In my junior year of college I was fortunate to be taught by the evocative Xavier Sala-i-Martin, albeit only for a semester. Every single lecture was somewhere between a faultless masterclass and a comedy show. Keeping 300 students attending lectures for an entire semester is no mean feat and without a doubt his wide array of colorful blazers played a part in this. However, what I will always remember will not be his insistence that Catalunya is a country, nor his endless praise for Barcelona F.C. but instead 10 minutes in which every student’s view of foreign aid was challenged.
It was clear from the very first day, that Xavier was not a fan of foreign aid, and undoubtedly not a fan of Jeffery Sachs‘ development models. For most of the semester, Xavier had trouble winning students over to his way of thinking, a world where poverty traps didn’t exist, and Africa should be left to fend for itself. Until one day, an elaborate anecdote from one of his first visits to Africa changed everything.
Xavier described a time, many years ago where he and his then girlfriend visited a village in Africa. In a laughably stereotypical example, his girlfriend pulled out a bag of sweets so that she could be the favorite of all the children in the village (1 – remember this number, I will return to it later). Immediately, she was swarmed, smiles everywhere. She was the hero of the village that day. She was happy, having satisfied her need to give, and obviously the children were happy too, as their need for sweets was satisfied too. A win-win for all.
The next day, she brought out from her luggage more sweets than the previous day, wanting to be upgraded to the village’s superhero. As she reached the village, the children overwhelmed her. She asked a lady in the village to help her hand out the sweets as it was too much to handle herself. As she started sharing the sweets with the children, the children became aggressive, each wanting more than the other and fights started breaking out (2).
While Xavier’s girlfriend was trying to divide sweets equally in what was quickly becoming a boxing match, she noticed that the lady that was helping her divide the sweets among the children had vanished along with the bag of sweets (3). After having chased her down to her hut, Xavier’s girlfriend questioned the lady as to her actions. The lady quickly defended her actions, saying that her son had an illness and if she was able to sell the sweets the following day, she could take her son to the doctor. Absolutely stunned, Xavier’s girlfriend did not utter a further word and left.
As an economist Xavier noticed several things his girlfriend was oblivious to. Xavier is a man that believes in incentives as if it were some higher power. He noticed that the free sweet handouts distorted the incentives of the children, as they spent the day waiting around for the sweets instead of going to school (4) because the children knew the handout was on its way. Furthermore, Xavier knew that the impacts were even more widespread. Who lost out on this day? The local sweet-shop owner, as no entrepreneur can compete with a price of zero (5).
Ultimately, the children were left holding grudges, a shop owner made a loss and the only real problem of an ill child was left unsolved (6). However, it was a success as we had a happy western donor who thought they were saving the world. This simple story demonstrates how foreign aid alone cannot foster the growth of any society. Let’s go back to those numbers and summarize each one in an economic sense:
(1) A unilateral decision was made by the donor of what the recipient needed. Little to no discussion with the recipients on which issues needed to be addressed. The donor chose a project which appeared spectacular, although not needed by the recipient.
(2) Violence starts spreading. Everyone wants as much of the free stuff as possible, and being in charge of large parts of funding and having the power to distribute it, is something worth fighting for. There is no doubt that large inflows of money can ignite civil wars.
(3) Corruption becomes rife. Countries receiving large sums of aid have seen politicians use public money for private gain. One does not need to look much further than Robert Mugabe of Zimbabwe or Mobutu Sese Seko of Zaire.
(4) Incentives are quickly distorted. If leaders or citizens know that free stuff is on the way, they have absolutely no need to engage in activities that will generate these goods for themselves. A cycle of dependency is born.
(5) Less economic growth. No entrepreneur can compete with free handouts. It would have been a different story had Xavier’s girlfriend bought the sweets at the local sweet shop. It still would not be ideal, but it wouldn’t hurt the entrepreneurs in the same way. We are seeing this more often today, where NGOs use local labour and local products to carry out their work in developing countries.
(6) The real problems are left unsolved. In the same way that the ill boy remained ill, many parts of Africa remain ill after five decades of aid, as they are almost never asked about what their true problems are.
Although this analogy may not be perfect, it certainly provides insight into the last 50 years on the African continent. Although the past looked bleak, Africa is not what it used to be. Things in Africa are looking more optimistic by the day: we are seeing stronger rule of law in most parts of the continent, with many countries taking a sterner approach on corruption in the last decade. Furthermore, trade and foreign direct investment has created economic growth for many countries.
Can aid help a country that is already on the right path? Certainly. Can aid put a country on the right path? Certainly not.
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just some ideas... 