But aid does not seem like investment. According to Deaton, the Nobel laureate in economics, it is not about poor countries lacking money. What they lack are institutions that ensure a social contract – a social pact – between the government and the government, between the state and the people. Aid undermines this contract, he believes.
Deaton believes that financial assistance, even when it – in the short term – increases the quality of life for recipients, may make it more difficult to build better institutions – which will benefit all members of the community in the long term. External aid can increase poverty and misery, because aid often makes governments less concerned about the needs of the poor.
If the conditions for development and growth are present in the recipient countries, money and capital will either be raised locally or invested from abroad. Then no assistance is needed. If, on the other hand, local conditions hinder development, aid is directly harmful. Then it helps to consolidate dysfunctional / unfortunate political and economic institutions and power relations.
7: A good circle – and a vicious one
Countries are poor and mismanaged, not because they lack money, but because they lack inclusive institutions for political participation and economic development. This is a key message in the two books this article is based on. The West developed political democracy and an economy that created growth and prosperity. Africa and Latin America instead gained institutions that enriched an elite that had a monopoly on political power.
According to phonejust, the historical background for the institutional development taking such a different direction is thus in the colonization of America and the transatlantic slave trade. Colonization and the slave trade was a critical period in history because it set in motion different dynamics in the different continents.
In Latin America and Africa, the triangular trade strengthened institutions that had already amassed wealth and power in the hands of a small elite: in Latin America with the heirs of the Spanish conquerors, in West and Central Africa with native kings and chiefs, who ruled autocracies slave states based on capturing and reselling slaves.
In North America and Britain, on the other hand, the transatlantic triangular trade in slaves, colonial products, and exports led to the formation of a broad political alliance against autocracy and its monopolies. In this process, the government’s need for taxation was important for the power the population could exercise. The need for taxation gave impetus to democracy in Western Europe.
The liberal political institutions, to which the revolutions (1789 and 1848) led, laid an important foundation for the West to leave the rest of the world socio-economically. Monopolies were dissolved, and laws and institutions came into place that secured private property, investments and innovations. The political institutions became responsive to popular pressure. This dynamic made it possible to mobilize political alliances for social reforms, a development that later led to the modern welfare state .
In the West, the governments’ need to tax was crucial for the population to gain influence . Angus Deaton’s most serious objection to aid is that it prevents a similar political dynamic from starting in the former European colonies: in countries where aid is a significant part of government revenue, governments are less responsive to the demands of the population. They simply have neither the need for tax revenue nor the need to build capacity to collect them.
A steady flow of aid money also makes it tempting for power groups in the recipient countries to rule the ruling elite and take over the government themselves. Aid money can escalate internal conflicts, lead to bloody power struggles and, in extreme cases, trigger civil wars with unimaginable humanitarian suffering for the civilian population.
However, Deaton believes that aid, and in particular health-oriented aid, can have something to do with it – on three conditions:
- When a country has relatively well-functioning and decent governing bodies
- When aid constitutes only a small part of the total economy
- When donors can work with local partners who have not been corrupted (thinking only of their own enrichment) or blunted by donors
The latter condition is difficult to fulfill because foreign donors move in an institutional and cultural minefield in the recipient country. How should one relate to different social groups? It is difficult to know what the country has the potential to do and what the most vulnerable groups really need. Because the aid relationship between rich donors and poor recipients is a power relationship, the needy often adapt their wishes and needs to what they think the donors want to hear .
In addition to the political damaging effect of development assistance, the consequences for the national economy and public health are difficult to calculate, even in cases where development assistance projects seem to have a positive effect. Therefore, Deaton advises to provide aid to Africa outside , and not in Africa: cancellation of illegitimate debt taken up by corrupt governments, halting arms exports and opening up western markets for African products. If the policy is changed in the rich donor countries, the effect will be both greater and more secure than aid.