Why foreign aid fails – and how to really help Africa
Daron Acemoglu and James A. Robinson in Why foreign aid fails – and how to really help Africa (The Spectator, January 2014) discuss the influence their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty on then British Prime Minister David Cameron. They appreciate his desire to help poor countries with increased foreign aid, but are skeptical. They write:
The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid.
And further they argue:
One could imagine that many factors have kept sub-Saharan Africa poor — famines, civil wars. But huge aid flows appear to have done little to change the development trajectories of poor countries, particularly in Africa. Why? As we spell out in our book, this is not to do with a vicious circle of poverty, waiting to be broken by foreign money. Poverty is instead created by economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country.
To those who wish to blame “capitalism,” that works too, as long capitalism is understood to be crony capitalism, where politically-connected businessmen and women control domestic monopolies and extractive industries. Acemoglu and Robinson use Syria and Angola as examples:
The key to understanding and solving the problem of world poverty is to recognise not just that poverty is created and sustained by extractive institutions — but to appreciate why the situation arises in he first place. …
The logic of poverty is similar everywhere. To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’
To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. A recent investigation by Forbes magazine into her fortune concluded, ‘As best as we can trace, every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.’ …
Success stories from the developing world rarely involve foreign aid. “Nakumatt: A Kenyan Supermarket,”, a chapter by June Arunga and Scott Beaulier in Lessons from the Poor: Triumph of the Entrepreneurial Spirit (Independent Institute, 2008) looks at the story:
When Nakumatt was founded in 1980s, it was a small retail shop selling blankets and mattresses in Nakuru, Kenya’s fourth largest city. Today, Nakumatt is a retail giant with 3,000 employees and a prestigious award for East Africa’s Most Respected Company in the Service Sector. Reasons cited for Nakumatt’s success include high levels of customer care and its partnerships with other companies, including the subletting of space in its stores to other retailers.
But the institutional challenges in Kenya and other developing countries are significant:
Legal and regulatory obstacles to entrepreneurship create hardship for countless people in the developing world. In Kenya it takes 8 steps and 73 days to register property, 13 steps and 54 days to launch a business, and 25 steps and 360 days to enforce contracts. Consequently, many entrepreneurs are driven to sell goods not through legal businesses, but at tiny kiosks in the informal economy, on whatever unclaimed space they can find. Unfortunately, because the kiosks are not legally recognized as property, few kiosk operators can obtain credit, so their prospects for upward mobility are very limited. Rather than legitimizing the kiosks, Kenya’s government has begun to demolish them.
For students researching and debating U.S. foreign aid policy, the challenge will be to find effective ways for developing countries to reform institutional barriers to enterprise.