G8 Member Canada made a stand on an inconvenient truth. After two years of study, and taking testimony from 400 witnesses in the U. S, Europe and Africa, a Standing Senate Committee of Foreign Affairs and International Trade, issued a report on issues related to African aid. In unsparing language, the Committee determined that after 40 years of aid, little has been done with its $12.4 billion in bilateral assistance to propel Africa from economic stagnation or to improve the quality of life on the continent. "Development assistance has been a holding pattern for Africa at best, and a direct facilitator of poor governance and economic mismanagement at worst."...To drive its point home to readers, the Committee printed a graph on the front cover of: "Overcoming 40 years of Failure." After an allocation from all other donors of $570 billion, it showed the per capita GNP in Sub-Saharan Africa at 17.1% of the world average in 1965, falling to 9.7% in 2004. In many areas the people are worse off than before and "ordinary citizens have paid the highest price for these failures."...The Committee determined that it was unrealistic for the international community to expect African countries to make economic gains without shifting its focus towards the things that African citizens and leaders actually want—assistance in generating investment, creating jobs, and facilitating trade.An Easterly Aid Wind Blows Out Of Canada,' Jeremiah Norris, TCS Daily, 3/15/2007
As Norris's sharp article illuminates, aid to Africa, so highly-touted by the UN, has been about as effective in changing economic circumstances there as the old welfare system was in the US before it was abandoned in 1995. Aid to Africa, sad to say, also follows another dismal path, that of the ill-famed loan portfolio extended to Africa in the 1980s, and for about the same reasons offered in credit reports to loan committees twenty years ago.
Commercial lenders in the 1980s, rather like aid-granting governments in the early 21st century, tended to stick to public infrastructure loans. Want to build a billion dollar dam? The banks would loan the money. And, within five to ten years, banks found that their clients could not pay back the credit extended. Hundreds of billions of dollars worth of debt defaulted. And yet, despite a very public disaster, the internal pressure in banks was enormous to stick to this losing formula. Why?
Well, strange thing: because interest rates were so high, if a debtor could sustain a payment schedule for, say, five years, the bank would make enough money to offset a default. And, wonder of wonders, money center banks in the United States, as elsewhere, are virtually guaranteed institutions. And, even better, the money was loaned to governments, not corporations or individuals. It was, as such, sovereign debt, whose default directly affected not only the bank but the government of the United States in its relations with the target country. As such, Uncle Sam would make good on the defaulted principal. Isn't that great? You and I, as taxpayers, got to pay for these "executive" decisions. Would one describe such bankers as cynical?
You bet. Why do you think money center bankers are sometimes called "socialists in Armani suits?" However, a few bank officers were deeply offended. One the writer worked for then, a very savvy Swiss banker who was doing a tour with a bank now merged out of existence, had a completely different thesis, one that very much gibes with the current Canadian recommendations. Instead of the model in play, which he described as a neo-colonial structure, where money was lent to benefit the banker's country or institution, not the client, he wanted instead to develop financial arrangements for assisting in building internal cash flows in African and other underdeveloped countries. "Internal cash flow is a key indicator of economic health," he noted on more than one occasion, something any Swiss banker knows a great deal about. One project he worked on involved building materials.
In the target countries, a particular mix of muds and clays made an especially durable brick. Though produced by a cottage industry, the material was in huge demand and, because of erratic supply, hugely overpriced. The bank officer, with considerable assistance from locals in-country, developed a financial plan for constructing a scaled-up business for making this kind of brick. It would be, in other words, real infrastructure, not a bridge to nowhere, nor a dam whose construction might involve wars between competing countries. The money made would become part of the internal economies of several countries, not transmitted offshore. What was the determination of the loan committee on this proposal?
Because the proposed business was not designed to produce products for exports to countries to whose banks these countries owed money, the plan was rejected. Not long after, this brilliant bank officer went back to Switzerland where he now runs a substantial bank. A large part of their business is in micro loans to the Third World, small amounts lent to the smallest of businesses. Reliability of repayment is above 90%.
Foreign aid as it's construed now, and has been for many decades, is strikingly similar in its ultimate effect, as this report by Norris suggests. The real objective isn't feeding the people of a given country, but bribing its government into pursuing interests favored by the donors. All welfare works like this. In the US, domestic welfare led to two constituencies: those who pleaded for benefits; and those who administered benefits. The only people who got out of their miserable economic conditions were the administrators, just like Africa's real beneficiaries of foreign aid. Everybody else's conditions steadily worsened.
This beat is one that a lot of drummers have sounded. The neat thing Norris reveals is that a national government in the West has decided to get in step. Maybe the US will follow.
Luther
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