Foreign Aid in Africa: More than Meets the Eye

In response to the 2023 military takeovers in Gabon and Niger, the U.S. government suspended its Foreign Aid intended to promote democracy and development. This decision highlights a significant issue: decades of well-intentioned Foreign Aid programs in Africa have not guaranteed successful policies. The consequences of overlooking this fact resulted in political conflicts, rampant corruption, and the perpetuation of poverty. Those who were supposed to be helped in the first place end up paying the price. Assistance policies call for a fresh approach; it is time to integrate new technologies and think beyond Foreign Aid to elevate the standard of living.  

Throughout history, selfless charitable acts have played a significant role in human development. However, when aspects of charity are merged with "international development" expectations and labeled as "Foreign Aid," it becomes a horse of another color. The interplay of incentives, financial resources, and politics can significantly deviate aid purposes from the intended outcomes. As much commendable as the intentions of Foreign Aid could be, Milton Friedman observed that the inappropriate means “far from contributing to rapid economic development along democratic lines, is likely to retard improvement in the well-being of the masses” and “undermine democracy.”  

Leaders should consider any political constraints of recipient nations before allocating aid resources, as high corruption rates may lead to misuse of funds. For instance, in Kenya, $600-850 million disappeared from the treasury between 1990 and 1995, although aid from developed nations continued entering the treasury. Some years later, the International Monetary Fund (IMF) froze aid to Kenya, “citing the grotesque corruption of the regime of Daniel arap Moi.” In 2004, UK High Commissioner to Kenya Edward Clay accused government officials of “eating like gluttons and vomiting on donors' shoes.” Years passed, but corruption persists in Kenya, ranking 123/180 in Transparency International's Corruption Perceptions Index.   

Moreover, in 2020, the World Bank published that “ruling politicians, bureaucrats, and their cronies” captured aid in the most aid-dependent countries. Despite its limited impact, an impressive number of resources is still spent on aid. The U.S. government has bilaterally transferred billions of dollars to African countries, exceeding $1.1 billion in 2021. In 2022, the U.S. transferred more than $910 million toward foreign economic development. While resources are abundant, its outcomes fall short of those desired.  

UNPACKING FOREIGN AID  

Foreign Aid involves transferring resources to a country to promote sustainable development, reduce poverty, or improve the recipient countries' well-being. According to former U.S. Ambassador John Hick, Foreign Aid is a matter of national interest consistent with U.S. values.  In a 1995 statement as Assistant Administrator for USAID in Clinton’s administration, Hick said, “To answer the question of why Foreign Aid to Africa is in the U.S. national interest, we need to take stock of the facts, take well-calculated risks, and believe that a brighter future for Africa is on the horizon.” He emphasized that “However, the progress is fragile,” and “The United States must remain engaged and maintain its commitment to promote Africa’s sustainable development.”  

Hick justifies that Foreign Aid “costs only a penny a day for each American citizen, yet it improves the lives of millions of Africans.” Nonetheless, good intentions and low cost are insufficient if the policy doesn’t achieve the desired goals. 

CHALLENGING THE CONVICTION  

Supporters argue that Foreign Aid programs can promote economic development by making capital available in low-income countries. They cite the Marshall Plan, where the U.S. aid fostered economic development in Western Europe after World War II. However, this plan was a limited-time program focused only on infrastructure. In contrast, Foreign Aid to Africa permeates every aspect of the economy. 

The effectiveness of the Foreign Aid model has been the subject of debate, especially in African countries where poverty is still prevalent. A prominent critic is the Zambian economist Dr. Dambisa Moyo, who argues that African countries had no significant growth despite receiving aid for decades. Even more, Foreign Aid harmed more than helped in Africa by creating an aid dependency, a cycle where countries become overly reliant on it, hinder the development of sustainable economic policies and institutions, and foster corruption. She supported this idea through extensive academic work, especially in her book Dead Aid: Why Aid is Not Working and How There is a Better Way for Africa.   

In conversation with Dr. Steven Levitt on his podcast People I (Mostly) Admire, Dr. Moyo pointed out that aid itself might not be the problem, but the fact that it is given in perpetuity. African governments have been receiving aid for more than 60 years, but the progress made so far has been disappointing. She pointed out that, in the 1970s, countries like Singapore and South Korea had lower income per capita than many African countries, yet they surpassed African countries in terms of economic growth. Moreover, she highlighted that to double a per capita income in one generation, which means about 25 years, a country needs to grow at 3% a year, and lower-income countries need to grow at a faster pace to anticipate this, approximately 7% a year. However, the best-performing African country, South Africa, has a growth rate below 3%.   

Dr. Moyo argues that the aid system in Africa has no evidence of success in promoting sustained economic growth. Rather, aid undermines the political environment, limiting development for the people while promoting officials’ power because local governments favor foreign donors over addressing their people’s needs, as the local citizenry does not determine their political survival. In The Dictator's Handbook, Dr. Bueno de Mesquita similarly argues that government officials use Foreign Aid to advance their political objectives. Aid donors provide financial assistance in exchange for policy concessions, and recipient governments commonly use such aid to consolidate their power. These scholars suggest aid may support autocratic regimes, reinforce their hold on power, and erode the political structure as resources are corrupted.  

The Corruption Perceptions Index (CPI) indicated that most sub-Saharan African countries are not making progress against corruption, with 90% scoring below 50, where 100 is the least corrupt.  Unsurprisingly, the resources of Foreign Aid have been a common element in African corruption scandals, such as those related to General Mobutu Sese Seko, who ruled Zaire (now the Democratic Republic of Congo) for more than 30 years; Sani Abacha in Nigeria; Uganda’s Refugee Scandal, Malawi Cashgate Scandal; and so on. Further, transferring aid involves multiple intermediaries with enough incentives to engage in rent-seeking activities. By UN estimations, only 30% of development assistance reaches its final destination.  

FOLLOW THE MONEY  

Preventing corrupt practices takes transparency and accountability, which involves closely monitoring financial movements. Blockchain infrastructure emerged as a potent tool to complement legal frameworks to combat crimes and could also mitigate damages to improve Foreign Aid programs.  

According to Walter Pereira, the economist founder of W Fintechs and expert in financial innovations, blockchain infrastructure offers anti-corruption advantages as a “decentralized and distributed ledger, meaning all transactions recorded on it are immutable, ensuring transparency, as anyone can verify the complete history of transactions.”   

Blockchain not only helps with transparency but also identifies inconsistencies in resource utilization, enabling “the complete tracking of each transaction, which is essential to ensure that resources for humanitarian aid reach their destination, avoiding diversions and ensuring that each step of the process is visible and auditable.”   

One strategy to address issues with Foreign Aid's perpetuity model is to set goals, break them down into smaller tasks, and allocate resources as each task is completed.  This can be realized through smart contracts on Blockchain, which Pereira defines as “autonomous programs that automatically execute the terms of a contract when predefined conditions are met.” Incorporating this mechanism for Foreign Aid programs could mean distributing resources “when certain humanitarian conditions, such as delivering supplies or completing specific projects, are met.” This requirement might steer incentives toward a commitment to meeting goals within set deadlines. Pereira also comments, "This approach reduces the need for intermediaries, improves efficiency, and provides transparency in transactions, ultimately reducing the possibility of corruption.”  

REIMAGINING AND MOVING BEYOND AID  

Foreign Aid programs must be evaluated based on their results rather than intentions. Reimagining these programs starts with distinguishing between people and those ruling them. In this context, financial innovations can assist in allocating aid resources better and tackle perpetuation problems. Also, it helps to improve access to services and opportunities for marginalized communities to participate in the economy. Pereira referred to a paper revealing that African financial innovations have reduced service costs and increased access to financial systems. The Grameen Bank activity in Bangladesh reinforces this importance by demonstrating that people experiencing poverty are reliable borrowers and that microfinance can be a viable business model. The provision of microcredit has empowered individuals to establish small businesses and achieve self-sufficiency.  

It is essential to not only fix the aid programs but also to look beyond them. Botswana's success highlights the importance of perceiving Foreign Aid as a step towards larger objectives. The country's positive outcomes resulted from the efforts to reduce its reliance on aid and focus on institutional reforms. This involved implementing trade policies that opened the country, maintaining stable monetary policies, and exercising fiscal discipline. Acemoglu, Johnson, and Robinson argued that implementing sound policies in Botswana promoted a “rapid accumulation, investment and the socially efficient exploitation of resource rents.” A low-income country's success takes much more than just aid resources flowing into it; nevertheless, ensuring these resources are appropriately used and not for government corruption is a good starting point. 

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