(4/8/01) The Economist reports that there is a common joke in Africa in which a student from Africa and and one from Asia attend the same school overseas and become friends. Years later the African visits his Asian friend and finds him with a government job and living in a mansion. The African asks him how he can afford a mansion and the Asian says "see that highway" and points to a modern four lane highway and says "I got 10%." Years later the Asian goes to visit the African and finds him with a government job and living in a palace. The Asian asks him how he can can afford a palace and the African says "see that highway" and points to an empty stretch of jungle and says "I got 100%."

Sub-Saharan Africa receives over $15 billion a year in in foreign aid. The people whose taxes pay for this have a right to know what we are getting for it. The answer is that at the very most we are getting a 6.6% correlation with growth for it and are most likely getting much less.

These correlations(R²) show that the relation between growth and aid to Africa is minimal at best. As time goes by the effectiveness of this aid seems to be diminishing. The highest correlation is for the longest period, 1975-1998. This correlation might be the highest because aid takes years to take effect. It might also be high simply because it includes years from the 1970's when aid seemed to be more effective. The correlation for the 1990's seems to show that today aid is pointless.

Despite the fact that aid seems to be diminishing in its effectiveness the aid giving institutions such as the World Bank love to crow about how much they've learned over the years and how aid is only getting more effective. You can go this link and see how many reports they have on increasing aid effectiveness and you can read their flagship report on aid effectiveness here. This constant crowing about aid effectiveness is at odds with much of the research cited in these reports. The World Bank's flagship report on aid effectiveness states that in countries with "Poor Policy" each dollar of foreign aid reduces the GNP by 30¢. The report then goes on to brag about how in a country with "Good Policy" each dollar of aid will increase the GNP by 50¢. It doesn't say what happens to that other 50¢. This study was conducted using countries from around the world including fast growing countries such as: S. Korea, Thailand, Malaysia, and Chile. Putting S. Korea in a study on foreign aid is like putting Jose Canseco on a company softball team. I wouldn't be surprised if the "Good Policy" countries which the World Bank says prove that aid can work happen to be the fast growing countries included in the study which have nothing to do with the real problems of African or Third World poverty.

The World Bank studies find no evidence that aid can be used to improve a country's policies. This means that no matter how much money we give the "Poor Policy" countries this money will never make them into a "Good Policy" country. Since the World Bank's own research shows that aid hurts countries with bad policies you might assume that the World Bank favors cutting off aid to those countries. You would be assuming too much. The people handing out the money know it's not doing any good. They keep handing it out anyway.

An aid proponent might argue that aid is not working because we are just not giving enough. There is no evidence that at very high levels aid is more effective per dollar than at lower levels. Some regressions run by the World Bank suggest that as aid goes up the per dollar effectiveness goes down. The clearest answer is to be found by looking at some of the countries which receive the most aid.

The small island nation of Sao Tome and Principe received an average of $378 a person in aid from 1990 to 1998. This is an enormous amount when you consider that the average African income outside of South Africa is only $1,000 a year. This money does not seem to have done much. For 1990-1998 economic growth was only 1.3% a year and the per capita GNP is currently $1,100. That is with a generous adjustment for the local cost of living. Without this adjustment Sao Tome has an average per capita GNP of $270. In order to give every African this much aid per person we would have to multiply total aid to Africa by 15, thus spending $225,000,000,000 a year to get the same results Sao Tome is getting.

The nation of Djibouti is not an island, rather it is a well-placed port on the Red Sea. For 1990-1998 it received an average of $186 in aid per person. Growth for this period was -2.7%. Per Capita GNP is now $1,200. Guinea-Bissau averaged $112 per person over these years. The result was a whopping 1.7% rate of growth. This is below the 2.7% a year in population growth that Africa experiences each year. Even the countries with the highest amounts of aid per capita do not seem to be improved by it.

These are all very small countries. The facts might be different for larger countries. Among the medium to large size African countries the obvious welfare queens are Zambia and Tanzania. Each of these countries usually takes 1/15 of the total aid for Africa all by themselves. No country in Africa has ever pulled in more aid than Tanzania. Since 1975 it has received $17 billion in foreign aid. This country is a particular favorite of the Scandinavians. The World Bank won't say what Tanzania's growth rate was in the 1970's or 1980's, but in the 1990's it was 2.9% a year. Unfortunately, the population grew at 3% a year. The World Bank currently lists Tanzania as the second poorest country in the world with a per capita GNP of $478. It should be noted that this, like the other per capita GNP numbers I use unless otherwise stated is adjusted for the cost of living in that country and this usually doubles the figure for African countries. Without this adjustment the average Tanzanian makes $240 a year. I would venture to say that aid has not done much for Tanzania.

While neither Zambia nor any other African country can touch Tanzania in terms of the total amount of money received, Zambia leads Tanzania and other countries of significant size in terms of aid per capita for the 1990's. Tanzania has 34 million people while Zambia has only 9.8 million. In the 1990's Zambia received an average of $94 in aid per person while Tanzania received $36. The reason Zambia is getting so much aid seems to be irrational. I have a suspicion that France and Britain are in an unspoken competition to see whose former colonies can be the most successful and because of this they give these colonies a disproportionate share of all African aid. After longtime Zambian dictator Kenneth Kuanda was finally replaced by Frederick Chiluba in 1991, I believe Britain decided that this was their chance to get Zambia rolling and stick it to France. Chiluba was supposed to be a true democrat and talked a lot about reform and both the World Bank and Britain believed in it and gave him tons of money. Despite this all Chiluba has made a mark in is in how much he spends on his clothing. Regardless, Zambia is a large country with a great abundance of natural resources. Some may say that tiny countries like Sao Tome are not fair examples, but Zambia is larger than Texas and has some of the most abundant Copper deposits in the world. This is truly a fair example.

Zambia's current per capita GNP is $686 if you adjust for the low local cost of living and $320 if you don't. Per capita GNP is the same as average income. I always try to use the higher figures adjusted for local costs in order to avoid the criticism of stacking the deck against Liberalism. Nevertheless, it's worth looking at both figures. If you use the higher figure then from 1990 to 1998 Zambia has received an amount of aid equal to 13% of the average income each year. If you use the lower figure it equals 29% of local income. Considering that the aid flow is in absolute terms using the lower, absolute per capita GNP figures might be the correct choice. Each reader should decide for himself. Whatever figure you choose, Zambia's growth rate for this period is still just .9%. The population growth rate was 2.8%. While leading medium to large sized African countries in aid per capita Zambia has seen its per capita income drop by 1.9% a year. This country has recently sold its massive Copper mines to South African mining giant Anglo American and if Zambia's economy improves in the future it may well be due to this change and not the delayed effect of massive amounts of aid. Each reader should decide for himself.

Non-aid inflows of wealth have to be part of any discussion of the effectiveness of foreign aid. Since the 1970's Nigeria has averaged $9 billion a year in oil sales, yet has an average income equal to the average for Africa outside of SA. It's true that this $9 billion has to be spread out over a country of 130 million and that might explain why it does not seem to have had any effect. However, Angola is a much smaller country and sells $5.5 billion in oil a year and only has to divide that among 12 million. That comes out to $450 per person. Angola's per capita GNP is only $632, far below the African average. If African countries which receive $450 per person in oil money can't translate this into success, how will foreign aid do any better? To give Africa as much money per person as Angola gets from oil we would have to give $288,000,000,000 a year.

At this point I think its worth bringing up the example of the Arab oil states. Saudi Arabia sells $50 billion of oil every year. Exactly what has this done to increase their productive capacity? If the oil wells ran dry tomorrow Saudi Arabia would be no different from Syria or Egypt. If the great oil wealth of the Mideast cannot buy any productive capacity then it is hard to believe that foreign aid will do so for Africa.

Even if Africa was ready to succeed and all it needed was seed money to get started with it would still be hard to justify foreign aid. If Africa was truly in need of nothing but seed money then someone would surely be willing to lend them this money. Even if the evil whites in America and Europe refused the kind hearted non-whites of Asia would surely be willing to lend money to their brothers in the struggle. This would mean that all aid would really do for Africa is save it the interest it would otherwise have to pay. This is not a great benefit and does not justify the grandiose terms that advocates of aid speak in. If all Africa truly needed was seed money it could find this money on its own and would have succeeded by now.

The corollary to saying that if African investments were economically justified private capital would make these investments is saying that if African investments are always made by public capital then they must be economically unjustifiable. An example would be the $8 billion steel plant the Nigerians paid the Russians to build for them. This represents almost an entire year's worth of oil money and oil is really the only source of money Nigeria has. This plant has never produced one single pound of steel. I think the key to this is that the Nigerians had to pay another country to build it for them. We need to start thinking about applying a 'if you can't build it, then you can't run it' rule to Africa. So much of the foreign aid industrial complex is about having outsiders go into Africa and build things for the people already there. No one asks how the people already there are supposed to run and maintain these things if they can't even build them. And if they can build them, why do we have to do it for them?

An aid proponent might argue that what Africa really needs is not money to buy steel plants, but money to build colleges to produce engineers who can run steel plants. At first solving African poverty through education appears to be an unassailable idea. It is not. The fundamental flaw is the belief that if highly trained steel engineers are available they will be chosen to run the steel plant rather than the boss's nephew. In a place called Africa the boss's nephew will get the call so often that money spent on education will be wasted. Consider this quote from a 1993 UN study on aid effectiveness "There is a growing sense that technical cooperation does not work well, that as presently practiced it is ineffective, that such benefits as it brings are extremely costly, and that in any case it has little lasting impact." The problem with trying to help Africa by increasing its technical knowledge is that African countries are primitive power states in which most promotion comes by successfully working the corrupt system, not by performing at one's job. If the outside world pays for the education of African specialists and these specialists are not given power over the areas they specialize in then this education is wasted.

One of the most fundamental reasons aid to Africa is so ineffective is because of the kinds of people who are in charge of it on the giving end. The World Bank's motto is "A world without poverty" but I think what they really want is a world without conservatism. The people in charge of giving out aid have little interest in building highways or any type of infrastructure. What they really want is to transmit their own values to the people of Africa. This can be seen in the spending choices they make.

The World Bank says that if Zambia had properly invested all the aid it has received since independence it would currently have an average income of $20,000 instead of the $683 it does have. Yet the World Bank itself does not seem to be trying to properly invest the money it gives to Zambia, or Africa in general. In 1980 the World Bank gave Zambia $47 million for "Community, Social, Personal & Environmental Services" and $32 million for mining. Copper mining is not only Zambia's largest industry, it's practically its only industry. The latest year I have data for is 1996 and in it the World Bank gave $147 million for "Community, Social, Personal & Environmental Services" and $5.5 million for mining. The ratio of fluff to mining went from 1.5 to 27 times more fluff. It's not as if mining was doing so well that it did not need help. From 1989 to 1999 Zambia's copper exports went from $1,233 million to $372 million a year. Aside from mining the other useful areas also recieved very little money. From 1980 to 1999 an average of only $2 million a year was given for construction. What's more startling is that in 12 of these years no money at all was given for construction.

The current Latest Loans page for the World Bank reports on this latest loan:
"RWANDA COMPETITIVENESS AND ENTERPRISE DEVELOPMENT PROJECT CREDIT AMOUNT: IDA-US$ 40.83 million equivalent Terms: Grace period=10 years; maturity=40 years PROJECT DESCRIPTION: This project will establish an enabling environment for growth and development of the private sector that will help reduce poverty in Rwanda. It will focus on promoting a competitive climate by streamlining the business environment; reducing costs and increasing the efficiency of telecommunications, water and electricity utilities, and the tea industry; and improving access to financial and support services to local entrepreneurs."

This fluff is not in grant form, rather Rwanda will have to repay the $40.83 million over 40 years. This is not foreign aid, this is a sick joke being played on the poor people of the world.

Because of the tragic genocide in 1994 Rwanda has been one of the most popular spots for the aid giving complex. In the 1990's it has received an average of $500 million a year. In 1989, before the aid gold rush Rwanda imported $86 million in capital goods. Barron's Dictionary of Finance and Investment Terms defines a capital good as "Goods used in the production of other goods-industrial buildings, machinery, equipment- as well as highways, office buildings, government installations. In the aggregate such goods form a country's productive capacity." In 1999 aid-rich Rwanda imported just $44 million in capital goods. This country's economy is based on coffee and is in no position to manufacture significant capital items on its own. It is a shame that instead of lending Rwanda $40.83 million for a highway or for its first railroad ever the World Bank wants to lend it $40.83 million to "establish an enabling environment for growth and development." The real enabling environment would be a Rwanda with $500 million in infrastructure being added every year.

The Word Bank's flagship report on aid effectiveness says that only 26% of aid goes to "economic infrastructure" and an equal amount goes to "social and administrative infrastructure." Administrative infrastructure is the one thing Africa already has enough of. In one study cited by the World Bank each dollar of aid leads to a 95¢ increase in government spending. Of that only 29¢ went to "public investment." Most of the money being given is going to the same kind of people in charge of giving it: bureaucrats.

The evidence against the idea that foreign aid is effective in lifting people out of poverty is overwhelming. There is no real evidence that foreign aid has ever or will ever work. Aid proponents constantly talk about "foreign aid success stories" like Thailand and S. Korea, but I don't think they really believe these Asian countries prove aid works. Do you? The only African country ever mentioned as a "success story" is Botswana. This country of 1.6 million people stands back and let's South African mining giant De Beers run its three diamond mines which produce over $1.5 billion in exports a year. Decide for yourself whether or not that's a foreign aid success story. If it is, that is the only one in Africa that $15 billion a year has produced.

References for Data | Datasets for Correlations | WB's Flagship Report on Aid Effectiveness

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