Why aid fails, and how it could work
Somalia has no government, unless you count a “transitional” one that controls a few streets in the capital, Mogadishu, and a short stretch of coastline. The rest of the country is divided into warring fiefdoms. Warlords extract protection money from anyone who has money to extract. Clans, sub-clans, and sub-sub-clans pursue bloody vendettas against each other, often fighting over grudges that pre-date the colonial period. Few children learn to read, but practically all self-respecting young men carry submachine-guns.
I was at one of the country’s countless road blocks, on a sandy road outside Baidoa, a southern town of shell-blasted stone walls and sandy streets. The local warlord’s men were waving their Kalashnikovs at approaching trucks, forcing them to stop. Many of the trucks carried passengers perched atop the cargoes of logs or oil drums. The men with guns then ordered all the children under five to dismount and herded them into the shade of a nearby tree. There, they handed them over to strangers with clipboards, who squeezed open their mouths and fed each one a single drop of polio vaccine.
This was foreign aid at its most heroic. The World Health Organization (WHO) is trying to eradicate polio. It’s a foul disease that paralyzes small children and sometimes kills them by causing their lungs to seize up, but it’s vaccine-preventable. As recently as 1988, it afflicted an estimated 350,000 people, but since then, under the WHO’s auspices, over 2 billion children have been vaccinated. In 2001, there were only 537 reported cases of polio, and the true total was thought to be no more than twice that.
Polio could be completely eliminated, like smallpox was in 1979. The wild polio virus cannot survive long outside its human host, so if enough people are vaccinated, it has nowhere left to hide. But it is holding out in places like Somalia: poor, often violent countries, where local health services are too dysfunctional to organize proper vaccination campaigns. This is where foreign aid workers come in.
Somalia has no public health service, so the WHO has to work with the only local authority that exists, which is to say, the warlords. It is a difficult and nerve-racking task, but somehow they manage it.
In each fiefdom, they make contact with the local thugocrat and ask, in language oozing feigned respect, his permission to carry out hut-to-hut vaccinations. They are careful to hire members of all the big local clans to help and to rent the cars they need – but no more – from whomever the local warlord nominates. The cars come with drivers and gun-toting guards but cannot be used to transport vaccines over long distances. If driven into a rival clan’s territory, they are liable to be hijacked.
In Somalia, the men with guns make the rules, and aid workers have to adapt to this, just as locals do. Somali women make money by building stick-and-plastic shacks at road blocks and selling tea to all the travelers forced to stop and wait there. The WHO learned from their example and placed a vaccinator with a cooler at every possible road block to catch peripatetic children. As described above, the men with guns sometimes help, in their own bossy way.
The obstacles are numerous but not insuperable. Some Somali parents refuse to let their children be vaccinated. In an oral culture rumors proliferate, including the rather unhelpful ideas that vaccines are un-Islamic or that they give you AIDS. But the WHO persuades the reluctant by getting people from their own clans to talk to them and by driving trucks around broadcasting pro-vaccine messages over loudspeakers.
To reach more dangerous areas, the vaccinators wait for a pause in the fighting and then pounce. There is a polio officer in every district. Because anyone with a foreign employer is assumed to be rich, they are obvious targets for kidnappers so some sleep in a different house each night. Whenever it looks safe enough to fly in the coolers, they holler. When I visited, in April 2002, their task was nearly done. There had been no new polio infections reported since the beginning of the year, and they were hoping soon to declare Somalia polio-free.
It was a staggering achievement, of which the WHO can be proud, as can UNICEF and Rotary International, who also helped. Vaccination campaigns are universally and rightly applauded. But there is more to aid than jabbing babies, and many of the other ways in which rich countries have tried to improve the lives of the poor have been much less successful.
A deep hole
Running through the rocks beneath northern Zambia is one of the world’s richest seams of copper, and there’s plenty of cobalt down there, too. Large deposits were first discovered near Nchanga in the 1920s1 and there could be another fifty years’ supply still to dig up.2 An opencast mine has been established there since 1955, a vast pit almost five kilometers long and 500 meters deep that makes the mechanical diggers scrabbling at the bottom look no bigger than the plastic sort that fall out of cereal boxes.3
Drop a coin into the pit at Nchanga, and it is gone forever. Drop in a million dollars, and you’ll lose most of that, too. Some notes will be buried in the earth as it is churned beneath the shovels or blown off into the bush to be eaten by browsing antelopes. Some will disappear into the foreman’s pockets. Several lucky workers will grab an armful and perhaps then stop working. The people in the surrounding villages will maybe find a few dollars in their backyards, but not enough to make a real difference to their lives.
This is pretty much the story of foreign aid to Zambia. Perhaps because the country is, unlike Somalia, marvelously peaceful, or perhaps because Zambians are such nice people, donors have lavished more aid on Zambia, per head, than almost any other country in the world. The aid was supposed to make Zambians less poor. It failed. Between independence in 1964 and 2000, average incomes in Zambia actually fell, from $540 to $300.4 The main difference between aid to Zambia and throwing a million dollars down a mine is the amount. By one estimate, between 1980 and 1996, counting only grants, not loans, 5,944 million-dollar bundles were thrown into Zambia.5
Six Marshall Plans
African leaders sometimes talk of the need for a “Marshall Plan” for Africa, a reference to the generous American aid program that helped Western Europe to recover after the Second World War. In fact, Africa has already received aid equivalent to six Marshall Plans.6 But whereas the original Marshall Plan was a triumph, aid to Africa has failed to alleviate the continent’s poverty.
This is also true of aid to poor countries in general. Few studies have found any robust link between aid and faster growth.7 Countries that receive lots of aid do no better, on average, than those that receive practically none.
Why is this? One reason is that faster growth is not always donors’ first priority. A hefty whack of Saudi Arabian aid, for example, is aimed at alleviating spiritual rather than material poverty by handing out free Korans. Much aid from some countries is a sly way of slipping money to domestic interest groups. Japanese donations, for example, have often been made on condition that the recipient buys chemicals or machine tools from Japanese firms.8
During the Cold War, the superpowers dished out much of their aid for strategic reasons. In the 1980s, for example, American aid kept the murderous (but anti-communist) Liberian President Samuel Doe in power, for which other Liberians are not particularly grateful. Soviet aid was less generous, but the possibility of pocketing a few million roubles led several African governments to nationalize industries, collectivize farms, and generally pursue policies that kept their citizens poor and hungry. (Greed was not the main reason for adopting statist policies – many African leaders believed in them – but aid doubtless encouraged a few waverers.)
Today, strategic considerations continue to guide much aid. Iraq swallows a huge chunk of American aid because America, having conquered the place, feels morally obliged to rebuild it and has a powerful interest in seeing it become a functioning democracy. Israel has long floated on American largesse, partly because it is the only (more or less) stable democracy in the Middle East and partly because a large domestic lobby demands that it be supported. Russia and Ukraine receive large sums for fear that they would otherwise sell their surplus nuclear warheads to terrorists. France hands out millions of euros to countries where French is spoken.
Even where aid has been intended to spur development, it often hasn’t. Until recently, big donors liked to finance big, showy projects such as dams and sometimes failed to notice the multitudes whose homes were flooded. When individual Westerners empty their drawers and cupboards to find things to donate to Africa, the results are often laughably inappropriate: starving Somalis have received heartburn pills; barefoot Mozambicans have been sent high-heeled shoes.9
Shoddy research can render aid worthless. In Mali, donors once built a fish farm in canals that, had they asked the locals, they would have learned were dry for half the year. In Kenya, the government of Mwai Kibaki, which won office in December 2002, argues that although the country receives plenty of aid, it is hard to find time to govern when ministers have to receive half a dozen delegations of donors each day to explain what they plan to do with it.
Turmoil in recipient countries can prevent aid from bearing fruit. I once stood on a dock in Kinshasa and watched medical aid workers close to tears as they described how a power failure, caused by a rebel attack on a hydroelectric dam, had shut down their refrigerators, destroying the vaccines they contained.
Less spectacularly but more commonly, corruption, incompetence, and bad economic policies can often be relied on to squander any amount of donor cash. The Zambian example speaks for many.
A “Z” grade for Zambia
At independence in 1964, Zambia seemed poised for success. The second-wealthiest nation in Africa, after South Africa, it had a popularly elected government committed to helping the poor, some of the world’s best copper mines, and a generous stream of aid. Most donors at the time believed that the main obstacle to development was lack of money and that giving poor governments cash to invest would spur rapid growth.
It was not so simple. Zambia’s first president, Kenneth Kaunda, set up a one-party socialist state and nationalized everything from the copper mines to hair salons and dry cleaning shops. In order to promote “self-sufficiency,” he erected tariff walls and currency controls, thereby shutting the Zambian economy off from the rest of the world. His officials told farmers what to grow, bought their crops, and then sold them at heavily subsidized prices. Generous loans were granted to farmers, and little attempt was made to make them repay. Zambians came to see government loans as a perk of freedom from colonial rule.
In state hands, Zambian industry withered. Kaunda assumed that the copper mines would be an inexhaustible source of revenue. Thousands of unnecessary hands were hired. Contracts to supply the mines with anything from pencils to pickaxes were awarded to ruling party cronies, who gleefully padded their invoices. When mining tools broke down, they were only occasionally mended. Copper production peaked in 1969, just before nationalization, at 825,000 tons a year. By 1999, it had plunged to less than a third of this level.10
From 1974, the copper price fell, and suddenly the government could not pay its bills. But any shortfall was picked up by foreign donors. As Kaunda’s economic policies grew more foolish, aid climbed steadily, reaching 11 percent of GDP by the early 1990s. IMF loans in the 1980s were tied to free-market reforms, but these were enacted without enthusiasm and frequently reversed. Aid kept the treasury full even as Kaunda destroyed most of the productive businesses in the country. A gentle and amiable man, and not a bad guitar-player besides, Kaunda is still widely respected in Zambia. But when he left office in 1991, after twenty-seven years in power, he left his countryfolk poorer. Zambians remember his rule as a time when the shops were so bare that even the well-off had trouble buying soap.
In the end, Kaunda’s disastrous handling of the economy led to his downfall. In 1990, donor pressure forced him to allow opposition parties. The next year, donors pushed him into calling an election. To his surprise, he lost. Frederick Chiluba, a former union leader, won on a platform of allowing greater democracy and liberalizing the economy.
Donor funds rose anew. Buoyed with foreign cash and goodwill, Chiluba enjoyed some early successes. He brought inflation down from over 100 percent to only 20 percent in 1999. He cut tariffs, repealed exchange controls, and welcomed foreign investors. This filled the shops with fancy foreign goods: wine and lawn furniture from South Africa, Japanese televisions, and dozens of flavors of ice cream. But only the wealthy could afford these things, and most Zambians continued to grow poorer under Chiluba, despite receiving roughly $900 a head in aid and debt relief during the 1990s.11
The torrent of foreign aid allowed Chiluba to delay or avoid essential reforms. For instance, before coming to power, he promised voters that he would trim the bloated and inert civil service he inherited from Kaunda. Instead, he recruited yet more bureaucrats in the hope that they would be grateful and vote for him. Without aid the wage bill would have bankrupted the government, but with donor support Chiluba was able to pay thousands of the brightest Zambians to shun the kind of productive enterprise that might have made the country less poor.
Worse, Chiluba failed for almost a decade to privatize the copper mines. Even after years of decay, the mines were still Zambia’s only significant exporter. Apart from foreign aid, they were the only way the country could get hold of hard currency, which they needed to buy things that could not be produced in Zambia. These included oil and practically everything more technologically advanced than a bowl of stew.
Under state control, copper output fell by the year, and the mines recorded huge losses. Without aid, the government would have had no choice but to sell them immediately. But donor support allowed Chiluba to dawdle. The idea of privatization was not popular with ordinary Zambians – many saw it as surrendering the country’s most prized asset to foreigners. But probably a more important reason for the delay was that in state hands the mines were a tremendous source of patronage. If anything, they were looted more systematically in the 1990s than they had been under Kaunda.
Under pressure from donors the government put the mines on the auction block in 1997 but then rejected all offers. Exasperated donors starting cutting aid, which forced the government to try again in 1999. By this time, most foreign mining groups had lostinterest. But in 2000 Anglo American, the firm from which the mines had originally been expropriated, bought most of them for $90 million. By one calculation, the delay cost Zambia $1.7 billion – about half a year’s GDP.12 No French or American president could have cost his country as much, in relative terms, without using nuclear weapons. To cap it all, two years later Anglo pulled out of Zambia, saying that the mines were in an even worse state than they had realized and could not be salvaged.
Meanwhile, Chiluba filled his government with an astonishing array of crooks, arms-traffickers, and drug-dealers.13 One of his former cabinet ministers, who resigned in disgust in the mid-1990s, handed me a parliamentary report into the misappropriation of state assets which would have been enough to bring down any normal government but which Chiluba’s regime simply suppressed. Another told me how even the money intended to buy corn for starving Zambians was stolen by Chiluba’s cronies. According to William Easterly of the World Bank, if aid had had the predicted accelerating effect on growth between 1961 and 1994, Zambians’ average income would have exceeded $20,000.14 Today, it flounders at less than a sixth of that.
An “A” grade for Botswana
Aid failed in Zambia. But in neighboring Botswana it helped fuel a protracted economic boom. It is a remarkable story.
Botswana was, at independence in 1966, one of the poorest countries in the world. Cows grazed the few patches of ground that were not desert. Herdsmen herded them. That was pretty much the sum total of economic activity in Botswana.
To begin with, aid funded virtually all government investment and much of its recurrent expenditure, too. In 1971 aid was equivalent to 98 percent of state revenue.15 But shortly after independence prospectors found diamonds under the Botswanan desert.
Unlike successive Zambian governments, Botswana’s did not squander the windfall. Diamond dollars were ploughed into infrastructure, education, and health. Private business was allowed to grow unmolested, and foreign investment was welcomed. A group of South Africans came and set up safari lodges in the Okavango delta, where a river runs into the desert and stops, forming a 15,000-square-kilometer oasis for all the wildlife in the country. Tourists flocked to gawk at the elephants and wild dogs and to be punted around water-bird sanctuaries in hollowed-out logs.
Donors’ suggestions were carefully evaluated; projects were only approved if the proposers could demonstrate that they were sustainable and did not duplicate work being carried out by others. Aid programs were transparent, too. Donors could come at any time and observe how their money was being spent.
In the last thirty-five years, Botswana’s economy has grown faster than any other in the world. Yet cabinet ministers have not awarded themselves mansions and helicopters, and even the president has been seen doing his own shopping. Exchange controls were abolished in 1999, the budget has usually been in surplus (although this has slipped recently), and GDP per head tops $3,000. The country remains vulnerable to swings in the price of diamonds and has not diversified enough into other industries. But all in all its record is impressive. Their task completed, donors are packing their bags.16 The country still has a horrific AIDS problem, but the government is now rich enough to offer drug therapy to people who need it.
Why the difference?
Aid helped lift Botswana out of poverty but was wasted in Zambia. Why the difference? Both countries had minerals. The two countries’ cultures are quite similar. Educational levels were different at independence, but it was Botswana that had the less literate population. What really mattered, however, was that Botswana had good economic policies, soundly administered, whereas Zambia did not.
All around the developing world aid works or fails according to whether the recipient country competently implements sensible economic policies. We’re talking about the basics here: spending approximately within your means, not cutting yourself off from the rest of the world, and not allowing civil servants to steal too much. A recent study by two economists at the World Bank sorted fifty-six aid-receiving countries by the quality of their economic management.17 Those with good policies (low inflation, a budget surplus, and openness to trade) and good institutions (little corruption, strong rule of law, effective bureaucracy) benefited from donor funds. Those with poor policies and institutions did not. Badly run countries showed negligible or even negative growth, irrespective of how much aid they were given. Well-run countries that received little aid grew steadily, at 2.2 percent, per head, per year. Well-run countries that received a lot of aid grew much faster, at 3.7 percent, per head, per year.
This huge difference can be explained by a number of factors. In badly managed countries, aid is sometimes stolen. When it is not, it tends to displace, rather than complement, private investment, perhaps because there are fewer opportunities to choose from in such countries. In countries with good management, by contrast, aid tends to “crowd in” private investment. This is probably because if an economy is growing fast, the returns on, say, road-building or setting up a new airline are likely to be greater.18
For aid to be most effective in lifting people out of poverty, it should be directed toward well-managed countries with lots of poor citizens. But too often it isn’t. Bilateral aid tends to favor allies and ex-colonies. A 1998 study by Alberto Alesina and David Dollar found that a former colony with a closed economy received about twice as much assistance as a non-colony with an open one.19 Undemocratic ex-colonies also received twice as much as democratic non-colonies. After controlling for population and average income, badly run countries received just as much bilateral aid as well run ones. (Nordic aid was a notable exception to this dismal trend.)
Aid is supposed to help the poorest but often doesn’t. The adage that foreign aid is a transfer of wealth from the poor in rich countries to the rich in poor countries is often true. A typical poor African country receives aid equivalent to about 10 percent of GDP, but the poorest fifth of the population disposes of only 4 percent of GDP.20 In other words, a lot of the aid is paying for conferences at five-star hotels, study trips for MPs to Washington, and Toyota Landcruisers to ferry aid workers around.
For the foolish – advice
Can aid persuade bad governments to shape up? Probably not.
In the 1960s and 70s, many donors believed that statist policies, of the sort practiced in Zambia, were the quickest way to develop. So several African countries were actually paid to adopt policies that impoverished them. From the early 1980s, the failure of these policies was hard to ignore. So the IMF and World Bank started to make assistance conditional on more laissez-faire policies – “structural adjustment,” in the jargon.
This has not been terribly successful either. African leaders, on the whole, distrust the IMF and the World Bank – understandably, given these institutions’ policy flip-flops. More important, few African leaders like markets or the idea of spending within their means, and donors have discovered that it is virtually impossible to force governments to implement policies they do not like. They often agree to cut subsidies, tackle corruption, or whatever in return for loans. But as soon as they have cashed the aid check, they tend to backtrack.
The Kaunda government in Zambia, for example, had to beg the IMF to bail it out in 1985 and again in 1989. Both times, large amounts of cash were exchanged for promises to keep spending under control and to liberalize the economy.21 Both times, the government broke its promises. This should not have come as a surprise. Neither Kaunda nor many of his officials wanted to reform. They passionately believed that the state should direct the economy and expected the copper price eventually to recover and plug the hole in the budget. It didn’t.
In the 1990s, donors sent mixed messages to Zambia. Bilateral donors such as Britain and the Nordic countries made much of their aid conditional on the Chiluba government behaving democratically. The World Bank and the IMF emphasized instead the need to stick with free-market reforms. Bilateral donors cut aid when, for example, Chiluba had the constitution changed to bar his only serious opponent – Kaunda – from contesting the 1996 presidential election. The Bretton Woods institutions only protested when, for example, the privatization of the copper mines was delayed once too often.
Neither type of threat did much good. In economic matters, attaching conditions to loans made the Zambian government what one writer called a “receiver of policy, rather than an initiator.”22 Ministries devoted their efforts simply to meeting the letter of donor conditions rather than energetically pursuing the spirit of free-market reforms. They also fiddled the numbers to make it look as if they were keeping promises when they weren’t.
Similar stories can be told of other countries. Daniel arap Moi, who ruled Kenya for nearly a quarter of a century, used to promise one thing to donors and the opposite to domestic interest groups. Even when recipients blatantly flout aid conditions, donors often hand over the money anyway, fearing that to refuse might spark an economic collapse.
According to the World Bank, “reforms rarely succeed unless the government is genuinely convinced that the reforms have to be implemented and considers the reform programme its own.”23 Richard Dowden, my former colleague at the Economist, expressed it more trenchantly: “If you give money to a recalcitrant junkie, he will waste it.”24
As a rule, elected governments are more likely to implement reforms than unelected ones, as voters who keep on getting poorer will protest at the polls. And new regimes are more likely to reform than old ones: governments, like people, get set in their ways.25
For countries with foolish governments, large-scale monetary aid is wasted, so the best approach is to offer ideas instead. The architects of successful reforms in Indonesia in the 1970s, and in several Latin American countries in the 1980s and 90s, were largely educated abroad, often at donor expense. The crash course in market economics given to senior African National Congress members shortly before the ANC won power in South Africa in 1994 was crucial in helping the new government to understand the importance of financial stability.
In the meantime, perhaps the only valid reason for attaching detailed conditions to aid is to provide a scapegoat for governments that are trying to push through wise but unpopular reforms. If a minister who wants to privatize a loss-making airline can say that an IMF loan will not materialize unless he does so, it may be harder for unions to block the deal.
For the virtuous – cash
Donors usually like their money to be used for worthy things such as agriculture, education, and health. A high proportion of aid is disbursed for specific projects, such as irrigation or building schools. Since the schools are usually built and the ditches dug, donors are usually satisfied that their money has served the purpose for which it was intended. But often it has not.
Most of the available evidence suggests that aid money is fungible – it goes into the pot of public funds and is spent on whatever the recipient government wants to spend it on. If donors earmark money for education, it may cause the government to spend more on education, or it may free up the money that the government would otherwise have spent on education to be spent on something else. If the government is benevolent, this may mean agriculture or tax cuts. If it is not, this could mean limousines for ministers and batons for cracking demonstrators’ heads.
The important factor is not the donor’s instructions but the recipient government’s priorities. A study carried out a decade ago in Indonesia found that for every extra aid dollar earmarked for agriculture, public spending on agriculture increased by ninety-two cents.26 By contrast, a fourteen-country study published in 1998 showed that each extra aid dollar aimed at agriculture actually decreased total agricultural spending by five cents.27 So the uncomfortable answer to the question “What is all our aid money being spent on?” is “Who knows?”
Many donors, if they put money into a road-building program that shows a return on investment of 100 percent, imagine that the return on their aid is 100 percent. But it may be that the government would have paid for the roads anyway, and the actual effect of the aid is to free up funds for a marginal project that would otherwise not have been carried out. The return on this project could be much lower. It could even be zero.
This does not mean that donors should never finance specific projects. Sometimes the real value of a donor-funded dam or telephone network lies in the technology that is transferred and the advice given on how to operate and maintain the completed infrastructure.
But the fact of fungibility suggests that the aid-giving process could be greatly simplified if most donations took the form of untied, unconditional “balance of payments support.” In other words, cash. Such support should go only to competent governments, and priority should be given to countries with lots of poor citizens.
There are not many such countries. India and Vietnam probably qualify, as do Mozambique, Tanzania, and Uganda, although corruption is a problem in all five.
Rich countries currently devote a miserable amount to aid. They may dig into their pockets to help tackle sudden, telegenic emergencies, such as floods in Mozambique or famines in Ethiopia (which is as it should be). But they have grown weary of funding the long slow struggle to help the bulk of the poor – the 2 billion or so who are not currently clinging to trees above raging floodwaters – grow a bit richer. Development aid to Africa withered in the 1990s, from $19 billion in 1990 to $14 billion in 1999, probably because rich-country taxpayers are fed up with bankrolling failure.28 If aid could be made to work, however, people in rich countries would surely be more generous. The necessary sums are, by rich-country standards, not very big.
Donors should be both more generous and more selective. Countries that are genuinely trying to implement sensible policies should be given more money. Countries that are not should be offered advice but no money. Donors should be ready to help new governments if they seem earnest about reform.
At the same time, however, donors should probably devote a smaller proportion of their aid budgets to helping individual countries and more to fostering the kind of technology that benefits poor people everywhere, such as vaccines. This approach has recently become more popular. Large though not yet adequate sums have been pledged to the UN-backed Global Fund to Fight AIDS, Tuberculosis, and Malaria, and charitable individuals, most notably Bill Gates, have supported some hopeful research into vaccines for diseases that afflict the poor.
Most important, rich countries should open their markets to goods from poor countries. Trade has far more potential to reduce poverty than aid.
The right to trade
In the energy-sapping heat of Uganda, I watched women bent double to tend rows of flowers destined for export. They toiled and sweated long hours for a pittance so that pampered Westerners could buy roses all year round. Bono, the Irish rock star and conspicuous campaigner for worthy causes, was also watching. One might have expected him to protest at this scene of back-breaking drudgery. Instead, he said it represented “globalization at its best.”29
He was right, of course. Growing flowers is hard work, but no more so than subsistence farming, which was the alternative; and it pays better. Everyone benefits: Europeans get roses in winter, and Ugandan rose-growers earn enough to put their children through school.
This is the sort of thing that advocates of heartless global capitalism, such as the Economist, have been banging on about since the 1840s, but it is rare to hear a rock star make the same point, which is why I was following Bono around Uganda. I don’t normally chase celebrities, and my employer doesn’t normally publish interviews with them, but in Bono’s case we made an exception.30 The shades-wrapped rock star had ventured onto our turf, and we were actually quite glad to see him.
It was in 2002, when a number of charities had started to notice that north–south trade is not always exploitative. Oxfam had just released a fat report on trade, which denounced rich countries’ tariff barriers against imports from poor countries and their subsidies for farmers. Christian Aid had also condemned northern protectionism. Few charities were yet calling for poor countries to reduce their own tariffs and subsidies, but it struck me as a good start that some realized that, as Bono put it, Africans “don’t want to spend the rest of their lives on the nipple of aid.”
Bono was on a tour of Africa with, of all people, America’s treasury secretary, Paul O’Neill. It was an odd spectacle. O’Neill was a hard-boiled company-boss-turned-politician, who wore a dark suit and kept doing sums out loud and in public. Bono, by contrast, was a bit hazy with numbers and apt to say lyrical things in his soft Irish brogue that sounded beautiful but, on closer examination, meant nothing. “People say that politics is the art of the possible,” he lilted, “but I think it should be the art of the impossible.”
I’m not going to mock the rocker. He’s a fabulously wealthy musical genius, and I’m not. More important, regardless of whether he understands the issues in much detail, he is uniquely able to publicize them. His ability to occupy magazine covers and television screens helped make the “Jubilee 2000” campaign for debt relief for poor countries such a success. And now he was fronting for a group of charities arguing that trade was at least as important as aid and that rich countries should tear down their trade barriers. That had to be a good thing.
Africa has lots of fertile land and cheap labor, so it is ideally placed to grow food and sell it to rich countries. Cheap labor should also make Africa a good place to make simple manufactured goods, such as textiles. Unfortunately, rich countries have erected towering trade barriers to keep precisely these products out.
Farmers in rich countries are especially well protected. In Western Europe, Japan, and (to a lesser extent) America, land and labor are expensive. Most things that French or Japanese farmers grow can be grown more cheaply in poor countries. Given the choice, thrifty Western consumers would probably buy a lot of groceries imported from the Third World. Western farmers know this and fear that it would put them out of business. So they lobby their governments for protection, which the governments seem happy to provide.
Rich countries impose hefty tariffs on imported crops; these tariffs are high enough to keep all but a few bags of foreign grain from being sold in supermarkets in Seoul or Tokyo. As if this were not favor enough, farmers in rich countries also receive all manner of subsidies. Sometimes they are paid to grow stuff. Other times they are paid to stop growing stuff that they have grown too much of because they were paid to grow it. Because prices fluctuate, governments sometimes guarantee a floor beneath which prices will not be allowed to fall. When prices fall below this floor, the government buys up all the surplus milk or wheat or whatever, which brings prices back up again.
Farm subsidies in rich countries are running at about a billion dollars a day. This is roughly equivalent to the entire GDP of sub-Saharan Africa. African farmers simply cannot compete. A huge potential source of profit is closed to them. What’s more, subsidies make farmers in rich countries produce more than rich-country consumers can eat. This surplus is often dumped on African markets, which lowers the prices that African farmers can get at home.
When rich countries cut subsidies or tariffs, farmers in poor countries swiftly benefit. Those Ugandan flower-growers used to have to compete with heavily subsidized Dutch flower-growers whose prices they could only beat during the European winter. But as those subsidies were pruned, the Ugandans started to harvest all year round, and their country’s flower exports blossomed from approximately nothing in the mid-1990s to $16 million in 2001.
Even so, compared with what Uganda could make selling peanuts to America if only they did not face tariffs of up to 164 percent, this is, well, peanuts. Ugandans who want to sell rice to Japan are hobbled because 93 percent of the market is reserved for Japanese growers. If they want to sell sugar to Europe, they must hack their way through a jungle of rules so thick that even experts cannot get through it. This is not an exaggeration. I called up Wyn Grant, an expert on European Union agricultural policy, and asked him to explain the sugar regime to me. He admitted that he couldn’t, not without referring to some heavy reference books. God knows how African sugar farmers cope. Even if they were to master the rules, they still face tariffs of up to 140 percent.
In all, rich country protectionism costs poor countries $100 billion a year, or twice what they receive in aid. At any rate, that’s the suspiciously round number that Oxfam’s policy analysts calculate the damage to be, and I can’t find a better one. What Oxfam, Bono, and other charitable types fail to notice, however, is that northern protectionism hurts the north, too.
Northern taxpayers lose out to the tune of those aforementioned billion dollars a day. Those northerners who eat food lose out, because they have to pay more for everything from bread to oranges. Among rich countries only New Zealand has taken the plunge and slashed agricultural tariffs and subsidies. As a result, New Zealanders pay half as much for the same basket of groceries as Western Europeans do. Bigger grocery bills particularly hurt the poor in rich countries because they spend a large chunk of their disposable incomes on food. Lawyers and lobbyists may not bother to read the price tags in the grocery store, but the jobless do.
The only people who win are the farmers who receive the subsidies. In Europe and America the biggest subsidies go to the biggest farmers, so a lot of the people being helped are rich. The average American farm reports a net worth of $564,000, twice the average household’s. The needy recipients of farm subsidies include Ted Turner, the media baron, Scottie Pippen, the basketball star, and twelve of America’s 500 largest companies.31
For smaller farmers, subsidies can make the difference between staying afloat and going bust. But is that as kind as it sounds? The torrent of handouts does not seem to have made them happy: British farmers are 50 percent more likely to kill themselves than other Brits. In effect, we’re paying them to stay in a dying industry, instead of learning a new trade. I don’t know about you, but if my son asked me for career advice, I probably wouldn’t say, “Go work in a doomed industry, and here’s ten grand if you stick at it.”
Agricultural protectionism – a pig that can’t be slaughtered
Given the harm that farm protection wreaks, it is strange that nearly every rich government does it. There are several reasons. First, people worry about “food security.” They fear that if they cannot grow their own food they will starve if war breaks out and their imports are torpedoed. This is a fair point, with roots in the Second World War, when German submarines caused havoc with Allied ships. But it is greatly overstated. In the nuclear age, if France went to war with a country advanced enough to seize control of French shipping routes, the last thing anyone would be worrying about would be whether there was enough sugar to make almond croissants.
Another argument is that farmers are the guardians of the natural beauty of the countryside and should be paid for this public service. Perhaps so, but if that is the excuse for farm subsidies, it would be cheaper and more effective to pay someone actually to preserve unspoilt fields and woodlands rather than paying to have them ploughed up and slathered with pesticides.
The main reason that farm subsidies persist is the reason that all subsidies persist. The benefits are concentrated, but the costs are dispersed. The average rich-country citizen spends over $300 a year on farm subsidies but probably doesn’t know it.32 The price tag on a loaf of bread does not tell her how much cheaper it would be if foreign wheat could be imported without tariffs. No one ever asks her to press $300 into the palm of a California rice-grower. And even if she did realize where the money was going, it’s less than a dollar a day, so she probably wouldn’t organize a protest march about it. She’s too busy earning a living. For the farmers who pocket them, however, farm subsidies are the single most important political issue. To defend them, they will certainly hire lobbyists, organize protests, and dump piles of fertilizer on their senators’ front lawns.
Those who would restrict trade with poor countries often argue that the way poor countries compete – by paying workers less – is unfair. This argument is emotionally appealing. Many Westerners would choke on their cornflakes if they thought that the corn was grown with child labor. Even if the corn-planters were adults, many people in rich countries would not like to think of them being exploited, and a typical African farm-worker’s wage of a couple of dollars a day sounds horribly exploitative to most Americans or Swedes.
This kind of thinking is behind moves by labor unions in rich countries to block imports from countries that do not adhere to rich-country labor standards. But it does the poor no favors. For most Africans, the alternative to long hours at low wages is long hours at no wages – unemployment. By preventing Africans from trading, well-meaning Westerners make them poorer.
Trade allows specialization. A plumber, for example, specializes in fixing water pipes. He gets good at it, so he can fix lots of water pipes in a day. He trades his services for money, which he can then spend on everything he needs. If he had to grow all his own food, weave his own clothes, and build his own house, he would be unlikely to do any of these things well. He would probably end up as poor as Nashon Zimba, the Malawian subsistence farmer I mentioned earlier. Poorer, in fact – Zimba trades his surplus corn for soap and T-shirts.
On a larger scale, countries prosper through the specialization that trade allows. British people are quite capable of growing wheat; they’ve been doing it for millennia. But South Africans can do it more cheaply, so it makes sense for Britain to sell South Africans insurance and buy their wheat.
Trade benefits both parties even when one party is better at more or less everything. This surprising observation was first made by David Ricardo, a British economist, who called it the law of “comparative advantage.” Ricardo said that if you can make A better than B, and your neighbor can make B better than A, but he can make both A and B better than you can, it does not follow that your neighbor should do both jobs. Both of you would profit more if each concentrates on what he does best. So would society as a whole.
The most digestible illustration of this I’ve heard was concocted by P. J. O’Rourke, an American humorist who likes to grapple with serious subjects. Let us decide, he writes,
that one legal thriller is equal to one pop song as a Benefit to Society. (One thriller or one song = 1 unit of BS.) John Grisham is a better writer than Courtney Love. John Grisham is also (assuming he plays the comb and wax paper or something) a better musician than Courtney Love. Say John Grisham is 100 times the writer Courtney Love is, and say he’s 10 times the musician. Then say that John Grisham can either write 100 legal thrillers in a year (I’ll bet he can) or compose 50 songs. This would mean that Courtney Love could write either 1 thriller or compose 5 songs in the same period.
If John Grisham spends 50 percent of his time scribbling predictable plots and 50 percent of his time blowing into a kazoo, the result will be 50 thrillers and 25 songs for a total of 75 BS units. If Courtney Love spends 50 percent of her time annoying a word processor and 50 percent of her time making noise in a recording studio, the result will be 1 half-completed thriller and 2.5 songs for a total of 3 BS. The grand total benefit to society will be 78 units.
If John Grisham spends 100 percent of his time inventing dumb adventures for two-dimensional characters and Courtney Love spends 100 percent of her time calling cats, the result will be 100 thrillers and 5 songs for a total of 105 BS.
Applying this principle to foreign trade, O’Rourke notes that “the Japanese make better CD players than [Americans] do, and they may be able to make better pop music, but we both profit by buying our CDs from Sony and letting Courtney Love tour Japan.”33
Joking aside, this works in practice, too. The Cato Institute, a libertarian think tank in Washington, has taken the trouble to rank ninety-one countries by their openness to trade between 1980 and 1998. The trade openness index (TOI) takes account of tariff rates; the severity of exchange controls, as measured by the difference between the black market exchange rate and the official one; restrictions on capital movements; and the actual volume of trade, compared to an expected volume calculated by looking at a country’s size, population, proximity to big markets, and so on.34
Cato’s researchers then tried to assess whether free trade made countries richer. The results were striking. The twelve most open economies had a GDP per head in 1998 of $23,387 – seven times the figure for the twelve least open. Average incomes in the most open countries grew by 2.5 percent annually over those nineteen years, leaving them on average 1.6 times richer at the end. In the twelve least open countries, average incomes grew by a pathetic 0.3 percent per year over the period, leaving them on average only 6 percent better off at the end. (The countries in the middle showed middling income and middling growth.) The bottom twelve contained five African countries; the top twelve none. Half of the countries in Africa were not ranked, mainly for lack of data.
The relationship between openness and growth remained similar when the study looked only at poor countries. If anything, poor countries appeared to benefit more from openness to trade. And when the researchers tried to allow for other factors that may be correlated with openness, such as country size, inflation, and security of property rights, they still found that trade openness boosts growth. Other economists agree. Using somewhat different measures, two Harvard economists found that developing countries with open economies grew by an average of 4.5 percent per year in the 1970s and 80s, while those with closed economies grew by only 0.7 percent.35
The good news for Africans is that their borders are opening. After several disastrous attempts at self-sufficiency in the 1960s and 70s, trade barriers started to fall in the 1980s and 90s. On the Cato scale of one to ten, seven out of twenty-two African countries improved by more than one point between 1980 and 1998, while only one African country (Sierra Leone) regressed.
The bad news is that Africa still has towering informal trade barriers: muddy roads, bad ports, crooked customs officials, and policemen who specialize in highway robbery – as I found out when I rode in the cab of a Cameroonian beer truck.