Foreign Aid Does More Harm Than Good

Let me start with a well-known proverb, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” I think this statement really encompasses the whole problem with foreign aid. Currently, we are giving the third world the proverbial fish. The third world cannot rely on aid forever. I think this is generally agreed upon. The question is: has it been working? I submit it has not. I’m going to be breaking my argument into three different parts. Firstly, I want to outline the model for how foreign aid is supposed to work and how that has failed to occur. Secondly, I want to discuss the problems that actually occur in countries receiving aid. Lastly, in the next round, I will give a more formidable solution to the problem of inequality in the world. Before I go into any of this, I want to point out that I am referring to development aid and not emergency aid. Emergency aid focuses on relieving nations who are in crisis, whereas development aid aims as reducing poverty, rather than alleviating short-term suffering. How Aid Has FailedTo begin, the growth model used in the IFIs today, despite frequently expressed misgivings and caveats, is the Harrod 1939-Domar 1946 model as further developed by Chenery and Strout 1966 as the Two Gap Model. The model has two important features: (A) investment requirements to achieve a given growth rate are proportional to the growth rate by a constant known as the Incremental Capital Output Ratio (ICOR). (B) Aid requirements are given by the “Financing Gap” between the investment requirements and the financing available from the sum of private financing and domestic saving. I will call the Harrod-Domar-Chenery Two Gap Model the “Financing Gap Model” for short, because its most important use is to determine financing shortfalls. (A) and (B) imply the following testable propositions: (1) aid will go into investment one for one, and (2) there will be a fixed linear relationship between growth and investment in the short run. The constant of proportionality is one over the ICOR. Essentially, aid will lead to investment, which will lead to growth, which will finally lead to a reduction of poverty. So, this is the metric upon which we should gauge the resolution on. Now, look at the way we approach poverty in the western world. We portray developing countries in the media as hopeless, disease-ridden, war-torn, corrupt waste lands. Is that any way to attract investors? In the words of economist Dambisa Moyo, “[The third world] is to development, what Mars is to NASA.” We don’t expect to see anyone moving to Mars anytime soon. We keep throwing money at the problem, but we don’t expect to see any change. These low expectations are hitching developing countries to a train destined for failure. The question becomes, over the past five decades, where the West has spent $2.3 trillion on foreign aid, have we seen meaningful, long-term economic growth? No. Have we seen a reduction of poverty? No. In fact, at least 80% of humanity lives on less than $10 a day and according to UNICEF, 22,000 children die each day due to poverty.The Harm Aid Has DoneIt doesn’t end there. Not only is foreign aid not accomplishing what it was intended to do, it is harmfully impacting developing nations. Aid does this in a cornucopia of different ways. The first is corruption. There is considerable corruption in Africa. The recently-released Transparency International Corruption Perceptions Index for 2009 finds 10 African countries in the bottom decile (with Somalia at the very bottom of the list). Of the 47 African countries reviewed, 31 scored less than 3 out of 10, “indicating that corruption is perceived as rampant.” Another data source, World Governance Indicators, reaches a similar conclusion. Africa is also the world’s leading receiver of aid money. Former Malawian President Bakili Muluzi has been accused of stealing $11 million in donor money and the World Bank agrees that foreign aid lead to corruption. The second is inflation. Inflation adds inefficiencies in the market, and makes it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on losses from currency inflation. The third is Dutch Disease. The curse of a resource-rich country, also known as “Dutch disease”, raises currency rates of exports in comparison to other currencies and makes the country’s other export activities uncompetitive. In other words, a poor country that is resource-rich will base their value of exports upon their need for imports. Since natural resource exports such as aid are unable to be exported or traded, they no longer carry any value. This explains how countries like Nigeria and Cameroon with its oil and minerals are still failing to grow, because they cannot capitalize on their commodities. It is also widely agreed upon that foreign aid kills off entrepreneurship. Next, foreign aid leads to civil wars and unrest. As aid money pools at the top (state-level), people are constantly fighting to overthrow their governments in order to access the vast amount of funds. It is no surprise to see the amount of wars and riots that take place within the poorest countries in our world. Even in the best possible conditions, with a corruption-free state, third world natives still do not look to their leaders. Within developed countries, we rely on our governments to provide services for us, such as education, healthcare, etc. However, in countries who receive aid money, look to the West for their social services. Instead of trying to please their people, governments are doting on the foreigners who give them the greatest amount of money. Foreign aid as essentially hitched the social services of the poorer nations on the first world. Aid is seen as permanent income, instead of a short-term solution. The third world needs to be taught to fish, not just given the fish.I'd like to thank Con for not only accepting my topic, but also welcoming me:) Also, I apologize how long it took me to respond. Can't wait to hear back from you!Ressources: http://academia.edu...;http://www.globalissues.org...http://www.dambisamoyo.com...https://blogs.worldbank.org...;http://www.globalissues.org...