The Politics and Economics of Aid

In delivering this year’s budget Treasurer Wayne Swan made the controversial decision to defer raising foreign aid to 0.5 per cent of Gross National Income, a commitment made by the Labor government. Instead, the budget included a modest increase of $300 million and foreign aid remains at 0.35 per cent of GNI. This announcement was met with criticism from the Greens and non-governmental organisations, many of whom receive funding through AusAid.

Foreign aid is a sticky political issue, and this is not helped by a misinformed public. Polling in the United States shows that many people believe foreign aid is 15 to 20 per cent of the national budget and they think it should be lowered to 10 to 15 per cent. The actual amount is less than 0.5 per cent.

Few dispute that the reduction of global poverty should be a goal for governments, business and individuals in the developed world. Yet the topic of foreign aid continues to inspire impassioned debate. Some economists, such as Jeffrey Sachs, argue for increased aid whereas others, such as William Easterly, argue that aid is at best an inefficient way of reducing global poverty and sometimes downright damaging.

At ESSA’s 2012 Q&A the IPA’s James Paterson argued that immigration is a highly effective way of reducing global poverty – such is the value of the remittances that immigrants and guest workers send home to their families and communities. This is a powerful argument and there is some truth to it; remittances make up a large proportion of the GNI in developing countries. However it is worth noting that whilst immigration and guest work can help development, those living in absolute poverty are often excluded from these migration flows. They tend to help the poor, but not the poorest. The is also the problem of ‘brain drain’ where the talented and educated citizens of developing countries are often the first to leave.

Those living in absolute poverty are also frequently excluded from foreign aid flows. Governments and non-governmental organisations are beholden to the voting public and donors who have vested interests and demand results. Large amounts of aid rarely go to the poorest ‘basket case’ countries. In fact, there are two main influences on a country’s foreign aid agenda; how close the recipient country is to the donor, and whether the donor country is involved in conflict in the recipient’s region. Indonesia and Papua New Guinea feature prominently in Australia’s foreign aid history and in 2007-8 Iraq and Afghanistan received the third and fourth most funding.

Foreign aid is deeply politicised. In the United States the infamous ‘Global Gag Rule’ is traditionally adopted by Republican administrations and rescinded by Democrat administrations. The rule prohibits funding from being given to any organisation which performs or ‘promotes’ abortion as part of their family planning services.

It seems that the jury’s still out on the effectiveness of foreign aid as a tool for development. Perhaps its concrete value lies in politics, foreign policy and international relations?