James Shikwati : The developing world needs trade, not aid, to help the poor

About a year ago, trade ministers who met at the last World Trade Organisation meeting in Doha, Qatar, launched a new round of trade negotiations called the Development Round. Since then very little has been done in the way of freeing up trade to people in poor countries.

Indeed, mostly things have gone in the opposite direction, with the US announcing a subsidy bonanza for its farmers and imposing restrictions on steel imports. Meanwhile, to the extent that the international community has been discussing "development" it has been in the context of increasing "aid" to the "developing" world. This was the theme of the meeting in Monterrey, Mexico, in March, and again at the World Summit on Sustainable Development in Johannesburg.

But "aid" will not stimulate development. Only trade can do that. For many years, well-meaning aid agencies have sought to help people in poor countries. Since the 1960s, over $500 billion. has been given to the governments of African countries in the form of grants and soft loans. Yet the results have been less than spectacular. During the 1980s, at least 92 attempted military takeovers – some succeeding, some not – were recorded, affecting 29 African countries. Between 1981 and 1996 aid to Africa from all donors averaged about $US19 billion annually. During the same period, nearly half the countries in Africa experienced significant episodes of violent conflict between government and opposition groups. Four million people lost their lives, including seven heads of state; 3 million people became refugees.

The question remains: how can something that seems so good have had such a corrosive effect? The answer is that aid gives untrustworthy leaders the resources with which to engage in violent and repressive acts. Mengistu (Ethiopia), Pol Pot (Cambodia) and Idi Amin (Uganda) are among the more infamous recipients of foreign aid. Even food aid has been diverted to feed soldiers whose sole aim is to keep the population down. Recent reports indicate Robert Mugabe is diverting food aid to his supporters rather than allowing it to go to the starving millions in Zimbabwe.

In places where poverty is rife, aid becomes the route to riches for the elite. Money is disbursed through contracts, with rulers receiving huge kickbacks for their favours. By 1982 Zaire (now Democratic Republic of Congo) had accumulated a foreign debt of $5 billion. Its president, Mobutu Sese Seko, had accumulated a personal fortune of $4 billion.

Aid also undermines the democratic accountability of government. By offering governments a non-tax source of revenue, it enables them to ignore the wishes of citizens and reduces their incentive to deliver public services efficiently and effectively. It also exacerbates cronyism. Why not award valuable contracts to your brother-in law’s more expensive (and less efficient) building company if you know the people can’t complain?

For the poor of the world, the main concern is that their governments stop strangling and looting their economies. As the Peruvian economist Hernando de Soto has shown, economic progress depends mainly on society’s institutions. That means formal property rights, free markets and the rule of law. These institutions enable people to own and exchange goods without fear of arbitrary expropriation, either by bandits or by the state. They thereby encourage economic activity, which enables people to escape from poverty. Some even become rich.

The rich world can help – by opening its markets to textiles, agricultural goods, and other products from the poor world. Trade will lead to production that will lift the standards of living in poor countries. It could also remove its agricultural subsidies, which reduce world market prices of these goods, reducing the amount poor-world producers can obtain for their goods.

When the developed world does give aid, it should be narrowly targeted (say, to provide assistance to trade negotiators or technical training), or in the form of products (such as food aid or medicines) rather than money that can be stolen, diverted or misused.

Guilt and goodwill have blinded many to the damage that aid can do. Trade, not aid, is the solution for the poor. At this week’s informal WTO ministerial meeting in Sydney, trade ministers should make good on their promise at Doha to create a world trading system that benefits all participants. That means reducing tariff and non-tariff barriers on all goods, as well as reducing agricultural subsidies.

James Shikwati, director of the Inter-Region economic Network in Nairobi, Kenya, is visiting Australia for the WTO meeting.

November 15 2002