Wednesday, September 7, 2011

Development aid money comes back to donor countries

This is a problem according to THIS report by the European Network on Debt and Development. Here are a few quotes from the article:

"The study shows that half of the contract value in World Bank-funded projects in the last decade went to firms from donor countries"

"Procurement refers to the awarding of contracts to private companies for aid projects such as building roads, supplying drugs or delivering schoolbooks to poor countries."

"Few poor countries have managed to become independent from international aid. This is partly due to donors’ procurement practices, the report states."

It is possible that the modalities of aid might be wrong. It could be that the best way to do it would be to simply give vast amounts of cash to developing country governments or simply direct to the people. But if there is an actual physical role to play, then something like this is happening:

- Hello, would you like to buy a chocolate bar from me?
- I don't have enough money.
- No problem, I will give you the money.
- Okay - that sounds like a good deal.
- Here is the money.
- Thank you. I would like one chocolate bar, please.

It is the same as just giving the chocolate bar to someone. Either way, you are giving someone something for free. Well, not entirely for free - you still have to work to make the chocolate bar.

You can chance 'chocolate bar'  to road, or computer, or school, or clinic, or whatever. In any case, donor countries are giving something for free - that is, people in donor countries are working hard to produce things to give to developing countries so that they can consume them. Let's not pretend any sort of bad deal is going on here.

We can go a bit deeper - there are conditions attached to giving that money - hence the reason some of it comes back. There have to be safeguards - ' procurement practices'. Of course, you just shouldn't be able to give the cash to your mate who makes over-prices sub-standard roads in your country (and yes, I know a real life example of this). That is corruption - in fact it is ripping off the taxpayer in the donor country, ripping off the poor people in the developing country who could have seen some of those resources better used, ripping off the road user. Far better to use a cheaper more reliable foreign (gasp!) company and use the difference in resources to, oh, I don't know, build a school, reduce donor country taxes, just about anything else, in fact.

Let's add another issue: what if you want to purchase computers for schools in your poor country. Or technical equipment for your hospital. What if you need a highly trained expert in a specific field. Or loads of other things. Good luck finding those the Congo. But, of course, you can always go for sub-standard, happy in the knowledge that the cash is staying in the country (likely going to your friends).

Obviously, as countries develop, more thing will be available within them, and the procurement systems will be more solid. But that is a slow process. In the mean time, there is nothing wrong with importing.

Finally, even the Netherlands - a pretty developed country - can suffer when large amounts of foreign money comes into their country. Usually we think of it as the natural resource curse (one part of which is ' Dutch Disease). Loads of almost free money in causing:   (1) exchange rate appreciation--> difficult for other sectors to export-->other sectors die hurting the economy (Dutch Disease) ;  (2) people with the cash buy lots of things pushing up demand--> prices increase-->all other areas of the economy are hurt (Balassa-Samuelson); (3) loads of cash=incentives for corruption; (4) loads of cash=incentives for ignoring the rest of the economy.

There is evidence that foreign aid has all of these effects too. So maybe it is not a great idea for us to dump all that cash on countries in any case. Some of it, sure. But too much can do more harm that good.

Having said all of that. If you can get good products, services, including management skills and efficient, non-corrupt procurement, locally, that would be a way better idea than looking back to donor countries. I'm really just railing against the framing of the article...

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