One may say a lot about Trump. As Bono said when introducing U2’s best song at Red Rocks in 1984: “There’s been a lot of talk about this next song… maybe too much talk… this song is not a rebel song; this song is Sunday Bloody Sunday.”
So perhaps there has been too much talk about Trump. But Trump’s behaviour is likely to have bloody consequences, quite literally. Unfortunately, American decisions have global effects, so we must talk about them. The most pressing thing, which might seem far from mining, is the abrupt pause to foreign aid recently executed by Trump.
Foreign aid is a controversial subject. In 2008, three scholars published a paper called The Curse of Aid, cited 1,193 times since. The opening line of the abstract states: “Foreign aid provides a windfall of resources to recipient countries and may result in the same rent-seeking behaviour as documented in the “curse of natural resources” literature.” Strikingly, the lead author, Simeon Djankov, worked for the World Bank at the time. The research showed that foreign aid had a more negative impact on institutional quality than oil rents. “We find that aid is a bigger curse than oil.”
This is important work, as it warns against the idea that aid always helps, which reminds me of a book called When Helping Hurts and another I reviewed in 2010 called Dead Aid. Aid, if not directed towards building strong domestic institutions through which broad-based development can thrive, can become one more rent source for elite capture. As the Djankov paper points out, stronger incentives for rent-seeking seem likely to reduce the quality of democratic institutions and the checks and balances in the governments of recipient countries. In the second half of the 20th century, an estimated US$2.3 trillion was spent on aid, and the results are not impressive. Clearly, a rethink is in order.
Consider, for instance, the dynamics of what might happen when official “development assistance” and “aid” become a large portion of a country’s annual budget. Let’s take Rwanda, an aid darling, despite shocking democratic credentials. In 2022, it received US$1,12 billion (constant 2021 US$) in total aid, about one-twelfth of the country’s GDP. US$170.38 million of this came from the US. Health expenditure in 2021 (the last year for which there is data) was US$73.53/capita.
In Angola, by way of comparison, aid flows were far lower in total in 2021 (US$247 million) than in Rwanda. And, while the GDP is much larger (US$82.4 billion) than Rwanda’s, domestic healthcare expenditure was US$114.77 per capita. That is US$41 per capita more than Rwanda. How can it be that per capita healthcare expenditure in Rwanda is lower than in Angola, while aid flows are significantly higher?
One answer might be that most of Rwanda’s aid is allocated to education and infrastructure. Let’s grant that this is the case, for the sake of the argument. The bottom line, nonetheless, is that countries receiving large aid grants are not seeing a concomitant improvement in institutional quality. And it is clear from decades of economics research that institutional performance is a primary determinant of long-run economic performance. Djankov and his co-authors did not suggest, however, that all aid should necessarily go towards promoting better institutions per se. Nonetheless, aid, like mineral rents, “can be appropriated by corrupt politicians without having to resort to unpopular, and normally less profitable, measures like taxation … When revenues do not depend on the taxes raised from citizens and business, there is less incentive for accountability.”
Indeed, at the aggregate macroeconomic level, the data does not look good. For Sub-Saharan Africa, US bilateral aid flows have increased from US$1.3 billion in 1999 to a peak of US$13.18 billion in 2021 (in current US$), while GDP per capita over the same time moved from US$1,178 to US$1,559 (in 2015 constant US$). On this metric, the return on investment has been extraordinarily poor. We don’t have a counterfactual, though, so one might argue that over those 22 years, the absence of US aid could have resulted in a declining GDP per capita.
Either way, it does not follow from the above that Trump is right to turn off the aid tap overnight. That is clearly senseless and destructive. This is not just because it creates enemies of former friends in the international domain, or because it hurts individuals and communities currently dependent on aid. Moreover, some aid-funded programmes have strong positive effects in respect of improving development outcomes. Randomised control trials (RCT) that evaluate the outcomes of specific projects became very popular for a time, and some projects had amazing results. The problem there, though, is that the RCT can only tell you that a project worked (or didn’t) in that context. It tells us nothing about how a project might be transposed (or scaled) into a different context. Nonetheless, aid distribution can surely be reconfigured to ensure incrementally better results at the micro-level that will eventually result in changes at the macro-level.
It is not enough to assert that simply because the macro results show a negative correlation between aid dependency and GDP per capita growth that aid should be cut. Of course, the US has indicated that the freeze is temporary and has been implemented to conduct reviews of current funding to ascertain its efficacy. Ninety days hardly seems like enough time for that exercise, though. Meanwhile, the negative impact on current recipients is likely to make Trump many more enemies than friends. Moreover, it will harm long-term health and educational outcomes. Three months without anti-retroviral treatment, for instance, will create irreversible long-term damage for individuals.
To move aid from being a curse to a blessing requires the same strategic moves as ensuring that natural resources become a blessing: strengthen institutions. While it is true that aid and subsidies are often seen as politically irreversible, if they have baked-in performance metrics (like a required annual improvement on the World Bank’s governance indicators) from the start, then we might start to see better outcomes. That would be a preferable approach to turning off the taps arbitrarily and abruptly.
- This article first appeared in Modern Mining magazine.
In this policy briefing by Julia Bello-Shunemann, Good Governance Africa addresses the impact of the freeze on foreign aid in Nigeria, arguing that it should spur the country on to greater self reliance.
Dr Ross Harvey is a natural resource economist and policy analyst, and he has been dealing with governance issues in various forms across this sector since 2007. He has a PhD in economics from the University of Cape Town, and his thesis research focused on the political economy of oil and institutional development in Angola and Nigeria. While completing his PhD, Ross worked as a senior researcher on extractive industries and wildlife governance at the South African Institute of International Affairs (SAIIA), and in May 2019 became an independent conservation consultant. Ross’s task at GGA is to establish a non-renewable natural resources project (extractive industries) to ensure that the industry becomes genuinely sustainable and contributes to Africa achieving the Sustainable Development Goals (SDGs). Ross was appointed Director of Research and Programmes at GGA in May 2020.
