Sunday, August 10, 2008

On Aid

Over the past fifty years the Western world has spent over $1.2 trillion attempting to help Africa lift itself out of poverty and launch into what economists call self sustaining growth.

Despite these efforts, the vast majority of Africa is mired in poverty while the majority of its wealth is concentrated in the hands of a relatively few kleptocrats. Recent economic research into the effects of aid on development has demonstrated that aid is not the mechanism to spur growth. Conversely, those countries who have not received any significant amount of aid over the past 50 years have significantly outperformed those that did.

In the early 1970s Kenya and Chile had vastly different conditions – Kenya was the star of Africa, with economic growth rates at 7% a year for over ten years. Chile was a basket case with growth of only 1.7%, large budget deficits and soaring inflation.

Over the ensuing thirty years Kenya, through the assistance of the World Bank, received over $15 billion of aid for development, while Chile received none, but instead focused on reforming its economic policies.

The results have been staggering – Kenya’s economy has grown at an average of 0.44% per year since the 1970s, while Chile has grown at 6% per year over the same period.

So what happened? Good economic policy or lack thereof, is what happened. Kenya has consistently refused to reform its fiscal policies and liberalise its economy and continues to tolerate cronyism and corruption. The World Bank has continued to turn a blind eye to its failures as it injects more and more cash into the economy. Chile, on the other hand, now has one of the fastest growing economies in South America.

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