Is the G-8 Making a $40 Billion Mistake?
by Ken Bell

Yesterday, according to the Associated Press, the Group of Eight industrialized nations agreed to a British led initiative in which they will write off more than $40 billion of debt currently owed by 18 of the poorest nations, many of them in sub-Saharan Africa, to the World Bank, the International Monetary Fund, and the African Development Bank “As many as 20 other countries could be eligible if they meet strict targets for good governance and tackling corruption, which eventually could boost the total debt-relief package to more than $55 billion.”

As the AP’s Ed Johnson indicates, “the debt-relief proposal was put forward by Britain and the United States after talks in Washington last week between President Bush and British Prime Minister Tony Blair. It was made possible by a significant concession by the White House when it agreed the debt write-off would not jeopardize future aid funding. Previously, Mr. Bush had insisted debt relief come out of existing aid packages.” In many respects this concession is a payback for stalwart British support during the more than three years of our war against FascIslam.

Britain further proposes “boosting international development aid by $50 billion a year,” a proposal they hope will be adopted at the G-8 summit in Scotland in early July.

The conventional wisdom is that this is a very good thing for a number of seriously underdeveloped nations. But is it?

In “Aid and development: Will it work this time?”, Fredrik Erixon, chief economist of the Swedish think-tank Timbro, is clearly skeptical. He argues that aid has in fact, “over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty.” In fact, he indicates “there appears to be an inverse relationship between aid and growth, and this is not unique to Africa. Growth is higher in periods when the aid-to-Gross National Income ratio falls.” This short article serves as a summary introduction to Erixon’s 30 page study of the same name.

Aside from a wealth of evidence documenting his principal thesis, Erixson offers a detailed comparison of the experiences of Kenya, Tanzania, Uganda and Botswana. His conclusions are of significant interest, and quite relevant to yesterday’s decision:

“To most observers it is quite clear that the idea of providing a takeoff into sustained growth by foreign aid has been a dismal failure. Overall, aid has not promoted economic growth, nor has it led to improved policies in developing countries. Rather, there is much evidence supporting the view that aid largely has backed political regimes with little interest in growth and development.”

Moreover, “political leaders today campaigning for increased aid certainly know this. The small of even negative effect of aid on economic development was the main reason for the falling aid levels in the 1990s . . .” and “serious research and evaluations of aid cannot point to any significant change in the structure of aid [except perhaps, I would add parenthetically, George W. Bush’s Millennium Challenge Account] that gives support to the argument that this time, increased aid will actually deliver the goods.”

Erixson believes that “we should treat with great concern the current push for massive increases in aid. There is a great danger, even a strong likelihood, that such aid will assist mostly in the corruption of governments that are already doing much harm to their citizens, promoting bad policies and undermining democracy and the rule of law.”

The crucial point is that “fundamentally, economic growth depends on qualitative, not quantitative, factors: the structure of property rights, the extent to which courts of law apply and enforce abstract, clear rules inexpensively and quickly, the size of government and its effectiveness in delivering public goods, and the openness of the economy to trade and investment with the outside world.”

These vital qualitative factors offer an alternative to proposed (and in part approved) aid increases. As Erixson suggests, “it would be much more sensible to scale back the levels of aid considerably; provide aid only to governments that are already reforming and which agree to continued reforms; and make clear that aid will be available only for a strictly limited period of time.

“At the same time, rich countries should open up their markets to receive exports from developing countries. The welfare gain to Africa alone that would be achieved by a free trade regime in agriculture is roughly the same as all countries’ official spending on development assistance today.

“Trade has proven to be instrumental to increased welfare. Aid has not.”