Australia's overseas aid should focus on domestic reforms

During Mao Zedong's reign as Great Helmsman, China's economy was a sclerotic mess. Under the shackles of economic collectivisation and centralisation, GDP per capita stagnated at around US$100 and millions of Chinese lacked the basic necessities of life.

China's tentative steps towards economic liberalisation after Mao's death in 1976 marked the beginning of one of the greatest explosions of prosperity in history. In less than 40 years, 600 million Chinese were lifted out of poverty and the largest middle-class of any nation emerged.

Propelled by cautious but consistent free market reforms, China's economic renaissance continues: By 2050, China will be home to nearly 20% of the world's middle-class consumption, and is predicted to boast an economy twice the size of the United States.

China does not owe this breakneck economic development to international aid efforts or charity. Instead, it is a product of domestic policy reforms that progressively accorded individuals more economic freedom.

China's precise reform path since the 1970s may not be immediately applicable to vastly different developing nations with vastly different barriers to prosperity. But one lesson from China's spectacular economic resurgence is relevant: Domestic policy reforms must be a central plank of overseas aid.

The Abbott government is shaking up Australia's Official Development Assistance (ODA). Aid spending has been capped at $5 billion (adjusted for inflation), and AusAID will lose its status as an independent government agency when it is fully amalgamated with the Department of Foreign Affairs and Trade.

The government now also needs to reprioritise the delivery of ODA towards facilitating necessary domestic policy reforms in aid-recipient countries.

The five strategic goals guiding Australia's aid program are admirable: Saving lives; promoting opportunities for all; achieving sustainable economic growth; improving governance; and providing humanitarian and disaster relief.

However, they arguably exclude the most powerful tool for fuelling economic development.

In response to the Independent Review of Aid Effectiveness in 2011, AusAID acknowledged that ODA is much less important for economic development than a country's domestic policies.

Despite this admission, facilitating necessary domestic policy reforms in ODA-recipient countries does not feature among the Australian aid program's five strategic goals.

To be sure, the fourth strategic goal touches on the need for domestic policy reform. It calls for improvements to existing governance structures through better services and increased government efficiency and effectiveness.

Yet even the fourth strategic goal does not address one of the key underlying causes of poverty and underdevelopment: In many developing countries, the governance structures do not need to be made more efficient and effective; they need to be overhauled.

Perhaps the most troubling example of dysfunctional domestic institutions among recipients of Australian ODA is landownership and management.

The initial impetus for China's explosion of prosperity was Deng Xiaoping's de-collectivisation of agricultural production.

Recognising that communal farming had mired China in famine and poverty, Deng gave official blessing to experiments with private family farming. Coupled with other liberal economic reforms, such as business-friendly special economic zones, the result was 35 years of uninterrupted economic expansion, during which annual economic growth rates averaged 10% and GDP per capita surged to more than US$5,500.

Collective landownership and management obviously has different origins in Pacific nations: traditional culture rather than communist ideology. Nevertheless, it still plays a decisive role in stalling economic development.

Papua New Guinea and the Solomon Islands are endowed with massive reserves of valuable natural resources, including timber, minerals, fishing stocks, and fertile agricultural land. And yet they have GDP per capita of approximately US$2,200 and US$1,800, respectively. For the Solomon Islands, that is barely US$700 more than it was 20 years ago; for Papua New Guinea, the increase is less than US$1,200 in the same period.

Given Papua New Guinea's and the Solomon Islands' poor development outcomes-lower GDP per capita than more than 125 of the world's countries-and their position on Australia's doorstep, it is no surprise that they receive a massive chunk of Australia's ODA. In 2013–14 alone, they will together get nearly $700 million (15% of Australia's aid budget).

Notwithstanding the value of the roads, hospitals and schools financed with Australian aid dollars, reforming the Wantok system of collective landownership and management is a prerequisite for prosperity in both nations.

On top of fostering a culture of clientelism that sees elected representatives and officials pursue the narrow interests of their communal group at the expense of society-at-large, Wantok arrangements create massive barriers to economic growth.

As in pre-Deng China, Wantokism stymies the efficient use of private property by stifling individual entrepreneurship. The commercial incentive that leads to the creation businesses and underpins economic growth is fatally undermined by a system that impedes the sale of land and bars individuals from profiting from their efforts to add value to property.

Reforming collective landownership and management, and thus breaking the grip of patronage on politics, will give Australia's Pacific neighbours the best chance of achieving economic self-reliance.

As well as getting value for money for Australian taxpayers, making domestic policy reforms one of ODA's strategic goals would therefore spur economic growth and help end poverty in developing nations.