In reframing Australia’s aid role, Minister for Foreign Affairs Julie Bishop has acknowledged that aid is best used as a catalyst, and that the poor should be helped to trade their way out of poverty.
Aid is a highly contested domain. Many economists see aid as part of the problem, not part of the solution. Much of the $US1 trillion ($1.06 trillion) development-related aid to Africa has made things worse, argues former World Bank economist Dambisa Moyo in her book, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.
She demonstrates how aid can trap developing nations in a vicious cycle of dependency, where corrupt governments siphon off benefits and refuse to make the necessary policy changes to improve living standards.
Over 60 years, rich nations have spent $5 trillion on aid yet 50 per cent of humans still live on less than $US2 a day. But in the last 20 years it was pro-growth, business-friendly policies that lifted 1 billion people out of extreme poverty – defined as living on less than $US1.25 – not aid.
More aid money will not beat absolute poverty. The economic rise of Asia on our doorstep was the greatest change in human welfare the earth has ever seen.
It taught us that the real heavy lifting in poverty reduction is done via prudent human capital investments, liberalising markets and building the infrastructure that underpins economic growth.
BEST USED AS A CATALYST
Bishop’s new policy for Australia’s foreign aid programme, worth $5 billion a year, admits the world has changed. Innovations from mobile phones to micro-credit are transforming market access. Her policy reframe recognises aid is now less than one-sixth of foreign direct investment to the developing world and one-third of remittances (earnings sent home by family members working elsewhere).
Aid is best used as a catalyst. Targeting spending on women and girls, for example, continues Labor’s policy and is proven to increase the money’s impact. Such spending can be used to leverage system change to increase the focus on women and girls in recipient countries.
Furthermore, there are good synergies in aid being administered within the Department of Foreign Affairs and Trade. Bishop can direct Australian diplomats in developing countries to advocate for better policy in those countries.
It’s none of our business what other countries do, unless they’re spending our money. Development economists have shown that increasing scrutiny, transparency and accountability can reduce the likelihood that bad governance is rewarded by aid.
The aid budget will now be capped at $5 billion. Australia will remain in the top 10 giving nations per capita, but climb no higher. Does this matter? As long as the smaller, more focused program achieves greater impact, then no. Aid should never be judged by dollars spent, but by outcomes achieved and lives improved. In this light, this refocus looks promising.
Aid now sits within the federal Coalition’s broader agenda: economic diplomacy in the national interest. This means tightening the focus on our region – 90 per cent of Australian aid will be spent in the Indo-Pacific region by 2014-15, including on enhancing security.
AID CANNOT DELIVER GROWTH
This focus on Australia’s interests rather than the global poor will be lamented by many. Bishop counters: “Aid is not charity.” Charity we do from home – we can give personally however we want.
Taxpayer-funded spending, she argues, needs to be aimed at producing systemic change: encouraging countries to spend their own tax revenues to build the pre-conditions for prosperity to benefit us all as trading partners. Compassionate Australians want their government to contribute to a world free from extreme poverty. But without results, compassion is an empty sentiment.
If it’s changed lives you seek – demonstrably better nutrition, education, healthcare and consumer goods – the only sure way is driving economic growth.
New jobs must be created for the next generation of young people (50 per cent of Asia’s population is under 25). Nine out of 10 new jobs, according to the World Bank, are created in the private sector.
Aid can’t deliver new jobs and economic growth. In Why Nations Fail: The Origins of Power, Prosperity, and Poverty, MIT and Harvard economists Darren Acemoglu and James Robinson demonstrate that inclusive growth, open markets, free trade, protection of property, investment in human capability and good governance account for differences in wealth around the globe.
Governments that fail these tests will never see their people rise out of poverty. No amount of compassion changes that.
Australians should be heartened to see sensible policy measures implemented. This is a step in the right direction. It brings Australian’s aid program into the 21st century, where the next billion entrepreneurs – many of them young – are waiting to trade their way out of poverty.
Elena Douglas is convener of the centre for social impact at the University of Western Australia’s business school