Trade, not aid, will eliminate the welfare trap

Just over a year ago, trade ministers met in Doha, Qatar, where they launched a new round of negotiations to be called the "development round". Since then very little has been done in the way of freeing up trade to people in poor countries. Indeed, mostly things have gone in the opposite direction, with the US announcing a subsidy bonanza for its farmers and imposing restrictions on steel imports.

Meanwhile, to the extent that the international community has been discussing "development", it has been in the context of increasing "aid" to the "developing" world. But "aid" will not stimulate development.

Only trade can do that.

If foreign "aid" is the answer, what is the question? Not "How do we help people in poor countries?" Foreign aid is more likely to be a hindrance than a help - acting as a kind of international welfare trap.

Nor is the question "How do we encourage foreign investment and stimulate economic growth?" Foreign aid, in the form of soft loans, crowds out private sector investment and replaces it with poorly performing government projects.

Rather, the question must be, "How can we enrich a small coterie of corrupt rulers while leaving everyone else worse off?" If that's not the question, First World leaders should ask themselves why they keep sending us aid.

For many years, well meaning aid agencies have sought to help people in poor countries. Since the 1960s, more than $US500 billion ($A892 billion) has been given to the governments of African countries in grants and soft loans. The results have been less than spectacular. During the 1980s, at least 92 successful or unsuccessful military takeovers were recorded, affecting 29 African countries. Between 1981 and 1996, aid to Africa from all donors averaged about $US19 billion a year. During the same period, nearly half the countries in Africa experienced significant episodes of violent conflict between government and opposition groups. Four million people died.

According to the African Development Bank, aid constituted 87 per cent of net financial flows to Africa between 1990 and 1999. Proponents of aid argue that private capital was unwilling to flow to Africa because of the parlous state of affairs in the continent and that these loans provided much needed investment. The lie to this argument can be read in the government defence budgets, which in many African countries far outstripped resources dedicated to public health, education and other vital areas. Indeed, far from stimulating development, "aid" actually encouraged violence, motivated by a desire to control the national "cake".

But how can something that seems so good have had such a corrosive effect? The answer is that aid gives untrustworthy leaders the resources with which to engage in violent and repressive acts.

In places where poverty is rife, aid becomes the route to riches for the elite. Money is disbursed through contracts, with rulers receiving huge kickbacks for their favours. By 1982, Zaire (now Democratic Republic of Congo) had accumulated a foreign debt of $US5 billion. Its president, Mobutu Sese Seko, had accumulated a personal fortune of $US4 billion.

Aid also undermines the democratic accountability of government. By offering governments a non-tax source of revenue, it enables them to ignore the wishes of citizens and reduces their incentive to deliver public services efficiently and effectively. It also exacerbates cronyism. Why not tender valuable contracts to your brother-in-law's more expensive (and less efficient) building company if you know the people can't complain?

For the poor of the world, the main concern is that their governments stop strangling and looting their economies. Economic progress depends mainly on society's institutions. That means formal property rights, free markets and the rule of law. These institutions enable people to own and exchange goods without fear of arbitrary expropriation, either by bandits or by the state. They thereby encourage economic activity, which enables people to escape from poverty. Some even become rich.

The rich world can help, by opening its markets to textiles, agricultural goods, and other products from the poor world. It could also remove its agricultural subsidies, which reduce world prices of these goods.

When the developed world does give aid, it should be narrowly targeted (for example, to provide assistance to trade negotiators or technical training), or in the form of products (such as food aid or medicines), rather than money that can be stolen, diverted or misused.

Guilt and goodwill have blinded many to the damage that aid can do. Trade, not aid, is the solution for the poor. At today's informal World Trade Organisation meeting, trade ministers should make good on their promise at Doha to create a world trading system that benefits all participants. That means reducing tariff and non-tariff barriers on all goods, as well as reducing agricultural subsidies.

Journalist James Shikwati is director of the Inter-Region Economic Network in Kenya. He is in Australia for today's meeting of trade ministers in Sydney.