Trade, not Aid – Addressing Poverty in Developing Countries


Some 821+ million people today suffer from hunger at present, this is despite the fact that globally there is a vast overproduction of food crops. Hunger today is not due to lack of food but lack of means of the poorest to access it. Trillions of dollars in aid has been poured into the least developed countries over the decades yet the average citizen of such states today is more undernourished than his predecessor in the 60s. What is more surprising that many of these countries, despite holding a natural comparative advantage in agricultural production, are net food importers. Demographic pressure, corruption, poverty is conveniently blamed for this modern crisis but they, like mass hunger, are fellow symptoms, not the cause. The real cause is the same instrument of foreign policy that is proclaimed as the cure to the disease of underdevelopment– aid itself is to blame.

This statement may certainly raise eyebrows, we all have grown up believing in the ‘myth of charity’. Poor countries lack money, sending them money will allow them to fill this deficit and facilitate a harmonious cycle of growth we assume. Yet, empirical research does not support this assumption. Covering data gathered from over 96 developing countries from the period between 1971-1990 in their study, Peter Boone and Jean-Paul Faguet from the London School of Economics analyzed aid’s impact on human development. They found that the level of aid a country received showed no correlation to improvement in GDP growth, life expectancy, child mortality and in the case of education, the impact of aid was negative. What was positively correlated with aid was the consumption of luxury goods. This implies that a significant portion of aid money was not invested in human development but ‘eaten up’ by the elite of their society.  Their findings are further supported by works of Easterly (2003) and Doucouliagos & Paldam (2008).

Similar to natural resources, aid serves as a resource curse, allowing the political elites of a poor country to simply live off the ‘rent’ it generates and allow themselves to be shielded from accountability by the masses by their lack of reliance on them for revenue. If the government gets all its money from aid than it has no incentives to look after the needs of people it claims to govern. Zaire, under Mobutu Seko, received nearly half of all foreign aid given by the U.S allocated to Sub-Saharan Africa. Yet, in all aspects of human development, there was a decline, all the while Mobutu and his entourage would fly to Disneyland in rented Concords and built vast palaces in the Congo Rainforest.

Aid does start to make sense if we look at it for what it is and not what it is marketed to be

Famine today is not a natural tragedy but a political one. A country that can afford millions of dollars in arms can afford to avert a humanitarian crisis yet because regimes are not reliant on ordinary people for their survival, they willingly allow crises to happen for their own political ends. Such was the case of the 1983 Ethiopian Famine with left 1.2 million people dead. It was a deliberate result of government policy meant to punish rebel-held areas and make the populace more reliant on the state through which the majority of the aid programs were channeled through. Ironically, through aid money, millions were forcefully resettled a means to reduce resistance to government rule.

It is hard to think that giving development aid to that helps sustain corrupt governments unsupported by their own people would be a sane policy, especially when research clearly contradicts claims that foreign aid will help spur development. Is it a wasted investment? A vast figurative sink of tax money? In an era of financial liberalization and information revolution, foreign aid should have been made redundant as the two main areas for which aid flow is often justified, that being lack of access to finance and knowledge capital no longer hold true. Yet aid does start to make sense if we look at it for what it is and not what it is marketed to be.

For every $1 of aid given to developing countries, $24 are lost in net outflows.

If we are to compare, colonialism is the closest historical analog to the modern-day international aid system. Like Colonialism, development assistance often serves to open up markets in the South, secure commercial gains, implement institutions on the recipient nations that conform with the values of dominant powers and justify the ‘project’ as seemingly improving the lives of the common people. What has changed is the language being used. “White Man’s Burden has replaced with “White Man’s Guilt” and “Civilizing mission” with “Humanitarian missions”.  Aid, from the standpoint of a donor country, is an immensely lucrative investment. For every $1 of aid given to developing countries, $24 are lost in net outflows. Since the 1980s, developing countries have spent over $4.2tn in interest payments – a direct cash transfer to financial institutions in New York, Zurich, and London, on a scale that far exceeds the amount of aid that they received during the same period. $13.4tn, a sum equal to the nominal GDP of China, was additionally lost, siphoned from developing countries as a result of capital flight – flight made all the easier due to the financial deregulations imposed by the Washington Consensus – to tax heavens in developed countries or their dependencies.

Food aid is what keeps the poorest people hungry. It is a deliberate instrument of creating dependency. Massive flooding of domestic markets with subsidized foreign produce while alleviating hunger in the short run, makes it harder for poor countries to feed themselves in the long run by creating a glut in prices, forcing poor farmers out of work and hindering agricultural development by discouraging local food production. Net exporters of food soon become net importers.

It is a strange irony of the modern world that because food is so cheap that the poor risk going hungry at night.

If aid is to be ever effective that it has to be distributed through independent NGOs, with funds made available directly from ordinary citizens instead of through government agencies in rich countries. A difficult task since getting to the powerless first requires the approval of the powerful and both local and international elites that see NGOs as obstacles to political ends would seldom allow them unrestricted access. The better alternative is to help facilitate trade instead. Among the poorest countries, the overwhelming majority of the population is rural and engaged in agriculture – a precarious livelihood where one bad harvest season can result in a slide towards poverty or starvation due to lack of enough savings. It is a strange irony of the modern world that because food is so cheap that the poor risk going hungry at night. In many developing countries, farmers are forced to sell their produce at fixed prices below market rates through state-run monopolies which then is sold cheaply to an urban support base or sold internationally at market prices by the country’s elite for their own profit. Even if government interferences or middle-men are eliminated, heavy farm subsidies and protectionism in the North deny poor farmers in the South their comparative advantage in agriculture and access to better markets. If poverty is to be genuinely addressed than the livelihood of the poor must not be restricted for the welfare of the rich. Better trade, not more aid is what is needed to address poverty in the developing world.



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