Opinion & Commentary
Africa needs free markets, not aid, to flee poverty
All-star economist Jeffrey Sachs recently made a fly-by presentation in Sydney, calling for a new Marshall Plan for poor African countries: $US150 billion ($A204 billion) a year in aid for those living in extreme poverty. But can more aid transfers and massive debt relief really resuscitate shattered economies? Whenever such issues are discussed, the Marshall Plan is cited as the archetype. The Plan, named for the US secretary of state who launched it in 1947, distributed the equivalent of $US100 billion ($A236 billion) over four years. It aimed simultaneously to boost European recovery, limit Soviet influence, and allow Germany to rebuild peacefully. Since then, however, so much myth and legend has grown up around the Marshall Plan that today people don't even question its success, but merely ponder how to apply it to today's problems. Sachs is not unique in calling for a new Marshall Plan.
In the US alone, UN Ambassador Jeanne Kirkpatrick called for a Latin American Marshall Plan; Vice President Al Gore called for a Global Marshall Plan of environmental initiatives; Senator Joseph Biden called for one for Central and South Asia; politicians from both sides want one for the Middle East; the Iraqi Prime Minister called for a Marshall Plan for his country; there has even been a call for a Marshall Plan to advance human security and control terrorism. But just as often as Marshall-size plans are called for, they fail.
Since World War II, the United States alone has provided over $US1 trillion in foreign aid with the result being, according to the United Nations, 70 aid-recipient countries are poorer today than they were in 1980, and 43 are worse off than in 1970.
Why don't new Marshall Plans work? Perhaps because the original Marshall Plan didn't do what we all think it did. Several years ago, American economist Tyler Cowen found that rapid economic growth in countries that had been occupied by Germany during the war occurred ''irrespective of the timing and extent of Marshall Plan aid''.
Economic historian Alan S. Milward and German historian Gerd Hardach also argue that the financial impact of the Plan was quite small: Marshall Plan aid was less than 5 per cent of the GNP of each recipient country. In nearly every previously occupied country, stringent Nazi economic controls were continued even after liberation. And in each case, rapid economic growth occurred only after the controls were lifted, good institutions installed, and sound economic policy established. Recovery occurred despite the aid, not because of it. Germany, France and Italy began their recovery before receiving Marshall Plan funds, and countries that received large amounts of aid per capita, such as Greece and Austria, did not recover economically until US assistance wound down. And one key point deserves highlighting here: these countries were rebuilding, not starting from zero. They had educated populations and had enjoyed a productive and relatively prosperous period until the war. The highly indebted poor countries today have little or no infrastructure, their populations are largely uneducated, and they have limited history with democracy or free markets. Africa has already received the equivalent of about five Marshall Plans. Net development assistance to Africa is currently at Marshall Plan levels ($US24 billion in 2003). But as Swedish intellectual Johan Norberg writes in his book In Defence of Global Capitalism, ''Studies of development assistance show assistance has been purely destructive and actually reduced national growth.'' He also points out that if the aid money that has been sent to Africa had gone to investments instead, ''African countries would have had a Western standard of living by now.'' Even the World Bank, which exists to lend, has found that ''aid on balance significantly retards rather than encourages market-oriented policy reform''. And a new study by the IMF is even more pessimistic: the Fund found that ''no sub-categories [of aid] have any significant impact on growth.'' The real lesson of the Marshall Plan is that entrepreneurial culture, legal stability, and free markets are necessary for economic success. The best way to promote free markets in other countries is to allow their businesses to trade without government interference. Liberty, not aid, is the key to eliminating poverty.
April W. Palmerlee is a Visiting Fellow at The Centre for Independent Studies and director of Potomac Partners.
