Foreign Aid and Economic Growth- The Disconnect

Malawi is a haven for non-governmental organisations (NGOs). Zomba, the town that I am staying in, is over run with them. The office that I’m in is across the street from Save the Children. Nearby are World Vision, USAID, and Project Concern International. They are at least 15 other international NGOs in a one mile radius. Then, of course, the numerous local ones. It seems like literally every few minutes I see a truck or car with a logo of an NGO drive by. Malawi is a very poor country (it’s ranked 227 out of 230 countries for GDP per Capita) and basic nutrition, healthcare, and educational needs are often carried out by aid organisations. In some sense, the country is run by them. Of course the plethora of these organisations in the country has very real benefits and their existence in Malawi is partly due to the government’s effective cooperation. That being said, I often wonder about what it will take to propel Malawi into self-sustainability.

They are competing theories regarding the role of foreign aid in economic growth. One argues that very poor countries are stuck in a poverty trap and need financial assistance to at least climb the first rung of the ladder towards economic prosperity. A large increase in the amount of foreign aid is called upon. This argument holds the optimistic belief that simply more money combined with wide-scale implementation of holistic social programs can eliminate poverty. The other theory asserts that an immense amount of foreign aid that has already been given to developing countries but has done very little to improve gross domestic product (GDP). It takes a more modest view towards development and advocates for less funds being directly disbursed through foreign donors (‘planners’) and instead given to local agents (‘searchers’), who have shown more success in creating positive change though trial and error methods and community accountability. This view shuns utopian ideals for ending poverty and instead advocates for small, but pragmatic ‘on the ground’ changes. Persons working in international development will recognise this as the Sachs versus Easterly debate.

Although not without some critiques, I lean towards the latter theory because it accepts the reality that economic growth is largely a result of local factors. While the Sachs argument stresses the need for external intervention for reducing poverty in developing countries, Easterly’s recognises that true progress for these countries will come from within. There have been very poor countries who have accomplished impressive rates of growth in GDP, while other countries of similar initial economic ranking and equal or more amounts of foreign aid have had less success. The difference has simply been governance.

One of the most famous economic growth success stories is provided by Botswana, a country in the same region of Africa as Malawi. It accomplished a per capita growth rate of 6% from 1960 to the present- no other country has been able to achieve a higher rate for such an extended time period. Though Botswana capitalised on its diamond reserves, the country’s success was largely due to its well-functioning democratic government. Many other nations, namely the Democratic Republic of Congo (a country that is ranked even lower than Malawi in GDP per capita), have rich resources which they have either squandered or not properly utilised. Singapore, a country with few natural resources, is another example of exceptional growth. In a few decades, Singapore went from being a malaria-infested swamp with high rates of infant mortality to having a GDP per capita that is ranked seventh in the world. Singapore was led by an autocratic leader, Lee Kuan Yew, who is criticised for civil rights abuses including limitations on free speech. Yet, he is also lauded for bringing immense prosperity to the country through policies that promoted rapid market growth and widely accessible social services.

Corruption and poor trade practices have stagnated Malawi’s economic growth. The previous Minister of Mining, Henry Chimunthu-Banda, approved of a raw deal with the Australian uranium mining company Palladin, which allowed a tax rate of 5% to be decreased to 1.5%. This translates to a loss $281 million over the 13 year period covered by the contract, which is especially egregious given the severe shortage of food and medicine and of teachers and clinicians that could have been alleviated with these funds. The most prominent Malawian government scandal is ‘CashGate,’ in which numerous civil servants conspired to steal $32 million in public funds. The scandal prompted the African Development Bank, the IMF, and several countries including the US to freeze $150 in donor funds to the government, which accounted for 40% of the budget.

With the belief that substantial improvement in quality of life can only be accomplished through effective government, it is easy to feel discouraged when when confronted with the immense poverty in Malawi combined with the ineptitude of its political leaders. But, I did not come here with a savior’s complex, rather only to offer a drop in the immense ocean of help that is needed. At the end of the day, I know that the work that we are doing at Emmanuel International (EI) translates into thousands of people who are not going hungry, who are accessing healthcare, who are improving their farming practices, and leveraging ways to improve household income. This is what is real. Most of my colleagues are Malawian and many have been doing this work for decades and yet, day after day, they have inspired me with their unwavering motivation and optimism. They make it hard to lose hope in Malawi.