Locked Into Welfare Dependency

In this New Age of Austerity it has always been baffling why our £7.3bn pa overseas aid budget should be ringfenced and protected from cuts.

Yes, of course, we all understand the Nasty Party's political desire to rebrand itself - although we should note they haven't offered the same blanket guarantee for welfare here at home, where cuts will likely be judged a whole lot nastier than cutting aid to some faraway country with people about whom we know nothing.

But these are tough times, and political decontamination aside, the key point about overseas aid is that there is absolutely no serious evidence it actually works.

Specifically, economic aid - which comprises the vast bulk of that £7.3bn - has had no discernable effect on economic growth rates in recipient countries. When the IMF conducted its own comprehensive statistical study of all the evidence since 1960 it concluded:

"We find little evidence of a robust positive impact of aid on growth... To be more concrete, in the cross-sectional analysis, we find some evidence for a negative relationship in the long run (40 year horizon)... We find some evidence of a positive relationship for the period 1980-2000, but only when outliers are included. We find virtually no evidence that aid works better in better policy or institutional or geographical environments, or that certain kinds of aid work better than others."

A pretty damning assessment - no convincing evidence it works overall, and no evidence that tweaking the details makes any difference.

So why has aid failed?

The theories are many but they largely boil down to the fact that aid has propped up dysfunctional and corrupt regimes in recipient countries, and has grossly distorted incentives across the wider economy. As this excellent overview by Zambian aid guru Dambisa Moyo puts it (and you really should read the whole piece):

"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...


...A constant stream of "free" money is a perfect way to keep an inefficient or simply bad government in power. As aid flows in, there is nothing more for the government to do -- it doesn't need to raise taxes, and as long as it pays the army, it doesn't have to take account of its disgruntled citizens. No matter that its citizens are disenfranchised (as with no taxation there can be no representation). All the government really needs to do is to court and cater to its foreign donors to stay in power...


Then there is the issue of "Dutch disease," a term that describes how large inflows of money can kill off a country's export sector, by driving up home prices and thus making their goods too expensive for export. Aid has the same effect. Large dollar-denominated aid windfalls that envelop fragile developing economies cause the domestic currency to strengthen against foreign currencies. This is catastrophic for jobs in the poor country where people's livelihoods depend on being relatively competitive in the global market."

Now that is enough to make anyone grind their teeth - western taxpayers shelling out billions to inflict rotten governments and uncompetitiveness on the world's poorest people - consigning them to perpetual welfare dependency and dirt poverty (we have blogged this many times - see previous posts gathered here).

So why haven't we just stopped? Why haven't we slashed our aid spending back to what most of us always thought it was in the first place - ie disaster and humanitarian relief (which would mean cutting roughly 80% of our current aid budget).

The answer is twofold.

First, western politicos do not wish to be seen as nasty - they much prefer to be photo-opped on stage with Bob and Bono, preferably bathed in golden light.

Second, the global aid industry has now grown very powerful and can make life extremely uncomfortable for those who seek to cut its food supply. The big consultancies and NGOs making up this industry have sophisticated lobbying and propanda arms (largely funded by the very taxpayers they are fleecing). Even the mighty IMF had to bow before them, issuing a post-publication disclaimer of that damning research report quoted above:

"This Working Paper should not be reported as representing the views of the IMF."

Now, in fairness to Mr Cameron and his team, they do at least seem to understand there's a problem. Back in January we blogged their sensible decision to fold the DfID budget in with that of the MOD and the Foreign Office, so that we can at least start to use the cash to support our strategic national objectives. And now Andrew Mitchell says he'll try to demonstrate we taxpayers are getting value for money:

"We will never maintain public support among hard pressed taxpayers for this vital and large programme unless we can demonstrate independently that when we spend £1 on development we are actually getting 100 pence of value.

We need to move the whole approach of aid and development towards looking at the results, what we are actually achieving on the ground, and away from an approach which is too dominated by impact and putting money on the table."

Which sounds like a much better approach than what we've seen previously. Moreover, he's already stopped the lunacy of aid to Russia and China - burgeoning super-power China for goodness sake! - although he's not yet done anything about the equally ludicrous flow of aid to booming space programme India (see this blog).

But as we've said many times, words are one thing, action something else. We will need to follow Mitchell's progress very carefully.

PS Talking of locked into welfare dependency, the TPA's Research Director Matt Sinclair was on BBC R4's Moral Maze this week talking about the need to reform welfare benefits here at home. Well worth hearing, and you can do so here.

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