Aid and its discontents - A paper by Dimitri Van den Meerssche and Franklin Cudjoe

Aid and its discontents - A paper by Dimitri Van den Meerssche and  Franklin Cudjoe

 

 

By Dimitri Van den Meersscheand                                                                                                                                                                                                                                                                                                                                                                                                                                      Franklin Cudjoe

Introduction_ 1

Authors:  Franknlin Cudjoe and

Part I          The motives and politics of development aid_ 2

1. The ethics of aid_ 2

1.1 Politicians, economists and rock stars_ 2

1.2. Philosophers_ 4

1.2.1 The academic emptiness of Bono’s justice_ 4

1.2.2 Amartya Sen and the capability approach_ 5

2. The politics of aid_ 8

3. Conclusion_ 11

Part II         Why aid is not working…_ 12

1. Aid has failed_ 12

2. Aid and African markets_ 16

2.1 Context16

2.2 Economics, quid?_ 18

2.2.1 Incentives, ethics and specialization_ 19

2.2.2 The miracle of coordination_ 21

2.3 The rules of the game_ 24

2.4 Why aid hampers growth_ 25

3. Aid and democracy_ 29

3.1 Why Democracy?_ 29

3.2 How does democracy work?_ 30

3.3 The path to democracy_ 31

3.4 Aid and Democracy_ 32

Conclusion and policy recommendation_ 35

 

 

 

 

 About the Authors:

 

 

Dimitri Van den Meersschegraduated with the highest distinction in law from Ghent University, Belgium in June, 2012. Van den Meerssche complemented his legal studies with credits in macroeconomics and finance and after a semester abroad in Copenhagen Denmark. During his student days, he participated in several liberal summer seminars, within Europe, Africa and the United States. These seminars were organized by the Institute for economic studies for European students and the Institute for humane studies in the USA. Further, Van den Meerssche was a chief editor and political secretary at LVSV, a liberal student movement in Belgium. Recently, Van den Meerssche has been active as a researcher and intern for the think tanks Open Europe (Brussels), IMANI (Accra, Ghana) and the Belgian Embassy (Benin and Egypt). He has published several articles through the Belgian media channels Knack, Dewereldmorgen and MO magazine and with UnMondeLibre (Libre Afrique). Currently, Van den Meerssche is preparing for advanced legal studies in the U.S. During his time at IMANI in Accra, he contributed to research on development policy in sub-Sahara Africa.

 

Franklin Cudjoe is founding director of IMANI, a think tank ranked fifth most influential in Africa (2009) and the only African think tank named in the top 25 most innovative think tanks in the world in 2010 and top 20 most innovative in 2011.  In 2012 IMANI emerged one of the top10 civil society groups in Africa in the latest Global Think Tanks Survey.
In the category of think tanks operating on an annual budget of less than 5 million dollars, IMANI placed 10th worldwide. IMANI is one of just 4 African think tanks ranked in this category. IMANI is also one of only four African think tanks ranked in the top 80 think tanks globally for its excellence for proffering solutions for Domestic Economic Policy problems. IMANI is one of only two African think tanks ranked in top 30 Global Think Tanks with the Most Innovative Policy Ideas/Proposals.  Furthermore, IMANI is one of 6 African think tanks ranked in the top 65 Global Think Tanks with the Most Significant Impact on Public Policy. Interestingly, IMANI is the only African market-oriented think tanks to be ranked in 7 categories.

Cudjoe is also General Editor of AfricanLiberty.org. He has won two John Templeton Foundation awards, and he has been cited in the United Kingdom's House of Commons' debate on aid and development in Africa as well as by South Africa's Supreme Court Judge on patents and intellectual property. Cudjoe debated Tanzanian President Mkapa on globalization in 2007, and in 2010 he led the World Bank's Africa region's taskforce within IMANI to investigate what Africans needed from the World Bank. Cudjoe was consulted by the United Kingdom's Prime Minister's office on how to make effective use of British aid in Africa. He is an Earhart doctoral fellow at Buckingham University in the United Kingdom, an alumnus of Harvard Kennedy School Executive Education, the Atlas Economic Research Foundation's Think Tank MBA programme and the Montreal Economic Institute's Think Tank Training programme and an alumnus of the Harvard Kennedy School Executive Education for Global Leadership and Public Policy. Cudjoe was named Young Global Leader by the World Economic Forum in 2010, a fellow of the Africa Leadership Network in 2012, and the only named Think Tank Leader in “Top 50 Africans” List of the respected Africa Report Magazine in 2012. Cudjoe is co-author of "The Water Revolution: Practical Solutions to Water Scarcity" International Policy Network press, 2006 (with forewords by Hernando de Soto Nobel Laureate nominee and Sir Ian Byatt). Cudjoe is also co-author of “Peace and Prosperity through World Trade”, published by Cambridge University Press. Cudjoe is one of nine African think tank leaders and Commissioners of The Zimbabwe Papers, a blueprint which examines reforms that will enable the country to become a thriving, peaceful and prosperous country.

 

Aid and its discontents

 

Introduction

This paper is  an attempt  to contribute to the  dissatisfaction  within the academic community  on the ongoing debates about  development aid in the hope that some progress is made on the need or otherwise of aid During this academic enquiry, we  stumbled upon an undefined and often in accurate  convictions  of aid supporters that had not much more to offer than an instinct of moral justice, a simplistic macroeconomic model and plentiful econometric analyses based on ad hoc assumptions, that were only useful to keep feeding the naïve hope of politicians and rock stars. In short, I felt as if the discourse on development aid was dominated by the morality of mass media and the intellectual fairness of logical positivism (or even utopian thinking). This paper stepped out of this box and humbly assessed three major topics that are of vital importance to the legitimacy and the design of development aid.

First of all we will seek the deeper morality of development aid and ask ourselves the question: why does the West feel like we should be helping the South? This question will lead us away from popular speeches on the justice of aid (which proves to be conceptually empty), to the work of Amartya Sen, who provided us with a useful academic framework of answering our question. Sadly, we had to contrast this valid moral motivation of development aid with the political motives of aid that we revealed and that clearly overrule any concept of morality whatsoever.

Secondly, we will dig into the mystery of why aid has failed so grotesquely in providing economic growth. Hereto we will first of all unravel the problem of efficient economic allocation, by exploring the importance of dispersed knowledge in society and its coordination by the price mechanism. After that, we will elaborate on the necessary institutions to facilitate any economic activity based on this dispersed knowledge and coordination. We will conclude that the centrally planned aid disbursements have completely neglected these basic characteristics of economic growth, by believing that scientific knowledge was satisfactory to simply plan efficient economic allocation and transplant the necessary institutions. Finally, we will briefly address why democracy is – and always will be – an idle hope in countries that are flooded with aid money. We will try to understand in which way development aid hampers the democratic process.

 

Part I      The motives and politics of development aid

1. First of all we should elaborate on the motives of development aid. Understanding these motives can help us to understand the politics of development aid, the fluctuations in the budget of aid and the modalities of aid policies.

1. The ethics of aid

1.1Politicians, economists and rock stars

2. Believing our politicians, the sole basis of development aid is the simple moral imperative that the rich should help the poor. In 1949 the American president Harry S. Truman stated in his inaugural address:

“we must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas. More than half the people of the world are living in conditions approaching misery. Their food is inadequate. They are victims of disease. Their economic life is primitive and stagnant. Their poverty is a handicap and a threat both to them and to more prosperous areas. For the first time in history, humanity possesses the knowledge and the skill to relieve the suffering of these people.”[1]

More than half a century later the political discourse on the political responsibility towards poverty relief had hardly changed. At the 2001 Labour conference, Tony Blair remarked that “the state of Africa is a scar on the conscience of the world” and that the West should “provide more aid”[2]. Or as Gordon Brown has put it in 2005:

“[the motive of development aid is the] moral sense that we all share that leads us to conclude that when some are poor all are impoverished, when some are deprived our whole society is diminished, when some are hurt the whole society shares that suffering. That we are part of one moral universe and wherever and whenever there is poverty, deprivation and need it is our duty to act.”[3]

These are beautiful words. Not only do they account for the high moral standards of our Western politicians, they further express a strong voluntarism and optimism. Not only should we eradicate misery and poverty, we also can make the world a better place. This thanks to our scientific advances and industrial progress.

3. In the academic world this optimism and voluntarism is clearly expressed by Jeffrey Sachs (perhaps the most influential academic figure in the universe of development policy). In his work the end of poverty he states that:

“All of us who work toward a brighter future are intellectually indebted to the awe-inspiring geniuses of the Enlightenment, who first glimpsed the prospect of conscious social actions to improve human well-being on a global scale.” … “We can realistically envision a world without extreme poverty by the year 2025 because technological progress enables us to meet basic human needs on a global scale and to achieve a margin above basic needs unprecedented in history.”[4]

4. This rhetoric is willingly shared by a broad range of rock legends, film stars and other popular media figures. At his speech to Labour Party Conference on September 29, 2004 in Brighton, UK, the famous rock star and front man of U2, Bono, concluded with following inspiring words:

We are the first generation that can look extreme and stupid poverty in the eye, look across the water to Africa and elsewhere and say this and mean it:  we have the cash, we have the drugs, we have the science -- but do we have the will?  Do we have the will to make poverty history? Some say we can't afford to. I say we can't afford not to.”[5]

If Bono would ever grow tired of making music, there is obviously a career in development policy awaiting him, since his inspiring words are conceptually in no way different from what professor Sachs wrote one year later.

5. The basic idea is very simple: human suffering is bad and those who can have the moral responsibility and the technological possibility to reduce this suffering. Development aid is the mere expression of this responsibility and the tool for spreading progress. Even though Brown’s quote already hints that there is a crucial element of self-interest hidden in this reasoning (being: we all areimpoverished, diminished, suffering and we don’t like that), one could easily argue that pure altruism is the fundament of these quotes and feelings.

1.2. Philosophers

1.2.1The academic emptiness of Bono’s justice

6. Now, let us investigate this hypothesis in a more profound philosophical way. What exactly urges this moral outrage in the development discourse? What are we feeling so bad about? Are we discomforted by a feeling of post-colonial guilt for ages of theft and slavery? Is the outrage related to our very human existence and the instinctive averse for human suffering? Or are we convinced that the spreading of progress in the third world will ameliorate human conditions on both sides of the spectrum (a motivation similar to the one that triggered the Marshall-plan in Europe after the Second World War)? Is development aid founded on pure altruism or are there selfish aspects connected to it? These entire questions boil down to the desire of creating a theoretical framework that conceptualizes the moral obligation of development aid.

7. In the popular aid-discourse – the one elaborated in the chambers of politicians, leading academics and rock stars – there is no doubt that pure altruism is on the basis of any development policy. This altruism is not based on simple charity, but is an expression of our notion of justice, as Bono expressed it in the same speech as cited above. Justice is being achieved when we do everything we can to ban “suffering”, it seems. But every theory of justice – utilitarian justice or natural justice, communist or liberal justice – is always founded on the reduction of suffering. While from a utilitarian welfare perspective taxes are legitimized to distribute wealth, this is unacceptable from a strict libertarian perspective. Post normative frameworks, however, claim to reduce suffering. If we do not achieve to define and measure the “suffering” in developing countries, development policies will remain prone to inconsequent and arbitrary instincts on which phenomena to remedy and how to do it. In short: any theory of justice is useless until we understand the suffering it wishes to erase.

8. For several decennia (and until today in certain policies), the policymakers in the field of development departed from the existence of poverty as a motivation for action. The mere existence of poverty legitimized and even required development aid policies. Poverty meant suffering and suffering obliged action. Of course the moral outrage was based on the consequences of this poverty (starvation, malnutrition, analphabetism, etc.), but there was no conceptual framework for the motives and goals of development policy that went beyond the definition, measurement and eradication of poverty. Several instruments and ways of measurement were developed to measure this poverty (of which the purchasing power of daily income appeared to become the most popular one). The mere measurement of this abstract “poverty” leaded to the implementation of policies that mainly focused on very quantitative and aggregated standards of development (rise in GDP/capita, economic growth, rise of consumption and purchasing power, amelioration of export and balance of payment, etc.).

In the 1960’s bestseller The Stages of Growth, W. Rostow claimed that Asia, the Middle-East, Africa and Latin America would be able to achieve an autonomous economic growth of 1.5 percent a year, if only 4 billion dollars would be added to the aid-budget. Without considering the economic fallacies underlying this statement, we notice that the motive for development aid was simply the eradication of poverty by an amelioration of aggregate economic parameters.

1.2.2AmartyaSen and the capability approach

9. It was noble prize winner Amartya Sen who changed this ball game. In his renowned academic work Sen developed the capability approach as an alternative theoretical framework to make judgments on the well-being of individuals and societies. This approach was a critique on ruling welfare economics, which typically linked well-being with either opulence (income, commodity command) or utility (happiness, desire fulfillment)[6]. Since this approach is very useful in comparing human well-being in an interpersonal way and hence forms a useful basis for the motivation, implementation and evaluation of development policies, it is important to elaborate on this concept.

This is an abstract image of the capability approach:

Commodity -----> Capability (to function) -----> Function(ing) -----> Utility (e.g. happiness)

10. First of all we should notice that Sen, like Adam Smith, emphasizes that economic growth and the expansion of goods and services are necessary for human development[7]. Without this accumulation of wealth there are no commodities on which eventual well-being can be based. However, like Aristotle, he reiterates the familiar argument that “wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else”[8]. Sen argues that wealth is crucial for the well-being of human beings, but it is not satisfactory as sole element of analyses of their well-being, let alone the idea that an analyses of the aggregate wealth of a country could suffice as evidence for the well-being of every single individual in this country.“[Any] dollar-a-day measure doesn’t take into account many variations that influence the conversion of income into good living,”Sen points out[9]. We can summarize by stating that Sen considers wealth accumulation as crucial in the process of development, but the income approach that incorporates this wealth is not satisfactory in the analyses of well-being (even if this income approach would be sensitive for income distribution)[10]. This means that an increase in suffering is possible even in a society with economic growth and that – since our concept of justice is always boiled down to a reduction of suffering – development policies should go further than a mere improvement of economic parameters.

11. We notice that the income approach was not sufficient for Sen. Nor was the utilitarian approach, since, with Rawls, Sen argued that there is more to life than achieving utility:“Happiness or desire fulfillment represents only one aspect of human existence[11].”“While it is important to take note of utility, there are many other things of intrinsic value (notably rights and positive freedoms) that are neglected by the welfare approach”[12].Further, Sen indicates that “utility can be easily swayed by mental conditioning or adaptive expectations”[13].

12. Having refuted both the utilitarian as the income approach to the understanding of human well-being, Sen developed his capability approach. This approach claims that the disaster of poverty is not related to a quantifiable lack of income, nor to the vague and immeasurable unhappiness of the people, but to the incapability (lack of freedom) for poor people to pursue functioning(or goals) that are of intrinsic value to their lives. In other words: there is no problem if somebody is poor – if he earns less than one dollar a day for example – as long as this situation does not impede this person to survive, to have access to health care, to go to school, to start a business, etc.

I. Robeyns summarizes this argument as followed:

the ends of well-being, justice, and development should be conceptualized […] in terms of people’s capabilities to function, that is, their effective opportunities to undertake the actions and activities they want to engage in, and to be whom they want to be.[14]

B.Tungodden claims that:

we do not care about the poor because they lack income per se, but because they are unable to do and be certain basic things of intrinsic value (like unable to move around, meet nutritional requirements, be sheltered, clothed, educated, and so on).”[15]

13. The link between the capability approach and the problem of poverty is mere motivational[16]. It offers a concept of suffering – of interpersonal evaluations of the well-being of people – that is necessary to recognize the moral problems of poverty and to urge for development policies, aimed at justice and hence the reduction of this suffering. We want to alleviate poverty when there is a causal relationship between this poverty and the fact that the freedom to achieve essential functioning in the lives of the poor are denied. To determine which of these capabilities and functioning can be accepted as essential is of course a difficult question. It is a question that can be answered in different ways. For example: the HDI chooses health, education and income, while the MDGs put forward different aims. For Sen, poverty is a moral wrong because it prevents people from developing basic capabilities necessary for living a minimally decent life[17].But what are basic capabilities? It is claimed that basic capabilities refer to the freedom to do some basic things considered necessary for survival and to avoid or escape poverty or other serious deprivations[18].Sen claimed that the relevance of basic capabilities is “not so much in ranking living standards, but in deciding on a cut-off point for the purpose of assessing poverty and deprivation”[19]. While human capabilities and functioning are as diverse as the human species itself, basic capabilities express the freedom or possibility to avoid poverty and exceed a threshold of well-being.

14. Hence, Sen has provided us with a crucial answer to our questions concerning the justice of development aid. B. Tungodden from the Norwegian School of Economics summarizes as follows:

In sum, the main message of the capability approach is that the normative basis of development should deal with what is intrinsically valuable for people – human freedom - and by insisting on this Sen has forced the debate to take into account a much broader spectrum of problems than what has frequently been dealt with in welfare economics and development analysis more generally.”[20]

15. We should give Sen credit for creating a framework of motivations, tools and goals in the field of development aid. He has certainly answered the question “why should there be development aid?” The concept of suffering that is necessary for any notion of justice is redefined from the vague concept of unhappiness or the sterile figures of income, to the lack of capabilities (freedom) to transform commodities and entitlements to essential human capabilities. Sen claimed the goal is not to alleviate a concept as abstract as “poverty”, but simply to enhance people’s freedom of pursuing their goals – which we consider as necessary and legitimate – by all possible means. It is fair to say that this is a simple summary of the modern ethics of altruism in development aid.

2. The politics of aid

16. Sadly it is necessary to contrast these ethics of altruism with the politics of altruism that we have experienced in the last sixty years. Let us go back to the roots of the development policies that we know today. Departing from the mid-fifties until the late sixties we experienced a very exciting time of what we could call “African emancipation”. Between 1956 and 1966 thirty-one African countries gained their independence. The strong Western powers were caught between two fires: on the one hand the geopolitical landscape post-world war II was very fragile and explosive, considering the permanent threat going out from the communist enemies; on the other hand it was clear that the demands for independence in developing countries could not be stopped (and any stop to these developments would unjustifiably collide with the sacred Western principles of democracy and sovereignty). In this context, aid was the perfect solution. As long as the “independent” post-colonial regimes depended on the Western financial back-up, independence should not jeopardize the geopolitical interests of the West in Africa, since the charismatic new leaders would remain mere puppets in the hands of Western interests[21].

While France, Britain, Belgium, Germany and Portugal all supported their ex-colonies to maintain their political influence, the United States saw development aid as a crucial tool of geopolitical policies during the cold war. Since these are bold statements that contest the sacred ethics of altruism, it is necessary to bring up substantial evidence.

16. Let us look at Belgium for example. In the complete history of bilateral aid flows, the only real ex-colony Congo (through it’s different names and shapes, today the Democratic Republic of Congo) has always been the number one recipient. The most recent data (2010) points out that the Democratic Republic of Congo received 650 million Euros, while the country second on the list of recipients (Rwanda), received 70 million Euros[22]. Among popular British aid recipients we find India, Nigeria, Kenya, Ghana and Tanzania. France opened the purse to Senegal, Ivory Coast, Morocco and Vietnam (among others)[23]. The power connected with the gigantic financial flows replaced the more visible power of direct occupation. In 2002, the causality between being a former colony and the amount of aid transferred was statistically established by A. Alesina and D. Dollar[24]. The same study further linked aid disbursements and colonial history with current voting behavior in the UN general assembly.

At the same time the Soviet Union supported and financed their African communist allies, like Lumumba in Congo and Mengistu Haile Mariam in Ethiopia (after the fall of Haile Selassie). The U.S., by contrast, rewarded its own allies, such as Mobutu Sese Seko in Zaire. It is an understatement to say that American “agents” had an influence in the transformation of Lumumba’s Congo to Mobutu’s Zaire[25]. As W. Easterly states: “everybody who fought against a regime supported by the Soviet-Union, was considered as a ‘freedom fighter’, that needed to be supported by the U.S.A. Some regimes that were too friendly towards the Soviets were overturned with the help of the CIA[26]. In the period between 1945 and 1985 the Liberian dictatorship received substantial amounts of development money in exchange for the permission of military bases on their territory and the installation of radio station “Voice of America”. In Ethiopia Haile Selassie received American aid in his battle against Communist Somalia[27]. The examples are obvious and endless. N. Woods justly summarizes that “the cold war had distorted foreign aid by channeling it to geostrategic goals”[28].

17. An important bottom-line in all these initiatives of support and intervention, is that the “allies” were supported, regardless the question if those in charge were ruthless dictators or preachers of prosperity and democracy. As D. Moyo notices:

“[…] the aid imperative took on an added dimension: not how deserving a country might be or the nature of its leadership, but rather the willingness of a desperately impoverished country to ally itself with one camp of another – benevolent leader or vicious tyrant, as long as they were onside, what did it matter?”… “One of the features of the Cold War was the West’s ability and eagerness to support […] a swathe of pathological and downright dangerous dictators. From Idi Amin in the east, to Mobutu Sese Seko in the West, from Ethiopia’s Mengistu to Liberia’s Samuel Doe, the competition among these leaders to be more brutal to their people, more spendthrift, more indifferent to their countries needs than their neighbors were, was matched only by the willingness of international donors to give them the money to realize their dreams.”[29]

18. When the cold war ended, of course these incentives for development (and the connected political control) vanished. This had as a consequence that the amount of aid given to Africa declined substantially. The net official development assistance disbursements as a share of donor GDP fell from 0.38 percent in 1982 to 0.22 percent in 1997[30]. Apart from this dramatic decline in aid, Western donors also changed the rules of aid. Since the rulers of developing countries were no longer of high importance in the geopolitical landscape, the donor-community started to demand a decent management of the large aid-sums. The 1990s gave birth to the first conditionality on good governance, financial management and the fight against corruption. We can ask ourselves following question: if the sole motive of aid is the quest for justice by reducing human suffering, why then do we see such a dramatic reduction in development assistance (at a time where the needs of the impoverished had in no way declined)? And why did we only commence with monitoring dictatorial leaders thirty years after the end of aid policies?

19. The geopolitical stability did not last for long, however. F. Fukuyama was sadly proven wrong with his ideas that the fall of the Berlin wall accounted for the end of history. It did not take very long for a new conflict to arise that once again covered almost the entire surface of our planet, hardly in a more subtle way. We are talking about the war on terror. If the idea that aid is used as a geopolitical tool is correct, we should notice a substantial augmentation in the aid budget, guided at strategic countries in this new conflict. And indeed, between 2001 and 2007 the United States quadrupled their official development assistance[31]. In a working paper by the Center for Global Development, it is stated that “the administration of President George W. Bush, which had initially been somewhat skeptical of foreign aid, has since [the war on terror] become a strong advocate for development assistance and significantly boosted the U.S. foreign aid budget.”[32]The article further claims that: “large increases in U.S. aid to Iraq and Afghanistan following American military invasions are obvious examples of the GWOT’s influence on aid allocation.”[33]

However, the most explicit recognition of this political agenda for aid-disbursements does not come from any outsider. In 2004 a document on aid allocation was published by the White House stating that the United States “will provide extensive assistance to states on the front lines of the anti-terror struggle, both in terms of financial assistance and training and support for allied governments.”[34]According to the document, such frontline states include Afghanistan, Colombia, Jordan, Pakistan, and Turkey.

The United States is far from the only state that considers geopolitical importance as a crucial criterion in aid allocation during this most recent war. In a study of the politics of foreign aid since 9/11, N. Woods found that in the U.K., “the strain on DFID’s [Department for International Development] resources and mandate to reduce poverty posed by the war on terror and the war in Iraq is already noticeable.”[35]

20. These obvious and undisguised geopolitical motives underlying aid allocation, naturally limit the budget for impoverished countries without any political importance. As Oxfam concluded in a report of 2005: “[The war on terror] will divert aid away from the poorest countries and communities, and weaken donors’ commitment to poverty reduction.”[36]This conclusion concerning the war on terror is no different from the one following the politics of decolonization or the cold war.

21. The most urgent questions these conclusions impose on the aid-debate are connected with the motives for development aid. Above we reconstructed the basic elements of the modern discourse on the ethics of development aid. We spoke about justice and the reduction of suffering, we elaborated on capabilities, interpersonal comparisons of well-being and human freedom. But looking at reality, we notice that bilateral aid has – throughout its entire history – been related to the maintenance or establishment of political influence, the creation of buffers against political enemies, the permission to install military bases and to spread the ideas and ideologies of the donor country.

3. Conclusion

22. However optimistic we concluded the first part of this paper, that reality imposed a cynical bitterness on the elaborations on the motives of development aid. First of all, while politicians and popular media figures hint out the inherent injustice in poverty and human suffering, we tried to construe a normative framework for analyzing this injustice. This led us to the theories on development, elaborated by Amartya Sen. His capability approach offered a satisfying conceptualization of human suffering, as a limitation of basic capabilities or opportunities to pursue a decent life outside poverty. This approach revealed the limitations of an aggregated income approach, as well as the traditional utilitarian welfare approach. The consequences of this philosophical shift are endless. Not only are we offered a new way of analyzing human suffering, Sen has further provided us with a framework of how to design and evaluate development policies. We can no longer be satisfied with numbers on economic growth, nor with any aggregated statistic on social or economic parameters. The capability approach obliges any development policy to dig deeper into the effects of the policy on the decentralized possibilities it brings to every single human being to achieve the freedom and possibility to step out of poverty and misery. To that purpose multidimensional poverty indexes should be elaborated and incorporated in any development policy. We can conclude that by his intellectual efforts, Sen has construed a new set of motives for any battle against poverty. The new framework is not only of practical use in measuring and fighting poverty, it is the very fundamental notion of justice that triggers the altruistic Western attempts in pursuing constructive aid policies. It is fair to say that Sen has offered us the intellectual basics of what we can call the altruistic morality of development aid.

23. Sadly the reality – exhibited by the politics of aid – has showed that the moral outrage, conceptualized by Sen, has in many cases appeared inferior to matters of geopolitical strategy. While there is a theoretical framework available within which development aid can be called morally just and even necessary, many practices mentioned above cannot be categorized as being moral to those standards. Without generalizing, many government-guided aid initiatives (particularly on a bilateral level) have proven to be very selfish and alien to any altruistic nature. These self-centered characteristics limit not only the morality but also the positive impact of development aid and hence they should urge any aid-receiving government to evaluate the costs and benefits of every sum of aid that is offered.

24. In following chapters we shall abandon these cases of political perversities of selfishness and we shall – for the sake of the argument – evaluate the economic and social merits of development aid as if they were offered in a spirit of high moral standards and altruism. We will look for other reasons why the astronomical amounts of aid disbursements have not brought sustainable economic growth to the African continent. We will investigate why Truman was wrong when he claimed that we possessed sufficient human knowledge and skill to elevate the sub-Sahara Africa to a level of economic stability and prosperity.

Part II     Why aid is not working…

25. In investigating why aid has not brought the desired changes in Africa, we will briefly investigate two relationships: aid and African markets and aid and democracy. First of all we will kick in an open door by stating that aid has failed to deliver sustainable economic growth.

1. Aid has failed

26. Before investigating these relationships, we will first kick in an open door by briefly arguing that – considering all data – aid in sub-Sahara Africa has bluntly failed to offer the African continent sustainable economic growth. Since the 1940s, approximately 1 trillion dollars of aid has been transferred from all rich countries to Africa. When we take only a cursory look at the aggregate data, we notice that as aid substantially increased (in absolute terms, as well as in comparison to GDP), economic growth in Africa dramatically declined or stagnated[37]. For the most aid-dependent countries we even notice a negative growth (averaging minus 0.2 percent per annum). Following graph shows the strong negative correlation between aid-dependency and economic growth.

Graph 1 – Aid and Growth in Africa[38]

 

 

 

 

 

 

 

 

 

 

27. The traditional economic motivation of development aid is related to the concept “poverty-trap”. This concept – inspired on simple Keynesian macroeconomic saving-models, developed by Rosenstein-Rodan in 1943 and elaborated by Jeffrey Sachs – claims that impoverished countries are trapped in an economy of low growth, because people lack the money to save for the future and thereby capitalize potential investments that can lift them out of poverty[39]. A “big-push” of development aid is hence necessary to jump start economic growth, and initiate a vicious cycle whereby investment generates income and thus raises the economic return to further investment[40].In its uttermost simplicity, the presumptions of this theory boil down to following equations:

 

 

With g as targeted GDP growth, Y is output, I symbolizes required investment, A expresses the required level of development aid, S stands for domestic savings and expresses the incremental capital-output ratio[41].

28. However beautiful and simple, reality has harshly falsified this theory. As we notice on the graph above, in the average African country in the nineties, more than 15 percent of its GDP consisted of development aid[42]. We can hardly imagine an economic push to become any bigger. However, the bigger the push, the slower economic growth appeared to be. W. Easterly noted that if Zambia would have converted all the aid it received since 1960 into investment, and all of that investment to growth – following the strict Keynesian logic that is cited as fundament of the big-push theory – it would have had a per capita income of about 20.000 dollars by the early 90s. Instead, by this time, the income per capita in Zambia was lower than in 1960, under 500 dollars[43].

29.  However, although it is very clear that the “big-pushes” did not bring substantial and sustainable economic growth to the African continent, inverse causality makes it difficult to draw any absolute causal relationship between aid and growth: it is always possible that the rise in aid was offered because of tumbling growth and that impoverishment would have been even worse without aid.

P. Boone, economist at the London School of Economics, shed some light into this statistical darkness with his renowned paper of 1996[44]. By introducing political motives in the allocation of aid, Boone succeeded in evading the risk of inverse causality (because in the context of political motives, aid is not directly offered in response to lower growth). His conclusion was harsh, but clear: “[even corrected for inverse causality] the effect of aid on investment is non-existent, as is the effect of aid on economic growth.”[45]He noticed that aid was converted into mere consumption, without positive long-term benefits (and even with inflationary effects, as discussed below). Boone was not the only one who rebelled against the aid-establishment. Hadjimichael (et al.) and Reichel found a negative relationship between savings and aid[46], while Clemens (et al.) discovered no single long-term impact of aid on economic growth[47]. IMF chief economist R. Rajan and IMF economist A. Subramanian re-evaluated this analysis and concluded that it is clear that aid does not bring any long-term or short-term benefits considering economic growth[48].

30. Above we argued – with Sen – that a mere quantitative approach to the development problem is not satisfactory. What is essential is to notice that the astronomical sums of development aid have not been able to limit the further decrease in basic capabilities of people on the African continent. Let us take a cursory look at the evolution of these capabilities[49].In overall, life expectancy stagnated (in some countries it has fallen back to what it was in the 1950s). One in seven children across the African continent dies before the age of five[50]. Adult literacy across most African countries has dropped below pre-1980 levels. Aggregate health indicators hardly improve. The political and legal system in most African countries remains arbitrary and dysfunctional. At a UN summit in 1977, the goal of universal access to water and sanitation was set for 1990. This goal is now included in the MDGs for 2015. In 1990, at another UN summit, the goal of universal primary school enrollment was set for the year 2000. This goal is now also part of the MDGs set for 2015[51]. We can conclude that, just as development aid has failed in providing sustainable economic growth; it has failed the Sen-test in improving basic capabilities for the poor.

31. As clear as the quantitative and qualitative indications of failure may be, new ad hoc hypotheses were produced to restore the optimism in the “big-push”-capacities of development aid. The intellectual aid-discourse appeared to be loyal to the fallacious scientific tradition of logical positivism. While – as K. Popper superbly argued – the capacity and voluntarily to falsify an intellectual framework adds to its academic value, the machinery of politicians and academics in favor of the popular aid-doctrine chose to be blind for the obvious truth and jumped for joy at the first economic analysis that satisfied their confirmation bias.

This analysis was offered by Burnside and Dollar in 2000[52]. In their analysis the World bank-economists were able to bypass the negative conclusion of Boone by distinguishing between aid offered to recipient with good policies and those with bad policies. Even though this paper was soon falsified and rejected on the basis of more elaborated criteria and new data[53], policymakers in the field of aid decided to choose the easy confirmation over the academically correct falsification and cited the Burnside and Dollar paper as justification for a new “big-push”. The paper was cited by president Bush, Tony Blair, the IMF, The Economist, The New Yorker and the American Millennium Challenge Cooperation as the academic argument for augmenting the aid budget (the fact that these events are situated in a time of intense geopolitical preparations for the war on terror is of course purely coincidental)[54]. Of the economic papers that falsified the renewed optimism and reconfirmed the failure of aid in producing economic growth, none had an impact that came close to the Burnside and Dollar paper.

32. The intellectual discomfort we feel when confronted with these events, only augments when we take a closer look at the most optimistic econometric studies mentioned above. Even the papers that confirmed the possible benefits of aid (in relationship with good policies - Burnside and Dollar - or on the short term -Clemens (et al.)), expressed the fact that the marginal effects of aid-disbursements are declining[55]. For any extra dollar of development aid, the contribution to economic growth would be lower, they claimed.

The paper by Clemens (et al.)concluded that all positive effects of development aid vanished when aid disbursements crossed the cape of 8 percent of the GDP of the recipient country. Past that crossing point, aid would have a negative effect on the economic growth of the recipient country[56]. So far the idea that the bigger the push, the higher the growth will be – an idea inherent to the model put forward by J. Sachs and do maintaining the popular aid discourse of our politicians and rock idols. If these aid-advocates would succeed in implementing the adapted (augmented) big-push, almost all developing countries will trespass this point where aid causes economic harm[57].

2. Aid and African markets

2.1 Context

33. It is clear that large injections of development aid have proven to be incapable in delivering neither sustainable economic growth, nor any substantial and well-spread amelioration in the basic capabilities of African people. In this chapter we will elaborate on the economic arguments of why the “big-push” model has failed.

34. Many critics have pointed out the technical economic fallacies of the model. It has been argued that aid has a crowding-out effect towards domestic savings and investment[58]; that aid has a severe potential to lead to high- (and hyper-) inflation[59]; that aid chokes of the export sector[60] and that aid discourages the implementation of sound and necessary policy reforms[61]. However important these conclusions may be, the value of reinvestigating them here is very limited.

35. There is also a second reason why we will not elaborate too fiercely on these technical economic theories. This reason is connected with the conceptual background of the entire platform where the discussion on the economic performances of development aid takes place. We notice that even some of the most severe critics of development aid; go a long way in the “big-push”- logic. There is a major difference between concluding that aid does not produce growth (by evaluating economic parameters and seeking explanations for their evolutions) and arguing that it is conceptually impossible for any centrally planned initiative to produce substantial and sustainable economic growth that leads to the amelioration of decentralized capabilities.

One can for example investigate whether or not development aid increases investment, conclude that this is not the case and for these reasons object to development aid. One can conclude that aid hampers export and hence deliver criticism. One can stress the inflationary consequences of aid-policies and call for solutions to this issue. All these objections are without any doubt useful. However, first of all, adapted ad hoc hypotheses in combination with political stubbornness and Bono’s charisma make all empirical and econometric evaluations prone to a perpetual cycle of re-evaluation and political manipulation. Secondly, many of these arguments are still situated within the basic Keynesian macroeconomic framework. Evaluating inflation rates, for example, is valuable because a new variable is introduced in the theoretical framework. However, doing so, one is still trying to understand and ameliorate an economic situation on the basis of an investigation of aggregate economic parameters and their relationship to each other. This academic discourse still accepts the idea that economic growth is simply an equation that needs to be perfected and solved.

D. Moyo is considered one of the fiercest critics of development aid today. Justly, she asks the question whether development aid is the most efficient way of financing development policies. In a brilliant way she exposed the abundance of fallacies underlying the current development policy. However, stripping down the essence of her discourse, we still read that:

“Nowhere is the role of government more crucial – as a strategist, as a coordinator and even, to some extent, as a financier – than in poor developing countries. For at the early stages of development, the nascent private sector is simply not large enough to assume a central development role.”[62]

While Moyo argues that other ways for financing development should be sought (Bonds and FDI for example), but never contests the notion that the road to prosperity is paved with – well financed – centrally planned government policies. Basically, Moyo argues that following equations are justified is we only replace A/Y with other forms of investment:

 

36. In this paper we will step outside the intellectual box of macroeconomic models, economic aggregates and supposed relations between economic parameters and government policies[63]. The basic problem of the macroeconomic development model is not the design of this model, but the existence of the model. Commenting on the recent and ongoing financial and economic crisis, P. Krugman claimed that the leading economists mistook the beauty of their models for truth[64]. This quote can literally be copied to describe the major fallacies of development policy. Following we will briefly elaborate on an alternative approach to look at the economic problems on the African continent. On this basis, we will construe an alternative critique on development policies. Concluding, we will try to offer a conceptual recommendation to redesign the discourse on development policy in particular and economic analysis in general.

2.2 Economics, quid?

37. The objective of this chapter is to offer an alternative way of approaching economic interactions and scarcity, as opposed to the “poverty trap” or “investment gap”. Before we can understand the potential and value of government interactions in the economic process, we need to understand the fundamental characteristics of this process. We need to understand what generates the accumulation of wealth, in order to understand poverty and create policies of poverty reduction.

38. Let us start this quest for understanding with a short story. “I, Pencil” is a story written by Leonard E. Read in 1958. It describes the miraculous history of how a pencil is made. The baseline of the story is that not a single person on the face of this earth knows how to make a pencil. This may sound odd and confusing. It is that confusion we have to grasp and unravel to understand what economic interaction is about. The story of how to become a pencil begins in Oregon or Northern California were trees are cut and tales about the mills in San Leandro, the graphite mines in Ceylon, the clay mines in Mississippi and the East Indies, where factice is developed to make the plug. Thousands or even millions of people have in some way contributed to the creation of a certain product or service without which the existence of the pencil would be impossible. Many people may ask: but how can one organize this? It is for those people that this chapter is written, for the answer to that question is equally important as simple: one cannot. Of all those people who have contributed, there isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how[65].And not only wouldn’t they know how to make a pencil, they don’t even want the pencil. All those people in the process want different things for the work they are performing: some want a car, some want food and some want to surprise their girlfriends with a nice Valentine present. Each of these millions sees that he can exchange his tiny know-how for the goods and services he needs or wants[66]. Without any mastermind organizing and coordinating the creation of a pencil and without anybody in the process explicitly trying to make a pencil, at the end of the chain something extraordinary happens: the pencil can be found in the store around the corner of where you are living. This can only be possible because millions of tiny know-how configurated naturally and spontaneously in response to human necessity and desire and in the absence of any human master-mind[67]. The process of creating the pencil followed an efficient order and allocation of labor, capital, goods and ideas and this following an undesigned and mere spontaneous order.

39. The importance of this story in understanding the failure of development policies today can hardly be overestimated. Let us investigate the different essential elements that contributed to the existence of the spontaneous order that facilitates the creation of every product or service that is offered in a free society.

2.2.1 Incentives, ethics and specialization

40. First of all, every human being involved in the process had only the incentive to ameliorate his own situation. As A. Smith wrote in 1776:

“It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.”[68]

Benevolence wasn’t the trigger for the chain of events that eventually produced pencils, just as there wasn’t any “big plan” for the creation of a pencil, in which every person had a crucial role to fulfill. The genesis of every spontaneous order of production, the first immutable bylaw of business is the simple incentive for self-improvement.

41. Secondly, we notice that to do this, principally, every person offered something that was of less value to him than what he got back. This realization contributes to the ethical soundness of the spontaneous order. Since the interactions are based on free decision-making, any transaction that is considered as unfair will not be repeated. Just as the spontaneous order filters ineffective allocations, it will eventually filter unfairness through the increased knowledge gathered by trial and error[69].  As J. Norberg argues: “free trade is by nature fair trade, because it is based on voluntary cooperation and exchange.”[70]

42. Thirdly, we notice that to gain as much value out of labor as possible, every individual developed and ameliorated his relative position in this trade by specializing for one specific skill. The specialization of skills that follows ameliorates the productivity of labor and hence the accumulated wealth in the system. This notion of the division of labor and the increase of wealth that followed goes back to the Pin Factory of A. Smith, who claimed that: “The division of labour, however, so far as it can be introduced, occasions, in every art, a proportional increase of the productive powers of labour.”[71]W. Easterly pointed out the importance of this specialization – and the free society it is built on – in the struggle of developing countries[72].

43. Finally, there is a forth characteristic of these market interactions that is absolutely crucial. In a free market environment, we inherently find a feedback mechanism. The only parties we find in the chain of economic interactions are there because they provide a valuable contribution to this chain. Any idea, investment or production that is not considered as useful, will without mercy vanish into the dark pockets of history. As J.A. Schumpeter argued, in any free market environment, there is a permanent dynamic of “creative destruction”[73]. Just as any bad idea will quickly be abandoned (because it does not generate profit), any existing pattern of production will be overruled when a new idea emerges that is more profitable to the economy. The free market provides permanent feedback considering the value towards society for any production.

2.2.2 The miracle of coordination

44. So far we have acknowledged the incentives to engage in free market interactions, the fundamental ethic of these interactions and the augmentation of wealth they generate. None of these concepts, however, is capable of explaining the genesis of the spontaneous order that suddenly emerged. It is in investigating the miracle of this coordination, that the true value of a free society becomes visible. So how did we come to this coordination? How is it possible to make a pencil without planners? How is it possible to coordinate a system that provides breakfast to millions of people in Paris, every day or that delivers Che Guevara t-shirts to almost every touristic shop anywhere in the world?

The first step in discovering the miracle of coordination is to understand the simple mathematical condition of any optimal economic allocation. As F.A. Hayek stated:

The conditions which the solution of this [economic] optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”[74]

45. If one would be able to simply inject the necessary data for this economic optimum in the calculus, the allocation of commodities could perfectly be planned. The fundamental problem for economic planning, however, is that this data is not available in the single mind of any planner and can never be. As F.A. Hayek continues:

“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources […] it is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”[75]

46. To achieve a useful transfer of commodities in society it is thus necessary that the dispersed knowledge can be transferred from one person to another. Various ways can be thought of to communicate this knowledge. To find the best way of utilizing this – initially dispersed – knowledge is the single most important question in any design of an efficient economic system. As Hayek argues, we cannot answer the question of how to gather this essential knowledge, without deciding on who can gather this dispersed knowledge. And the question of who can gather this knowledge depends mainly on what kind of knowledge we are seeking. Should we be interested in scientific knowledge, for example, it is clear that only very few people (so called experts) are needed and the level of planning can be fairly centralized. But, following Hayek, we clearly see that:

“there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.”[76]

These unique sources of information are related to the knowledge of people, local conditions, special circumstances, informal bylaws of trade and other time- and space bound determinants of social and economic interaction. The knowledge of these phenomena is as diversified and dispersed as every single human being. Since the knowledge of every aspect of economic interaction is dispersed, “we need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used.”[77]

47. Although these insights are crucial in understanding economic interaction, they still don’t provide us with a satisfying explanation of how all these tiny bits of knowledge are coordinated in the immense constellation of business. “There still remains the problem of communicating to [any agent] such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.”[78]

Without this communication nobody would be able to transform his particular knowledge into a valuable economic transaction. The fundamental pillar of the coordination that has contributed to the existence of a pencil is the medium of communication that allows people to calculate the knowledge and preferences of others in their own decision-making process. And this is where the true wonder of a free, decentralized society is exposed: the actions based on dispersed bits of knowledge are all coordinated based on the information carried by the price system[79].

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.[80]

The price of a certain commodity has captured the desire and availability for this commodity for every single person in the market. This immense amount of information is available for everybody who – departing from his limited knowledge and desires – wants to engage in any sort of interaction related to the commodity. Hence, all fragmented bits of knowledge and preference are coordinated.

48. That is how pencils are made without any single mastermind pulling the strings. A free society uses the price mechanism as medium of information to reveal opportunities and incentives for every single person who wants to utilize this information in order to convert his dispersed and personal knowledge into a profitable transaction. This transaction leads to new sources of information and new incentives for other people, until thousands of people are – without their knowledge – connected with a chain of profitable transactions that are fine-tuned to their very personal desires. If people would stop using pencils, the end of the chain would gradually supply that information to every segment in the chain, simply by altering his orders. The price of the pencil parts would drop until the point where they are of new use in another economic chain, and a reallocation of all relevant factors would eventually form a new spontaneous order of production, equally disguised as the former one. These chains of dispersed knowledge, information and coordination form the beating heart of any prosperous society. These chains are the very reasons why the centrally planned Soviet economy never stood any chance against the free Western society.

49. It is of vital importance to realize that nobody can grasp the complete image of any of these chains – let alone the totality of these chains that forms an economy. We will never be able to anticipate to people suddenly changing their preference from pizza to sushi, nor will we ever be able to design a bureaucracy that can immediately inform all pizza and sushi producers (and the millions of people that produce for those producers) of this shift in preference. We will never be able to monitor the billions of personal relationships, informal agreements or cultural peculiarities that determine how the chains are constructed. In fact, we know very little about it all. And this is exactly the humility we need to constructively assess economic issues. As A. Whitehead cited:

“It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.”[81]

50. The most efficient way to organize economic transactions should depart from the recognition of this “unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired.”[82]This is obviously only possible in a free society, where people have the unlimited right to produce, buy or sell. This freedom will unlock the immense potential of dispersed knowledge, division of labor, specialization and coordination by the price-mechanism[83].

2.3 The rules of the game

51. To achieve the miraculous wealth accumulation that a free society has to offer, any government should avoid interfering in the fragile constellation of economic production, just as it should avoid any distortion on the price system. This does not mean however, that there is no crucial role in the economic process for regulation. With W. Easterly, we can argue that the entire system of wealth accumulation only becomes possible when there are regulatory norms that make it possible to have free and well-protected transactions[84].

52. As argued by H. De Soto, a system of formal property rights is required to have a prosperous free market economy[85]. Without protection of property, there is simply no incentive to invest or to accumulate wealth, since this wealth can be taken away at any point. Further, it is impossible to lend money without any formally accepted title to the property one possesses[86].SEN acknowledged this necessity and it is claimed that:

“if we care about the poor, understanding the role of property rights is fundamental. Law that absorbs the informal property rules of local communities respects how people relate to each other at the local level. At the same time, these rules must be integrated within one unified property system that provides the means for economic development.”[87]

On this point, Sen and Desoto are on the same level. In De Soto’s The Mystery of Capital we read that:

“When the poor live and conduct business outside the formal property rights system, they can trade and lend only within local circles of people who know and trust each other. They are unable to participate in a system that creates sustained economic growth because the legal property rights system does not include them.”[88]

To return to the terminology we used above, we can say that, because the poor are imprisoned in an informal circuit, it is impossible to gain access to the chains of economic development. As S. Scalot and D. Schmidtz argue, Sen presumably would agree with Desoto that:

“a modern government and a market economy are unviable without an integrated formal property system. Many of the problems of non-Western markets today mainly result from the fragmentation of their property arrangements and the unavailability of standard norms that allow assets and economic agents to interact and governments to rule by law.”[89]

In other words:

“[Only] in an institutional environment defined by private property rights […] market prices emerge that communicate information to entrepreneurs about how to use resources in ways that enhance wealth”[90]

53. We can conclude that formal legal institutions (mainly property rights and enforceable contracts) are pivotal for the existence of the “Hayekian coordination” we discussed above. If people lack legal protection for their investments and transactions, the chains of economic interactions are limited to the very narrow field of people who can trust each other on another basis (family, community, ethnic networks, etc.). This narrows the market and – as Smith has argued – the level of specialization in a society depends on the scale of the market[91]. A smaller scope of interactions limits the potential of specialization, productivity and wealth creation.

2.4 Why aid hampers growth

54. Above, we have conceptually unraveled the deeper causes of economic interaction and wealth creation. Further, we briefly addressed the necessity of formal institutions in organizing this market. In this chapter we will investigate the impact of development aid as we know it on both the African markets and institutions.

55. The current aid discourse is still dominated by the”big-push” model, as elaborated by J. Sachs[92]. For the implementation of this big push, it is argued that we need a big plan. Already in 1956 G. Myrdal, economist, sociologist and noble prize winner, claimed that there was an overall consensus that a developing country needed a general, integrated, national plan[93]. More than half a century later, this is still the general conviction. After incorporating the principles of theParis Declaration on aid Effectiveness of 2005, today all developing countries have designed their own national Poverty Reduction Strategy Papers. These papers are demanded by the IMF and the World Bank in order to get funding and answer to the desire of G. Myrdal, as well as the more recent demand by J. Sachs, who supports these plans and regrets the fact that they are underfunded[94].

56. The firm belief in these centralized, government-designed plans may be astonishing, but when we analyze this belief in the context of the Harrod-Domar model – that suggests aid to simply fill the gap between necessary investments and domestic savings – things start to make sense. First of all, this model only considers economic aggregates when it claims that development aid investments should fill the investment-savings gap in developing countries. In this context it makes sense to provide a huge, overall capital injection. Secondly, as mentioned above, there is a firm belief that we possess the scientific knowledge and technology to convert money to prosperity. This belief, adds up to the idea that we simply need a national plan on how to spend the money to get the engine going.

57. Now, let us try to match these planning initiatives to our conclusions on economic interactions, as elaborated above. First of all we should mention that it is obvious that development aid can increase the output of any specific chain of production, when it increases the inputs of this chain. As D.B. Skarbek and P.T. Leeson argue: “this follows from the nature of the physical world, which positively relates quantities of outputs to quantities of inputs used in their production.”[95]However, this relationship has nothing to do with the economic problem, which is determined by the economic efficiency of allocating scarce goods. Solving the economic problem determines whether a country’s economy develops. To do so, we require the mechanisms of knowledge-exchange and coordination, as elaborated above. In analyzing how aid relates to these mechanisms, we immediately recognize Hayek’s distinction between scientific knowledge and dispersed knowledge. Since the “planners”[96] believe not only that scientific knowledge is sufficient in achieving economic prosperity, but also that they possess this knowledge and can apply it, they consider it as perfectly plausible to design national plans for development. It is very obvious, however, that these plans are not capable of tapping in to the immense amount of decentralized and dispersed knowledge that– as elaborated above – is essential to achieve economic prosperity. While aid may supply additional capital to poor countries, these finances do not tell recipient planners how to invest them in economically efficient ways—that is, in ways that produce wealth[97]. P. Bauer was the first economist who protested against this “planning of development”, stating that:

foreign aid providers do not know which investments are appropriate for a developing economy, so aid money is poured into bad projects (also known as white elephants), which not only fail to encourage economic growth, but divert scarce human and other resources away from productive uses. Aid destroys economic incentives, leads to misallocation of scarce resources, and so not only fails to jump start, but actually undermines growth.”[98]

In his statement, Bauer clearly recognizes the lack of knowledge that is inherent to the centralized approach of development policy. The centralized, national plans will never achieve widespread wealth because not one person or group of persons holds all of the information necessary to successfully coordinate an economy. These plans will never gain access to the million different preferences in society, the informal networks of production or distribution or the different cultural norms that determine the unwritten bylaws of economic activity. The national plan, for example, can determine that malaria is a fundamental problem and hence decide to hand out malaria nets. They can never calculate, however, that in some regions malaria is way less of a problem than food security. In these regions people will rather use the malaria nets as fishing nets (which will of course destroy the nets in a minimum of time). This is only a slightly exaggerated example of how the structural lack of knowledge will lead to a structural misallocation of scarce goods and eventually destroy the decentralized economic structures and incentives.

58. Not only do the centralized plans suffer a fundamental lack of decentralized knowledge, they further distort the price system that is pivotal in coordinating economic actions. By injecting large amounts of malaria-nets for example, the price of malaria nets dramatically decreases. This obviously discourages local producers of malaria nets. The result is that several years after the initial donation of malaria nets, most of these nets are vanished or destroyed and there are no local producers of malaria nets remaining.

59. We can conclude that the central planning of developing economies neglects the very engine of economic prosperity: the invisible chains of economic production based on free initiatives on the basis ofdispersed knowledge and coordinated by an efficient price system. Since the entire system of specialization, profit maximizing incentives, free choice and feedback are depending on these neglected and distorted elements, we can only expect the national plans to further limit any form of economic emancipation.

60. Apart from the economic injection of investment, the national plans also try to inject the necessary institutions into African societies, in order to ameliorate the economic framework. However, the knowledge problem – as elaborated above – is equally devastating in planning institutions as in planning economic prosperity.

Almost all developing countries have sophisticated legal systems governing property rights and enforceable contracts. These legal systems show many resemblances with the legal codifications of the European countries that colonized these countries. However, when those legal norms are not accepted at the bottom levels of society – where they are culturally and socially overruled by informal social norms – they are worth less than the paper they are written on.

61. In a short stint with   the Belgian embassy in Benin, one of the authors of this work studied property rights, albeit limited in scope to the glamorous parts of the main city. The national plan of the Beninoir government considered the lack of property rights as a serious limitation to the development of the economy, for the reasons mentioned above. To tackle this problem, the government designed a new legal code and supported initiatives (initiated by the American and German development agencies) to implement these modern legal structures on the agricultural society in Benin. However, these modern norms were completely rejected by the rural communities, far away from the big government buildings at Cotonou. In those communities, all transactions concerning the property of land are governed by the fundamentally different norms of informal, customary law. These ancient legal structures are adapted to local history, to particular aspects of the local culture and to the balance of power that governs the area. When the government tried to impose the modern system of property on those communities, the mingled with this delicate and unwritten social balance. As a result, the institutional transplantation was rejected, in the same way the human body rejects the transplantation of a vital organ that does not match the biological particularities of the system it is introduced to. The informal transactions continued and soon all formal certificates were outdated and utterly useless. After spending millions of dollars and wasting the time of thousands of people (geometric experts, lawyers, translators, government official, consultants, politicians, diplomats, volunteers, etc.) the insecurity towards property had only augmented. The insane optimism and the following – equally centralized – sequel programs inflict on everybody who is not yet lost in this swamp of social engineering a feeling of existential despair.

In Ghana, questions remain about whether Ghana’sland administration problems have all gone away after the first phase Ghana’s Land Administration Project which has seen some $50m spent without much to show for. This is due largely in part to the number of agencies which appeared to operate without any synergy between them. These agencies, being the Lands Commission Secretariat, Lands Title Registry, Survey Department, Office of the Administrator of Stool Lands, Land Valuation Board and the Department of Town and Country Planning came across to the public as being far removed from each other.

 

The public and legal practitioners had to run from pillar to post from one agency to the other with no verifiable records for their common use, in the almost fruitless attempt to get one transaction or other completed.

 

Added to this maze was the fact that one often discovered that depending on what the nature of the issues were, one had to deal with one or more of the Ministries of Land Forestry and Mines, Environment, Science and Technology and/or Local Government and Rural Development.

 

It was thus almost an exercise in futility the attempt to regulate and harmonize land administration in Ghana. In many ways, persons who went to the wrong agency and yet managed to lay hold of some form of documentation almost always had to contend with other persons who had similar claims relying on documentation from another agency all of them dealing with land issues. The resulting confusion which served as a recipe for most of the disputes over land in Ghana perhaps was quite a strong basis for the proposal to join up the agencies under one common unifier, the Lands Commission.

 

62. Sadly, this is not an isolated example. It is fair to say that these social perversities are the only possible consequence of any system that designs an institutional order without tapping in to the dispersed knowledge and bottom-up developed institutions in the society. And this is exactly the system we are experiencing today. The national plan designed by the local government (with support of the IMF and the World Bank) leads to a sterile and uniform approach to economic and institutional challenges that are too dispersed to ever be grabbed on a central level. To think this is possible on the basis of Western scientific knowledge on economy and institutions is Hayek’s pretence of knowledge in its purest form.

3. Aid anddemocracy

3.1 Why Democracy?

63. Let us first of all conceptually analyze why democracy is often considered as an essential requirement for sound economic development. The objective of this chapter is to unravel certain positive aspects of democratic societies and to determine the essential features of democracy.

64. Let us – for the sake of the argument – accept the traditional view[99] that governments are essential in the protection of private markets and the provision of public goods and services. Accepting this argument brings us to the question of how we should organize this government. An important lesson we have learned from private markets is that it is essential to have an efficient feedback mechanism to determine whether or not a certain product or service is useful to society. In the context of free markets, this feedback mechanism is offered by competition and consumer preference that lead to numerous transactions, eventually resulting in profit or loss. This way cheaters or producers of unwanted or overpriced commodities are erased out of the economic chain.  However, since governments act in a strict monopolistic environment, this feedback mechanism is absent and other ways of feedback are required.

65. The fundamental problem with an oligarchic – let alone dictatorial – organization of the government is that these political systems limit the possibility of giving feedback to very narrow social and economic circles. Because there is no (or limited) feedback concerning the provision of public goods and services, there is no reason to expect good services replacing bad ones. An even bigger problem is that these political systems often limit the benefits of necessary institutions (free entrepreneurship, property rights, enforceable contracts and the rule of law) to privileged segments of society. As D. Acemoglu of MIT has argued, these characteristics result in the fact that long-term growth in dictatorial or oligarchic regimes can be expected to be substantially lower compared to democratic regimes[100].

66. Democracy, on the contrary, is built on the acknowledgement that feedback is essential. Democracy in Western Europe emerged out of a series on concessions made in response to revolts, the most explicit feedback a society can offer. As argued by D. Acemoglu and J.A. Robinson, these often violent eruptions of feedback gradually became immune for repression and evolved into a more permanent feedback-mechanism[101]. Conceptually, governments in a democratic system depend on the feedback of the people to gain power, just as producers in the market depend on the feedback of the consumers to gain profits[102]. Even though the feedback mechanism on the political level is substantially more distorted than the one offered by free markets, we do notice a strong correlation between increasing levels of democracy and increasing quality of public goods and services[103]. A. Sen argues that because of the democratic feedback mechanism, governments are more vigilant about avoiding economic disasters[104].

Since the knowledge of problems and opportunities is dispersed, decentralizing government is essential in increasing the efficiency of the decision-making process. As Harvard economist D. Rodrik argues, democracy is a “meta-institute” that uses local and specific knowledge to construct institutions that facilitate wealth creation in society[105]. For these reasons, it is argued that democracy is probably the least bad way to organize a government that is responsible for providing public goods and creating institutions that facilitate free markets.

3.2 How does democracy work?

67. When discussing the ‘content’ of democracy, elections are often the first things that come to mind. This is logical, since elections are the most explicit way of feedback between the people and the power. However, if elections would be the only requirement, chances would be very low that an effective feedback-mechanism would arise. It would be possible for those in power to imprison opponents, to control all media, to forbid the organization of other parties and dissident social organizations and to hamper education. This way, the only feedback that would reach the government would be confirming its policies. This is conceptually the same as saying that a producer is “successful”, while he is operating within the bubble of an artificial monopoly.

For these reasons, the very constitutions that allowed societies to embark on the adventures of democracy contained fundamental rights and freedoms, without which democracy would be an empty box. Among these fundamental rights and freedoms we find the freedom of speech, the freedom of press, the fundamental right to vote, the political and legal equality of minorities[106], the freedom to organize and the protection of unions, etc. These constitutional guarantees enable an active civil society to provide an exponential bigger quantity of feedback than any election could ever bring. We can conclude that in evaluating democracy, we need to look beyond the organization of elections. And it is behind those curtains that the real problems of many African democracies are situated, as we will discuss below.

3.3 The path to democracy

68. Above, we already noticed with D. Acemoglu and J.A. Robinson that a social change towards more democracy will take place at the historical moment where the costs of violent repression exceed its benefits[107]. Several elements have an influence on when this historical moment will take place.

69. First of all, we should ask what governments have to lose by allowing decentralized feedback. Since true democracy obliges the elite to accept the feedback from the poor, these elite can expect democracy to have a distributative impact. The poor majority will surely demand a certain degree of reallocating wealth[108]. On the other hand, however, governments traditionally depend on their people to finance their policies, wars and wealth. It is this money transfer from the individual to the collective level that truly guarantees the enforceability of the feedback offered by the population. Because, as valuable the quote “no taxation without representation”, turning the equation around is even more powerful: “no representation without taxation.” The people in power will make a simple financial evaluation based on how much they have to lose by distribution and how much they have to lose by opposing its own citizens.

70. In analyzing why this evaluation leads to different results at different times and places in history, S. Engerman and K. Sokoloff pointed out the importance of natural resources. Rich natural resources (such as oil, gold or silver) have the fundamental characteristic that they demand a large scale organization to be developed – contrary to basic agriculture, which can take place at the level of a family. This need for a centralized organization, eventually leads to a very limited economic and political elite and a deep social inequality[109]. This elite has a lot to lose by the distribution of wealth that democracy is destined to bring, since the revenues out of natural resources (that they – at least partially – will lose), substantially outnumber their tax revenues. This leads to a strong disincentive to make democratic concessions in countries that are rich of natural resources. As L. Wantchekon of New York University shows, new African democracies are often those with limited natural resources, while countries with plenty resources show a history and present state of dictatorship and repression[110]. The most obvious examples are oil-rich countries[111].

71. Secondly, the repression that needs to contain the democratic aspirations gets more expensive, when confronted with an educated and politically organized population[112]. A well-educated population with a strong and organized civil society is not only more capable of demanding democracy, but it is also necessary to accomplish a true democracy where governments are bound by the feedback that is given[113]. As D. Moyo argues: “The particular role of strong civil society is to ensure that the government is held accountable for its actions, through fundamental civil reforms other than simply holding elections.”[114]

3.4 Aid and Democracy

72. Above we have unraveled not only the benefits of a true democratic society, but also the several features that are bound to have an impact on the process of democratization. In this chapter we will investigate the impact of development aid on this process.

73. First of all we should realize that development aid shares the same destructive character as the possession of natural resources in the process of democratization. Since aid-budgets are centralized in the hands of the political elite (similarly to the revenues of natural resources), they substantially lower the incentive to engage in the process of democratization that will oblige governments to distribute this pool of money. Just as the “resource curse” leads to bad governance, development aid to governments limits every incentive to democratization and implementing the rule of law and augments the profitability of corruption[115]. S. Knack of the World Bank concludes that more development aid has resulted in a decrease of rule of law and an increase in corruption[116]. An even more explicit empirical study showed that in the period between 1960 and 1999, aid had a worse impact on the process of democracy than the availability of oil[117].

74. Secondly, the availability of development aid limits the need for tax revenues. As mentioned above: it is this money transfer from the individual to the collective level that truly guarantees the enforceability of the feedback offered by the population. When governments needs tax revenues, the people have a leverage to demand obedience to their feedback. As argued by Shleifer: “by breaking the link between government resources and its ability to tax, foreign aid might undermine the basic contract between the government and the governed.”[118]This is exactly what we mean when stating that there is no representation without taxation. All positive aspects of democracy we have mentioned depend on the power of feedback. When this feedback is merely given through elections, without a substantial financial transfer backing the voice of civil society, governments have no single incentive to act democratically (particularly in the light of everything they have to lose). This – in combination with the fungible character of development aid – is the reason why so many countries in Africa remain stuck in the swamp of rampant corruption.

75. While development aid increases the disincentive to democratize and decreases the power of feedback by the people by limiting the necessity of taxation, the aid donors do not seem to succeed in demanding any accountability either. According to Coyne and Ryan, the world’s worst dictators have received 105 billion dollars under the guise of official development assistance[119]. In 2002 the 25 most undemocratic regimes in the world received a sum of 9 billion dollars, while the 25 most corrupt regimes receives 9.4 billion dollars. Despite beautiful words about accountability and conditionality towards good governance[120], systematic research found no single indication that corrupt governments receive less aid. In fact, A. Alesina and B. Weder of Harvard and Mainz University discovered a positive relationship between corruption and the allocation of development aid[121]. We can conclude that aid has not only taken away the power of the people of demanding influence through taxation, but that it has also failed in creating its own mechanism of accountability[122].

76. Further, we should come back to the idea that the repression of democratic urges becomes more expensive when people are better educated and organized (if there is a more advanced civil society)[123]. To achieve this situation is one of the reasons why governments receive aid money. However, since we understand that educated people make it harder for governments to withstand the democratic urges that will eventually lead to the distribution of commodities controlled by this government, how can we expect any government to be motivated to achieve this task? As argued by W. Easterly: “governments explicitly want to keep down the productive capability of the poor due to the potential of creating political activism that would threaten the current political regime.”[124]This argument goes back to the ideas of P.T. Bauer and M. Friedman, who claimed that:

“As public choice theory would predict, governments of the poor have an incentive to misappropriate foreign aid in a manner that serves their own self-interest. Fearful that development might bring about their downfall, officials in these governments have the incentive to use or misuse aid in a manner that promotes their regime maintaining power.”[125]

We conclude that development aid – similarly to natural resources – creates an incentive to hamper the democratic process, in fear of distribution. This fear carries a strong disincentive to achieve the goals, designed by Western donors.

77. Finally, it is clear that recipient rent-seeking governments do not want to see the rent reduced. Since development aid is given to the poorest countries in the world, rent-seeking governments have the incentive to maintain the state of poverty. Obviously, this creates a moral hazard problem[126]. D. Brautigram and S. Knack illustrate the existence of a moral hazard problem surrounding foreign aid. “Aid allocation may encourage impoverishing policies because as the damaging policies create misery, the more likely donors are to grant more aid to try and alleviate the impoverished conditions”[127].

78. We can conclude that – although the potential benefits of a free and democratic society are substantial – the attempt of development aid to inject democracy in the African society, has horribly failed. Even though in some countries elections are organized, the powerful feedback mechanism that democracy has to offer is absent in almost every African country. The negative impact of aid in this process of democratization is fourfold. First of all, aid offers a perfect incentive for rent-seeking behavior and a strong disincentive to allow democratic mechanisms to divide the cake in too many pieces. Secondly, aid limits the necessity of governments to turn to their taxpayers, thereby breaking the fundamental democratic condition of feedback between the government and the governed. Further, aid calls upon recipient governments to increase the power of civil society, while at the same time creating the incentive of blocking education, emancipation and civil society. Finally, the condition of poverty that opens the gates for development aid creates a moral hazard problem: recipient governments are tempted to further impoverish their people in order to increase the profits of their rent-seeking behavior.

79. Sadly, the most recent recommendations on development aid only tend to increase the role and freedom of local governments in the allocation of aid, giving further way to these perverse incentives[128].

 

Conclusion and policy recommendation

 

The general objective of this paper was to step outside the traditional box where the discussion on development aid takes place and re-evaluate the various presumptions that determine the public opinion and the policies on aid.

First of all we evaluated the morality of development aid. While in the popular discourse politicians, economists and rock stars juggle with terms as “justice” and “moral obligation”, we found these arguments particularly empty. We find it of crucial importance to underline that fundamental philosophical, economic or social issues have never been solved properly by adhering to media-fed mass-emotions instead of rationality and intellect. This is exactly the reason why we embarked on the quest for a theoretical framework that conceptualized human suffering and the moral obligation to react to it. This quest has guided us to the work of Amartya Sen. His capability approach offers a perfect framework to analyze the problem of poverty, as a problem of insufficient freedom in achieving basic goals and fulfilling basic needs. The most important lesson to remember, concerning the morality of aid, is that there is no single philosophical justification of fighting poverty as a quantifiable sum of economic aggregates. It is in giving people access to their basic capabilities that development aid finds a moral meaning. This conclusion urges us to measure poverty without using economic aggregates and to seek an exit out of the big plans for development, that try to achieve general quantifiable goals as “sustainable economic growth”, or “general poverty reduction”.

Secondly, we analyzed the economic arguments of why aid has not lived up to the expectations. Hereto we first of all repeated and elaborated the generally accepted these that development aid has failed to meet its goals. Further, we analyzed why any centralized economic plan will never be able to achieve economic efficiency. We offered a theoretical framework, explaining how only free economic interactions can convert the immense amount of dispersed knowledge into economic interactions, coordinated by the price mechanism. It is obvious that development aid can increase the output of any specific chain of production, when it increases the inputs of this chain. In achieving greater economic efficiency, however, the big plans of development are doomed to fail. The reason for this failure is that they do not succeed in tapping into the dispersed knowledge that is essential for any efficient chain of interactions. Further, they lack any feedback mechanism and they tend to distort the price mechanism that is of crucial importance for economic coordination.

Finally we discussed the relationship between development aid and corruption. First of all we explained that democracy is probably the best political institution, since it offers the possibility to give feedback on the provision of public goods and free market protection, in a similar way as the price mechanism gives feedback to producers in an economic context. Secondly, we discussed the several aspects that any democratic system has to cover in order to facilitate this feedback mechanism. Further, we discovered several difficulties on the path towards a democratic society. We found that the process of democratization is hampered by an economic situation built on the reclamation of natural resources and by a social situation of illiteracy and severe segmented inequality. Finally, we concluded that the large transfers of development aid worsened the democratic state of many African countries. Aid gives a disincentive towards democratization in the same way natural resources do: they give an immense income to the economic and political elite, which they do not want to see distributed. Aid also hampers the feedback mechanism of democracy, by erasing the financial leverage (in the form of tax revenues) of the people towards their government. Further, aid creates a disincentive for governments to educate their people, since a higher level of education would increase the democratic desires and endanger the rent-seeking position of the political African elite. Finally we had to conclude that development aid has not only erased the feedback mechanism between the government and its people, but it has also refused to implement and enforce its own measures towards accountability.

On the basis of these conclusions, we can only say that we are heading the wrong way. To end this paper with a voluntary note, however, we will offer several policy recommendations concerning the future of development aid. First of all, it is obvious that we should abandon all “big plans” for development. The mechanisms of development aid should be decentralized and taken out of the hands of governments. Secondly, we are happy to conclude that the implications of the moral theories concerning development aid are quite similar to the economic arguments given in this paper. The overlapping consensus of the two can be distilled to following recommendations: aid should be focused on specific programs in specific sectors (hence there is no problem of economic calculation), aimed at increasing basic capabilities, organized and implemented by local people who possess specific knowledge and provided with an efficient feedback mechanism (similar to a market mechanism) that can determine success from failure. Financing initiatives that comply with these requirements, is a valuable way of delivering marginal improvements to the lives of poor people. This is all aid will ever be able to achieve. For all the rest we should put our hope and trust in the fairness and creativity of free people.

 




[1] Inaugural Address of H. S. Truman, Thursday, January 20, 1949, http://avalon.law.yale.edu/20th_century/truman.asp

[2] Quoted in D.Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, XVIII.

[3] Gordon Brown speech at a joint Department for International Development and UN Development Programme seminar. http://www.guardian.co.uk/politics/2005/jan/26/development.uk, Wednesday 26 January 2005

[4] J. Sachs, The end of poverty: economic possibilities for our time, New York, Penguin Press, 2005, 347-348.

[5]Bono speech at the labour party conference, September 29, 2004, Brighton, UK, http://www.atu2.com/news/transcript-of-bonos-speech-at-labour-party-conference.html.

[6] D.A. Clark, “The Capability Approach: its development, critiques and recent advances”, 2006, GPRG-WPS-032, http://www.gprg.org/pubs/workingpapers/pdfs/gprg-wps-032.pdf, 3.

[7] A. K. Sen, “Development: Which Way Now?” 1983, Economic Journal, 93, 745-62.

[8] A.K. Sen, “Development as Capability Expansion”, in K. Griffin and J. Knight (eds),  Human Development and the International Development Strategy for the 1990s, London, Macmillan, 1990, 44.

[9] D. Morrell, “Qualitative measure: Who is Poor?”, 2011, http://harvardmagazine.com/2011/01/who-is-poor.

[10] It is perfectly possible to develop a distributive sensitive income approach – an academic challenge in which Sen successfully took part. Sen followed the argument by J.Rawls that inequality (of income) is justifiable if the inequality works in the advantage of those worse off.

[11] A.K. Sen, Resources, Values and Development, Oxford, Basil Blackwell, 1984, 512.

[12] A.K. Sen, The Standard of Living: The Tanner Lectures, Cambridge, Cambridge University Press, 1987, 8.

[13] A.K. Sen, Development As Freedom, Oxford, Oxford University Press, 1999, 62.

[14] C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 63.

[15] B. Tungodden, “A Balanced View of Development as Freedom”, July 6, 2001, http://www.cmi.no/pdf/?file=publications/2001/wp/wp2001-14.pdf, 6.

[16] B. Tungodden, “A Balanced View of Development as Freedom”, July 6, 2001, http://www.cmi.no/pdf/?file=publications/2001/wp/wp2001-14.pdf, 6.

[17] C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 177.

[18] C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 69.

[19] A.K. Sen, “The Standard of Living,” in Hawthorn (ed.), The Standard of Living, Cambridge, Cambridge University Press, 1987, 109.

[20] B. Tungodden, “A Balanced View of Development as Freedom”, July 6, 2001, http://www.cmi.no/pdf/?file=publications/2001/wp/wp2001-14.pdf, 13-14.

[21]Extensive literature on the role of political motivations in the disbursement of aid can be found with: P. Mosley, “ The political economy of foreign aid: A model of the market for a public good”, Economic Development and Cultural Change, 33, 373–393; P. Mosley, “Towards a predictive model of overseas aid expenditures”, 1985, Scottish Journal of Political Economy, 32, 1–19; B. Frey, F.Schneider, “Competing models of international lending activity”, 1986,Journal of Development Economics, 20(2), 225–245; W.N. Trumbull, H.J.Wall, “Estimating aid-allocation criteria with panel data”, 1994,Economic Journal, 104, 876–882; P. Boone, “Politics and the Effectiveness of Foreign Aid,” 1996, European Economic Review, 40:2, 289-329.

[24]A. Alesina, D.Dollar, “ Who gives foreign aid to whom and why”, 2002, Journal of Economic Growth, 5, 33–64.

[25] Insinuated inter alia by W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 294.

[26] W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 320.

[27] W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 322.

[28] N. Woods, “The shifting politics of foreign aid,” 2005, International Affairs 81 (2), 393-409.

[29] D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 14 & 23.

[30]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 23.

[32] T. Moss, D. Roodman, S. Standley, “The Global War on Terror and U.S. Development Assistance: USAID allocation by country, 1998-2005”, Center for global development, Working paper number 62, July 2005, http://www.cgdev.org/files/2863_file_WP62_1.pdf, 2.

[33] T. Moss, D. Roodman, S. Standley, “The Global War on Terror and U.S. Development Assistance: USAID allocation by country, 1998-2005”, Center for global development, Working paper number 62, July 2005, http://www.cgdev.org/files/2863_file_WP62_1.pdf, 2-3.

[34] U.S. Budget, Office of Management and Budget (2004), www.whitehouse.gov/omb/budget/fy2004/state.html.

[35] N. Woods, “The shifting politics of foreign aid,” 2005, International Affairs 81 (2), 393-409.

[36]Oxfam, Paying the Price: Why rich countries must invest now in a war on poverty, Oxford, UK, 2005, www.oxfam.org.

[37] D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 46.

[38]W. Easterly, “Can foreign aid buy growth”, 2003,  Journal of Economic Perspectives, 17, 3, 35.

[39] J. Sachs, The end of poverty: economic possibilities for our time, New York, Penguin Press, 2005, 56-57.

[40] A. Shleifer, “Peter Bauer and the failure of foreign aid”, Cato Journal,Vol. 29, No. 3 (Fall 2009), 381-382; J. Sachs, The end of poverty: economic possibilities for our time, New York, Penguin Press, 2005, 54-60.

[41]W. Easterly, “Can foreign aid buy growth”, 2003,  Journal of Economic Perspectives, 17, 3, 31.

[42]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 52-53.

[43]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 47; W. Easterly, “Can foreign aid buy growth”, 2003,  Journal of Economic Perspectives, 17, 3, 23-48.

[44]P. Boone, “Politics and the Effectiveness of Foreign Aid,” 1996, European Economic Review, 40:2, 289-329.

[45]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 53; B., Peter, “Politics and the Effectiveness of Foreign Aid,” 1996, European Economic Review, 40:2, 289-329.

[46] M.T. Hadjimichael, D. Ghura, M. Mulheisen, R. Nord, E.M. Ucer, “Sub-Saharan Africa: Growth, Savings and Investment, 1986-2003”, IMF Occasional Paper No. 118, 2005; R. Reichel, “Development Aid, Savings and Growth in the 1980s: A Cross-Section Analysis”, 1995, Savings and Development, 19, 3, 279-296.

[47]M.A. Clemens, S. Radelet, R. Bhavnani, “Counting Chickens when they Hatch: the Short-term Effect of Aid on Growth”, 2004, http://ideas.repec.org/s/wpa/wuwpif.html.

[48]R.G. Rajan, A. Subramanian, “Aid and Growth: What does the Cross-Country Evidence really show?” IMF Copy, April 2005.

[50]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 6.

[51]C.R. Williamson, “Exploring the failure of foreign aid: The role of incentives and information”, 2009, Rev. Austrian Econ, DOI 10.1007/s11138-009-0091-7, 6.

[52]C. Burnside, D. Dollar, “Aid, Policies and Growth,” 2000, American Economic Review 90, no. 4, 847-868.

[53]W. Easterly, R. Levine, D. Roodman. “New Data, New Doubts: A Comment on Burnside and Dollar's 'Aid, Policies, and Growth' (2000),” 2003,American Economic Review; R.G. Rajan, A. Subramanian, “Aid and Growth: What does the Cross-Country Evidence really show?” IMF Copy, April 2005.

[54]The speech by president Bush can be found at: www.whitehouse.gov/news/releases/2003/03/20020314-7/html. The announcement by the MCC can be found at: www.whitehouse.gov/news/releases/2002/11/20021126-8.html#3.

[55]C. Burnside, D. Dollar, “Aid, Policies and Growth,” 2000, American Economic Review 90, no. 4, 847-868; M.A. Clemens, S. Radelet, R. Bhavnani, “Counting Chickens when they Hatch: the Short-term Effect of Aid on Growth”, 2004, http://ideas.repec.org/s/wpa/wuwpif.html.

[56]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 58; M.A. Clemens, S. Radelet, R. Bhavnani, “Counting Chickens when they Hatch: the Short-term Effect of Aid on Growth”, 2004, http://ideas.repec.org/s/wpa/wuwpif.html.

[57]T. Moss, A. Subramarian, “After the Big Push? Fiscal and Institutional Implications of large Aid Increases”, Center for Global Development, 2005.

[58]This is the “Samaritan’s Dilemma”: By giving foreign aid, the “Samaritan”, or the donors, alters the incentives faced by those receiving it. If the recipients believe that future poverty will increase the likelihood of more foreign aid, aid could actually worsen incentives to invest. Instead of saving and investing, citizens now face an even stronger incentive to consume and become dependent on the donors. Described by: C.R. Williamson, “Exploring the failure of foreign aid: The role of incentives and information”, 2009, Rev. Austrian Econ, DOI 10.1007/s11138-009-0091-7, 9; J.M. Buchanan, “The Samaritan’s dilemma”, E. S. Phelps (Ed.), Altruism, morality, and economic theory., New York, Russell Sage Foundation, 1975;  Further evidence and literature: P. Boone, “Politics and the Effectiveness of Foreign Aid,” 1996, European Economic Review, 40:2, 289-329.

[59]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 61.

[60]This phenomenon is generally described as The Dutch Disease: when a country faces a large inflow of (any) foreign currency, this currency will have to be converted to the local currency and hence the demand for the local currency increases. This rising demand will obviously have as a result that the value of the local currency increases, an effect that will have severe negative consequences on the export-position of the country.

[61] J. Heckelman, S. Knack, S. “Foreign aid and market-liberalizing reform”, 2008,Economica, 75, 542–548; S. Knack, “Aid dependence and the quality of governance: Cross-country empirical tests”, 2001,Southern Economic Journal, 68(2), 310–329.

[62]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 74.

[63]Doing so, we feel supported by the “Lucas Critique”; R. Lucas, “Econometric Policy Evaluation: A Critique”,  1976, Carnegie-Rochester Conference Series on Public Policy, 1,1, 19-46.

[65]L.E. Read, I, Pencil, New York, The Formation for economic education, 1958.

[66]L.E. Read, I, Pencil, New York, The Formation for economic education, 1958.

[67]L.E. Read, I, Pencil, New York, The Formation for economic education, 1958.

[68]A. Smith, An inquiry into the nature and causes of the wealth of nations, London, W. Strahan and T. Cadell, 1776, 18-21.

[69]The presumption of “free decision-making” is of course mere conceptual. In a free society is it pivotal to combat any form of coercion in the market-process. This is an ongoing struggle, in which it is of the highest importance to offer different parties the chance to interact with each other with equal legal possibilities. Further elaboration on this topic would lead us too far, however.

[70]J. Norberg, In defence of global capitalism, Washington D.C., Cato Institute, 2003, 58.

[71]A. Smith, An inquiry into the nature and causes of the wealth of nations, London, W. Strahan and T. Cadell, 1776, 21.

[72]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 81.

[73]J.A. SCHUMPETER, Capitalism, Socialism and Democracy, New York, Harper & Row, 1975.

[74]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 519.

[75]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 519-521.

[76]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 521-522.

[77]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 524.

[78]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 525.

[79]Inspired on: L. von Mises, Socialism: An economic and sociological critique, Indianapolis, Liberty Fund, 1922.

[80]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 526.

[81]Cited in: F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 528.

[82]F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 530.

[83]Same conclusion by: C.R. Williamson, “Exploring the failure of foreign aid: The role of incentives and information”, 2009, Rev. Austrian Econ, DOI 10.1007/s11138-009-0091-7, 9

[84]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 85.

[85]Several other authors confirm this point of view: D.C. North, Structure and Change in Economic History, W.W. Norton, 1981; J. DeLong, J. Bradford, A.Shleifer “Princes and Merchants: European City Growth before the Industrial Revolution”, 1993,Journal of Law and Economics, 36, 671–702; S. Knack, P. Keefer, “Institutions and Economic Performance: Cross-country Tests Using Alternative Measures”, 1995,Economics and Politics, 7, 207–227; R. Barro, “Determinants of Economic Growth: A Cross-country Empirical Study”, 1999, MIT Press.

[86]H.DeSoto, the mystery of capital: why capitalism triumphs in the West and fails everywhere else, Basic Books, New York, 2000, 8: “we found that people who could not operate within the law also could not hold property efficiently or enforce contracts through the courts; nor could they reduce uncertainty through limited liability systems and insurance policies or create stock companies to attract additional capital and share risk”.

[87]C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 188-189.

[88]C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 184.

[89]C.W. Morris (ed.), Amartya Sen, Cambridge, Cambridge University Press, 2010, 188-189; H.De Soto, the mystery of capital: why capitalism triumphs in the West and fails everywhere else, Basic Books, New York, 2000, 72.

[90] D.B. Skarbek, P.T. Leeson, “What Can aid do?”, 2009, Cato Journal,Vol. 29, No. 3, 2; L. Von Mises, Economic Calculation in the Socialist Commonwealth, Auburn, Ala., Ludwig von Mises Institute, 1920; F.A. Hayek, “The use of Knowledge in Society”, 1945, American Economic Review, XXXV, No.4, 519-530; I.M. Kirzner, Competition and Entrepreneurship, Chicago, University of Chicago Press, 1978; C.J. Coyne, P.T.Leeson, “The Plight of Underdeveloped Countries,” 2004, Cato Journal 23 (4), 235–249.

[91]A. Smith, An inquiry into the nature and causes of the wealth of nations, London, W. Strahan and T. Cadell, 1776.

[92]J. Sachs, The end of poverty: economic possibilities for our time, New York, Penguin Press, 2005.

[93]G. Myrdal, “development and underdevelopment”, Cairo, 1956, 63-65; quoted in P.T. Bauer, Dissent on development, Cambridge, Harvard University Press, 1971, 70.

[94]J. Sachs, The end of poverty: economic possibilities for our time, New York, Penguin Press, 2005, 270.

[95]D.B. Skarbek, P.T. Leeson, “What Can aid do?”, 2009, Cato Journal,Vol. 29, No. 3, 1.

[96]Following the terminology of W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006.

[97]D.B. Skarbek, P.T. Leeson, “What Can aid do?”, 2009, Cato Journal,Vol. 29, No. 3, 3.

[98] A. Shleifer, “Peter Bauer and the failure of foreign aid”, Cato Journal,Vol. 29, No. 3 (Fall 2009), 381-382.

[99]Expressed by W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 124-125.

[100]D. Acemoglu, “The form of property rights: oligarchic vs. democratic societies”, MIT copy, April 2005, http://economics.mit.edu/files/4480,

[101]D. Acemoglu and J.A. Robinson, Economic origins of Dictatorship and democracy, Cambridge U.K., Cambridge University Press, 2006.

[102]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 124.

[103]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 125.

[104]A.K. Sen, Development As Freedom, Oxford, Oxford University Press, 1999.

[105]D. Rodrik, “Institutions for high-quality growth: what they are and how to acquire them”, 2000, Studies in Comparative international development.

[106]The specific importance of this aspect is highlighted by P. Aghion, A. Alesina, F. Trebbi, “Endogenous Political Institutions”, Harvard University Copy, January 2004.

[107]D. Acemoglu and J.A. Robinson, Economic origins of Dictatorship and democracy, Cambridge U.K., Cambridge University Press, 2006.

[108]D. Acemoglu, J.A. Robinson, Economic origins of Dictatorship and democracy, Cambridge U.K., Cambridge University Press, 2006; W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 125.

[109]S. Engerman, K. Sokoloff, “Factor endowments, inequality, and paths of development among new world economies”, 2002, NBER Working Paper 9259, http://www.nber.org/papers/w9259.pdf.

[110]N. Jensen, L. Wantchekon, “Resource Wealth and Political Regimes in Africa”, Comparative Political Studies, 2005.

[111]M. Ross, “Does oil hinder democracy?”, World Politics 53, 2001, 325-361; P. Collier, A. Hoeffler, “Democracy and resource rents”, Department of Economics, University of Oxford, 2005.

[112]D. Acemoglu, J.A. Robinson, Economic origins of Dictatorship and democracy, Cambridge U.K., Cambridge University Press, 2006.

[113]W. Easterly, “The middle-class consensus and economic development”, Journal of Economic Growth, 6, No. 4, 2001, 317-336.

[114]D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 58.

[115]W. Easterly, The White Man’s Burden. Why the West’s efforts to aid the rest have done so much ill and so little good, Penguin Press, New York, 2006, 142.

[116]S. Knack, “Aid-dependency and the quality of governance: Cross-country empirical tests”, Southern Economic Journal, 68, No. 2, 2004, 310-329.

[117]S. Djankov, J.G. Montalvo, M. Reynal-Querol, “The Curse of Aid”, World Bank Copy, April 2005.

[118] A. Shleifer, “Peter Bauer and the failure of foreign aid”, Cato Journal,Vol. 29, No. 3 (Fall 2009), 385; see also: D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 66.

[119] C.J. Coyne, M.E. Ryan, “With friends like these, who needs enemies? Aiding the world’s worst Dictators”, 2009,The Independent Review, 14(1), 26–44.

[120]We find them inter alia in the Cotonou agreement and the Paris Declaration for Aid Effectiveness.

[121]A. Alesina, B. Weder, “Do corrupt governments receive less foreign aid?” American Economic Review 92, 2002, 1126-1137.

[122]Confirmed by: A. Shleifer, “Peter Bauer and the failure of foreign aid”, Cato Journal,Vol. 29, No. 3 (Fall 2009), 384; J. Svensson, J. “Why Conditional Aid Does Not Work and What Can Be Done About It?”, 2003,  Journal of Development Economics 70, 381–402; W. Easterly,  “Can the West Save Africa?” Journal of Economic Literature 47, 373–447; D. Moyo, Why Aid is not Working and how there is a another way for Africa, Penguin Books, London, 2009, 52-53.

[123]D. Acemoglu, J.A. Robinson, Economic origins of Dictatorship and democracy, Cambridge U.K., Cambridge University Press, 2006.

[124]W. Easterly, “Was development assistance a mistake?” 2007,American Economic Review, 97(2), 328–332.

[125]C.R. Williamson, “Exploring the failure of foreign aid: The role of incentives and information”, 2009, Rev. Austrian Econ, DOI 10.1007/s11138-009-0091-7, 8; P.T. Bauer, “Economic history as theory”, 1971,Economica, 38, 163–179; M. Friedman, “Foreign economic aid: Means and objectives”, G.Ranis (Ed.), The United States and the development economies, New York, Norton, 1958.

[126][126]C.R. Williamson, “Exploring the failure of foreign aid: The role of incentives and information”, 2009, Rev. Austrian Econ, DOI 10.1007/s11138-009-0091-7, 9.

[127]D. Brautigam, S.Knack, “Foreign aid, institutions and governance in sub-Saharan Africa”, 2004, Economic Development and Cultural Change, 52(2), 255–86.

[128]See for example the principles of ownership and alignment in the Paris Declaration for Aid effectiveness.

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