There appears to be a widespread belief that developing countries would be better off if more aid was available. But is it true?
The presumed objective of aid is to help countries achieve a better life for their citizens: they should be better off, healthier, better governed, more self sufficient, and suffer less from corruption.
Unfortunately, the evidence indicates that much of the aid money poured into developing countries achieves the exact opposite. I strongly agree with the conclusions of a Professor Little who wrote a book “Aid to Africa" in the 1960s. He concluded that the biggest problem with aid was finding a country that was capable of absorbing it and putting it to good use. Nothing has changed.
It is useful to look at what has genuinely improved the lot of people in developing countries. Electricity, mobile phones and television come high on the list. Television because, in India at least, there is a positive correlation between television and the welfare of women. Little, if any, aid money has gone into subsidising television. Mobile phones have been most successful in countries where the government and aid money have stayed away.
There has been massive aid to government owned power companies: when you examine the effect you begin to wonder if they would have been better off without it.
I have been working on bank funded power projects in developing countries since 1963 and it seems to me that the basic problem with aid projects is that the bureaucrats tend to measure success by the amount of money they lend, not by the good it does. A major problem is that the countries contributing to development bank funds expect their aid money to provide work for their contractors and manufacturers.
The bureaucrats like to lend lots of money for new and expensive projects that are often of dubious merit or for the refurbishment of old aid projects that have descended into rack and ruin from a chronic lack of maintenance. Success is not measured in terms of projects that are economically successful in the long term and that teach good management, effective maintenance and develop indigenous engineering skills. Aid projects should aim to eliminate the need for expensive international consultants who often don't take local conditions into account and fail to help domestic organisations become more independent and less in need of aid.
One would expect that aid money at low interest rates is an offer you cannot refuse. But, often, this is not so. Bank funded projects can cost three times more than they should. If they charge a 3% interest rate the interest cost will be equivalent to a 9% interest rate on a project costing 1/3 as much. If they could borrow money at 6%, the country would be heaps better off.
Working on aid projects reveals the damage that can be done. In one rural electrification project I promoted the simple low-cost system developed in New Zealand and Australia that was well within the capabilities of the local engineers. But the money was lent by a development bank that insisted on international consultants who imposed obsolete, expensive, unreliable and maintenance intensive distribution systems that cost three times as much as they needed to. For a later phase of the same project I pointed out that if they continued to use this expensive and obsolete distribution system their budget was not nearly sufficient. So I tried to persuade them to adopt a system that would guarantee that it could be done well within budget. After I left the bureaucrats fiddled my cost estimates to make it appear that all the work could be done within the budget using the obsolete system. They did not care that the inevitable cost overrun would have to be repaid one day.
On a project involving the refurbishment of a 40 year old dam and power station I carefully broke down the work that needed to be done into: work that the organisation could do on their own; work that the organisation could do with some help from expatriate consultants; and the work that needed overseas expertise and contractors.
The bank’s local administrator ignored my recommendations and wrapped it all up in a single contract that took a lot of time to organise and finished up with an inexperienced contractor. I suspect he did so to make it easier to extract a bribe from the contractor. So the local engineers – who have the potential to be quite good – will have virtually no involvement and will not develop the expertise and skills that they need for continued maintenance of the power station. What good does that do?
In reality the banks drive home this lesson: “Don't bother about the cost because we've got heaps more money to lend you and don't bother maintaining anything we give you because, when it breaks down, we will give you a whole lot of new equipment". No one should be surprised that aid recipients learn this lesson quickly.
I believe that the primary objective of all aid projects should be to develop local resources and skills to accelerate the day when the country no longer needs aid. The sad fact is that most development banks perpetuate the need for continued aid and provide an environment where corruption is almost inevitable.
As a final thought, substitute "welfare" for “aid" and draw your own conclusions.