The fallacy of foreign aid

Investment – not aid – is needed if we are to eradicate poverty in the world’s poorest countries, argues Andrew MacLeod

Foreign aid is a thorny issue. Economic strain has seen a number of rich countries reshuffle their aid priorities in recent years, raising fears of a decline in funds to developing nations.

The result has been a spike in calls to governments to increase their donations, hinged on the idea that large handouts can remedy poverty and set poor countries on the path to economic growth.

There is little doubt foreign aid has a role to play in stabilising fragile countries, and has done much good in delivering emergency relief to millions around the world. But is it really best placed to drive economic development? Will doubling aid help those in greatest need? Or is the way the world looks at aid and philanthropy simply wrong?

Only employment can lift people out of poverty in a sustainable fashion. Aid and philanthropy cannot

I have seen first-hand that it is. Consider this: if you track capital flows from OECD to non-OECD economies, you will see that about 53 per cent of funding flows through the private sector. Just under a third – 30 per cent – is generated by remittances, and around 17 per cent comes from foreign aid and philanthropy. If the goal is to lift the world out of poverty, why then do we think of aid and philanthropy as major players in the process, when they contribute the smallest quantum? Efforts to double aid, the smallest pool of cash, would be better spent on driving private investment using aid and philanthropic funding to change the development trajectories of poor countries.

The end game of development should be people gaining sustainable employment, with companies large and small paying tax to a responsible government, which in turn uses that tax to pay for hospitals, schools and other critical infrastructure. If we consider that to be the ultimate objective, all development interventions should hinge on bringing economies and people closer to that end point.

Ask yourself this: which organisation is more likely to lead to long-term sustainable employment, a private sector company investing in an economy, or an aid organisation giving away resources in that economy? Only employment can lift people out of poverty in a sustainable fashion. Aid and philanthropy cannot. Aid and philanthropy can, however, assist in the process, if funding is focused on helping to improve the investment climate.

I have been part of the aid and development industry for nearly two decades, first as a worker with the International Red Cross in Bosnia and Rwanda, and later with the UN in Pakistan, the Philippines and other locations. I have seen with my own eyes the deep failings of aid. More recently, I have observed how multinational firms can impact less developed economies in my role as an advisor to blue chips such as Rio Tinto and others. As importantly, companies can generate real value for their bottom line.

This value is a reflection of the so-called community risk discount rate, which is calculated as follows. Resource and other companies put a price on their assets by looking at the future revenue an asset will bring, and discounting the cost of holding money, sovereign risk and community risk factors. They also deduct the estimated future costs required to earn that revenue. The result is the asset’s net present value.

If a company can genuinely lower that risk, then the value of the asset – which is that declared in public listings – will be raised. Conversely community risk can reduce value and, in extreme circumstances, is one factor that can destroy the total value of an asset.

Community impact programmes, therefore – those that measurably work, as opposed to marketing spin – can tackle risk, protect the value of assets and improve the lives of employees. In Mozambique, BHP Billiton, the world’s largest miner, ran an antimalaria campaign that slashed adult malaria infections from 92 per cent to 5.6 per cent. In the process, it cut absenteeism in its workforce and improved productivity by an amount higher than the cost of the programme. In other words, the antimalaria drive was profitable.

I am not arguing for an end to aid and philanthropy, or for the private sector to take control of all capital flows. I argue for new and genuine partnerships between the aid and philanthropic industries, and private corporations. Huge aid flows alone have done little to eradicate poverty and improve employment prospects in poor nations, suggesting it is not how much money is spent, but how it is spent that will count.

Wouldn’t philanthropic or aid money be better spent in a programme with measurable indicators linked to outcomes? Wouldn’t we be better with development investment, rather than development aid?

About the writer

Andrew MacLeod is a board member of Cornerstone Capital, an advisor to Australia’s Gane Energy and the UK-based Critical Resource, and a former general manager of Rio Tinto. He is the author of ‘A Life Half Lived’, which makes the case for development investment rather than development aid, and is based on his experience as a former senior official with the UN and the International Committee of the Red Cross.