ESSA

ESSA

When foreign aid does more harm than good


Justin Liu

By

July 2nd, 2015


Justin Liu contemplates a scenario where foreign aid produces counterintuitive effects.


Paradoxically, well-intentioned aid, provided by charities and NGOs, can greatly impede poverty-stricken recipients from achieving prosperity.

How?

Surely the generosity of these organisations is better than nothing?

Not necessarily. Let’s tell a story.

John is an aspiring entrepreneur who lives in Kenya. He picks out egg farming as a suitable endeavour to pursue in his local community. He is a little nervous about his startup costs as he needs to buy chickens, some land to raise the chickens on, and countless other miscellaneous items. He is not too worried though, as his town does not have another chicken farmer and most of the eggs consumed in his community have to be imported from elsewhere.

John sets up his operation and it begins reasonably well. He manages to get his friends and family to start buying eggs, and word of mouth about his business begins to spread. While he still has a large debt to pay off, it will be the last of his worries if his operation continues to grow at this rate.

However, one day disaster strikes. A lovely NGO from Australia is going to fund a program where free eggs get distributed to every single household in John’s community.

John is driven into panic mode—and rightly so. People stop buying his eggs; and why would they buy his eggs? It is hard to say no to free food. When people run out of the eggs they are given, they simply buy eggs off their neighbour, or their friend who does not want all their eggs. John’s sales drop to zero very soon after the egg program begins. He falls behind in his debt repayments to the bank and ends up having his business’ assets repossessed. His chickens, his land and his equipment are all gone. John now has nothing and must live off the generosity of his family and friends.

A couple of months later, the NGO decides that their egg program is a success and decides to refocus their program on another community. The influx of free eggs is stopped, and people begin to import their eggs again. Now would be an ideal time to begin egg farming again, but John is financially ruined. He is unable to acquire a new loan given he has previously defaulted on a loan. Moreover, other people are cautious of becoming egg farmers, as there is always the risk that another NGO might decide to enter the market and produce more eggs.

John has suffered significantly as a result of this program and his community has not benefited much either. Admittedly, they were given free food for a period of time but it is difficult to see any long-term benefit. It is evident that simple handouts of money, food, clothing, or anything for that matter, impart no real value on the recipient.

So what’s a solution?

Temporary flows of aid end up suppressing normal economic development—especially in the case of sustainable local economies. Real economic development and transformation comes from locally owned enterprises, where people create value and prosperity for themselves. And what part can we, the developed world, play in helping people out of poverty? One established initiative is microcredit, the provision of small loans to entrepreneurs. Organisations such as Grameen Bank and Kiva.org issue small loans so that borrowers can do as John did and start up their own businesses—hopefully without the interference of charities and NGOs.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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