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Is China North or South?

Why foreign aid still makes sense, but needs to reseat the players?

When the well-off Western countries - sometimes called the OECD countries - increase their spending on food, drinks and gifts in the run-up to Christmas, the amount of money donated to charity also seems to increase. Yet this holiday season,  American Republicans have decided to question the effectiveness of such donations.

The discontent politicians criticise the donations stemming from private philanthropy that trickle down in a southern direction from more to less developed countries. They are even more doubtful in regard to the delivery of development aid through international organisations like the World Bank or the United Nations Development Programme. The Republicans estimate that up to 46% of all foreign aid is wasted on over-priced and inefficient programmes, corruption, and debt relief for countries that stepped into the debt trap and now need a bailout.

Since the concept of foreign aid on an international level was launched by the United Nations in 1970, over half of the signing countries have been falling short of their agreement to spend at least 0.7% of their GDP on donations to poorer countries. During the 1990’s - a decade of relative prosperity and growth - the donation rate was the lowest ever. Only the Scandinavian countries and Luxembourg regularly spend above the minimum threshold for aid contributions. In fact, in 2008 the vast amount of money that flowed into poor countries was not the result of donations - it was remittances sent home by the 150 million migrants working for low wages in host countries, amounting to 650 billion USD.

Professor William Easterley, a leading expert on development and capacity building, has criticised foreign aid for not having achieved much, despite grand promises. “The West spent 2.3 trillion USD and still has not managed to get three dollars to each new mother to prevent five million child deaths,” Easterly lamented in his book, The White Man’s Burden.

Is the idea of foreign aid outdated?

When the question of why wealthier countries should help poorer ones is asked, there are commonly two answers. Beyond pure solidarity, it is a matter of arguments with historical and economic or political roots. Development assistance in the traditionally poorer southern regions of the globe is often considered to be a moral obligation resting on the shoulders of the ex-colonisers in the Northern Hemisphere. Though the aid resulting from this colonial guilt has certainly helped during the transition periods of impoverished regions, it can hamper independence in an increasingly globalised world. Use of German aid in countries like Namibia, a former German colony, also brings into question the effectiveness of the spending. As compensation for the World War II genocide of the Hereros tribe, Germany still donates a disproportionate amount of money to Namibia. These funds could instead be better used in more needy areas like that of neighbouring Zambia or the Darfur region.

The economic reasoning relies on the “trade not aid” mentality, or the less comforting “strings attached approach”. It is the approach used by Bill Gates, who in donating 100 million USD to India for fighting AIDS in 2002 simultaneously secured significant future business with what was becoming the world’s largest supplier of software developers. It is also the example of the United States bringing a reasonable amount of development money to surprised recipients like Cameroon, Angola, and Guinea in 2003, then getting the vote of all three in the UN Security Council to invade Iraq.

The emphasis on making the developing countries self-confident players in international trade rather than a dependant almshouse is the right one. Despite the potential, however, it can be reduced to absurdity if countries are bullied into making illogical decisions. For instance, Eritrea, which verifiably could build its own railway network cheaper and faster with local resources and expertise, is forced to fly in pricy international consultants from Europe and the US to do little more than block the construction with paperwork.

Foreign development aid has also created some positive impact, including in South Korea. In 1970, the average annual income was 255 USD, not differing much from their communist neighbours in North Korea. After an impressive number of capacity building projects and charitable help, today’s South Korea is a leading country in technology and international co-operation with an annual income in 2010 of 20,750 USD per capita. Meanwhile, cut-off from such aid North Korea has remained as one of the poorest and most underdeveloped economies in the world.

The same positive development is true for the so-called BRIC countries - Brazil, Russia, India and China. The foursome is emerging from a troubled past of poverty, crime, and lack of progress, instead producing economic world leaders. Experts believe that the BRIC export share will rise from the modest 1% achieved at the end of the twentieth century to almost 50% by 2050. Currently, the contribution to the world GDP of the BRIC countries alongside South Korea, Turkey, and Mexico is twice as high as that of the classic G7 countries, which are still the chief donors in the Western world.

As Angel Gurria, the Executive Secretary of the OECD stated in the Development and Co-operation Report for 2010, “There has never been a better time to invest in developing countries: the returns to preserving economic growth will be high.”

His statement indicates the basic success factor for an up-to-date foreign aid policy whereby the developing countries are partners, not donation recipients that need to do something in return. If the aid is effective and the effects sustainable, the investing country should be happy to have gained a new partner at a comparable level that shares their trust and experience. In order to achieve this, foreign aid needs to empower the recipient from the beginning by respecting their wishes, while keeping in mind that some countries might not yet be ready to receive certain kinds of assistance. For example, a new hospital only makes sense if there is a well-trained staff to run it. Likewise, new generics might not be helpful if there is no bridge to transport them across the river. To a certain degree, the allocation of development funds in the last years has begun to reflect this. The aid money spent on products has halved since the 1970’s and 80’s and the investment for infrastructure has doubled.

The sense of ownership that developing countries need to be successful has to be recognised by the donators, for instance by extending banking services to the poorest areas. This has already been done in some regions of Africa and Latin America, where the village inhabitants create their own system of savings and use the interest rates on it to buy goods or invest in trade. Instead of overpriced investment, the approach brings capacity and knowledge to the countries, creating trust in the potential of developing countries, especially African ones.

Despite the still generally gloomy outlook of political turmoil, famine, and disease, Africa is a promising continent. The prospects for 2011/2012 suggest a 6% economic growth, which would put it on equal footing with Asia. Individual countries may even have higher rates. Ehtiopia, for example, has reached growth of 7.5%, making it the tenth largest producer of livestock in the world. While Europe and Asia are struggling with their rapidly ageing populations, Africa has lots of young people with a proven sense of entrepreneurial spirit and high mobility. There have never been more democratically elected governments in Africa than today.

It is not the idea of foreign aid in itself that is outdated; it is the concept of the players that needs to be refreshed. In a world where several European countries need a bailout and in which China has invested two billion USD in Zambia, erecting 300 companies in the region, old relationships between ex-colonies and colonisers are changing. The framework within which the rich West or North helps the poor South or East no longer holds.

A mindset of recognising potential, sharing responsibility and tackling risks in a globalised world needs to be put in place. The UN Millennium Development Goals (MDGs) are more valid than ever, particularly with their result-orientation towards a greener world, the fight against poverty and corruption, development for decent work, and the delivery of new technologies and medication. It is now up to the countries involved in applying the MDGs to stop acting in a traditional post-colonial environment. Development work today should be considered as an investment into the common global future, which will not remain within the regional borders of the 19th century.

For the Republican candidates gearing up for the primaries in the US, it might gain them some votes to proclaim inefficient foreign aid should be stopped altogether, but the attitude is hardly the best approach to international investment. Foreign aid needs to be reconsidered, but not cut – an idea that applies not only during the Christmas season.

by Miguel Peromingo