 days for food aid to arrive — often in time for the local agricultural rebound to be destroyed. How do local farmers compete with free food? The net result is it destroys their livelihood and makes the next crisis more likely.
Michael Maven, in his expose of foreign aid, Road to Hell, quoted a Somali observing, "Look into drug donations and how they destroyed our developing healthcare system. We once had so many pharmacies here. Pharmacists knew their jobs. Now there are people handing out drugs who are not trained because of the donated drugs from the international community that are so cheap." This is why aid expert Peter Bauer complained that aid "only centralizes economic control in the hands of the government".
In the British paper The Guardian Kenan Malik chastised "many on the left" who praise aid "as a means of redistributing global wealth". But he notes foreign aid "is not given away as charity — it is wielded as a weapon to boost trade and further political aims". The nations handing out the cash want political favours in return — and often those favours are not in the best interests of the recipients.
USAid brags, “The principal beneficiary of America's foreign assistance programmes has always been the United States." Malik noted many aid "loans" mean recipient nations now pay more in interest than they receive in aid. He concluded, "As a global system, foreign aid is a fraud. It has become a means not of ameliorating inequality, but of entrenching it."
Market oriented critics have criticized foreign aid because it is a government-to-government programme. While many on the Right focus on the disasters caused by recipient governments, it behooves us to remember Mr. Malik's criticism and note how the donor nations are equally as guilty when it comes to destroying local economies.
A study, Elite Capture of Foreign Aid, noted aid "skeptics" fear "aid may be captured by economic and political elites". The authors looked at aid disbursements to various nations and found it resulted in outflow of capital to nations known for helping hide bank accounts. It wasn't reassuring:
… aid disbursement to the most aid-dependent countries coincides with significant increases in deposits held in offshore financial centers known for bank secrecy and private wealth management. Aid capture by ruling politicians, bureaucrats and their cronies is consistent with the totality of observed patterns: it can explain why aid does not trigger flows to non-havens, why the capital outflows occur precisely in the same quarter as the aid inflows and why the estimated effects are larger for more corrupt counties.
Yet, what's a benefactor to do? Many of us want to see development thriving in poorer nations and we put money into such projects. I prefer micro-loans. The organization I use works with field partners around the world. These partners receive loan applications from individuals, not from politicians. They may fund the expansion of an existing business or help pay for an education. But the individual recipient is expected to repay the loan so funds can be reloaned to another.
In my experience most repay the loans. These are given back to the lender who reloans them to another on the list of current applicants. This lacks the grand scheme politicians love to use as photo opportunities, but it does more to create an economic foundation for a country than government-to-government aid. Development works when it's bottom-up, not top-down.
My loans helped Rafael Andres stock his shoe shop in Colombia, and Loina in Samoa buy a freezer for her store. They helped Aniceto, a single father in Mozambique buy inventory for his store and financed Isaías Antonio in El Salvador when he needed to hire labourers to help harvest his corn crop.
Micro-loans at the local level would do more good than 99.9% of all government projects. In fact, I'd go as far as saying that even picking poor villages and giving every resident a universal monthly benefit would do more good ultimately. When aid is government-to-government, it is corrupted — both by the "donors" and the "recipients." Trust the people instead.