Acton Institute Powerblog

It’s time to reform foreign aid

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When money intended to address immediate international crises become decades’-long dependency projects, it is time to reconsider how taxpayers’ money is spent and on whom. […]

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When we speak of good intentions, foreign aid comes immediately to mind. It will come as no surprise to Acton readers that sound economics are not always attached to those intentions. In the U.S., billions of dollars are earmarked annually for foreign aid, and the results are less than satisfactory. Can foreign aid as we currently know it be made more efficient, more likely to produce the intended results?

Foreign aid projects are generally designed as emergency measures, focusing only on the short term. As such, they are not intended to reverse all socio-economic problems of a given country, and may, in fact, keep the intended beneficiaries in an undesirable state of long-term dependence, instead of offering temporary relief. Relieving hunger and suffering in the moment is important and cultivating hope in the discouraged is desirable, but it is necessary to think beyond immediate situations to the long-term future of people who need help. As Jonathan Lea has written: “Although food aid programs may sometimes alleviate hunger in the short run, the overall effect of them appears to be the disruption of local agricultural markets, making it harder for poor countries to develop their own resources and feed themselves in the long run.”

In short, the success of foreign aid and poverty-reversal policies should be measured by how many people are no longer in need of support rather than how many people are still being supported years later.

The manner in which foreign aid is often delivered is part of the problem. As Dambisa Moyo has written in regard to aid to Africa, crony capitalism benefits governments and bureaucrats far more than it does the poor on the ground. And the manner in which loans are doled out also can ensure dependence and long-term debt.

One example of how foreign aid can inhibit local solutions to poverty is that of Herman Chinery-Hesse, a Ghanaian entrepreneur who develops software and connects local entrepreneurs with potential customers. He ran into a problem, however, when an NGO, upon learning of his work, used foreign aid cash to provide for free the same products Chinery-Hesse was developing, destroying his growing market. Chinery-Hesse has argued that the Ghanaian government does not distribute the foreign aid money for the development of local businesses; the use of the money is determined first and foremost by the donors, and there is no incentive for Ghana, or any other aid-recipient country, to change this.

Another example of the unintended negative consequences of foreign aid also involved Chinery-Hesse, who held contracts with the government. A competing foreign company asked the government of Ghana to provide a cheap loan to finance its project in Ghana. The government not only complied, but stopped contracting the services of Chinery-Hesse’s company, as the foreign entity could now provide the same services for less money through the foreign-aid financing. The is not market competition, but the use of foreign aid to override local, private interests to benefit those of the government.

It has been argued often that poverty is so dramatic and inequality so extreme in some nations that no solution is possible that does not involve the state. To that I would like to share the story of a group of Brazilians who created a postal delivery company—Grupo Carteiro Amigo—in one of the poorest neighborhoods in Rio de Janeiro. The state-owned postal service did not deliver in this neighborhood due to the violence there and an inability even to find the mail’s intended recipients. Aware of the demand in this region, the guys from Carteiro Amigo Group mapped the neighborhood and offered the residents a delivery service. Beginning with a bottom-to-top focus on a solution, these entrepreneurs found financial support for their idea, and they are now expanding the business and even providing a mobile app to make the service more accessible.

This is further proof of the inherent ability of human beings to develop their own home-grown solutions and to create businesses that impact not only themselves but also their local community. Foreign aid can be helpful and efficient if it is designed for people to access markets, expand entrepreneurial projects, and receive education. In other words, if it is intended to develop human capital. With that in mind, Thinking Huts, a nonprofit organization dedicated to making education more accessible with humanitarian-driven technological solutions, has completed its first 3D-printed school in Madagascar. The 3D school was cheaper and faster to build than a conventional brick-and-mortar school would have been. Moreover, this model can be employed in remote regions where access to education is very low. Wouldn’t that be a good way to allocate foreign aid? Educating, training, and developing human capital, focusing on individuals heretofore excluded not only from markets but also the education that would enable them to become independent, is one way that foreign aid can act efficiently.

To be very clear, I’m not calling for an end to all foreign aid and NGOs, but a reformation of how resources are used. Given the enormous inefficiency in how foreign aid is distributed and to whom (for examples, dictators who use it to maintain power), it is time for markets, individual initiative, and local creative energy to be the true beneficiaries.

Matheus Cosso Resende

Matheus Cosso Resende is a member of the Acton Institute`s 2022 Emerging Leaders class and an economics enthusiast who believes in the power of education to break down barriers. His great objective is to contribute to the formation of a free, inclusive, and prosperous society. Matheus majors in economics at Mackenzie Presbyterian University, Brazil, loves soccer. and is a big fan of Palmeiras, a Brazilian soccer team.