When Foreign Aid
Doesn’t

A recent Economist magazine article entitled “Not so caring” mildly chastises Canada for the low level of foreign aid flowing from our borders. It seems that the 0.27 percent of our GDP that we devote to foreign aid is not enough.

If foreign aid were successful, maybe 0.27 percent wouldn’t be enough. Current research, however, suggests that foreign aid does little more than make politicians feel better. Successful aid would presumably leave the recipient country better off after it received the aid. But when they are judged using this principle, the world’s foreign aid programs have failed dismally. The tumultuous history of Côte d’Ivoire highlights our failures in this respect quite clearly.¹

Economists are fond of saying “incentives matter,” but it is also true that institutions matter. Unfortunately we often take our relatively good institutions for granted when we distribute foreign aid, and by accident or by design we undermine important institutions in foreign countries.

Africa’s Côte d’Ivoire grew at an average rate of 8 percent for 35 years following the Second World War. In the post-war period, the institutions that were created nurtured a competitive industrial environment and the economy flourished. Given these strong initial conditions, it was hard to imagine that anything could interrupt this country’s rise to prosperity. Unfortunately for the residents of the Côte d’Ivoire, something could, and did—an invasive, and increasingly bloated and corrupt central government. And at every step, Canada was there to encourage this development.

At present, a single political class controls the economy of Côte d’Ivoire, which was once a competitive marketplace. The state extracts revenue from a disorganized and impoverished agriculture sector through export marketing boards, and generally holds back rural development. Initially these marketing boards were set up to stabilize farm prices, but ultimately became a tool for government revenue generation. Farmers are forced to sell their crops at substantially discounted prices to these boards, which then sell them abroad.

The trend towards centralized control started in the late 1960s and early 1970s as the government began taking a more active role in the economy; it even published a five-year national plan in 1970. At the time, it was common knowledge that a significant percentage of foreign capital designated for economic development went, legally and illegally, to the Côte d’Ivoire’s ruling class. This capital was used in largely inefficient projects primarily meant to increase the prestige of the central government, including large hydroelectric plants and the erection of a new capital city. Canada’s aid-granting organization, the Canadian International Development Agency (CIDA), rewarded the government for its efforts by increasing average government-to-government aid tenfold in the 5 years following the publication of the national plan compared to the 5 years before it.

In 1978, a World Bank book examining the history of the Côte d’Ivoire concluded that the country’s economic success, from colonial times to the then present, was due to the state. In the author’s opinion, the remaining economic problems of the nation—a non-diversified economy, unequal income distribution, and low return on investment—could be solved by the central government. The author, after noting that state investment as a percentage of total investment increased from 40 to 60 percent between 1960 to 1970, inferred that the increasing role of the state would enable the government to alleviate the perceived problems of the nation. The year following the publication of this book, CIDA gave the Côte d’Ivoire by far the largest grant that it had ever given the country (according to CIDA records going back as far as 1964/65).

By 1982, the World Bank finally recognized that the Côte d’Ivoire’s troubles were caused by massive government intervention in specific sectors of the economy. For instance, the export marketing boards were hurting farmers, not helping them. Health spending was mainly directed at the wealthy urban population, virtually ignoring rural areas where half the population resided. Fifty to 80 percent of education spending was siphoned off for higher education mainly benefiting the wealthy elite. While government spending on a per student basis for university ranks among the world’s highest, 40 percent of children aged 6 to 12 do not attend school. Instead of tackling any inequities in the system, the state was at the forefront of creating further inequities.

International studies by Peter Bauer and others have shown that foreign aid helps to entrench bad leadership and allows government to pursue bad economy policy. However, these revealing new analyses have not recognizably changed CIDA’s aid giving patterns in the case of the Côte d’Ivoire.

While the government of Côte d’Ivoire is the principal cause behind the nation’s decline, we in Canada were not innocent bystanders. Our assistance, along with that from the rest of the world, aided and abetted the development of perverse incentives within the Côte d’Ivoire’s economy. What was once an economic miracle had its per capita GDP fall 4.3 percent per year between 1985 and 1994.

If we are truly interested in helping foreign countries we should not subsidize corrupt governments with foreign aid; rather we should eliminate trade barriers. According to the World Bank, this would increase the developing world’s GDP by 3 percent annually. Encouraging countries to develop strong institutions is the best way to ensure their prosperity. In the final analysis, the Canadian government should not increase the foreign aid budget, but rather concentrate on removing trade barriers and encourage the economic liberalization of developing countries. This would eventually lead to a higher standard of living for these nations—something no amount of aid could promise to do.

Notes

1  Information regarding the World Bank and the political and economic structure of the Côte d’Ivoire are from Pascal Wick and Jane S. Shaw, “The Côte d’Ivoire’s Troubled Economy: Why World Bank Intervention Failed” Cato Journal, vol. 18, no. 1.

References

P.T. Bauer, Equality, the Third World, and Economic Delusion, Cambridge: Harvard University Press, 1981.

Canadian Historical ODA (Official Development Assistance), International Development Information Centre, 1998.

David Dollar and Lant Pritchett, Assessing Aid. A World Bank Policy Research Report, Toronto: Oxford University Press, 1998.

The Economist (1999), “Not so caring” January 9–15, p. 34.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.