Brady Yauch
Probe International
September 25, 2009

In the wake of the recent financial crisis, the World Bank called on the developed world to drastically increase lending to developing nations. Robert Zoellick and company say that countries in Africa and other parts of the developing world need this money to combat rising levels of poverty and an economic collapse.

Yet a recent article [PDF] in the Financial Post Magazine paints a much different picture of Africa—one that has enjoyed years of strong economic growth. According to the article, while real GDP stagnates in the developed world, many African economies are firing on all cylinders with growth of 6% to 7% annually. Stock market returns over the past three years have followed suit: 47% in Zambia, 67% in Mauritius, 155% in Malawi (all figures in local currency).

“For the last eight years, it (Africa) has been outpacing the rest of the world in economic growth”, said Roelef Horne, a portfolio manager for the Mackenzie Universal Africa and Middle East Class mutual fund. “When you say that to people, they sit up and look at it differently.”

Horne believes the potential economic and investment opportunities look more like those of Latin American 20 or 30 years ago. “Because there is not yet a lot of external capital there, there are very nice opportunities.”

But the World Bank and the aid industry seem intent on misleading the public and donor countries, telling them that Africa cannot produce economic growth naturally and must rely on hand-outs from Western governments.

Now, with the G20 meeting taking place in Pittsburgh, World Bank president Robert Zoellick is calling on leaders from the donor nations [PDF] to make good on their commitments to increase lending to the developing world. Without this money, he warns, again, millions of Africans will be pushed back into poverty. So far, the World Bank says it has only received $7.8 billion in commitments from G20 donors. [PDF]

Death…destruction…meltdown. It’s always the same with the World Bank: give us more money to solve the world’s problems.

There is no doubt that the global economic crisis is punishing the Third World, but foreign aid is not the answer. Decades of failed aid projects, creating unrepayable debts to the aid agencies that financed them and a deeply ingrained culture of corruption, have proven that foreign aid does not work.

Worse, say critics like Probe International and Dambisa Moyo, author of the blockbuster book, “Dead Aid”, aid means governments don’t have to rely on their citizens for public revenues, making them unaccountable spendthrifts. Both argue that Western donor countries should phase out state-to-state aid money.

In Africa, particularly, if foreign aid slows, then government leaders will be forced to pursue programs and initiatives that foster economic growth and stability, says Moyo. They will have to establish domestic tax regimes and in the process, account to their own people.

Experience seems to bear that out. Economic figures show that, despite claims by the World Bank and other institutions that aid is necessary, many poor countries’ economies grew as aid funds dropped. In the last 15 years, as the amount of Official Development Assistance (ODA) has declined or stagnated to countries in Africa, economic growth has remained positive [PDF] and outperformed the advanced economies of the G7. (See graphs) And according to the World Bank itself, the incidence of poverty in Sub-Saharan Africa has been steadily decreasing during that time period.

While the financial crisis that rocked financial markets over the last year has certainly had an effect on Africa’s economic outlook, it might not be as dire as Zoellick and other aid leaders warn.

“The global credit crisis definitely put a damper on what had been rapidly growing foreign interest in Africa’s capital markets,” says Ryan Shen Hoover, publisher of the Investing in Africa newsletter. “However, the markets are showing signs of recovery. I believe they’re poised for substantial gains as investors’ risk appetite returns.”

“Ultimately, investors want to be where the growth is,” he says. “If market governance continues to improve, and political risk is contained, the future looks bright for Africa investors.”

One major obstacle to that self-recovery is now the World Bank and its band of fellow state aid financiers who will derail the those market governance improvements with their rush of easy money [PDF] . According to the OECD, the total net ODA in 2008 from members of its Development Assistance Committee rose by 10.2% in real terms to USD 119.8 billion. This is the highest dollar figure ever recorded.

And for the 2009 fiscal year that ended in June, the World Bank said it doled out a record $13-billion through its International Development Association (IDA) — about $2-billion more than last year. Through its International Bank for Reconstruction and Development (IBRD), the bank expects to loan about $33-billion, almost triple last year’s total.

What is shaping up to be a banner year for the aid agencies will likely cripple Africa’s economic prospects by perpetuating the era of undisciplined spending and unaccountable governments. And in the process, this massive influx of aid will scare away the market investments that work.

Further reading:

World Bank projects in Kenya suspected of fraud

More odious debts for the Democratic Republic of Congo if the World Bank gets its way

At what cost are carbon credits funding hydro projects in the developing world