The right kind of aid

By Roger Bate, Published 01/04/2005

As more aid pours in for the unfortunate victims of the Asian tsunami, there has been much hand-wringing that nations, notably the Untied States, have not done enough. But while the highly paid UN staff whips up, and the media avidly reports, big government aid competition, what is far less well monitored is whether the money is being well spent. If history is any guide, the short run aid, especially from the private sector, will probably be relatively well spent, but the loner term aid, especially from governments, will prop up failing systems and allow domestic funding for healthcare and social security to be diverted into arms purchases.

Lord Peter Bauer pointed out half a century ago that much of the so-called aid to developing countries was being used by recipient governments to subjugate their own people. Yet after five decades of failed aid, donor governments keep on undermining the very development they are attempting to promote.

Donor nations may attempt to ensure that aid is spent on health care, food delivery, poverty reduction or some other desired relief work. They may also receive solemn pledges from recipient governments on the proper utilisation of aid money. But once the money is thrown into the budget pot of the recipient government, the aid frees other resources for spending on weaponry and other odious acts to support suppression.

Overcoming the ‘diversion of funds’ problem in government-to-government aid appears insuperable as long as developing-country governments regard oversight as interference in their internal affairs. However, people-to-people, non-governmental aid would solve the oversight problem and have many other additional benefits.

Donor nations could leverage earmarked aid funds by a multiple of three or four, depending on their tax rates, by allowing tax deductions to their own corporate and individual taxpayers for investments and philanthropy in designated developing countries. In other words, government-to-government aid could be converted into a larger amount of citizen-to-citizen aid.

Poverty relief would be real, identifiable and quantifiable if made by private organizations and individuals. Investments and donations in recipient countries would go directly to areas where they would make the most difference in providing jobs and relieving poverty. Bureaucrats would not absorb a large percentage of the funds in administration costs, and buying arms with donor money would be out of the question.

Private investors and donors have a personal interest in ensuring that their investments are productive and their donations used for their intended purposes. They consequently oversee the process more efficiently than their governments are capable of doing. Investors reduce poverty by investing their capital in the production of goods and services — tax breaks and diplomatic support from their home countries could reduce the risk of investing in poor countries and provide incentives for them to do more of it.

Instead of having anonymous flows into the coffers of recipient governments, aid to developing countries would become personalised – the recipients of donations and employees of investing firms would be able to put faces to their benefactors. As a result of such personal contact, demands for aid now directed at governments would become invitations directed at investors and requests to private donors, completely changing the nature of the process. Most importantly, direct interaction between individual donors, investors and the citizens of developing countries would occur, contributing significantly to good relations between nations.

The UN’s Millennium Development Goals (MDGs) aim to reduce poverty, malnutrition and ill health. A ‘global partnership’ is envisaged, coupled with the exhortation that ‘while success depends on the actions of developing countries, which must direct their own development, there is also much that rich countries must do to help.’

But since most previous government-to-government aid has failed abysmally the MDGs are likely to be missed since despite past failure, the UN continues to expect governments to be the primary agents for ridding the world of poverty, disease and all the social ills that accompany them. There is no recognition that it is private firms and individuals that are, always have been, and always will be, responsible for reducing their own poverty and that of others. It should be of no surprise that it is the private sector in China that has driven poverty from millions, but the UN misses this point.

If governments were to concentrate on their legitimate core functions and leave the business of business to the people, economies would function more efficiently, consumer needs would be met more effectively, and poverty would be rapidly reduced.

The most effective way to address all the MDGs is therefore to leave the delivery of aid in the hands of private firms and individuals from developed countries, whose governments should refrain from taxing monies utilised by their citizens for investment and philanthropy in poor countries. Citizens of poor countries must develop institutions such as property rights, the rule of law, and freedom of exchange to sustain wealth-creation, which is the other side of the poverty-reduction coin.

Given the right conditions and incentives, the rich citizens of China, America and Europe will reach out to the less fortunate of Asia to help them create the necessary institutions needed to support poverty-reduction.