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.