Africa, however, would surely be better off if rich countries followed the much-lambasted Italian example and cut their aid budgets. Decades of academic research have failed to show a positive correlation between foreign aid and economic development. In Africa, the correlation between the two is negative. In addition to breeding corruption, aid acts as a disincentive to genuine political and economic reform. It is time to free the aid debate from the grip of rock stars and celebrities.

In all likelihood, Italy's aid cut had more to do with the global recession than with any specific theory of economic development. The International Monetary Fund says the Italian economy will shrink 4.5 percent this year. The 2009 budget deficit and explicit national debt, Banca d'Italia predicts, will reach 3.7 percent and 111 percent of gross domestic product, respectively.

Bob Geldof has little interest in Rome's predicament. To him, the Italian government, now chairing the G-8, is a "crowd of shysters." "How can you possibly trust any government that promises something, does nothing, and expect them to lead the world?" the former pop star asked at a recent press conference. "How dare they?"

Let us step back and address the related issues of political trust and aid efficiency. It is true Italy has never been a paragon of good government. It is, for instance, one of Western Europe's most corrupt countries. But Italy has been a parliamentary democracy since 1946. Political competition between the parties is vigorous and civil society vibrant and strong. The Italian press regularly rakes Prime Minister Silvio Berlusconi over the coals, and elections are free and fair.

Contrast that record with Africa's. In 2009, Freedom House classified a mere 10 out of 48 countries in sub-Saharan Africa as "free." The rest were either "partly free" or "not free." Only seven countries in the region have a free press. Moreover, except for Botswana, Mauritius and South Africa, all the other countries in sub-Saharan Africa were deemed more corrupt than Italy. Out of the bottom 20 most corrupt countries in Transparency International's Corruption Perceptions Index (CPI), 11 were in Africa.

The 2008 CPI index ranked Ethiopia and Sudan, both top aid recipients, in 126th place and 173rd place, respectively. Both have appalling human rights record. The Ethiopian government killed nearly 200 protesters rather than concede an election loss in 2005. The Sudanese government's human rights record in Darfur and South Sudan is, to put it mildly, shocking.

Mr. Geldof questions the trustworthiness of a democratically elected Italian government to fulfill its aid promises in the midst of a severe and unexpected economic crisis. We question the trustworthiness of many African regimes not to embezzle or otherwise misuse the money of the Western taxpayers.

But the call for increased aid would be misguided even if it did not exacerbate the problem of African corruption. Between 1975 and 2005, per capita aid to sub-Saharan Africa averaged $24.60 per year. By contrast, in China it averaged $1.50 and in India $2.11. During the same period, the compounded average annual GDP growth rate per capita in China was 7.9 percent and in India 3.5 percent. In Africa it was a negative 0.16 percent. Nine countries in sub-Saharan Africa were poorer in 2007 than in 1960.

Many factors lie behind that vertiginous decline, but the evidence suggests that far from promoting economic reforms in Africa, aid has retarded the pace of reform. Thus, while the rest of the world liberalized and prospered, reforms in sub-Saharan Africa have been limited. The region remains the least integrated part of the global economy.

Thankfully, an increasing number of Africans are now calling for change. These are not members of the African elite who depend on aid for their lavish lifestyles. Nuhu Ribadu, the former Nigerian anti-corruption chief who lives in exile, thinks most aid to Nigeria is stolen and wants further aid disbursements to come with heavy preconditions. John Githongo, the former Kenyan anti-corruption chief who recently returned to Kenya after four years in exile, sees the West's determination to fund tainted governments like his own as a form of racism — Africa is held to lower standards. Dambisa Moyo, the Zambian author of the best-selling book Dead Aid, wants aid discontinued altogether.

Regrettably, these African dissenters are often ignored or attacked. When Ugandan journalist and democracy advocate Andrew Mwenda called for Western countries to stop giving aid to Africa, Bono heckled him with shouts of profanities.

Celebrities like Bono and Mr. Geldof may boast the best of the intentions, but through the years they have come to play an outsized role in the aid debate. When challenged, they and other aid advocates, such as Jeffrey Sachs of Columbia University, have dismissed the views of Africans directly affected by the issues. How dare they?

Moyo's growing popularity has even compelled the usually taciturn Jeffrey Sachs of Columbia University to join the fray. Writing on The Huffington Post, he threw ad hominem attacks against both Moyo and his long-time critic Bill Easterly of New York University. Both responded, pointing out some of the problems associated with aid. But one argument needs further discussion: the aid debate has a racist undertone.

This year marks 20 years since the end of communism. As Oleh Havrylyshyn, a former International Monetary Fund official who teaches at the University of Toronto shows, the transition of central European and Baltic countries from communism to capitalism has been largely successful. Countries that embraced more rapid and more extensive economic reforms "tended to experience higher growth rates and lower inflation and received more foreign investment. Inequality increased less among rapid reformers than among gradual reformers. The same is true with respect to poverty rates."

Baltic countries, which were among the most enthusiastic reformers, benefited greatly from increased economic freedom. Between 1995 and 2007, real incomes in Latvia, Estonia and Lithuania rose by an astonishing 167 per cent, 146 per cent and 125 per cent respectively. In the eurozone, they rose by 24 per cent over the same period. Moreover, longevity, environmental quality and school enrolment rose throughout the region, while child mortality declined. The current economic troubles in CEB take some shine off the region's accomplishments, but they don't erase them.

A political consensus in favour of economic liberalization emerged soon after the fall of the Berlin Wall. Common people were transfixed by western cars and fresh oranges that they saw on German television. Though they disagreed about the speed and the extent of economic reforms — western European and American economic models were both popular — there was little opposition to the general direction of policy changes. One of the most vehement promoters of rapid rather than gradual change, incidentally, was a Harvard University economist — Jeffrey Sachs.

No such consensus exists in Africa. During the 1990s, I lived in both, Czechoslovakia and South Africa. In the former, people saw socialism as a massive failure. In the latter, many saw it as respectable policy alternative. In the former, it was near impossible to find a self-declared communist. In the later, communists were in the government. In CEB, people tended to see the wealth of the western world as a result of high productivity in capitalist countries, while in Africa they tended to see it as a result of colonial exploitation.

Following the collapse of communism, virtually everyone assumed that the key to future prosperity in CEB lay in economic reforms, not in foreign aid. Implicitly, almost everyone understood that the people in the region would simply have to respond to market incentives, and produce goods and services that domestic and foreign customers would want to buy. Inability to compete with the west was inconceivable. Failure was not an option.

Such a mindset is demonstrably lacking when it comes to Africa. Globalization tends to be seen as a threat and seldom as an opportunity. Local politicians fret about competition from China and Bangladesh. Non-governmental organisations caution against liberalisation lest Africans be taken advantage of by unscrupulous westerners. Musicians and movie stars urge aid, not reform, as a solution to poverty.

The result? African incomes rose by mere 26 per cent between 1995 and 2007, less if countries rich in oil and mineral resources are taken out of the calculation. Nine out of 48 sub-Saharan African countries were poorer in 2007 than in 1960. Africa failed to grow in spite or perhaps because of all the aid that had poured to Africa over the last half-a-century. Instead of reforming their economies and growing their private sectors and domestic tax revenue, African governments relied on aid to survive.

In a nutshell, there appears to be a peculiar lack of confidence in Africans to react to market incentives like everyone else does and to benefit from globalization. Africans, the consensus of aid advocates and protectionists appears to be saying, should be shielded rather than exposed to market forces. But, what does that say about the underlying assumption with regard to the ability of Africans to succeed just as the people of CEB had succeeded?

Yet, it is the opponents of aid, not its advocates, who get the short end of the stick. When ABC's John Stossel questioned Sachs about the link between corruption and aid, for example, Sachs accused Stossel of treating poor Africans as "enemies." On the contrary, Stossel responded, it is the African elites that are the enemy of both the African people and of the western taxpayer. Or, as the British economist Peter Bauer put it half-a-century ago, foreign aid is a way of "taxing poor people in rich countries and passing it on to rich people in poor countries."

While the world debates whether Africa should adopt market reforms, other regions power ahead. The concept of "global poverty" is losing its meaning everyday. Soon, poverty will be solely an "African problem." To prevent that from happening, Africans must be treated not as hopeless recipients of charity but people equal to everyone else in ability.

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.

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.

Trade liberalization has the greatest potential to help Africa emerge from poverty. Yet that is where the least amount of progress has been made. Negotiations on trade liberalization have ground to a halt, and the threat of protectionism looms large as the current global economic slowdown worsens.

The Gleneagles Summit, for all its good intentions, gave rise to unrealistic expectations. The heavy emphasis on aid and debt relief made Western actions appear to be chiefly responsible for poverty alleviation in Africa. In reality, 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 West 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 Western farm subsidies. Africans, however, will have to make most of the changes needed to tackle African poverty.

African development is high on the list of topics for the leaders of the Group of 8 countries meeting in Hokkaido, Japan. The host country has already pledged to double its aid to Africa from the current $6.9 billion over the next five years. President Bush, arriving in Japan on Sunday, made it clear he planned to push other G-8 nations to meet their 2005 promises to increase African aid.

Representatives of rich countries seem united in their belief that Africa would benefit from more international assistance and oblivious to the harm that aid has already inadvertently caused to African populations by propping up Africa's most dysfunctional states.

Instead of serving their people, most African states function as vehicles for the self-enrichment of political elites that have inherited none of the public-spiritedness of their colonial predecessors but all of the latter's contempt for the African masses. The remedy, therefore, might be to let Africa's failing neocolonial states disintegrate totally -- so that organic African political structures can emerge.

One of the key innovations that made the birth of the modern state possible was the emergence of a fundamental distinction between the government and the state. Over time, "states" came to mean the permanent territorial institutions that belong to all citizens, while "governments" denoted groups of people with temporary control of the machinery of the state. That crucial distinction nourished the ethos of public service that makes the embezzlement of public funds and all other abuses of state resources not only illegal but shameful.

The historical process whereby individual loyalties to families and clans lost ground to loyalties to states spanned many centuries in the West. Up to colonialism and after, original family and broader in-group loyalties remained largely intact in Africa.

When the colonial powers imposed the machinery of the modern state on Africa, complete with tax collectors, customs officers, police officers and soldiers, they did not instill an ethos of public service in local populations. After all, they meant to govern with their own officials. When Congo gained independence from Belgium in 1960, for example, it had only three Africans in the entire civil service and only 30 university graduates.

Is it surprising that when the colonial administrators abruptly left, almost all of their African successors proceeded to use their official positions to benefit themselves, their families and tribes? In fact, many Africans believe that it is immoral not to help family and clan if one can do so.

Corruption in Africa is almost a matter of common sense: As long as everyone else is abusing public office to benefit their clans and families, it remains self-defeating not to do so as well. A teacher in, say, Kenya may draw his government salary but seldom visit the classroom. Instead, he'll hold a second job -- driving a taxicab, maybe. In doing so, he may have learned from city government, in which public servants are nominally responsible for the delivery of public services but seldom do anything at all.

Most African states are therefore predators on the people they are supposed to serve and protect. Police officers extort bribes instead of protecting life and property; soldiers rape and rob the people they are supposed to protect from foreign attack; teachers collect salaries but do not teach; customs officers extract bribes instead of collecting duties; and for many African diplomats, foreign tours amount to prolonged shopping vacations.

From a historical perspective, then, the greatest harm inflicted by colonialism was to interrupt the organic evolution of indigenous African governments and states. That harm is being perpetuated by Western governments and nongovernmental organizations that want to help African populations.

On a micro level, Africa is littered with failed projects financed by foreign aid, including a steel plant in Ajaokuta, Nigeria, that does not produce steel and agricultural projects in Mali that decreased rather than increased the production of grain. Millions of Africans have been uprooted, with their livelihoods destroyed, by the pursuit of harebrained agricultural and irrigation schemes dreamed up by ignorant and arrogant, if well-meaning, foreigners.

On a macro level, aid has kept predatory African states alive by enriching corrupt political leaders and paying the salaries of their bureaucrats, soldiers and police. Uganda, by no means an outlier when it comes to "budget support," receives 50% of its annual government revenue from foreign aid. Economist Paul Collier of Oxford University showed that aid pays for up to 40% of African weapons purchases. On a continent where interstate conflicts are mercifully rare, those weapons are often used to crush domestic opposition -- as has been happening in Zimbabwe.

Pulling aid away from dysfunctional African states seems like a shocking move. Allowing failing states to collapse, it will be said, could lead to anarchy and turn Africa into a haven for terrorists. In the aftermath of the U.S. invasion of Iraq, however, many now believe that terrorists are best confronted by security measures, including intelligence gathering and surgical strikes against individual terrorist groups, rather than by social engineering on the scale of entire countries.

Aid is social engineering par excellence. But after 50 years and hundreds of billions of dollars, it should be clear that aid has failed to make the modern state viable in most of Africa. Instead, it has prevented the emergence and growth of authentic African polities rooted in African traditions. Aid should be ended along with most of the well-meaning but mostly harmful Western involvement in African affairs.

The well-meaning G-8 leaders can find an outlet for good works at home -- African countries are too poor to afford their charity.

Some of these changes might be sensible, but they miss an essential business lesson: that organisations get better results when individuals are held accountable for delivering defined products and punished and rewarded accordingly. However well one organises government ministries, they're still government ministries, and ministries are always better at taking control of processes than responsibility for outcomes.

As the economist William Easterly explained recently, international development aid by governments generally doesn't work, because no one is credited when it achieves its objectives and, more importantly, no one is blamed when it doesn't.

Free markets encourage the creation of firms that specialise in providing particular goods and services. A firm lives and dies by its ability to serve the needs of consumers, who can always take their business elsewhere. By contrast, governments and international institutions like the UN can set lofty goals, like ending poverty, but they are unrealistic, largely because governments use other people's money, seldom weigh costs and benefits, or think in terms of tradeoffs. Nor are they ever held accountable; they're never forced to deliver.

Professor Easterly satirised the UN's Millennium Development Goals. These, he said, had to co-ordinate 52 international donor agencies feeding aid to 97 government bureaucracies in the interest of meeting 48 different development targets — and no one was responsible for any of them. Well, that should be easy, right?

So, what exactly are the mainland's new ministries supposed to accomplish for its people? In the US, the Department of Labour compiles and publishes employment statistics, but it can't actually make a dent in the unemployment figures. However much the idea of an economic "stimulus package" may sound appealing, the government can't simply create half a million jobs with a onetime tax rebate. (If it could, shouldn't it do that each and every day?)

A case can also be made that consolidating related government functions into a smaller number of larger ministries decreases individual accountability, and thus the effectiveness of the agency, even further. Before September 11, 2001, one might have expected the director of central intelligence to be sacked in the event of a major attack on American soil. That didn't happen but, now, in the era of the all-encompassing Department of Homeland Security, it's not even clear who's supposed to go.

The private sector organises activities a lot more efficiently. Take Apple Computer, where the vice-president of the iPod division has one objective: to sell as many of the company's ubiquitous MP3 players as possible to maximise profits. In 2004, he dramatically increased iPod sales, and received over US$26 million in stock options as a reward.

Central governments, of course, aren't trying to sell iPods, but they are trying to make a palpable difference in the lives of the people they represent. They do better when they focus their resources on accomplishing limited objectives, and allow local governments and private organisations to do everything else.

What qualifications must the new heads of the ministries have? What exactly are they supposed to provide? And under what circumstances should they be fired? A business is a business. No government — no matter how well-structured its ministries, how well-educated its ministers, and how well-intentioned its policies — can be run like one.

Recent experience and the economic history of rich countries, however, suggest that those expectations are unrealistic. Most people, poor or otherwise, are not entrepreneurs, so there is little reason to think that mass credit would in general lead to viable business start-ups. Today as in the past, business start-ups in the advanced countries depend predominantly on savings and informal sources of credit; past forms of microcredit never played a role in small business development, and much microcredit is actually used for consumption rather than investment. In the history of today’s rich countries, moreover, economic growth occurred first, then came credit for the masses. That credit was and is predominantly for consumption rather than investment.

There is no reason to believe that the nature and sequence of growth and mass credit are fundamentally different for poor countries today than they were in the past. We should not expect microfinance to noticeably affect growth or successful business development.

Africa is the world's poorest continent. Between 1974 and 2003, the per capita income in sub-Saharan Africa declined by 11 percent. Africa continues to trail the rest of the world on human development indicators including life expectancy; infant mortality; undernourishment; school enrollment; and the incidence of HIV/AIDS, malaria, and tuberculosis. The international aid lobby advocates more foreign aid and greater debt relief for Africa as solutions.

Unfortunately, as the case of Uganda shows, foreign aid and debt relief can exacerbate Africa's problems by postponing economic reforms and the emergence of a transparent and accountable government.

Uganda implemented significant economic reforms in the 1990s because of domestic economic and political factors. That progress led many observers to label Uganda as an economic success story and brought the country debt relief and an increase in foreign aid. But foreign aid, which makes up 50 percent of the Ugandan government's budget, is providing the government with an independent source of "unearned" revenue. That allows the government to avoid accountability to Uganda's citizens. Moreover, foreign aid enables the government to pay its bills without having to undertake further necessary economic reforms.

Similarly, debt relief to Uganda has had some unintended consequences. It has enabled the government to borrow still more money and remain highly indebted by significantly increasing its level of absolute debt. The country's debt as a share of gross domestic product is still more than 50 percent. The government is wasting much of the new money on military equipment and political patronage. To promote democracy and accountability, the West should discontinue future aid flows.

After half a century and more than US$500 billion, there is little to show for World Bank efforts. But we have no measure of the bank's performance except the one it chooses to promulgate and no means to validate the wisdom of the industrialized world's collective investment decision.

The optimism of weighty reports cannot cover up the realities on the ground. The living standards of the poorest nations have stagnated and even declined as much as 25 percent.¹ Thirty-eight countries have amassed $71 billion in unpayable multilateral loans, encouraged by the bank's selfserving projections of country growth, on which rich-country taxpayers must now make good. Corruption has been exposed both within the bank and in its programs and is now estimated at more than $100 billion.² Protest is rising among leading African scholars who seek to stop all aid because it serves only to entrench and enrich a series of corrupt elites. Massive anecdotal evidence of waste, ineptitude, and outright theft can no longer be ignored.

The bank gives itself good marks and boasts that more than three-quarters of projects completed had "satisfactory outcomes."³ But when the auditors are captive, when the timing of judgment is premature, when the criteria are faulty, and when the numbers are selectively manipulated—how credible are the conclusions?

Should we just take the bank's word for it when U.S. taxpayers are being asked to commit more than $2.5 billion per annum for the next 40 years?

Captive Auditors

"Independence" at the bank is purely cosmetic, for a temporary change of desk and a new nameplate do not alter the signature on the paycheck or the rewards of the bank's personnel system. The Independent Evaluation Group is a department of the bank like any other, save the ceremony of reporting to an executive board that is passive at best. For all members of the evaluation group save the titular director general, a revolving door leads back to standard line jobs and advancement at the bank. Because results are published, there is strong pressure to display success. Outside verification is precluded because there is no public access to the underlying data. This hardly fosters disinterested and rigorous judgments, even though the bank boasts that staff cannot review projects that they themselves designed.

Fact-finding missions are suspect when they do not stand at full arm's length from their subjects. The magnitude of the Enron failure spotlighted the folly of placing credence in inside oversight and even in outside auditors who can be intimidated by high-paying clients. In 2002 scandal arose at the German government employment office when claims of 50 percent placement rates were sliced to 17 percent by an independent audit. Corporations always seek to elevate the price of their stock; public agencies always wish to expand their funding. External auditors beyond the subject's influence are needed to pierce the film of self-congratulation and to provide the discipline that protects the public interest.

Questionable Methodology and Selective Manipulation

The "independence" issue aside, the bank's evaluation methodology spews out conclusions without worth. What the bank proclaims as results are really only projections made at a moment when optimism is high. The World Bank's definition of "outcome" actually means only "likelihood" that a project or a program will be successful as rated by the loan officer when the disbursement of funds is complete. That often happens years before physical projects are up and running. Generalized "adjustment programs" attract the highest marks. Yet promised reforms will require years to impact the economy if they are indeed ever implemented.

Seldom does the bank return to inspect long-term project success, and many on-site investigations come up empty for lack of monitoring and records. The focus is on quantity of inputs with little effort expended to measure the effective output of programs.

Performance measures have been manipulated to bolster management claims of success and refute critics. In the late 1990s satisfactory ratings jumped when the criteria were revised upon the instruction of bank management without a corresponding adjustment to previous years to ensure consistency of measurement, also upon the instruction of bank management. After the Meltzer Commission in 1999 noted that "sustainability," the sine qua non of development, had languished at 50 percent success rates for years, ratings jumped to 72 percent in 2000. Were these true improvements or had the bar simply been lowered?

The Need for an Independent Performance Audit

The bank is better at managing its numbers than at managing its programs. What is needed is a bona fide external audit by private-sector companies on-site to determine the lasting contribution of bank projects in the poorest countries after a 3–5 year operating history and to provide a continuing benchmark for the efficacy of bank aid. Auditors would report directly to the legislative and executive branches of the Group of Seven (G7) governments. Individual program audits and aggregate evaluations of performance would be published and the exercise repeated every three years.⁴

Five to seven million dollars, or less than 2/10ths of 1 percent of the U.S. commitment to the bank's International Development Association (IDA) funding for the next threeyear cycle, would pay the cost of an audit of the performance of a 1/3 sample of three years of IDA projects.

Bank objections to external examination have centered on damage to the institution's morale, on the waste of funds, and on the irrelevance of a past record that has been allegedly rectified by the latest version of the "New Bank." This last reason has been the routine response by a series of managements over the past three decades.

The technicalities of client confidentiality and sovereignty rights of nations that wish to evade scrutiny have also been advanced as impediments. For those on the receiving end of billions of dollars of subsidies that flow from taxpayers in industrialized nations through the channel of World Bank financing, there should be a corresponding obligation. Free access to the facts and the ability to publish them must become a condition of all World Bank loans.

As the UN Millennium Development goal of halving extreme poverty has gained momentum, donor nations are poised to fund an exponential increase in development aid—a $50 billion doubling of annual flows to the poorest nations by 2010 and another $50 billion annual increment previewed for 2015. The bank will get more than its share. Then there is the windfall of so-called debt relief for which the bank extorted 100 cents on the dollar from the G7 for a $46 billion portfolio of worthless developing-country loans on which it had been sitting for more than two decades. The result is an assured stream of funds on automatic pilot to fill deep holes in the bank's balance sheet and then pour out as unauthorized new aid.

Giving masses of money does not end our responsibility to the developing world. Donors have an inescapable interest in the uses to which aid is put and the results that aid achieves. Sums this significant must be weighed against alternative uses for scarce taxpayer resources.

This is the moment to insist that the World Bank be under serious and continuous external review. The bank must become the exemplar of the transparency and accountability it commends to the developing world. Provision for a triennial external performance audit must become a condition of approval of the G8 Gleneagles accord on debt relief and the funding of future aid. There will be no reform without the recognition of past failure.

Notes

This essay was adapted from testimony before the Committee on Foreign Relations of the U.S. Senate, March 28, 2006.

1 Aid was not the moving force behind the impressive gains in China, India, and Indonesia where virtually all progress in developing- country living standards has occurred.

2 See Danielle Knight and Edward T. Pound, "Cleaning Up the World Bank," U.S. News & World Report, April 3, 2006.

3 World Bank, 2004 Annual Review of Development Effectiveness: The World Bank's Contribution to Poverty Reduction (Washington: World Bank Operations Evaluation Department, 2005), p. 60.

4 Sen. Mike Crapo of Idaho and Sen. Michael Enzi of Wyoming focused on the issue of an external performance audit of World Bank programs in the 106th Congress. See S. Con. Res. 136 in the 2nd session.

In 1950 the U.S. rescued South Korea from an invasion from the North. Today Seoul has about 40 times the GDP, twice the population, and a vast technological edge over the Democratic People's Republic of Korea. But the South continues to rely on Washington for a defense arrangement that is expensive for America, unpopular in Korea, and unnecessary for both countries. After the June summit between Presidents George W. Bush and Roh Moo-hyun, President Bush opined: "We're strategic partners, allies and friends."

Delusions about South Korea's need for assistance infects Capitol Hill as well. This summer, Rep. Dan Burton (R-Ind.), vice chairman of the International Relations Committee's Subcommittee on Asia and the Pacific, sent a "Dear Colleague" letter to other House members extolling the U.S.-ROK alliance. "Forged in the heat of battle, the U.S.-South Korean bilateral relationship continues to be one of our most vital and vibrant partnerships," Burton declared. The congressman cited "the continuing contributions made by South Korea to our mutual alliance—some that are all too often forgotten."

Actually, they aren't worth remembering. For instance, Burton pointed to trade. But Americans and South Koreans trade because it is mutually beneficial to do so, not because of our military alliance. The ROK "has been a strong ally in the U.S.-led War on Terror, having committed more than 3,270 troops to Iraq," the congressman noted. What Burton didn't mention was that Seoul insisted its forces be placed far away from hostilities.

Another "contribution," in Burton's view, is that Seoul "has taken positive steps on the question of human rights in North Korea." But the ROK does not accept North Korean refugees as a favor to America. Moreover, Seoul has turned markedly frigid towards those fleeing North Korean tyranny. Government ministers have publicly denounced activists who organize mass defections and dis claimed any interest in undermining Pyongyang. South Korea seems more concerned about offending the DPRK officials doing the oppressing than the millions of people being oppressed.

Burton also contended that "South Korea is a key partner in the Six-Party Talks to resolve North Korea's nuclear issue." Actually, Seoul and Washington view the issue very differently. ROK Unification Minister Chung Dong-Young recently proclaimed that the North is entitled to have a nuclear program. South Korea has been closer to China than the U.S. in the six-party talks. Moreover, the South is providing substantial economic aid to North Korea without asking for much in return. ROK public opinion increasingly views the U.S. as a greater threat than the DPRK.

Nevertheless, Burton wrote, "South Korea is an important military ally with over 33,000 U.S. troops stationed in the country." But there's no justification for maintaining U.S. troops in the ROK. The South lost most of its strategic value to America after the Cold War. The U.S. garrison performs no useful regional role. If the United States ends up at war with China, we won't be launching a ground invasion. More important, the South Koreans are unlikely to allow the U.S. to use their nation as a launching pad. Earlier this year, President Roh emphasized that his nation would not get involved in a war in Northeast Asia at America's behest and that Washington could not use its troops based in the ROK without Seoul's permission.

There remains much that Americans and Koreans can do together. But maintaining a close military alliance is not one of them. It's time to focus on the interests of America rather than "allies" who believe Washington owes them a defense.]]> Mon, 17 Oct 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=5146 http://www.cato.org/pub_display.php?pub_id=5117 Washington Post endorsed the view that giving more money to poor people and poor countries can solve the problem of domestic and global poverty. It's remarkable that so many smart people in our society are unaffected by the evidence that such transfer programs just don't work.

In a front-page article, two reporters talked about the destitute people fleeing Hurricane Katrina and wondered if America would finally face the problem of poverty. They quoted a foundation president who lamented that Americans "ignore the problems of poverty" until a catastrophe happens. They suggested that only a renewed "War on Poverty" could both help the poor and tell us whether Republicans are ready and able to govern.

A column by David Broder, the dean of Washington journalists, likewise deplored the miserly treatment of the poor. Even Lyndon Johnson, he said, the architect of the War on Poverty, "diverted the resources it required to the other war, in Vietnam."

Meanwhile, a Post editorial called for more aid to the governments of poor countries. It suggested that rich countries measure their commitment to development by a benchmark that emphasizes the amount of aid along with trade, investment, and other criteria.

In every case the assumption that transfer payments are the solution is not even explicitly stated; it's just taken for granted. But where's the evidence supporting this for welfare and foreign aid?

The United States has spent $9 trillion (in current dollars) on welfare programs since President Johnson launched the War on Poverty in 1965. Critics have challenged this figure, saying it includes more than welfare alone. It does include more than Aid to Families with Dependent Children, now known (hopefully) as Temporary Assistance to Needy Families (TANF); it also includes food stamps; Medicaid; the Special Supplemental Food Program for Women, Infants, and Children (WIC); utilities assistance under the Low-Income Home Energy Assistance Program (LIHEAP); housing assistance under a variety of programs, including public housing and Section 8 Rental Assistance; and the free commodities program. Clearly, those are all transfer programs for the poor.

Look at Louisiana alone: Michael Tanner, author of The Poverty of Welfare, writes, "The federal government has spent nearly $1.3 billion on cash welfare (TANF) in Louisiana since the start of the Bush administration. That doesn't count nearly $3 billion in food stamps. Throw in public housing, Medicaid, Child Care Development Fund, Social Service Block Grant and more than 60 other federal anti-poverty programs, and we've spent well over $10 billion fighting poverty in Louisiana."

If all that spending didn't cure poverty, then surely more spending isn't the answer. Indeed, maybe it's the problem. Welfare and other aid programs ensnare people, leading them to become dependent on their monthly check rather than finding jobs and starting businesses. In 1960, just before the Great Society's dramatic increases in welfare programs, the out-of-wedlock birth rate in the United States was 5 percent. After 30 years of rising welfare benefits, the rate was 32 percent; young women had come to see the welfare office, not a husband, as the best provider. Welfare created a cycle of illegitimacy, fatherlessness, crime, more illegitimacy, and more welfare.

Likewise, the United States has spent over $1 trillion on foreign aid. And yet, the Clinton administration reported that "despite decades of foreign assistance, most of Africa and parts of Latin America, Asia and the Middle East are economically worse off today than they were 20 years ago." Government-to-government aid has tended to strengthen governments in poor countries at the expense of business and individuals and has made governments increasingly dependent on their rich lenders. Few countries have "graduated" from aid to self-sufficiency. After all that aid, according to a National Bureau of Economic Research study, sub-Saharan Africa is actually poorer than it was 30 years ago.

It's not even that the Post reporters weren't aware of the facts. In the 19th paragraph, the front-page story notes that "there are more than 80 poverty-related programs, which in 2003 cost $522 billion." The next line reads, "Yet despite those programs, 37 million Americans continue to live in poverty."

Maybe "despite" is the wrong word. The reporters should consider the possibility that the sentence should read "Because of those programs, 37 million Americans continue to live in poverty."

Similarly, the editorial notes that other policies such as free trade and liberal immigration laws may benefit poor countries more than government-to-government aid. But the editorial writers still can't break free of the idea that giving taxpayers' money to bad governments will help their oppressed citizens.

It's time for new thinking about poor people and poor countries. Transfer payments don't work; they trap both people and countries in a state of dependence instead of self-reliance.

Markets work. People who get a job--any job--and stick with it until they find a better one will stay out of the welfare-and-poverty trap. But welfare is a powerful lure away from the world of work.

Markets work internationally, too. If you rate all the countries in the world by the degree of economic freedom they have, that turns out also to be a ranking of their prosperity. Per capita income in the freest 20 percent of countries is 10 times what it is in the least free countries. Those latter countries need property rights, free markets, honest courts, and low taxes--not foreign aid.

And reporters need new glasses, to let them see the evidence in front of them rather than relying on their outmoded assumptions.]]> Mon, 10 Oct 2005 00:00:00 EDT http://www.cato.org/pub_display.php?pub_id=5117 http://www.cato.org/pub_display.php?pub_id=9292 Africa defies conventional logic: grinding poverty amidst immense mineral riches. Africa’s economic growth of 5 percent in 2004, though more respectable than in previous years, was less than the 7 percent needed to achieve the United Nations Millennium Development Goals of reducing poverty and child mortality and improving education. At that rate, the United Nations Development Program has warned that the achievement of the millennium development goals may take 150 years.

The Commission on Africa, which was established by British prime minister Tony Blair, seeks to raise $50 billion a year on the international capital markets and use it to reverse Africa’s economic atrophy. Blair made aid to Africa the centerpiece of the British presidency of the G-8 meeting in Gleneagles, Scotland, in July 2005. President George Bush has tripled aid to Africa to $4.3 billion since he took office in 2001. In addition, the Bush administration’s Millennium Challenge Account (MCA) seeks to boost grants to poor African countries. France proposes an international tax on financial transactions or items such as plane tickets. Japan favors a $200 million fund to nurture private-sector companies in Africa to improve the continent's investment climate and credit rating. The UN is calling on rich countries to increase their foreign aid to 0.7 percent of GDP by 2015. The UN argues that lack of resources is a major impediment to economic growth and that additional funds will be well spent. But will any of those plans help Africa?

Most Africans are skeptical. They have heard those righteous calls before. Every decade or so, a throng of Western donors, African governments, and international organizations gathers to announce grand initiatives to pull the world’s poorest continent out of its economic miasma. Congratulatory pats on the back are exchanged. Delegates return home and then nothing much is heard after that. Back in 1985, the United Nations held a Special Session on Africa to boost aid to Africa. In March 1996, the United Nations launched a $25 billion Special Initiative for Africa. They all fizzled. Why should Africans place any faith in the current initiatives to reverse Africa’s economic atrophy?

The Failure of Aid

Helping Africa is a noble cause, but the campaign has become a theater of the absurd – the blind leading the clueless. The record of Western aid to Africa is one of abysmal failure. More than $500 billion in foreign aid – the equivalent of four Marshall Aid Plans – was pumped into Africa between 1960 and 1997. Instead of increasing development, aid has created dependence. The budgets of Ghana and Uganda, for example, are more than 50 percent aid dependent. Said President Aboulaye Wade of Senegal: “I’ve never seen a country develop itself through aid or credit. Countries that have developed — in Europe, America, Japan, Asian countries like Taiwan, Korea and Singapore — have all believed in free markets. There is no mystery there. Africa took the wrong road after independence. ¹

The more aid poured into Africa, the lower its standard of living. Per capita GDP of Africans living south of the Sahara declined at an average annual rate of 0.59 percent between 1975 and 2000. Over that period, per capita GDP adjusted for purchasing power parity declined from $1,770 in constant 1995 international dollars to $1,479. The evidence that foreign aid underwrites misguided policies and feeds corrupt and bloated state bureaucracies is overwhelming.

Tanzania’s ill-conceived socialist experiment, Ujaama, for example, received much Western support. Western aid donors, particularly in Scandinavia, gave their enthusiastic backing to Ujaama, pouring an estimated $10 billion into Tanzania over a period of 20 years. Yet, between 1973 and 1988, Tanzania’s economy contracted at an average rate of 0.5 percent a year, and average personal consumption declined by 43 percent. Today, Tanzania’s largely agricultural economy remains devastated. Some 36 million Tanzanians are attempting to live on an average annual per capita income of $290—among the lowest in the world. Other African countries that received much aid between 1960 and 1995 – Somalia, Liberia, and Zaire – slid into virtual anarchy.

Much of the aid received was simply looted. Speaking at the New Partnership for African Development (NEPAD) meeting in Abuja, Nigeria, in December 2003, the former British secretary of state for international development, Lynda Chalker, noted that 40 percent of the wealth created in Africa is invested outside the continent. “If you can get your kith and kin to bring the funds back and have it invested in infrastructure, the economies of African countries would be much better than what they are today,” she said. ² The chairman of the session and president of the African Business Round Table, Alhaji Bamanga Tukur, agreed: “It is really difficult to ask foreign investors to come and invest on our continent when our own people are not investing here. There is no better factor to convince foreign investors than for them to see that our own people, both those based at home and those in the Diaspora, invest in Africa. ³

Indeed, the amount of capital leaving Africa is staggering. Percy Mistry of the Oxford International Group pointed out that the external stock of capital held by Africans overseas could be as much as $700 billion to $800 billion. ⁴ The World Bank estimated that “nearly 40 percent of Africa’s aggregate wealth has fled to foreign bank accounts. ⁵ Considering the missing billions in export earnings from oil, gas, diamonds, and other minerals that are not openly accounted for, it is dubious that Africa suffers from a poverty trap, as Jeffrey Sachs of Columbia University argues.

Africa’s case for more aid and debt relief has not been helped by President Olusegun Obasanjo of Nigeria, which is arguably the most mismanaged economy in Africa. As he was pleading for more aid at the World Economic Forum in Davos, Switzerland, in February 2005, four of Obasanjo’s state governors were being probed by London police for money laundering. The most galling was the case of Plateau State Governor, Chief Joshua Dariye, who was accused of diverting some $90 million into his private bank accounts. Dariye was dragged before the Federal High Court in Kaduna by Nigeria’s Economic and Financial Crimes Commission. Incredibly, Justice Abdullahi Liman ruled that although Dariye was a principal suspect in the case, Section 308 of the Nigerian Constitution protected sitting governors from criminal prosecution.

In February 2005, Nigeria’s police chief, Inspector General Tafa Balogun, was forced into early retirement after investigators probing money-laundering allegations found $52 million hidden in Balogun’s network of 15 bank accounts. At the time of his early retirement, Balogun had been on the job for only two years. Even Nigeria’s senate is riddled with scams and inflated contracts, with proceeds pocketed by sitting senators. According to the president of the Institute of Chartered Accountants of Nigeria, Chief Jaiye K. Randle, individual Nigerians are currently lodging $170 billion in foreign banks – far more than Nigeria’s foreign debt of $35 billion.

In July 2005, Nigeria’s Economic and Financial Crimes Commission revealed that a succession of military dictators stole or squandered $500 billion – equivalent to all Western aid to Africa over the past four decades. ⁶ Even when the loot is recovered, it is quickly re-looted. The Nigerian state has recovered $983 million of the loot of the former president, General Sani Abacha, and his henchmen. But the Senate Public Accounts Committee found only $12 million of the recovered loot in the Central Bank of Nigeria. ⁷

Aid for Reform

Foreign aid given to support reform in Africa has not been successful either. According to the United Nations Conference on Trade and Development: “Despite many years of policy reform, barely any country in the region has successfully completed its adjustment program with a return to sustained growth. Indeed, the path from adjustment to improved performance is, at best, a rough one and, at worst, disappointing dead-end. Of the 15 countries identified as ‘core adjusters’ by the World Bank in 1993, only three ( Lesotho, Nigeria and Uganda) are now classified by the IMF as ‘strong performers.’ ⁸

The World Bank evaluated the performance of 29 African countries to which it had provided more than $20 billion in “structural adjustment” loans between 1981 and 1991. The bank’s report, Adjustment Lending in Africa, concluded that only six African countries had performed well: The Gambia, Burkina Faso, Ghana, Nigeria, Tanzania, and Zimbabwe. That gives a failure rate in excess of 80 percent. More distressing, the World Bank concluded that “no African country has achieved a sound macro-economic policy stance.” Since then, the World Bank’s list of “success stories” has shrunk. The Gambia, Nigeria, and Zimbabwe are no longer on that list.

In 1998, four new “success stories” were added ( Guinea, Lesotho, Eritrea, and Uganda). However, the senseless Ethiopian-Eritrean war and the eruption of civil wars in western and northern Uganda have knocked those two countries off the new “success stories” list. Uganda depends on foreign aid for 58 percent of its budget. There are growing concerns about its democracy, defense spending, and rampant corruption. Yet, in December 1999, Uganda’s aid donors announced the country’s biggest-ever loan of $2.2 billion – with no visible strings attached. As The Economist pointed out, “Cynics might say that Uganda can hold the world to ransom because the World Bank, the IMF and the other foreign donors cannot afford to let their star pupil go under. ⁹

The Western Aid Lobby Is Partly to Blame

Africans themselves have realized that Western aid has not been effective. David Karanja, a former Kenyan member of parliament, for example, said: “Foreign aid has done more harm to Africa than we care to admit. It has led to a situation where Africa has failed to set its own pace and direction of development free of external interference. Today, Africa’s development plans are drawn thousands of miles away in the corridors of the IMF and World Bank. What is sad is that the IMF and World Bank experts who draw these development plans are people completely out of touch with the local African reality. ¹⁰

The donors themselves contributed much to the failure of Western aid to Africa. Foreign loans and aid programs in Africa were badly monitored and often stolen by corrupt bureaucrats. “We failed to keep a real hands-on posture with aid,” said Edward P. Brynn, former U.S. ambassador to Ghana. “We allowed a small, clever class that inherited power from the colonial masters to take us to the cleaners. It will take a whole lot of time and money to turn Africa around. ¹¹

More maddening, the donor agencies knew or should have known all along about the motivations and activities of corrupt African leaders. They knew or should have known that billions of aid dollars were being spirited into Swiss banks by greedy African kleptocrats. “Every franc we give impoverished Africa comes back to France or is smuggled into Switzerland and even Japan” wrote the Paris daily, Le Monde in March 1990. ¹² Even famine relief assistance to Africa was not spared. Dr. Rony Brauman, head of Médecins sans Frontières, lamented in the 1980s: “We have been duped. . . . Western governments and humanitarian groups unwittingly fuelled – and are continuing to fuel – an operation that will be described in hindsight in a few years’ time as one of the greatest slaughters of our time. ¹³

Patricia Adams of Probe International, a Toronto-based environmental group, charged that, “in most cases, Western governments knew that substantial portions of their loans – up to 30 percent, says the World Bank – went directly into the pockets of corrupt officials, for their personal use. ¹⁴

Yet, the World Bank considered those same African governments “partners in development.” When the United Nations launched a $25 billion Special Initiative for Africa in March 1996, the bank’s president James Wolfensohn said that he was “pleased that the Special Initiative is designed to be supportive of and a ‘true partnership’ with African leadership.’ ¹⁵ In fact, World Bank loans have often bailed out tyrannical regimes in the past. After shattering Ghana’s economy, the Marxist government of Jerry Rawlings found that the Soviet and Cuban governments could no longer provide it with assistance. Rawlings made overtures to the West, which responded with alacrity, eager to win one more “convert.” The regime signed a “structural adjustment” agreement with the World Bank in 1983. Slight improvements in the economy were hailed, and Ghana was declared a “success story” and a “role model for Africa.” Twelve years later and after the infusion of more than $4 billion in loans, the World Bank admitted that declaring Ghana a “success story” was a mistake and not in the country’s own best interest. ¹⁶

In recent years, loans provided by the World Bank for various poverty-reduction programs in Ghana have continued to be embezzled by the political elites. According to Goosie Tanoh, leader of the newly formed National Reform Party, “It is an open secret that so many grants from Japan, Canada, USA and Britain had been given to party functionaries who have misapplied it. ¹⁷

In Kenya, Nairobi’s deputy mayor, Abdi Ogle, demanded the resignation of the World Bank’s country director for Kenya, Harold Wackman, a Canadian, accusing him of turning a blind eye to embezzlement of an emergency loan of $77.5 million in July 1998 to repair infrastructure damaged by heavy rains. “Not a cent of this money has come to the City Council because it has disappeared into private pockets within the Ministry of Local Government,” fumed Ogle. ¹⁸

Kenyan constitutional reform, which was supposed to have addressed the problem of pervasive corruption in that country, has stalled under the watchful eyes of the ruling elite. Widespread government corruption has caused international donors to withhold money allocated to fight AIDS. The disease has killed about 1.5 million in Kenya since 1984. The government estimates that about 1.4 million Kenyans are infected with HIV/AIDS. Yet Kenya’s health ministry is riddled with graft. A recent audit revealed the existence of “ghost workers” whose salaries worth $6.5 million per year are collected by living workers. In June 2004, the same health ministry paid $1.8 million for a radiography machine for the Kenyatta National Hospital that was never delivered. Over the course of the past 12 months, Kenya has been rocked by corruption scandals in various ministries, but little action has been taken. The ministers who were involved were sacked, but not prosecuted to recover the loot.

During his 24 years in power, Daniel Arap Moi’s government embezzled and stole an estimated $3 billion to $4 billion. The country’s central bank was looted. The money was stolen by making fictitious payments on foreign debt; kickbacks were collected on all public contracts, and when that didn’t supply enough cash, politicians awarded themselves fake contracts. A report by Kenya’s recently created Anti-Corruption Commission estimates that up to $3 billion of the missing money is still stashed overseas. After he left office, Moi and his family were among the wealthiest people in Kenya, with seven big homes and connections to at least 30 major business firms. But he also left behind an economy crippled with foreign debt, collapsed infrastructure, unemployment hovering at 70 percent, and nearly two-thirds of the population living under the poverty line.

The Need for Domestic Reform

Foreign funds can help only those African countries that undertake political, economic, and institutional reform, but the commitment to reform has been woefully lacking. The democratization process in Africa has stalled through political chicanery and strong-arm tactics. Only 16 of the 54 African countries are democratic, and political tyranny remains the order of the day. Often, those countries that are democratic remain deeply corrupt. Intellectual freedom is stuck in the Stalinist era: only eight African countries have free and independent media. The record on economic reform is abysmal. Only Botswana, Mauritius, Namibia, and South Africa can be described as “success stories.”

At the July 2004 African Union Summit in Abuja, Nigeria, frustrated UN Secretary-General Kofi Annan told African leaders of their lack of progress on meeting the UN’s Millennium Development Goals that they agreed to in 2000. Four years earlier, he was less restrained, lashing out at African leaders and blaming them for most of the continent’s problems. ¹⁹

African children echo the same sentiments. At the United Nations Children’s Summit held in May 2002 in New York, youngsters from Africa ripped into their leaders for failing to improve their education and health. “You get loans that will be paid in 20 to 30 years and we have nothing to pay them with, because when you get the money, you embezzle it, you eat it,” said 12-year-old Joseph Tamale from Uganda. ²⁰

Tony Blair and Jeffrey Sachs should listen to the voices of average Africans, who have not benefited from aid in the past and are unlikely to benefit in the future. Without domestic reforms, African politicians will line their pockets, but Africa will remain desperately poor.

Notes:

1 Norimitsu Onishi, “Senegalese Loner Works to Build Africa, His Way,” New York Times, April 10, 2002, p. A3.

2 Kunle Aderinokun, “Africa at Large: 40% of Continent’s Wealth Invested Outside,” This Day, Nigeria, December 4, 2003, cited in George Ayittey, Africa Unchained ( New York: Palgrave Macmillan, 2005), p. 324. We are indebted to George Ayittey, from whose research and writing we have borrowed in preparing parts of this text.

3 Aderinokun.

4 Percy Mistry, “Aiding Africa,” letter to The Economist, July 14, 2005.

5 Karen DeYoung, “Giving Less: The Decline in Foreign Aid,” Washington Post, November 25, 1999, p. A1.

6 Peter Goodspeed, “Corruption’s Take: $148B,” National Post ( Canada), July 4, 2005, p. A1.

7 Ayittey, Africa Unchained, p. 439.

8 George Ayittey, “Corruption, the African Development Bank and Africa’s Development,” Testimony before the Senate Foreign Relations Committee, September 28, 2004, p. 7.

9 Cited in Ayittey, Africa Unchained, p. 161.

10 Cited in George Ayittey, Africa in Chaos (New York: St. Martin’s, 1998), p. 275.

11 Blaine Harden, “The US Keeps Looking for a Few Good Men in Africa,” New York Times, August 27, 2000, p. 1.

12 Cited in Jonathan C. Randal, “French-Speaking Africa Hit by Popular Discontent,” Washington Post, March 26, 1990, p. A17.

13 Rony Brauman, “Famine Aid: Were We Duped?” Reader’s Digest, October 1986.

14 Patricia Adams, “The Debts of Corruption,” Financial Post ( Canada) May 10, 1999.

15 African Recovery, May 1996, p. 13.

16 World Bank, Ghana Country Assistance Review: A Study in Development Effectiveness (Washington: World Bank, January 1996).

17 Ghanaian Chronicle, August 14, 2000.

18 Daily Graphic, January 9, 1999, p. 5.

19 Daily Graphic, July 12, 2000; p. 1.

20 “African Children Accuse Leaders,” BBC News, May 10, 2002.

The foreign aid industry has for decades tried one approach after another in an effort to make aid work. A career of field experience in the aid industry, however, confirms the empirical record that aid is unimportant to growth or poverty reduction and suggests that aid is not likely to work in the future. The belief that foreign assistance has been generally ineffective, moreover, appears to be widespread among aid practitioners with long field experience.

The current effort by the United Nations to double worldwide aid flows is part of a pattern to reinvent foreign aid. Since the 1950s, the industry has alternately focused on promoting industrialization, agriculture, poverty reduction, health, institutions, and so on. The UN has sponsored numerous grandiose resolutions that have also failed to spur development.

We have come to the point where new ideas on making aid work are recycled old ideas. In practice, the aid industry has not changed much. The ineffectiveness of aid has little to do with a lack of resources. Its roots lie instead in the complex nature of poverty and the flawed nature of institutions and governments in poor countries. The aid industry's bureaucratic continuing growth also undermines effectiveness and accountability. Rich nations should reject calls for increasing aid and should probably reduce such funding.

In the 1960s, many developmental economists believed in the "vicious cycle of poverty" theory, which argued poverty in the developing world prevented accumulation of domestic savings. Low savings resulted in low domestic investment and low investment was seen as the main impediment to rapid economic growth. Foreign aid, therefore, was intended to fill that apparent gap between insufficient savings and the requisite investment in the economy.

And so, between 1960 and 2005, foreign aid worth more than $450 billion, inflation adjusted, poured into Africa. Result? Between 1975 and 2000, African gross domestic product (GDP) per capita declined at an average annual 0.59 percent rate. Over the same period, African GDP per capita fell from $1,770 in constant 1995 dollars adjusted for purchasing power parity (PPP) to $1,479.

In contrast, South Asia performed much better. Between 1975 and 2000, South Asian GDP per capita grew at an average annual 2.94 percent. South Asian GDP per capita grew from $1,010 in constant 1995 dollars adjusted for PPP to $2,056. Yet, between 1975 and 2000, the per capita foreign aid South Asians received was 21 percent that received by Africa. The link between foreign aid and economic development seems quite tenuous.

Foreign aid to Africa has also enabled government officials to embezzle large amounts of money and misspend much on loss-making projects. In total, Nigerian President Olusegun Obasanjo estimated, "Corrupt African leaders have stolen at least $140 billion from their people in the [four] decades since independence." Large debt is all most Africans have been left.

As a result of the widespread corruption among politicians in Africa and other parts of the developing world, development economists began emphasizing good governance as a solution to underdevelopment. The focus on internal conditions in poor countries was not welcome news for the foreign aid lobby in Western capitals, which relies on foreign aid to keep it afloat.

Thousands of nongovernmental organizations (NGOs) derive their funding from aid. Many NGOs, therefore, focus on "externalization" of African problems, blaming Africa's poverty on an unfair trade system and colonial legacy. Ian Vasquez of the Cato Institute observes that calls to massively increase foreign aid look like "giant conflicts of interest."

Mr. Sachs, however, seems to dismiss thorough internal reform as a prerequisite for African economic growth. As he recently said in a New York Times interview, "The poor are blamed for their problems. We say the poor are poor because they are corrupt or because they don't manage themselves. But in the past two years I've seen exactly the opposite. ... The idea that African failure is due to African poor governance is one of the great myths of our time."

But evidence is not on Professor Sachs' side. African corruption has been getting worse, not better, over the last few years. Each year, Transparency International publishes its Corruption Perception Index (CPI). The CPI defines corruption as "abuse of public office for private gain." It is measured on a scale from 0 to 10. The higher the number, the lower the corruption. In 2000, the average African CPI was 3.24. By 2004, the African CPI fell to 2.87.

With the African CPI score on the decline, how can Mr. Sachs claim to have "seen exactly the opposite"? Perhaps he confuses the growth of African democracy with the reduction of corruption. Indeed, Africa today has more democracy than ever before. Between 1960 and 2004, Africa had 198 leaders. Only one, the prime minister of Mauritius, was voted out of office between 1960 and 1989. Things changed thereafter. Between 1990 and 2004, 23 African heads of state were voted out of office.

The spread of democracy enables more Africans to vote corrupt governments out of office, and that surely is a step in the right direction. Unfortunately, elected officials' behavior in power has not appreciably changed. Many Africans continue to see participation in the government as a means of becoming wealthy, and weak institutions allow them to succeed.

"Very few people believe that it is possible to reform the system," says Robert Guest, Africa editor of The Economist. "They do not believe that they can ever have a clean government. And because they do not believe it, they think the rational thing to do is to try to get their own people into office and then try to get them to steal as much money as possible and distribute it among their kinfolk."

The truth is there are no quick fixes to African poverty. Like so many times in the past, the grand utopian visions of well-meaning Westerners are likely to crash on the hard rocks of African reality. In the end, Africans will get it right and prosper, but they will not succeed by seeing foreign aid as a panacea or hoping someone else will solve their problems for them.

But disaster aid of the kind required in Asia is quite different from development aid. Egeland's "stingy" statement was sadly the first of a series of calls by those using the crisis in Asia to advocate increases in worldwide development funds. Writing about the disaster, the New York Times described Washington's overall non-military aid as a "pitiful amount."

It is a mistake to conflate emergency aid and long-term development assistance. The goals of each are different, and emergency aid accounts for a small amount of the total. Of the $69 billion that rich countries gave to poor countries in 2003, for example, only 8.5 percent was for emergency and distress relief according to the Organization for Economic Cooperation and Development. The bulk of aid still goes to promote traditional aid objectives such as growth and poverty reduction.

Unfortunately, foreign assistance has a poor record at promoting development. There is in fact no correlation between aid and growth and few experts inside or outside lending agencies are satisfied with the performance of aid. In practice, much aid has been inimical to growth because it has supported governments whose policies keep people impoverished in the first place. The result has been debt, not development.

The World Bank's list of 42 heavily indebted poor countries that cannot pay back their loans -- most of them in Africa -- is a serious indictment of the foreign aid process. Ninety-seven percent of that long-term debt is public or publicly guaranteed. Even though the World Bank acknowledges that aid has often been an "unmitigated failure" and that aid that goes into a poor policy environment doesn't work, the Bank's soft loan branch in recent years increased its lending to countries with poor policies.

Nor is aid generally effective at promoting reforms in recipient nations. Post-soviet Russia and dozens of countries around the world -- including heavily indebted ones -- are evidence that countries promise necessary reforms but ignore aid conditions once the money is received. By the end of the 1990s, the World Bank acknowledged what has also become a consensus among development experts: there "is no systematic effect of aid on policy."

One of the reasons for aid's disappointing performance is that "rich countries don't hold the managers of aid institutions accountable for their long record of failure," according William Easterly, a leading development economist formerly at the World Bank. Indeed, aid agencies rarely cut off recipients who misuse those funds, something of which all recipients are well aware. Largely because the lack of accountability hasn't changed, Easterly opposes increases in foreign aid.

Yet for the foreign aid establishment, the amount of money moved is still a prominent measure of success. Thus, Washington is ungenerous because it transfers 0.15 percent of its GDP to poor countries -- less than other rich countries. Thus also, the World Bank is calling for a doubling of worldwide aid flows. The UN regularly cites its own arbitrary level of desired aid, set in the 1970s at 0.7 percent of rich counties' GDPs. In practical terms, that would mean that worldwide aid flows would almost triple to more than $190 billion. For the United States, it would mean more than quadrupling the 2003 aid level of $16.2 billion.

The truest measure of generosity, however, is how much individuals and private organizations voluntarily give. Former U.S. Agency for International Development official Carol Adelman found that U.S. private aid to those abroad far exceeds Washington's official development assistance. A few years ago, her "conservative estimate" put private foreign aid at three-and-a-half times U.S. development aid.

The rise in aid from private U.S. entities includes foundations, churches, corporations, and private voluntary organizations like the YMCA and the Red Cross. It is safe to say that U.S. private aid still accounts for between three and four times official aid. U.S. remittances alone amounted to at least $30 billion in 2003, nearly double U.S. aid.

And because private aid tends to be less bureaucratic and gets to the people it intends to help, it also tends to be much more effective than official assistance. According to Adelman, moreover, the United States contrasts sharply with the "Europeans and the Japanese [who] continue to give primarily through their governments."

In this sense, the United States is, if not the most generous country in the world, very near the top of the list. And its aid is surely more helpful to the world's poor than that of other countries. It's a shame that the Asian tsunami disaster is being cynically exploited to advocate massive increases in aid that doesn't work.

But there is something more we can do that will have long-term positive benefits for the citizens of tsunami-battered nations -- something that will buy us goodwill but cost us almost nothing.

Let them work in the United States.

When migrants earn money while working abroad and then sent it back to their families living in their home country, it's called a remittance. Not many people know that total remittances around the world now add up to $80 billion a year. That's impressive because it's twice the amount of government foreign aid.

Mexicans working in the United States ship close to $20 billion a year to their families on the other side of the Rio Grande. In some nations, such as Jordan, Albania, Nicaragua, and Yemen, remittances account for over 15 percent of GDP.

Unlike aid from governments and multilateral agencies like the World Bank, remittances are not squandered by bureaucracy and are not channeled through often corrupt governments, which routinely use money intended to buy milk to buy missiles. Instead, remitted money goes straight to common people on the ground, the people who need it and for whom it is intended.

In a 2003 Foreign Policy article, Devesh Kapur of Harvard University and John McHale of the Queen's School of Business in Ontario note that immigrant communities have begun to pool remittances and use them to finance small business and public works projects in their home communities.

Kapur and McHale report that remittances have helped people living in collapsed states such as Afghanistan, Haiti, Liberia, and Somalia to survive. They call remittances the "most reliable source of foreign money going to poor countries" and the "principle source of foreign capital for small family businesses throughout the developing world."

The potential for remittances to help rebuild businesses, communities, and lives along the battered coastlines of South Asia should be obvious. But in order for remittances to work their magic, Indonesians, Malaysians, Sri Lankans, and other victims of the tsunami need to gain entrance to and employment in other countries. Help from the United States may already be on the way.

Last week, President Bush proposed a new temporary worker program that would allow foreign citizens to work legally in the United States for a limited time. The program is intended primarily to bring illegal Mexican and Central American workers into the legal labor market, and to expedite the ability of foreigners to begin working for American businesses who have offered them a job. However, the program could easily be reconceived as a prime source of aid to disaster-stricken nations.

American citizens have been laudably generous with their charitable giving. But South Asians need more than a sudden influx of money. And recall: Iranians received only a small fraction of the aid pledged by the UN in the wake of the Bam earthquake, and the Red Cross created a storm of controversy when it proposed to use funds donated to the victims of 9/11 for other purposes. The victims of the tsunami need the kind of steady, medium- and long-term support that remittances offer.

So Congress, with the disaster victims in mind, should speed the passage of Bush's temporary worker plan, and charities should begin working to match South Asian workers with American employers. Handouts initially produce gratitude that eventually shades off into resentment. But because everyone gains through trade, longstanding economic relations tend to engender friendship and trust.

A concerted effort to bring South Asian workers to the U.S. would not only provide tsunami victims with effective aid through remittances, and American employers with needed workers, but it would also foster benevolent sentiments toward the United States in this largely Muslim part of the world.

Some pundits have excoriated the United States government for failing to win the government money-pledge numbers game. But Americans know that private charity can often help the needy better than the government. We also know that helping people to become independent is better yet.

By quickly implementing a temporary worker program, and working hard to bring South Asian workers to the U.S., Americans can demonstrate to the world the wisdom and compassion of helping people help themselves.

However, American generosity in the provision of emergency aid should not be confused with the U.S. contributions of development aid. Development aid has a sorry record in helping economic development in poor countries and should be stopped.

According to the U.S. Secretary of State Colin Powell, the American government made its initial financial commitment of $35 million in response to the early estimates of the devastation in the region. As the numbers of casualties increased, so did American financial help. Reports suggest that the current American commitment of $350 million may well rise even further.

It is true that other governments promised more money. Australia, for example, promised $764 million, Germany $661 million, and Japan $500 million. The British government pledged to increase its aid to "several hundred millions of pounds." But such calculations ignore the crucial role that private philanthropy has historically played in the United States. The American Red Cross, for example, has already received $103 million in private donations. According to the Associated Press, on January 4, the overall level of private donations from the United States reached $200 million.

Nor does the official financial assistance pledged by the American government include the so-called "in-kind" help, which is crucial if the relief effort is to succeed. Without American assistance in distribution of aid, much of the food and medicines donated by other developed nations would take far too long to reach the victims of the tsunami. Part of the task of distributing aid now rests with the USS Abraham Lincoln carrier strike group, the operational cost of which is over $6 million per day. If the USS Abraham Lincoln remains on site for just one month, it will add $180 million in in-kind help.

In addition to the carrier strike group, the United States has also dispatched a number of other ships and supporting craft to the region. Those include the amphibious assault ship USS Bonhomme Richard and 12 other ships from the U.S. Navy's Military Sealift Command - all laden with food, fuel, medical supplies, construction and road-building equipment and electrical power-generating equipment. The USNS Mercy, a 1000-bed hospital ship that was sent to the region, will help to arrest the spread of water-born disease.

The people in the region recognize the positive role played by the American military. The spokesman for the Indonesian government, for example, told the British newspaper the Guardian that the U.S. naval presence "made a big difference." Indonesia, he continued, does "not have enough helicopters and so the American aircraft are enabling us to reach many more people... than would otherwise have been the case. They [Americans] are certainly saving lives."

In view of the overwhelming generosity of the American people and their government, it is perhaps not surprising that the United Nations official who accused the United States of being "stingy" changed his position. Jan Egeland, the U.N. Undersecretary-General for Humanitarian Affairs, now claims that the United States, rather than being stingy in terms of helping the tsunami victims, is ungenerous in providing foreign aid to promote development.

But emergency and development aid are hardly the same. Emergency aid, especially, when poor countries are concerned, saves lives. The ostensible function of development aid is to help poor countries' economies to grow. Here the United States has, once again, taken the lead. According Doug Bandow, senior fellow at the Cato Institute, between 1945 and 1997 the United States provided $1 trillion in foreign aid to countries around the world.

The trouble is that unlike emergency aid, development aid is by no means benign in its effects. Africa, for example, has been one of the largest recipients of per capita foreign aid. But according to the National Bureau of Economic Research, Africa has experienced decades of economic decline. African per capita GDP is now 11 percent lower than what it was in 1974. The continent today accounts for a greater percentage of the world's poor than ever before. In 1970, only one in 10 poor people lived in Africa. Today that number is one in two. Regions that received less foreign aid per capita fared better.

These days, even international aid agencies, such as the World Bank, recognize the negative effect of much past foreign aid on development in poor countries. Money lent or granted to corrupt regimes in the developing world is often stolen, misallocated, or used to suppress the freedoms of the populace. Development aid often serves as a disincentive to governments in the developing world to reform their economies. The U.N. unfortunately continues with the old mantra, advocating that more good money be thrown after bad.

The recent events in the Indian Ocean brought out the best in the people of the United States as well as others across the globe. Care must be taken to prevent the foreign aid lobby from using this tragedy to suit its own interests.

The Interim Iraqi National Assembly responded on November 22 with a standing ovation -- in opposition to the Paris Club resolution. "We don't want your charity," the members of the assembly in effect declared at the meeting, which was broadcast live on Al Irakia and Al Sharkia TV. "We want our rights, and the rule of law. Saddam's debts are odious debts. They are not the debts of the Iraqi people."

The standing ovation followed the tabling of a recommendation -- based on a doctrine in international law known as the Doctrine of Odious Debts -- that the assembly's Economic and Financial Committee had been crafting for weeks. It laid out the approach the Interim government will take toward debt-repayment and it did more, too: It resonated with the Iraqi populace, which discovered in that live broadcast that the repugnance they feel at repaying Saddam's debts is grounded in law. As one Iraqi said in a survey conducted last year by Jubilee Iraq, a debt-relief organization, "When Saddam executed people, he used to charge their families for the bullets used -- this is precisely what the creditor countries who financed Saddam are asking of Iraqis today."

The document tabled before the assembly stated: "There is a strong basis in international legal principle and precedent to define these debts as being 'odious' and thus not legally enforceable. This legal doctrine of odious debt was formulated in the 1920s by Alexander Sack, a former Russian Minister working as a legal professor in the Sorbonne University in Paris. He published the most extensive and important works on the treatment of state debts in the event of regime change. He defined an odious debt this way: 'If a despotic regime contracts a debt not for the needs or in the interest of the state, but rather to strengthen itself, to repress the population that fights against it, etc., this debt is odious for the population of the state,' and he continues: 'The creditors have committed a hostile act against the people. They can't therefore expect that a nation freed from a despotic power will assume these 'odious' debts... the debt consequently... falls with the fall of this regime."

The document presented to the Iraqi assembly described numerous examples of past odious debt repudiations, including by the U.S. on behalf of Cuba after the Spanish-American war in 1898 and by Britain after the Boer War. "The clearest examples of legal precedent are firstly the Versailles Treaty of 1919, which ruled that Poland was not liable to repay German loans which financed the purchase of land in Poland by German colonialists. Secondly, Costa Rica passed a law repudiating the debts of the previous tyrant Federico Tinoco to the Royal Bank of Canada. Britain requested an arbitration by a U.S. Supreme Court judge." His judgment found that the new government cannot be held responsible for the funds spent by the tyrant for his personal purposes.

The Iraqi National Assembly estimates that 95 percent of the debts accumulated by the Saddam regime are odious, and proposes a blanket settlement on that basis, largely as an expedient. If, however, creditors insist on repayment, Iraq's assembly would use the UN's existing arbitration procedures, under which both sides appoint a portion of the arbitrators on an arbitration panel, and the appointed arbitrators then select the balance of the panel. The onus would then be on the creditors to show that the monies lent to Saddam were, in fact, used for the benefit of Iraqis and not for Saddam's personal purposes.

The Iraqi approach to debt repayment, if carried through, has profound implications for international finance. Currently, debt restructuring issues are resolved informally and behind closed doors at the Paris Club, a grouping of the West's government lenders. Here the lenders treat all loans as legitimate and enforceable and then decide among themselves the loans to be written off and those to be rescheduled. Unlike the formal arbitration process that Iraq wants, at which the legitimacy of debts could be examined, in the Paris Club process the debtors have no right to refute claims made by lenders. This cozy process suits governments and government agencies that make questionable loans to the likes of a Saddam, a Marcos, and a Castro, allowing them to remain in power, but they don't suit the captive populations of these dictators' regimes.

To head off the Iraqi assembly's declaration on odious debts, and avoid a challenge to their ability to lend to questionable governments, the Paris Club members rushed through their debt forgiveness program prior to the establishment of a democratic Iraqi government following elections in January. This tactic did not work.

The document that the Iraqi assembly endorsed was clear: "This National Assembly has a responsibility to the Iraqi People to protect their current and future interests.... These interests are threatened by the Paris Club cartel of creditors which refuses to accept that any of the debts are illegitimate, and is attempting to get Iraq to sign, before the end of the year, an agreement to repay a significant portion of the odious debt. There is a strong basis in international legal principle and precedent to define these debts as being 'odious' and thus not legally enforceable."

Most debts created by Saddam Hussein in the name of the Iraqi people would qualify as "odious" according to the international Doctrine of Odious Debts. This legal doctrine holds that debts not used in the public interest are not legally enforceable.

There is a widespread acknowledgment that the debts created by Saddam Hussein's regime bought weapons, palaces, and instruments of repression. Iraqi legislators should, as a first order of business, establish an arbitral process to determine the legitimacy of the estimated $120 billion in claims against their people. Only after Iraqis have an accurate accounting of these claims against their nation, and determine which are legitimate, should they appeal to creditors for debt relief, if any is required. To do otherwise would allow creditors to evade responsibility for financing Saddam's regime against its people.

An odious debts arbitration would demonstrate to Iraqis that justice can be served by the rule of law. An arbitration would also expose the role of foreign creditors and thus help establish accountability in other countries.

Fears that an Iraqi debt arbitration would threaten the stability of international finance are misplaced: most claims against Iraq are held by public creditors, not private; furthermore, an arbitral process would establish the due diligence that creditors need to observe in order to protect future loans against odious debt charges. By clarifying the responsibilities of creditors (or borrowers), and thus their rights to repayment (or repudiation), an odious debt arbitration would help reduce the moral hazard that has destabilized international finance for the past 60 years. More profoundly, by giving creditors an incentive to lend only for purposes that are transparent and of public benefit, future tyrants will lose their ability to finance their armies, and thus the war on terror and the cause of world peace will be better served.

During 1957-99, Argentina relied on the IMF's financial morphine a total of 33 years. The ratio of debt to gross national product rose from 29 percent in 1993 to 41 percent in 1998 and 50 percent in 2000. Excessive government spending was at the core of that debt buildup. Economists at the Latin American Economic Research Foundation (FIEL) in Buenos Aires estimate that, when correctly measured, total government spending in dollar terms nearly doubled between 1991 and 2001, while GDP grew only 57 percent.

The primary source of excessive government spending was the inefficient provincial governments with large public payrolls. Under the so-called co-participation plan, the federal government covered provincial deficits. Most of the resulting debt was funded in global capital markets leveraged by implicit IMF guarantees for future "emergency" credits. Much of the debt was dollar denominated.

Since December 2001, Argentina has continued to accumulate debt. Total government debt stood at $144 billion at year-end 2001 but had risen to $177 billion by the end of 2003. Buenos Aires has shown little interest in dealing seriously with what should be its policy priorities: structural reform to constrain future deficit spending; renegotiation of foreign debt; fixing the politicized banking system now saddled with government debt of uncertain value; and restoring property rights, especially through impartial enforcement of contracts.

The Argentine people will not easily forget the past. How can they trust government when their deposits were frozen, the peso devalued, and dollar deposits converted to pesos at exchange rates that imposed significant wealth losses? How can businesses and banks have confidence in government when it broke contracts and forced pension funds and banks to hold its bonds?

Is there a way for Argentina to throw away its IMF credit card, introduce neglected reforms, and reenter international capital markets?

The answers to those questions require some soul-searching by Argentine politicians and foreign investors alike. President Nestor Kirchner is right when he says that those who invested in Argentine bonds should face up to the risks they were taking and not expect to be fully compensated for poor foresight. And Economy Minister Roberto Lavagna is correct in calling for reform of the co-participation program and for reducing taxes on investment.

But if Argentina is to achieve sustainable growth, it needs to take responsibility for pushing such policy priorities forward. Rather than shield itself from the discipline imposed by the market-as, for example, through its support of short-term capital controls that increase the cost of capital-Buenos Aires should embrace market-friendly policies.

One powerful way of achieving that end is to abandon the model of debt-led development that has kept Argentina from reaching its full potential. As the experience of rich countries tells us, when debt is used to finance profitable private-sector investments, development can occur. But in the case of most developing countries-including many that have introduced market reforms-the debt is often used to finance government profligacy and maintain the status quo.

Without IMF support, Argentina would have to act responsibly or face the consequences in global capital markets. Accountability in the market is more apt to promote sound policies in Argentina than IMF surveillance and future credits. The IMF cannot change domestic politics or bring about fundamental reform simply because it wants to.

Indeed, a recent IMF report noted that IMF-supported fiscal targets "were not met in a large number of cases," and when some progress was made it occurred "in the first year of the programs with little progress thereafter."

Today, Argentina is once again experiencing economic growth and low inflation. But how long will it last without institutional reform? The end of convertibility means that the central bank must now maintain a credible monetary policy and let the peso float. Mexico's fairly open economy has so far succeeded in holding down inflation under such a regime. But is it realistic to expect that Argentina, with its relatively closed economy and IMF support, will be as successful?

As Anna J. Schwartz of the National Bureau of Economic Research wrote in the Cato Journal: "Perhaps the time has arrived to abandon debt-based development; to encourage the conversion of debt to equity; to set countries on a different path than one that leads to unsustainable debt, crises, and debt restructuring; and to rely on equity investment for development."

Simply, it is time to reduce government's role in building up debt. Doing so is far more likely to lead to better policy decisions, wiser investments, and actual development.

Maybe your college professor taught that the legacy of colonialism explains Third World poverty. That's nonsense as well. Canada was a colony. So were Australia, New Zealand and Hong Kong. In fact, the richest country in the world, the United States, was once a colony. By contrast, Ethiopia, Liberia, Tibet, Sikkim, Nepal and Bhutan were never colonies, but they are home to the world's poorest people.

There's no complete explanation why some countries are affluent while others are poor, but there are some leads. Rank countries along a continuum according to whether they are closer to being free-market economies or whether they're closer to socialist or planned economies. Then, rank countries by per-capita income. We will find a general, not perfect, pattern whereby those countries having a larger free-market sector produce a higher standard of living for their citizens than those at the socialist end of the continuum.

What is more important is that if we ranked countries according to how Freedom House or Amnesty International rates their human-rights guarantees, we would see that citizens of countries with market economies are not only richer but tend to enjoy a greater measure of human-rights protections. While there is no complete explanation for the correlation between free markets, higher wealth and human-rights protections, you can bet the rent money the correlation is not simply coincidental.

With but few exceptions, African countries are not free, and most are basket cases. My colleague, John Blundell, director of the London-based Institute of Economic Affairs, highlights some of this in his article "Africa's plight will not end with aid" in the Scotsman on June 14.

Once a food-exporting country, Zimbabwe is on the brink of starvation. Just recently, President Robert Mugabe declared he's going to nationalize all the farmland. You don't have to be a rocket scientist to figure out the consequence will be to exacerbate Zimbabwe's food problems. Sierra Leone, rich in minerals, especially diamonds, with highly fertile land and home to the best port site in West Africa, has declined into utter despair. It's a similar story in nearly all of south-of-Sahara Africa. Its people are generally worse off now than they were during colonialism both in terms of standard of living and human-rights protections.

John Blundell says the institutions Westerners take for granted are entirely absent in most of Africa. Africans are not incompetent; they're just like us. Without the rule of law, private property rights, an independent judiciary, limited government and an infrastructure for basic transportation, water, electricity and communication, we would also be a diseased, broken and starving people.

What can the West do to help? The worst thing is more foreign aid. For the most part, foreign aid is government to government, and as such, it provides the financial resources that allow Africa's corrupt regimes to buy military equipment, pay off cronies and continue to oppress their people.

It also provides resources for the leaders to set up "retirement" accounts in Swiss banks. Even so-called humanitarian aid in the form of food is often diverted. Mr. Blundell reports Mr. Mugabe's thugs rip labels off of wheat and corn shipments from the United States and Europe and relabel them as benevolence from the dictator.

Most of what Africa needs the West cannot give, and that's the rule of law, private property rights, an independent judiciary and limited government. The one important way we can help is to lower our trade barriers.

The participants included Ed Crane, president of the Washington-based libertarian Cato Institute; José Piñera who, as a Chilean government minister, began the world's first privatized social security system a quarter-century ago; and Ruth Richardson, who, as finance minister, was instrumental in New Zealand's highly successful free market reforms.

They were in Moscow to participate in an important Cato Institute conference on economic reform co-sponsored by the Russian Institute for Economic Analysis and the Russian Union of Industrialists and Entrepreneurs last Thursday and Friday, followed by another conference in St. Petersburg Monday.

President Putin has received mixed reviews in the West. On one hand, he has been reforming Russia's economy while retrenching on some press freedoms and democratic reforms. He has a very able team of market-oriented economists. His chief economic adviser, Andrei Illarionov, is highly regarded by many Western economists who have known or worked with him over the last decade. One of Mr. Illarionov's favorite themes, presented at the Cato conference, is the optimal size of government. He has compiled an impressive amount of evidence that most governments, including Russia's, are too large to maximize economic growth and popular well-being.

The Putin administration has the clear goal of greatly increasing Russia's economic growth, from the respectable 5 percent to 6 percent range of the last several years, to 7 percent or more. Despite Russia's recent economic successes, it is a laggard to its higher growth neighbors on the east and south, particularly China and India. Russia has, in part, been succeeding because of high oil, gas and metals prices, all of which it produces and exports in prodigious quantities. But these also make it very vulnerable to the next cyclical commodity price downturn. To achieve its goal of higher economic growth, Russia must create modern manufacturing and service sectors that it sorely lacks.

Economic Adviser Illarionov and President Putin well understand part of Russia's problem is the excessive and stifling government bureaucracy. For instance, the Russian Central Bank has 82,000 employees, 3 times as many as the U.S. Federal Reserve, even though we have twice the population and 20 times the gross domestic product (GDP) of Russia. New Zealand's Ruth Richardson told Mr. Putin she believed he needs to act more quickly in cutting back the size and powers of the bureaucracy, and Elena Leontjeva of the Lithuanian Free Market Institute added that he should do so by slashing budgets rather than by rearranging the deck chairs.

Russia has made progress in tax reform by instituting a highly successful 13 percent flat rate income tax. However, the total tax burden is still way too high to make Russia truly competitive. A Russian businessman explained to me that before he pays his employees each week, he first deducts from wages the 13 percent flat tax, then a 35.6 percent "social tax" (for the state pension program) that is now slated to be reduced to 26 percent. In addition, he has to pay a 35 percent tax on business profits and a 17 percent value added tax on his purchases. In his comment to Mr. Putin, José Piñera, whose privatized social security programs have been adopted by 17 countries, stressed the need to simplify and speed Russia's proposed move to a partially privatized social security system.

In his dialogue with Mr. Putin, Ed Crane of the Cato Institute emphasized the importance of privatizing all the press and not restricting press freedoms, and noted that a truly strong leader makes his people freer. President Putin was highly engaged in the meeting and clearly understood the observations and recommendations being made to him.

If one goes to downtown Moscow, it is clearly vibrant, and the renovations of recent years make it look not much different from a normal European city. The problem is that central Moscow is not yet typical of all Moscow, let alone much of the rest of Russia, where real poverty and hardship are the plight of the typical family. As one who has been to Russia many times and was involved with the early reform efforts, I am heartened to see the progress but also discouraged by the continuing corruption and missed opportunities. Mr. Putin and his economic advisers clearly know what they should do, but the open question is whether Mr. Putin will use his current high political standing to act quickly and boldly enough to make his country a real economic "tiger" or will continue only incremental steps.

Mr. Putin may go down in history as just another Russian ruler who squandered the opportunity or he as Russia's greatest statesman, who elevated his country to prosperity and freedom. The choice is his, and the jury is still out.

The prize is a rare honor, but then de Soto is an extraordinary individual. It's not every economist that finds himself the target of terrorist bombings and assassination attempts. Because of his scholarship and activism on behalf of the world's poor, in the late '80s and early '90s, de Soto was repeatedly targeted by the Marxist terror group, the Shining Path.

It's not hard to understand why Marxist radicals found de Soto's ideas so dangerous. They threatened the monopoly the political left (Marxist and non-Marxist) held over solutions to the problems of the world's poor. For years, statist development experts had sought top-down solutions, operating under the implicit assumption that poor people in the Third World were largely incapable of entrepreneurship. De Soto utterly rejected that patronizing viewpoint, and, beginning in his native Peru, focused on the lack of formal property rights as the source of poverty in poor countries. As an author and an activist, and later as advisor to Peruvian President Alberto Fujimori, de Soto worked to bring impoverished Peruvians out of the shadow economy, and unlock their potential for wealth.

In 1979, after a successful career in business in Europe, a 38-year-old Hernando de Soto returned to a Peru plagued by poverty and Shining Path terrorism. Having made enough money to retire, he could now devote himself full-time to solving the riddle of development: What is it that makes the "North" rich, and the "South" poor? De Soto knew that Peruvians did not lack for entrepreneurial energy. The bustling underground economy of Lima was a testament to that. Nor did they lack property, per se. From countryside to urban shantytown, ownership was governed by a system of informally evolved and acknowledged property rights.

But as de Soto explained in his 1987 book The Other Path, these de facto owners were locked out of the formal, legal economy -- and that was the root of the problem. "They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation." And the more de Soto and his fellow researchers at the Institute for Liberty and Democracy investigated, the more they realized that dealing with the Peruvian state to obtain legal recognition of one's assets was maddeningly difficult, if not impossible. Thus, the poor "do not so much break the law as the law breaks them -- and they opt out of the system."

Lacking formal legal title to their property, the poor are unable to use these assets as collateral. They cannot get bank loans to expand their businesses or improve their properties. Their potential is locked up in what de Soto calls "dead capital." He and his colleagues calculate that the amount of "dead capital" in untitled assets held by the world's poor as "at least $9.3 trillion" -- a sum that dwarfs the amount of foreign aid given to the developing world since 1945.

The Shining Path is moribund, but de Soto remains. Through books like 2000's The Mystery of Capital, and hands-on work with the Institute for Liberty and Democracy in Egypt, Mexico, Haiti, and elsewhere, de Soto has pushed developing-country governments to simplify and streamline the process of granting title. Bringing formal property rights to the poor can bring them out of the sway of leftist demagogues and into the extended order of the modern global economy. "Are we going to make [capitalism] inclusive and start breaking the monopoly of the left on the poor and showing that the system can be geared to them as well?" That's de Soto's challenge, and his life's work.