The British economist Peter Bauer once described foreign aid as “taxing poor people in rich countries and passing it on to rich people in poor countries.” The unambiguous failure of foreign aid over the past fifty years proves that Bauer was correct.
Instead of stimulating economic growth, foreign aid has bred poverty and corruption. This is especially true of Africa, the world’s poorest region. Regrettably, Bauer’s message did not reach Brussels, where European bureaucrats seem to be more immune from rational arguments than ever before. That is why the EU demands that even the poorest among the new EU members contribute to the European foreign aid agency, EuropeAid. The EU will thus not only fail to help the African countries, but also harm the poor in Central and Eastern Europe.
Foreign aid serves an important purpose. It expiates the guilt that we — the rich — feel for living a comfortable life. Such guilt is misplaced because consumption depends on production. To put it differently, the total value of what we consume equals the total value of what we produce or obtain through voluntary exchange with others. But the cleansing feeling, which comes from lavishing money on the poor, should not be confused with the effect that foreign aid has on African countries. A growing body of evidence suggests that far from helping the poor countries, foreign aid slows economic reform and retards growth.
Africa, for example, has been the largest recipient of foreign aid. But according to National Bureau of Economic Research analysts Elsa Artadi and Xavier Sala-i-Martin, Africa has experienced decades of economic decline. In sub-Saharan Africa, per capita gross domestic product is now 11 percent lower than what it was in 1974. Ghana, for example, had inflation adjusted per capita income of $800 in 1967. By 1997, that figure had fallen to $370. Regions that received less foreign aid per capita fared better. As a result, Africa today accounts for a greater percentage of the world’s poor than ever before. In 1970, only 1 in 10 poor people lived in Africa. Today that number is 1 in 2.
Foreign aid also fuels corruption among African officials. Because of faulty domestic institutions and poor oversight, African leaders were able to steal billions of foreign-aid dollars over the past forty years. A study commissioned by the African Union in 2001 estimates that corruption continues to cost Africa $150 billion per year.
Unfortunately, the World Bank nurtures the myth that foreign aid, if better targeted, could improve African economic growth in the future. For example, Craig Burnside and David Dollar of the World Bank maintain that developing countries, which follow good fiscal, monetary, and trade policies, can benefit from foreign aid. But the World Bank data have not been independently corroborated. William Easterly, Ross Levine, and David Rodman of the National Bureau of Economic Research updated the World Bank data and found no positive correlation between foreign aid and economic growth. Harold Brumm of the United States General Accounting Office concluded that foreign aid retards growth even in countries that follow sensible policies. As Ian Vasquez of the Cato Institute explains, foreign aid can serve as a disincentive to continued economic reform even under the best of circumstances.
Not surprisingly, the United States and the EU have chosen to ignore those studies. With foreign aid, like other government programs, results do not matter. It is the thought that counts. That is why President George W. Bush promised to spend $5 billion on a new foreign-aid initiative known as the Millennium Challenge Account. That is also why the EU wants to swell the EuropeAid budget by taxing its new members. But some of the EU newcomers are only slightly richer than the richest African countries. The 2002 GNI per capita in Latvia, Lithuania, and Slovakia was $3,480, $3,660, and $3,950 respectively. The 2002 GNI per capita in Gabon, Botswana, and South Africa was $3,120, $2,980, and $2,600 respectively. With 2002 GNI per capita of $3,850, Mauritius was actually richer than Latvia and Lithuania.
The hardship, which the people of Central and Eastern Europe experience as they try to complete their transformation from communism and oppression to free markets and democracy, should be the EU’s chief concern. As such, Gunter Verheugen (commissioner for enlargement) and Chris Patten (commissioner in charge of EuropeAid) should perhaps answer the following question: Is it not absurd and heartless for the European Union to deprive the poorest people in Europe a part of their income to subsidize economic decline and corruption in Africa?
– Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.