Foreign aid could negate incentive for reform

Freedom Newspapers

The agreement among the world’s economically developed countries, called the G-8 countries, to forgive more than $40 billion in debt owed by some of the world’s poorest countries to international institutions like the World Bank and the International Monetary Fund could be the beginning of a fresh start for those poor countries.

But if the agreement simply marks a continuation of previous government-to-government aid policies, it will do little to improve life for the people in those countries, most of them in sub-Saharan Africa.

What those countries need most is economic freedom, reduction in official corruption and a commitment to the rule of law (which simply means that rulers are subject to the same laws that govern their subjects). The record confirms that countries that institute such policies experience economic development and those that remain mired in corrupt official policies remain poor — except for those in a position to skim foreign aid or trade deals.

In the 1960s, per capita GDP in East Asia and the Pacific was lower than in sub-Saharan Africa. But most Asian countries, while none became models of laissez-faire, adopted market-friendly policies. According to Brent Schaefer, a fellow in international regulatory affairs at the Heritage Foundation, even Indonesia saw GDP increase (in constant terms) from $249 per capita in 1960 to $1,000 in 2003. Nigeria, by contrast, saw its per capita GDP increase only from $224 to $248.

Unfortunately, while some of those who campaigned for debt forgiveness understand some of this, the evidence is that most do not.

British Prime Minister Tony Blair for example, believes the wealthier countries should double aid to poor countries. Unfortunately, as Donald Boudreaux, chairman of the Department of Economics at George Mason University, said, while Western countries have poured nearly a half-trillion dollars of aid into Africa, “ordinary Africans are no better off. The reason is that ‘aid’ subsidizes the very corruption and tyranny that kill prosperity.”

As Republican Rep. Ed Royce of Fullerton, Calif., who headed the Africa subcommittee for eight years, said: Eliminating U.S. subsidies on cotton and sugar would help African countries more than all the aid being discussed.

In insisting on greater democracy and transparency in countries whose debts are being forgiven, President Bush shows some understanding of the relationship between decent governance and economic success. By not placing more emphasis on economic freedom, however, he may be sowing seeds of failure in countries whose people deserve much better.

The moral hazard here is that forgiving debt and increasing aid, while it might make politicians in donor countries feel good, could eliminate whatever incentive rulers in poor countries have to mend their ways.