Foreign aid and the economic crisis

The global economic downturn has finally reached developing countries, and most prognoses are grim. In BR’s May/June 2008 issue, economist Edward Miguel wrote an article , “Africa’s Turn?,” highlighting economic progress and new technology with the takeaway that Africa’s economy might finally be turning the corner after decades of stagnation. More recently however, Miguel worries on his blog that the economic crises could wipe out the positive momentum:

Like the previous commodities boom-then-bust cycle in the 1970s and 1980s, the current downturn threatens to erase the income, health and nutrition gains of the past decade or so, when Africa finally seemed to be breaking out of its economic malaise.

International agencies like the IMF and the World Bank have sounded the alarm and asked for increased funding to help countries hit by the crisis (which it looks like they will get).

Not everyone, however, sees the crisis as necessarily a bad thing for African development. The title of Marcus Mann’s blog “Aid Skeptic” should give you a hint about where this is going:

Amongst all this the IMF, the World Bank and the NGO industry are crying out for help for the developing world. The World Bank claims it needs billions of dollars more in order to alleviate suffering and foster economic growth. Yet no one asks the question – why? In its 60 plus year experience the World Bank’s policies, work and programs have yet to launch a single country into self-sustaining economic growth.

Could the global economic mayhem actually be beneficial to Africa and the rest of the aid dependent nations? The answer is it depends.

In a country that is creative and resourceful and committed to good governance and sound economic policy the sudden disappearance of aid money gives them a chance to develop the way the rest of the world has developed – on their own. Nations develop by competing in the global marketplace and creating environments that are business friendly, have sound judicial institutions and respect for the rule of law.

As Mann points out, currently “developed” countries did not get that way thanks to aid. Each had to overcome similar obstacles many African countries face today.

Only once the populace became fed up with the situation did things begin to change. Politicians were held accountable, corruption was curtailed (albeit never eliminated,) the institutions of the judiciary were strengthened and stifling bureaucracy and government interventionism, most often manifested in the form of government seizure of business, was eliminated. An entrepreneur in America can register a company in hours, in Africa it can take months.

The opportunity is there for Africa to take – whether or not it does so is up to the leaders in question. If history is a guide they won’t because people, both inside and outside Africa, don’t demand it of them. Instead they will continue to beg, and bleeding hearts in the Western world will continue to fund their regimes, their cronyism, and their poor economic policies. Think about that the next time you donate to an NGO

For a longer and more entertaining look at why aid might actually keep corrupt governments in power, check out this speech by my friend Andrew Mwenda, a Ugandan journalist and entrepreneur, at the TED conference in 2007.