Commentary

Cannot Be Saved by World’s Rich

Earlier this month, the London meeting of the Group of 20 richest countries reaffirmed the Group of Eight’s commitments from 2005, when the world’s eight leading industrial nations, meeting in Gleneagles, Scotland, agreed to increase aid, reduce debt and open their markets to African goods.

The G-20 will be no better at reducing African poverty than the G-8. Aid disbursements and debt reductions over the past few decades saw incomes in African countries stagnate or even decline. Domestic reforms, including unilateral trade liberalization, are more likely to reduce African poverty in the long run.

Sub-Saharan Africa lags behind the rest of the world in most indicators of human well-being. It scored a mere 0.472 on the United Nations’ 2006 Human Development Index, which is measured on a scale from 0 to 1, with higher values denoting higher standards of living. The United States, in contrast, scored 0.948.

The G-20 will be no better at reducing African poverty than the G-8.”

For decades, many development experts have advocated more aid and debt relief as solutions to African poverty. In 2005, for example, Columbia University professor Jeffrey D. Sachs unveiled his plan to end extreme poverty around the world by 2025. Rich countries, he argued, should commit themselves to increasing annual aid to the world’s poorest nations from $73 billion in 2006 to $135 billion in 2015.

But aid has failed to stimulate growth in Africa. Between 1975 and 2005, for example, per capita aid to Africa averaged $24.60 per year. By contrast, in China, it averaged $1.50 and in India $2. Over the same period, Chinese and Indian incomes, adjusted for inflation and purchasing-power parity, rose by 888 percent and 174 percent respectively. In Africa, incomes fell by 5 percent.

Moreover, aid has encouraged waste and corruption. Inadvertently, it also has financed “around 40 percent of Africa’s military spending,” according to Paul Collier of Oxford University.

Similarly, the effects of debt relief remain ambiguous. For example, Oxfam and Jubilee 2000, two British nongovernmental organizations, have drawn a link between debt relief and poverty reduction. A recently released study from the U.S. Government Accountability Office, however, found, “The impact of debt relief on countries’ poverty-reducing spending is unknown.”

In fact, far from putting African countries on a firmer financial footing, debt relief often has led to yet more wasteful borrowing, necessitating more debt relief. Thus, the World Bank and International Monetary Fund’s Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC) in 1996 was followed by the enhanced HIPC initiative in 1999 and then by creation of the Multilateral Debt Relief Initiative in 2005.

Trade liberalization has the greatest potential to help Africa emerge from poverty. According to a 2005 World Bank study, “moving to free global merchandise trade would boost real incomes in sub-Saharan Africa proportionately more than in other developing countries or in high-income countries. … Farm employment and output, the real value of agricultural and food exports, the real returns to farm land and unskilled labor, and real net farm incomes would all rise in the region, thereby alleviating poverty.” The primary reason Africa stands to benefit “proportionately more” is because Africa remains one of the world’s most protectionist regions. For example, average applied tariff rates in Africa remain comparatively high.

Whereas such tariffs in high-income countries within the Organization for Economic Cooperation and Development fell from 9.5 percent to 2.9 percent between 1988 and 2007, in Africa they only fell from 26.6 percent to 13.1 percent between 1987 and 2007.

Unfortunately, the Doha, Qatar, round of negotiations on trade liberalization have ground to a halt, and the threat of protectionism looms large as the current global economic slowdown worsens. All major players deserve blame for the Doha fiasco. Global negotiations on trade liberalization happen along long-established mercantilist lines, where countries trade concessions on market access with one another.

Mercantilists see imports as a threat. In reality, imports increase competition and specialization, and increased specialization leads to increased productivity. In a competitive market, reduction of the cost of production then leads to cheaper goods and services, which in turn increases the real standard of living. That is a major reason why people living in more open economies tend to be richer. African states should liberalize irrespective of what the rest of the world does.

For all their good intentions, summits of rich nations, be they G-8 or G-20, give rise to unrealistic expectations. The heavy emphasis on aid and debt relief make foreign actions appear to be chiefly responsible for poverty alleviation in Africa. In fact, the main obstacles to economic growth in Africa rest with Africa’s policies and institutions, such as onerous business regulations and weak protection of property rights.

Africa remains the poorest and least economically free region on Earth. The G-20 should do all it can to help Africa integrate with the rest of the world. It should eliminate remaining restrictions on African exports and end its farm subsidies. Africans, however, will have to make most of the changes needed to tackle African poverty.

Marian L. Tupy is a policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity. He is the author of a just released Cato study, “The False Promise of Gleneagles: Misguided Priorities at the Heart of the New Push for African Development.”