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August 2002. Volume 20, Number 8

Bonomics and Third World Debt

Carl F. Horowitz

P.T. Bauer passed away this spring most likely never having attended a U2 concert. But the eminent English economist had known many people like the Irish superband's lead singer, Paul Hewson, aka Bono Vox. "Many supporters of official foreign aid," he wrote more than 20 years ago, "are genuinely and humanely concerned about conditions of people in the Third World. . . .  They are apt to look on foreign aid as being the same thing as voluntary charity. They rarely appreciate the radical differences between the two, differences which must affect the operation and results of foreign aid."

Bono, back from a highly publicized late-May tour of Africa, isn't likely to get a shock of recognition from these words. US Treasury Secretary Paul O'Neill, whom Bono corralled as his traveling partner, and who has long been a sensible skeptic of foreign aid, lately seems to have grown in office as well. Foreign aid, he noted upon his return, can work "in the right environment." The pair made their way through four sub-Saharan countries—Ghana, South Africa, Uganda, and Ethiopia—visiting AIDS clinics, startup enterprises, and schools. Bono made clear this was business, not celebrity preening.

The business at hand, at least for now, is coaxing public and private lending institutions of the world's industrialized nations to forgive $350 billion in functionally uncollectible loans owed by more than 50 developing nations, mostly in sub-Saharan Africa.

Time's March 4, 2002, cover story revealed Bono to be a true autodidact. Building upon tutoring by Harvard economist Jeffrey Sachs, Bono, as spokesman for a group called Drop the Debt, has displayed savvy at the highest levels of power and influence, especially in a visit to the Oval Office back in March.

That month President Bush unveiled a proposal to increase core US foreign aid by 50 percent over the next three years, resulting in a $5 billion annual increase over current levels. The additional funds would be routed to a new Millennium Challenge Account, which would primarily assist countries that show progress in eliminating corruption and human-rights abuses, and in reforming their financial systems.

Whew! For a while there, egalitarians had been worried. Combined US government foreign grants and credits to all of Africa had declined from $2.2 billion in 1995 to $841 million in 1999. Surely we can afford this initiative, they note, since our total foreign aid budget is around $10 billion, a mere one-tenth of 1 percent of GDP.    

On a purely musical level, Bono, to say nothing of the rest of U2, is enjoyable, and often thrilling, so let us cut him at least a little slack. Africa does need help, and desperately. Long the poorest of the continents, millions of its people at any given time are at death's door due to illness or starvation. But what seems to elude Bono, not to mention people paid to know better, is that the loans, loan guarantees, and grants that Africa apparently needs to stay afloat have a long, ignoble history.

Institutional foreign aid for decades has served as an invitation to graft. Whether the benefactor is the World Bank, the International Monetary Fund, UNESCO, commercial banks, or governments themselves, easy money from the West has propped up numerous kleptocratic strongmen and their cronies for whom debt repayment has been little more than a joke. Under certain circumstances one can make a case for writing off a debtor nation's nonperforming loans. But the clear intent of Bono's campaign is to open the gates to more aid as soon as possible, presumably targeted toward the neediest. Good luck.

British journalist Graham Hancock in his scathing book, Lords of Poverty, describes how international development aid among Western and developing nations functions as a gentleman's club for the politically connected. He takes few prisoners in describing the exploits of con artists and sociopaths abroad who have treated assistance as their own personal slush fund to reward friends and/or punish opponents.Bypassing these national elites is far easier in theory than in practice, whether or not the money reaches local levels.    

In a most apropos case, Secretary O'Neill, in a discussion with the central bank governor of Uganda (a nation that gets $300 million annually from the World Bank), estimated that it costs $2,000 to drill a well. He asked: "What was so important that there wasn't $25 million to $30 million to give everyone in Uganda clean water?"

But even with "sufficient" funds, there is no guarantee everyone would have access to drinkable water. A number of years ago the World Bank provided a long-term loan to Bangladesh to build 3,000 freshwater wells, each of which would serve 25 to 50 small farmers in village cooperatives. But control over the wells quickly developed into a spoils system for bureaucrats, judges, landlords, and other power brokers, who on occasion charged extortionate rates to the farmers. "The big landlords compete and whoever offers the biggest bribe gets the well," admitted a World Bank official.   

Foreign aid can become an open cash register for tyrants on a truly grand scale. Over the course of the regime of Ferdinand and Imelda Marcos, $26 billion in foreign aid had flowed into the coffers of the Philippine government. The sybaritic power couple planned their escape well; they already had moved more than $10 billion of that money into secret foreign bank accounts.

The late Central African Republic dictator Jean Bedel Bokassa burned through $20 million of French government money on a lavish one-day ceremony in 1977 to transform himself from president to emperor—this in a country with an annual per capita income of $250. The late Mengistu regime of Ethiopia, which received $1.8 billion in outside assistance during 1982–85—a large jump over the $1 billion it got during the previous three-year period—used the money to create a famine in a region of the country occupied by rebel forces.

Are such horror stories the exception rather than the rule? It is difficult to avoid coming to an opposite conclusion. The World Bank's own internal audits repeatedly have found that its projects, especially in Africa, have failure (or near-failure) rates often in excess of 50 percent. If foreign aid has done enormous good, it has been for political constituencies that sustain the foreign-aid system. 

Bono and his friends in high places might ask themselves if each project, from irrigation dams to health clinics, would have been solvent had they been subject to market discipline. The problem is that the funds have entrenched the positions of Third World political leaders for whom market discipline is anathema. 

Advocates of canceling African debt note that the era of corrupt dictatorships has run its course and has given way to a new generation of reformers such as Abdoulaye Wade (Senegal), John Kufour (Ghana), and Olusegun Obasanjo (Nigeria). Why force these leaders to devote huge portions of their national treasuries to repay debts accumulated by their predecessors when they could be spending the money on immediate needs?

It's worth remembering in the face of such an argument that corrupt dictatorships in the past often have promised reforms to keep the aid coming. Moreover, even if future loans were to result in lower default rates, recipient nations still would be in hock to an international as well as to a national welfare state. And therein lies the ultimate issue.

Creating traditions of free trade, property rights, and entrepreneurship in an impoverished continent, often amid lethal tribal and religious conflict, will take decades to achieve. But it is the only way to throw off the yoke of foreign aid.

A few Africans appear to understand this. Daniel Etounga-Manguelle, a native of Cameroon and founder of Societe Africaine d'Etude, d'Exploitation et de Gestion, which has sponsored dozens of development projects throughout Africa, put it this way: "We must accept profit as the engine of development. We must recognize the indispensable role of individual initiative and the inalienable right of the individual to enjoy the fruits of his labor." If only he, rather than Bono, had taken that tour with Secretary O'Neill

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Carl F. Horowitz is a Washington-area consultant on immigration, human rights, welfare, and labor policy (choro73851@ aol.com). Suggested Reading: P.T. Bauer, Equality, the Third World, and Economic Delusion, Cambridge, Mass.: Harvard University Press, 1981; Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, New York: Atlantic Monthly Press, 1989; Daniel Etounga Manguelle, "Does Africa Need a Cultural Adjustment Program?" in Culture Matters: How Values Shape Human Progress, Lawrence E. Harrison and Samuel P. Huntington, eds., New York: Basic Books, 2000, pp. 65–77. 

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