Saturday, November 28, 2009

Damn the Aid

I was recently directed to what is probably the most damning opinion on foreign aid I’ve come across in a while (hat tip Jodi and Tracy.)

Here’s the bottom line:
Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades.

The point the author makes is that Africa (and I would add other developing nations) needs investment and not aid. When you accept investment, be it equity or debt, there is significant responsibility attached to provide a return. In other words, you need to make the money work so you can pay back your investors.

Hopefully the money you make with the investment is more than what you need to pay back. If so, you have economic growth and that is good.

It’s not a perfect system, but it seems to work in places like India, SE Asia and more recently in Latin America (the Economist gushed on Brazil in its cover story a few weeks back.)

I’ve touched on this point before, but my view is that the world is awash with capital trying to find its way into places like Africa. Yes, I know there is a credit crunch going on but I think the view still holds.

African countries could start by issuing bonds to raise cash. To be sure, the traditional capital markets of the U.S. and Europe remain challenging. However, African countries could explore opportunities to raise capital in more non-traditional markets such as the Middle East and China (whose foreign exchange reserves are more than $4 trillion). Moreover, the current market malaise provides an opening for African countries to focus on acquiring credit ratings (a prerequisite to accessing the bond markets), and preparing themselves for the time when the capital markets return to some semblance of normalcy.

I would also add multilateral institutions and development banks as potential partners. Yes they have been part of the problem in the past, endlessly financing non-returning projects. But there are factions within these organizations that are now demanding a return and reform for their development financing dollars, and that is a good thing.

Corporations are eager to invest in developing country as well. The problem is there aren’t any good projects to invest in. There is a lot of money sitting on the sidelines waiting for the right time to enter Africa (I’m talking about investment in things other than resource extraction).

So what is everyone waiting for? Institutional reform for one (or even institutional creation in some instances)

Governments need to attract more foreign direct investment by creating attractive tax structures and reducing the red tape and complex regulations for businesses. African nations should also focus on increasing trade; China is one promising partner. And Western countries can help by cutting off the cycle of giving something for nothing. It's time for a change.

I would disagree with the point on China. Yes, China is pouring money into Africa but it is doing so to buy up resources and it is hard to see China making the demands for reform an outside investor has to make on Africa. Recent news from Dubai may make the Middle East a less active investor as well.

Why Foreign Aid Is Hurting Africa -

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