University of Botswana Law Journal - PULP

FOREIGN AID, THE RULE OF LAW AND ECONOMIC DEVELOPMENT IN AFRICA 7
entirely antithetical to economic growth and development, amongst those who
receive it. Finally, foreign aid, by subsidizing corrupt regimes, empowers
dictators and begets increased corruption and repression of the poor masses it
aims to help. Despite its noble intentions, foreign aid is doomed to failure for
these systemic reasons, which shall now be examined in further detail.
Foreign Aid Lacks Market Signals
Under market capitalism, entrepreneurs evaluate possible investment projects
on the basis projected return- “i.e.”, will the investment be profitable? 17
Entrepreneurs stake their own funds, or borrowed funds for which they are
ultimately liable, on these investments, thus they have strong incentive to “get
it right,” “i.e.” to avoid bad investments that won't pay off. Of course,
entrepreneurs can and do fail in this regard; they frequently lose money in what
turn out to be unprofitable investments and face the prospect of going out of
business. Entrepreneurs who repeatedly fail will ultimately lose their funding,
whether it be their own money, bank credit, or shareholders' equity. In general,
successful entrepreneurs, those who do the best job of satisfying consumers
and thereby winning their business, are rewarded with profits, and
unsuccessful entrepreneurs, who waste resources, are “fired” by the
consumers. In contrast, the bureaucrats and government officials responsible
for “investing” foreign aid dollars face no such market test, and hence have no
such incentive to make the best investment choices. 18 As long time aid
practitioner Thomas Dichter has noted: “Whereas a large corporation cannot
lose money forever without facing some consequences, the aid industry has
gone on for 60 years with hardly anything to show for the two trillion dollars it
has spent (something it does not really bother to deny), and yet it is still very
much in business.” 19 The primary incentive of World Bank bureaucrats is to
spend as much money as possible, not to ensure it is effectively spent.
Consequently, billions of dollars have been siphoned into inefficient, and
unproductive, and capital-intensive projects such as the construction of damns,
oil refineries, airports, and crop-storage depots. 20 Many of these projects are
unsustainable, and have to be abandoned. A 2000 report found that 73 percent
of the projects undertaken in Africa that year by the World Bank were not even
17 For a more detailed explanation of the entrepreneur’s role in the market economy, see I. Kirzner,
Competition and Entrepreneurship (University of Chicago Press, 1973).
18 For an explanation of the different incentives that private and public decision makers face, see L. V.
Mises, Bureaucracy (Yale University Press, 1944).
19 T. Dichter, Time to Stop Fooling Ourselves about Foreign Aid: A Practitioner’s View, Cato Institute
Foreign Policy Briefing No 86 (2005).
20 See D. Osterfeld, note 9 above, p, 150; G. B. N. Ayittey, Aid For Black Elephants: How Foreign
Assistance Has Failed Africa, in D. Bandow & I. Vasquez ed., Perpetuating Poverty (Cato Institute,
1994).