Cameron should focus on free trade rather than foreign aid

The development economist Peter Bauer famously observed that “Aid is the process by which poor people in rich countries subsidise rich people in poor countries.” Indeed there is a wealth of evidence, both theoretical and empirical, that foreign aid is largely counterproductive.

In particular, aid may help to sustain kleptocratic elites that feed off such infusions. Indeed, income is frequently diverted to buy weapons to suppress internal dissent, typically through the oppression of minority ethnic groups.
Foreign aid also tends to distort markets by creating unfair competition and crowding out local suppliers. Currencies may also be artificially inflated, harming exports. And let’s not forget the negative economic effect of extra taxation on donor countries, which in turn harms their poorer trading partners.

Politically, dependence on foreign aid may breed a bureaucratic, centrally planned, top-down approach to economic development issues, when what is really needed is a framework of basic institutions (such as private property) within which entrepreneurship can thrive. Accordingly, it is very difficult to find an example of a country that has achieved long-term economic development through foreign aid.

Yet despite the overwhelming evidence, and notwithstanding the UK’s worst-ever peacetime fiscal crisis, the Conservative Party has announced that if elected it will ring-fence Britain’s overseas aid budget and meet the UN target of spending 0.7% of GDP on aid by 2013.

David Cameron also wants to change the way aid is delivered to make it more effective. But it is surely naïve to think that, despite repeated attempts to solve this problem, aid can somehow be better targeted so that it doesn’t fall into the hands of corrupt elites. Third World politicians and bureaucrats will simply find different ways of siphoning off money.

If the Conservatives really want to help developing countries they should focus on removing trade barriers, particularly those imposed by the European Union, rather than adopting the failed policies of international socialism.

15 July 2009, IEA Blog

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