African Outlook Online

Dayo's Standpoint

The True Cost of Foreign Aid

The True Cost of Foreign Aid


By Dayo Balogun

Until recently the true reason for the existence of foreign aid in the 21st century has not stopped to baffle me.

I have noticed developed countries around the world already in huge debt and budget deficit continue to give foreign financial aids to other well endowed countries but in order to justify such aids, they referred to the recipient nations as poorer countries because of epic corruption and mismanagement of resources.


Recent findings however have thrown more light on the true cost of foreign aid especially to countries on the African continent that are in receipt of such foreign financial aids.


Despite growing opposition at home, the Conservative-Liberal Democrats coalition government of United Kingdom, like the previous Labour government they took over from, continues to commit 0.56% of UK`s gross national income (GNI) to giving foreign aid to "poorer" countries around the world. In fact, the amount UK spends on foreign aid is expected to hit 0.7% of GNI before the end of 2013 according to Chancellor George Osborne. UK's official development assistance (ODA) is expected to rise to £11.3bn when it hits the 0.7%of GNI target. This is in spite of austerity measures being implemented and cuts to public sector spending being made in the UK.


I simply do not understand why a country implementing austerity measures at home is so committed to increasing foreign aid. Call me naive but I simply still do not understand why UK, a country with national debt amounting to £1,377.4 billion or 90.7% of her total gross domestic product (GDP) as of the first quarter of 2013 has committed to increased spending on foreign aid.


In a speech to the UN general assembly last year, Prime Minister Cameron stated that it was not only a moral obligation that better-off countries have to tackle poverty in a world where more than 1 billion people live on less than a dollar a day; Mr Cameron argued that it was also in everyone's interest to build a more prosperous world, otherwise the problems of conflict, mass migration and uncontrollable climate change "will come and visit us at home".


While the jury is still out on the moral obligation reason given by the prime minister, research findings clearly show that financial aid has not actually helped towards building a more prosperous world nor led to lesser number of people living on less than a dollar a day and majority of countries in receipt of aids money are not actually poor but bedevilled with corruption and record mismanagement of resources!


A report recently released by Africa Progress Panel (APP) chaired by the former UN Secretary- General Kofi Annan has highlighted the dangerous and very devastating impact of illicit financial outflows from African continent have had on her economic development and poverty alleviation in Africa. This for me has highlighted the true cost of foreign aid received by many of African countries and supports the school of thought that significantly more money than ever disclosed as being spent as foreign financial aid by developed countries make it back into or remain in their economies.


I am not convinced that foreign countries that give foreign financial aids are not aware of this illicit financial outflows from the African continent because what is an outflow from Africa, illicit or not is an inflow into same foreign European and American continents.


Africa Progress Panel (APP) report cited research carried out by Global Financial Integrity (GFI) on illicit financial flows out of Africa facilitated by tax haven secrecy and anonymous shell companies which are seriously and dangerously damaging the economic growth of the African continent. GFI`s research shows that illicit financial outflows cost Sub-Saharan Africa about $385billion between 2001 – 2010 which is close to $400 billion that could have been spent on healthcare, education and other infrastructural development. Therein lies the real cost of foreign aid.


According to Mr Annan, utilisation of Africa`s vast resources to ameliorate the needs of millions of people and lift them out of poverty “will require strengthened governance backed by international cooperation to stem the haemorrhage of revenues associated with tax evasion, secret deals and illicit financial transfers”.


Perhaps the absence of strengthened governance devoid of corruption and mismanagement in African countries is not conspicuous enough for the foreign governments to see. Otherwise I cannot think of any reason that justifies giving of so called foreign aid while doing next to nothing to stop the glaring illicit financial outflow in multiple folds of the said aid out of the same region. This simply calls into question who is actually giving aid to who, weather the developed countries are interested in helping to solve the glaring problem or perpetuating the system which - let’s face it - aids illicit financial inflow into their economies.


The APP report compares the amount of money flowing illicitly out of Africa, citing GFI’s research, to the amount of foreign aid and foreign direct investment flowing into the continent - noting that the illicit outflows exceed foreign aid and foreign direct investments.


In the report produced by APP, Mr Annan continued by stating that “It is time to draw back the veil of secrecy behind which too many companies operate. Every tax jurisdiction should be required to publicly disclose the full beneficial ownership structure of registered companies. Switzerland, Britain and the United States - all major conduits for offshore finance - should signal intent to clamp down on illicit financial flows. And the G-8 and the G-20 should work together to expand the scope and reach of the Dodd-Frank extractives transparency legislation.


What makes the foreign aid system no longer fit for purpose or a reasonable means by which most of the problem highlighted by David Cameron can be solved is the complications involved in passing the aids to recipient countries and the fact that a larger chunk of the aid does not reach targeted people. Even by developed countries standards, establishing how much of the aid money that actually gets to the intended projects is unclear because what counts as aid varies and money often passes through multiple intermediaries with high overhead and running costs each step of the way.


Analysts have struggled for many years to establish where much of the aid money actually ends up. Last year, reports of £500million spent by department for international development (DfID) on UK-based consultants, stoked controversy in addition to why vast number of big DfID contracts continues to go to British companies.


Four of the African countries that were in the top 10 positions of countries in receipt of aid from UK between 2008/09 and 2010/11 according to DfID are Ethiopia, Tanzania, Nigeria and Sudan but positive outcomes or progress in these countries as a result of the financial aid are rare. For instance according to UK`s Independent Commission on Aid Impact report released in November 2012, £230million British aid program to boost schools in Nigeria are struggling to make any difference to the country`s chaotic education system.


The Commission found that around a third of the eligible children targeted with that aid money, an estimated 3.7million were still not in school, while those that were in school, received little by way of education. A researcher who visited one DfID-funded school in rural Nigeria found almost all the teachers were absent, leaving the pupils to play football outside.


It’s high time African countries stopped accepting or relying on foreign aid. African countries are richly blessed in both human and material wealth and should begin with first drastically reducing corruption and mismanagement of resources. Maybe and just maybe if politicians and the general populace of Africa start getting their acts together, much of the illicit financial flows out of Africa can be curbed. I sincerely don’t think that I need to overemphasize the obvious fact that continued reliance on western countries for aid is not sustainable or realistic in the wake of recent global economic meltdown.


I do strongly agree with Mr. Annan that what countries on the African continent need is empowerment and not handouts. According to Mr Annan, “It is also critical that the G-8 helps to empower African governments. The region's revenue authorities are hopelessly ill-equipped to tackle problems such as transfer pricing or to counter illicit transfers. That is why the Africa Progress Panel has called on the G-8 to provide the technical, financial and administrative support to build capacity.”


My candid opinion is that there is no place for foreign financial aid in the 21st century. As in the popular saying “Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime". If foreign developed countries want to help African countries far more should be done not only to expose but stop illicit transfers from Africa to tax havens in Europe and America.