Overseas Aid: a leg-up to struggling states, or corrosive deadweight?

The Australian Strategic Policy Institute recently released a report entitled Our Failing Neighbour: Australia and the Future of Solomon Islands, which describes the problems and possible solutions to the collapse of government and breakdown of society in the Solomon Islands. It states plainly that more aid won't fix their problems and could in fact make them worse.

This simple assertion defies conventional thinking on development assistance. Most people think development assistance is an altruistic contribution to poor countries.How can it be bad? But there are several voices who have been claiming aid's ill effects for a long time, such as Helen Hughes of the Australian National University.

The collapse of the Solomon Islands and similar trends in other countries in the "arc of instability" provide a timely prompt to consider whether our aid actually works, and if not why. And, surprisingly, the issue of whether development aid (as opposed to more specific humanitarian aid) actually helps poor peoples is alarmingly questionable.

If we look at the track record of aid, we find that it is unimpressive. Had global aid since 1950 been invested in US treasury bonds, the cumulative assets of developing countries would now be US$2.3 trillion, earning interest in perpetuity. In stark contrast is the global reality. If you exclude India and China, global poverty is at an all-time high and most of the countries that received the aid mentioned above are heavily indebted and dependent on donor aid. Global development aid grew steadily from 1950 until the mid 1990s while the vast majority of poor countries stayed poor. A history of aid to sub-Saharan Africa reveals that economic growth, the main driver of development, has declined as aid has increased. That is, the more aid, the more poverty.

Interesting also are the sizes of the development bureaucracies. The World Bank's administrative expenses went from US$81 million in 1959-60 to US$1.5 billion in 1993-94 (in 1993 dollars). In the same period its staff went from 657 to 7106. In 1997 Australia's Agency for International Development (AusAID), whose growth would reflect that of other development agencies, had 555 staff plus 170 overseas staff. These figures don't include the panoply of staff in profit and non-profit organizations which exist on AusAID funding.

Proponents of increased aid might argue that aid does work and might cite the examples of China or India, where much of the success in global poverty reduction has occurred. Aid's role in the development success of these countries is questionable, however. Per capita they have received and continue to receive very small amounts of aid, about US$1.50 per capita in 2000. Meanwhile, sub-Saharan Africa, which has received a massive amount of aid over sustained periods, receives roughly 13 times more aid per capita, US$19.40 per capita, as it stagnates. Closer to home, Australia has spent AUS$15.9 billion on aid to Papua New Guinea since independence. In that period economic growth has been minimal and the standard of living in PNG has broadly deteriorated. In 2000 PNG received a total US$57 of aid per capita.

Since 1970 the Solomon Islands has received an annual average of US$110 per capita in aid, while the Pacific as a whole has received annually US$220 per capita in aid.

A landmark study of aid effectiveness published in 1998 by the United Nations Development Program found that there was no clear link between aid and economic growth. It did find aid seemed to work better when the governments of recipient countries were already effective. Recent research suggests that even this link is questionable.

The Millennium Development Goals (MDGs) agreed by the UN general assembly in 2000, have set development targets for the wealthy and poor nations of the world. They include halving the number of people living in absolute poverty and achieving universal primary education. The most important thing about these goals is that most of them set hard targets for 2015. The MDGs are useful for several reasons. Most importantly, they set hard targets within a rigid timeframe - something never done before. This is definitely a step towards worthwhile action.

Second, the MDGs build some accountability into aid. If targets are not reached both the wealthy and poor nations have a set of benchmarks with which to hold each other accountable for their efforts. Surprisingly this is a relatively new phenomenon. Big aid dollars have been flowing for years regardless of results.

Third, the setting of the MDGs implicitly acknowledges an open secret - aid has failed to nurture development. The fact that hard targets within a set timeframe are needed, suggests their absence for the past 50 years has undermined aid. OECD governments, in gradually winding back their aid relative to GDP, have implicitly acknowledged this secret for a decade. And Australia is not alone doing this.

It is important to acknowledge aid failure because if wealthy nations are to actually help poor countries, in contrast with efforts to date, they need to address their mistakes. The current denial of failure implicit in much development thinking is what is limiting aid's effectiveness and undermining development. Essentially, development assistance bureaucracies are not being held accountable for the lack of development.