More Aid vs. Trade

Following up from the interview below. I want to point out that there is a fundamental problem with the aid vs. trade debate. Too many commentators structure the argument as either/or, where in reality in many cases the most effective solution is both.

The impetus to make this point comes from a post on Cato at Liberty. The writer makes the very correct point that trade is most important prong of the west’s three pronged developmental assistance plan (the others being aid and debt relief), but goes a bit far in dismissing the value of aid.

Foreign aid, as many (including myself) have argued, is a very bad idea. Aside from encouraging corruption and helping to keep nasty dictators in power, it is a major disincentive to necessary political and economic reforms.

(following the link)

aid has harmed rather than helped Africa. It has failed to stimulate growth or reform, and encouraged waste and corruption. For example, aid has financed 40 percent of military spending in Africa. Similarly, debt relief has failed to prevent African countries from falling into debt again.

There seems to be a serious problem of definitions here, first of all she’s lumping in “cold war military aid” (which is the only way that statistic makes sense) with public welfare aid, and then doesn’t differentiate between broad governmental aid and targeted project based aid. While I share her suspicion of direct governmental aid, either of the military or civil sense, non-project based aid is a small and shrinking parts of aid budgets, and almost entirely limited to areas like Iraq and Afghanistan where what we really want to do is help keep nasty governments in power, because the alternative is a power vacuum where terrorists can thrive.

If we throw out broad governmental aid and focus solely on project based aid – hydro-electric dams, food aid, medical treatment – then there is still plenty of room for criticism – there is a bloat of NGO’s many of which don’t seem to do all that much. But on the other hand, some aid is necessary for business in these areas.

An example: I was talking to an executive at BHP Billiton, who said they had problems getting a mining project off the ground (I believe in Tanzania, but not 100% sure) because right when they got everything up and running there was a malaria outbreak. Similarly The Democratic Republic of the Congo has a government budget on USD 2 billion on government revenues of USD 700 million, and it, no surprise, has one of the highest rates of malaria infection in the world. We could wait for “free market” forces to rise high enough that everyone can buy their own mosquito nets (and are well educated enough to know why its necessary) before working with the country to trade its vast mineral wealth, or we can assist in building the structures that a functional trading economy is based on – roads, schools, hospitals, and at least basic medical care.

There is difficulties and plenty of potential wastage involved in this kind of aid+trade two pronged approach, and in order for it to be effective the aid has to be project based – i.e. it has to involve bringing things to people not an open-ended subsidizing of what should be governmental operations. But there aren’t really all that many other options if we are to have a global economy that integrates development poor but resource wealthy areas of the world.

The answer here isn’t categorial dismissal, but rather more oversight and more of a focus on concrete results and wealth creation. And, of course, we should remember that altruism doesn’t have to contradict self-interest.