The Blog

Capitalism or Aid: Which has Lifted More People out of Poverty?

So aid is done, right? Let's pack up and go home. Not so fast. As always with stories that can be condensed into an hour-long lecture, and even more for stories that can be condensed into a five-minute opinion broadcast, the picture is somewhat greyer.

There has been a recent wave of interest in a year-old speech made by Bono at Georgetown University in which he made the claim that capitalism has lifted more people out of poverty than foreign aid. The recent uptick in interest has been due to the media provocateur Glenn Beck latching onto the speech, and recycling through the American right-wing blogosphere that maybe capitalism has won the day after all.


Let's take a little look just at Africa. Aid to Africa increased significantly in the first half-decade of the new century due to a perfect storm of the Monterrey Consensus and the Millennium Development Goals which, other than reiterating the target of 0.7% of national income for aid, also led action on poverty reduction, maternal and child health, education and disease prevention. Added to this were a number of programmes such as the Global Fund for HIV/AIDS, TB and Malaria, and the rise of private philanthropy (such as the Gates Foundation) and activism (like the Clinton Global Initiative) that not only added to the pot, but also kept issues of foreign aid and poverty in the news.

But - and it's a huge but - it also depends upon what we mean by aid. Measuring aid principally consists of trying to calculate all receipts from foreign sources, and then subtracting from this investments for business, person-to-person transfers, and what the OECD call 'Other Official Flows', which can include government-to-government assistance, export credits or subsidies, and all other funds that may be said to support social or economic infrastructure, other than regular business.

Over the last decade, ODA has stayed at a pretty consistent $150bn a year in 2012 dollars. This consistency masks two opposing trends - the emergence of new donors, such as from the Middle East, East Asia and South America, and sharp falls in ODA from traditional donors in Europe and North America. Even with large increases from the new donors, and with aid holding up from certain donors such as the UK, the US and Germany, this is largely balanced out by a general downward trend among the traditional donors, who even with the emergence of new competitors still provide 80%-90% of official aid.

Look at what else happened. Non-ODA remittances increased by 50% to over $600bn, as did personal remittances to well over $300bn. And this does not include the $500bn annual trade with the big emerging economies of Brazil, Russia, India and China - $300bn alone from China. So trade rather than aid does seem to have the upper hand.

But, this is only half the story that Bono tells, and choosing which period to measure is key. Bono looks at the amazing growth in Africa in recent years, and he is correct to note that aid seems to have decoupled from GDP. Africa's GDP declined by nearly one third in the decade and a half between 1980-95, from something approaching 2/3 of a trillion dollars to half a trillion dollars in the mid-1990s, adjusted for inflation. In fact, the Sub-Saharan African economy only returned to the real-income levels of the mid-1970s around 2005. During this thirty year period, Britain expanded its economy by 150%, and the US economy tripled in size.

So for Bono to be unambiguously right about capitalism having won in Africa, he would need to explain why boom-times seem to have been cancelled out by equally pronounced busts over the long-run.

As pointed out elsewhere, African growth rates, undoubtedly aided by poverty reduction and better governance, have been fuelled by rising land values and commodity prices. Land values have risen due to the demand for present and future commercial agriculture, enriching some but keeping those pushed off the land in poverty, as well as land tenure reform making African land a more attractive investment. Commodity prices, including but not limited to oil, have risen as demand for energy and metals increases year after year.

Both land and extractive commodities are subject to considerable market uncertainty and the danger of bubbles, or the decoupling of market prices from real value (which is especially difficult to quantify for those assets.) With increasing resource shortages and environmental pressure, land and extractive industries would seem good bets. But the general uncertainty around these industries means that they could go either way.

During the 1980s and 1990s, when land and commodities were cheaper, inward investment to Africa was low, and as a result economies stagnated. Sure, other factors were involved such as poor governance, conflict and imposed structural adjustment (what is now known in Europe as austerity.) But the macroeconomic 'headline news' was of high prices for goods produced in rich countries, such as information technology and hi-tech engineering and manufacturing, and low prices for extracted goods and agricultural products produced in poor countries. It is the reversal of this trend that accounts for much of Africa's new success.

We also have to take in to account the richer picture of aid now, and the problems of separating aid from non-aid. ODA was established as a measure of aid in the 1960s because neater distinctions could be made between aid and trade. But it at least included a select number of countries (the OECD DAC countries - the rich donors), who were slowly joined by other countries like Mexico or Turkey that did not join the DAC but agreed to harmonise their aid with it.

China is now one of the largest providers of direct investment in Africa, and the other BRIC nations are close behind. Furthermore, because they do not follow DAC reporting protocols it is difficult to separate out aid from investments, loans and informal flows. So, as well as an expansion in non-official aid has been a growth in the complexity of remittances to Africa.

Bono says that we '...mustn't let the economic recession become a moral recession. That would be cruelty.' He makes a valid point. But to simply say that capitalism has won, or that aid is now unnecessary, without providing some more context about what is included within those terms, doesn't help the debate much either.