Trade vs Aid: Dissecting a False Dichotomy
23 Jun 2010
By Gerard DeGroot for ISN
Bono, the rockstar/anti-poverty campaigner, does not like having his wisdom questioned. At a Technology, Entertainment, Design (TED) conference in Tanzania in June 2007, the Ugandan journalist Andrew Mwenda did just that. He argued that 30 years of aid to Africa had achieved precisely nothing. In fact, he maintained, all that aid had exacerbated poverty by enticing bright Africans into corrupt government, rather than into entrepreneurship. Bono, squirming in his seat, looked ready to explode. Then came Mwenda's killer line: "What man or nation has ever become rich by holding out a begging bowl?"
"Bollocks," Bono shouted.
The showdown in Tanzania has become an iconic event in the 'Trade vs Aid' debate, with Mwenda's pointed rhetorical question endlessly repeated by conservative columnists and bloggers. Whether he likes it or not, Mwenda is now the poster boy of neoliberals who argue that the solution to poverty lies in free trade. Bono inadvertently helped their cause by calling him an "African Margaret Thatcher." Neoliberals, who argue that aid is like giving whiskey to an alcoholic, feel that Africa's first step to recovery lies in going cold turkey. Only when aid ceases can the continent begin the process of development that unfettered trade will bring.
"Aid to countries that are not performing well tends to strengthen the factors of under-development," argues Fredrik Erixon, chief economist at external pageTimbro. Erixon points to the fact that, despite $1 trillion in aid given to Africa over the past 50 years, the long anticipated development breakthrough has yet to occur. In contrast, he argues, the 'Asian Miracle' occurred not because of a boost provided by aid but because several Asian countries opened their economies to trade and direct foreign investment.
A favorite tactic of the free traders is to argue that barriers to trade cost poor nations more than $100 billion a year, about twice what rich countries give in aid. That seems a devastating statistic, but, like most of the 'evidence' bandied about in the trade vs aid debate, it's divorced from nuance or context and is conveniently impossible to prove. It also encourages the assumption that trade and aid are mutually exclusive. In fact, both are essential components to development. Each complements the other.
Trade by itself is certainly not a panacea. Granted, trade restrictions have impeded development, but that does not mean that their relaxation will make poverty history. In fact, free trade can seriously inhibit development, particularly when gross inequalities exist between trading partners. When weak developing countries lower trade barriers under pressure from wealthy nations, what often results is an asymmetric bargaining situation that favors the stronger party.
This has been demonstrated most profoundly in the Ivory Coast, where trade barriers were relaxed in order to encourage cocoa production. Unfortunately, the handful of dominant players in the chocolate industry are much more powerful than local farmers, or for that matter, than the Ivory Coast government. As a result, cocoa bean prices have not risen in 30 years, despite significant inflation affecting almost every other commodity. In order to make ends meet, farmers have resorted to using child labor or, in some cases, slaves. The farmers know that if they raise their prices or restrict production, bean buyers will take their dollars elsewhere - that is what is meant by free trade.
Neoliberal - or neocolonial?
In external pageEconomic Democracy: The Political Struggle for the 21st Century, J W Smith argues that neoliberals are guilty of blatant hypocrisy when it comes to the advice they offer the developed world. "The structural adjustments imposed upon weak nations as necessary for free trade are the opposite policies under which every successful nation developed," he maintains. "Virtually every nation successfully developing did so…[by protecting] tender new industries and markets. That they developed under the philosophies of Adam Smith is a myth designed to hide a continuation of plunder through unequal trades."
The extent of that plunder was revealed in a study by Christian Aid in 2005. The charity external pageestimated that sub-Saharan Africa was $272 billion worse off because of free trade policies imposed as a condition of debt relief and aid programs. "The reforms that rich countries forced on Africa were supposed to boost economic growth," the report contends. "However, the reality is that imports increased massively while exports went up only slightly. The growth in exports only partially compensated African producers for the loss of local markets, and they were left worse off."
In other words, for 'neoliberal' read 'neocolonial'. It's no surprise that free trade policies enthusiastically promoted today are the same ones that predominated during the golden age of imperialism. However, since unfettered free trade did not spur development in Africa during Victorian times, it is unlikely to do so now.
Nor is it remotely the case that the so-called 'Asian miracle' demonstrates the centrality of free trade to development. That 'miracle' was driven by a few strong states, among them South Korea and Malaysia, whose strategy for economic growth in fact ran counter to neoliberal orthodoxy. State intervention, nationalization and trade restrictions - all abhorrent to neoliberals - were fundamental to their success. In contrast, those states less able to resist the rules imposed by wealthy nations fared less well.
Clearly, salvation does not lie in free trade. But neither do traditional forms of aid offer much hope. The neoliberal case has been immensely strengthened by the fact that it is so terribly easy to find evidence of aid's failure. Every plank in the neoliberal case against aid - namely that it breeds corruption, bureaucracy, dependence, etc. - has firm foundation. In the form that it has been practiced for the last 50 years, aid is a bankrupt policy worthy of derision.
As that last sentence hints, however, the fault lies not in the policy, but in its administration. Aid has to be given directly to those who will benefit from it, not simply distributed to corpulent, often corrupt, bureaucrats. Those giving aid have to ensure that money is distributed in a way that will contribute to long-term development. The old adage applies: 'Give a man a fish, feed him for a day; teach a man to fish, feed him for a lifetime.' Ironically, that's precisely what Mwenda argues, as does Bono. The differences between the two men are not as profound as neoliberals would have us believe.
Taking a page from the Victorians
Just as the Victorian period provides salutary lessons on the limitations of free trade, so too it provides an interesting case study on the importance of cleverly targeted aid. Toward the end of the 19th century, industrialized countries alike discovered that further development would be retarded without a healthy, educated, well-trained workforce. Classical liberalism - the idea that individuals needed only a free market in order to thrive - morphed into 'new liberalism,' which held that the state needed to provide the poor with the basic tools necessary to their progress. The states that fared best in the pre-1914 period were those that built the most developed social welfare systems.
It seems ironic, then, that neoliberals today expect poor nations to achieve prosperity without the basic tools that were accepted as essential to development a century ago. Granted, the difference lies in the fact that the developed nations paid for their own social welfare programs, whereas development aid programs presuppose that welfare in Africa and elsewhere will be paid for by rich nations. That is undoubtedly true, but if we wait for the poor countries to be able to afford the improvements in health care, education, housing and training that are essential to development, we will wait a very long time indeed. If what is wanted is a great leap forward, infrastructure improvements will have to be financed by wealthy nations.
For David Crosweller, founder of the charity external pageWherever the Need, the solution is as simple as providing toilets. Without toilets, there can be no clean water; without clean water, there can be no healthy people; without healthy people, there can be no development. "We start with the very basics in life," says Crosweller. "That is the key if we are really going to alleviate poverty. If you think about it logically, it's quite sensible really. Unless you have good health…there's no way you are going to work your way out of poverty. Yes, you can continue receiving aid, but I believe our job is actually to stop people receiving aid and to make them self-sufficient."
Crosweller's logic is reinforced by a poll in the British Medical Journal which recently external pagerevealed that the 'sanitary revolution' - the provision of clean water and sewage facilities - is considered to be the most significant medical breakthrough since 1840. The sewers of the Victorian age were built not by free traders, but by progressives who understood the connection between health and development. Since classical liberalism did not alleviate poverty in the 19th century, there is no reason to assume it will do so now. Aid is not perfect, but it is essential to the social transformation that has to occur before real development can begin.