Is foreign aid doing any good in Africa?

[Eddie Dane]

I know little about the subject, so the objective here is to educate myself.

My wife works for an aid organisation. Although I never say so, I'm highly sceptical of the use of the activities they deploy. She and her colleagues are very motivated, well meaning people.

One of the things that feeds my scepticism is the following:
Setting up a school in Africa is a good thing, but very cheap by western standards. I guess you could plonk down a functional school building in Congo for about a thousand Euro. But running the organisation that sets such a project up is quite expensive. Requiring an organisation with educated full time employees and an office building in a Western city.
What follows is that a significant part of the donations and subsidies go to running the organisation itself.

all the people who work with my wife accept a salary that's lower than it would be if they'd work for a commercial organisation. But they still have a director who drives a decent car.

I'm also shocked by some of the projects I hear about. BBC radio recently did an item about a bus that tours Rwanda. In the bus there are desks and computers so that people in villages can experience working with a computer.
Why? Well, most of Rwanda has no access to electricity, so this is the way to teach people about computers. I just went WTF! Shouldn't they be teaching basic agriculture, literacy and bicycle repair? You know, stuff people can use?

And what happens to a local economy when a ship full of food shows up and starts handing out grain? Will that economy still have traders and farmers after a few years of being on the dole?

I'm sure there are bad organisations and good ones. I'm inclined to think micro credit is a good idea, (thinking of donating) but I'd like some good information about it.

So, I'd like to discuss the good, the bad and the ugly in the world of foreign aid.

Did anyone here look into the issue and to what conclusions did you come?

[shuize]

I agree with you about micro credit. In fact, I tried to open an account with Kiva a few months ago. That didn't turn out so well. There was a problem with my credit card (I think it was because I tried to use a U.S. card from Japan, but I can't say for certain since I use it to buy from Amazon in the States all the time), and I was unable to make the minimum credit card payment of a few hundred dollars to open an account. I emailed them and offered to write a check but they responded that they'd only take a check if it was for a minimum of $1,000 USD.

WTF?

Here I am trying to give them money and they basically told me to piss off if my check wasn't big enough. Hey, Kiva, don't take my money. That'll sure show me ... ?!?

I guess I post all of this to say, I think some of the aid organizations really have their heads up their asses.

[Francesca R]

WTF?

Here I am trying to give them money and they basically told me to piss off if my check wasn't big enough. Hey, Kiva, don't take my money. That'll sure show me ... ?!?

I guess I post all of this to say, I think some of the aid organizations really have their heads up their asses.It's a non-profit firm. If it incurs high costs processing squillions of cheques for $200 each then maybe it would have to charge loan-shark interest rates to get that back. But no worries, you've got a copper-bottomed case for trashing them now, right?

[shuize]

It's a non-profit firm. If it incurs high costs processing squillions of cheques for $200 each then maybe it would have to charge loan-shark interest rates to get that back. But no worries, you've got a copper-bottomed case for trashing them now, right?


Yeah, have it your way. I'm the bad guy.

[WildCat]

IShouldn't they be teaching basic agriculture, literacy and bicycle repair? You know, stuff people can use?
People in Africa are quite able to grow crops. What they aren't able to do is compete in the world market with the heavily subsidized crops from the US and Europe.

It's even worse when these places, out of the goodness of their hearts, dump donate their excess crops into Africa. Then the African farmers can't even sell their crops there, because you can't compete with free.

The best thing that could be done to help Africa would be for the US and Europe to end their agricultural subsidies. Besides being a wasteful use of tax dollars at home they are destroying the economies of developing nations.

[Last of the Fraggles]

I'm sure foreign aid is doing 'good', what I'm not so sure about is if it is making any long term difference.

If we just left them alone to sort themselves out would that improve things or make it worse? Not sure of the answer there either.

[GreyICE]

Yeah, have it your way. I'm the bad guy.

Why does this have to be about bad guys? Maybe you're a good guy, and they're a good organization, and logistical difficulties made things tough for both of you.

[Matty1973]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back. Of course there are reasons for it - high costs of managing small loans, local inflation rates etc and it does compare favourably to the other local borrowing sources which are something like an average of over 80% APR.

I have made a few loans through them and am very impressed with the way the whole thing operates but once I found out the rates borrowers have to pay I stopped putting more money into the account. Having said that none of my borrowers have defaulted so far so I guess they do find it a viable.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

[Matty1973]

Looking slightly closer on the site the rate is actually 35.38%.

This is how they define it:


Average Interest Rate and Fees Borrowers Pay (Portfolio Yield):
Kiva uses a calculation called "portfolio yield" to express the average interest rate and fees that Kiva entrepreneurs pay to the Kiva Field Partner administering their loan. Portfolio yield is defined as all interest and fees paid by entrepreneurs to the Field Partner divided by the average portfolio outstanding during any given year.

The portfolio yield is a better indication of the cost of borrowing money from a Kiva Field Partner than the simple interest rates reported by our Field Partners because it:

includes any fees associated with loans and
is expressed in one-year increments (similar to the way an APR works)
For more information about portfolio yield and interest rates, please visit the Kiva Help Center and click "Interest Rates/Portfolio Yield".

[Last of the Fraggles]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back. Of course there are reasons for it - high costs of managing small loans, local inflation rates etc and it does compare favourably to the other local borrowing sources which are something like an average of over 80% APR.

I have made a few loans through them and am very impressed with the way the whole thing operates but once I found out the rates borrowers have to pay I stopped putting more money into the account. Having said that none of my borrowers have defaulted so far so I guess they do find it a viable.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

So once you determined that this option was better than all the other options that may or may not have been available you decided to stop funding it?

I had a look at this Kiva site and it looked interesting but I couldn't find if the donators received interest on their loans or not. Can anyone clarify?

[geni]

People in Africa are quite able to grow crops. What they aren't able to do is compete in the world market with the heavily subsidized crops from the US and Europe.

It's even worse when these places, out of the goodness of their hearts, dump donate their excess crops into Africa. Then the African farmers can't even sell their crops there, because you can't compete with free.

Questionable. In recent years we've become fairly good at limiting food dumps to where their is an actual shortage. It is posible for african farmers to make money. For exampler zimbarwe before the place got more messed up than usual.


The best thing that could be done to help Africa would be for the US and Europe to end their agricultural subsidies. Besides being a wasteful use of tax dollars at home they are destroying the economies of developing nations.

Every time we suggest that the french start setting fire to things.

[Bob from NJ]

How much are corrupt African governments to blame for the bad situations?

[Francesca R]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back.I don't have a source, but I think that typical rates on micro-lending are a lot higher than that.

once I found out the rates borrowers have to pay I stopped putting more money into the account.That is mystifying, unless you've found a way to lend direct and only charge 5%.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.Not really. Similarly, for billions of people, a great way to help them would be to find them a job that paid $2 per day. Great compared to not doing anything that is.

[Francesca R]

How much are corrupt African governments to blame for the bad situations?Neither guns nor butter would melt in their mouths.

[Matty1973]

So once you determined that this option was better than all the other options that may or may not have been available you decided to stop funding it?

I had a look at this Kiva site and it looked interesting but I couldn't find if the donators received interest on their loans or not. Can anyone clarify?

I had already funded the account when I quite naively thought that since the donators don't receive interest that means the borrowers are not paying interest. When I found out the rate charged was so high I thought twice about putting in a further larger amount as had been my original intention.

I did try and persuede my dad to also join but it is very hard to explain the system with out sounding like a loan shark when you are suggesting money should be loaned to the poorest people on the planet at rates that are quite simply uncomfortable.

One good thing about the Kiva website is that it is very easy to relend money as it is gradually paid back by other borrowers. Rather than withdraw the money you just pick another borrower and it goes out to them right away. So for now I'm sticking to that. Pretty much every month enough gets repaid by the current borrowers to lend enough (minimum $25 of the total loan) to a new borrower.

[Fronzel]

How much are corrupt African governments to blame for the bad situations?

I'd say somewhere between 99 and 100%.

Not only that, but foreign aid helps them maintain their rule and petty little wars.

[JJM 777]

And what happens to a local economy when a ship full of food shows up and starts handing out grain? Will that economy still have traders and farmers after a few years of being on the dole?
Many politicians inside and outside of USA have complained about USAID practice of sending American food to Africa, which dumps the price of food for the local farmers in Africa, instead of sending money to Africa to buy the local food for a fair price.

European mainstream politicians complain that this American practice is a clandestine form of farm subsidies, and thus a breach of the trade agreements between EU and USA. This is typical America: talk about free trade to others, while subsidizing and protecting your own market as much as you ever can.

[Matty1973]

I don't have a source, but I think that typical rates on micro-lending are a lot higher than that.

Kiva did use to have some information regarding the typical rates charged in each local community displayed next to the rate charged by the Kiva lending partner. Typically from memory the rates were between double and quadruple the Kiva rates.

Now however they have a comparison described as "Median for MFI Peers in Country" which appears much lower than the rates they listed previously. To give some examples for some of my loans: Cambodia Kiva partner lends at 29% & the country median is 36%. Nicaragua it's 17% compared to 31% and worryingly in Senegal its 25% when the country median is only 20%.

That is mystifying, unless you've found a way to lend direct and only charge 5%.

If Kiva had been more upfront about the rates borrowers pay then I would have been less alarmed when I found out. All the information is there on the site if you know where to look for it but I'm quite sure a large proportion of the lenders are unaware of the rates charged on money they lend for free.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.
Not really.

If that really does not amaze you then you are clearly a lot wiser and financially savvy than I am.

[geni]

I'd say somewhere between 99 and 100%.

You will withdraw that insult. Even the French empire was more competent than that. The idea that the colonial administrators were so bad at their job that their work could be entirely undone within a few decades is deeply insulting to those hard working men and the latter business expat communities.


Not only that, but foreign aid helps them maintain their rule and petty little wars.

Hey. People were makeing serious money looting the DRC. Hardly petty. Got any electronics that contain Tantalum? You sure the stuff wasn't worth fighting over?

[rjh01]

I'd say somewhere between 99 and 100%.

Not only that, but foreign aid helps them maintain their rule and petty little wars.

I would second that answer.

Also I suggest that China has received very little foreign aid since 1990, yet in now the economy is booming and has been for many years (from a very low base). So foreign aid is not needed for development.

[Earthborn]

What people constantly keep forgetting, even after being told like a hundred times: Africa is a pretty big place. The problems are not the same for every country. Much of Africa is quite poor, but not everywhere for the same reasons.

In disaster areas it is perfectly reasonable to send it lots of food, otherwise people will starve. In war torn places, it may prolong the war, but perhaps also make it less severe, with fewer people dying from hunger.

There are also countries in Africa that are stable, have quite good governance, where people aren't starving and where people know basic agriculture, bicycle repair and how to read. Dumping food there will disrupt the economy and stunt its development, but teaching them about computers will help them enormously. It all depends on what the problems in a country actually are, and what level of development already exists.

[Flo]

I would second that answer.

Regarding the responsability of many local governments, I'd say 50%, and the other 50% to the various governments of industrialised countries that have permitted them to remain in power.


Also I suggest that China has received very little foreign aid since 1990, yet in now the economy is booming and has been for many years (from a very low base). So foreign aid is not needed for development.

Completely different conditions. China hasn't been colonised, its culture destroyed and negated, its territory dismembered to suit the needs of colons, its various populations played against each other on clanic/ethnic basis, its people turned into servants and given almost no education for centuries, then been the ground for WWIII by proxy for decades. China has therefore been able to build on a strong sense of community, in a political and historical sense, something that almost no country in Africa has been able to develop.

[Flo]

Many politicians inside and outside of USA have complained about USAID practice of sending American food to Africa, which dumps the price of food for the local farmers in Africa, instead of sending money to Africa to buy the local food for a fair price.

European mainstream politicians complain that this American practice is a clandestine form of farm subsidies, and thus a breach of the trade agreements between EU and USA. This is typical America: talk about free trade to others, while subsidizing and protecting your own market as much as you ever can.

European mainstream politicians are perfect hypocrites, who see no harm in dumping their agricultural surpluses and byproducts (a few years ago, the whole chicken farming industry in Cameroon has been "killed" when European firms poured chicken carcasses on the local markets - the byproduct of our taste for pre-cut chicken), letting African dictators buy castle and luxury cars in Europe and covering fake election (the recent farce in Gabon), or trying to cover firms that dump their toxic waste all over the continent.

[rjh01]

<snip>
Completely different conditions. China hasn't been colonised, its culture destroyed and negated, its territory dismembered to suit the needs of colons, its various populations played against each other on clanic/ethnic basis, its people turned into servants and given almost no education for centuries, then been the ground for WWIII by proxy for decades. China has therefore been able to build on a strong sense of community, in a political and historical sense, something that almost no country in Africa has been able to develop.

I picked an African country at random Congo (https://www.cia.gov/library/publications/the-world-factbook/geos/cg.html). It gained its independence in 1960. Yet its GDP per person is only about $300. Its problems are war (with other African countries) and dictatorship. Sorry but what you say does not stack up with the facts.

I could have chosen many other countries in Africa.

[Eddie Dane]

Completely different conditions. China hasn't been colonised, its culture destroyed and negated, its territory dismembered to suit the needs of colons, its various populations played against each other on clanic/ethnic basis, its people turned into servants and given almost no education for centuries, then been the ground for WWIII by proxy for decades. China has therefore been able to build on a strong sense of community, in a political and historical sense, something that almost no country in Africa has been able to develop.

I'm sure colonisation has been a factor, but this is an oversimplification.

Sub Saharan Africa doesn't have a long history of being nation states prior to colonisation. China has been a (mostly) unified country for 3000 years.
Read Jared Diamond's Guns Germs and Steel. What we see now is the result of ten thousand years of history, not one hundred.

[timhau]

Now however they have a comparison described as "Median for MFI Peers in Country" which appears much lower than the rates they listed previously. To give some examples for some of my loans: Cambodia Kiva partner lends at 29% & the country median is 36%. Nicaragua it's 17% compared to 31% and worryingly in Senegal its 25% when the country median is only 20%.

Local median rates mean little for those who don't qualify for loans in their local institutions.

[Eddie Dane]

What people constantly keep forgetting, even after being told like a hundred times: Africa is a pretty big place. The problems are not the same for every country. Much of Africa is quite poor, but not everywhere for the same reasons.


I realise that.

With all the attention focused on hunger and disaster, people forget that there are plenty of Africans with businesses, jobs, cars, education etc.
There aren't enough of them though.

Giving computer training to Rwandan villagers who live in a province with no electricity is still stupid IMHO.

[Flo]

I'm sure colonisation has been a factor, but this is an oversimplification.

Sub Saharan Africa doesn't have a long history of being nation states prior to colonisation. China has been a (mostly) unified country for 3000 years.

Yes, those are the two reasons why you can't compare the development of China and of African countries in the last 60 years.


Read Jared Diamond's Guns Germs and Steel. What we see now is the result of ten thousand years of history, not one hundred.

I've read it. It mostly explains why Africa didn't develop like Europe or China, and was therefore so easy to colonise.

[Flo]

I picked an African country at random Congo (https://www.cia.gov/library/publications/the-world-factbook/geos/cg.html). It gained its independence in 1960. Yet its GDP per person is only about $300. Its problems are war (with other African countries) and dictatorship. Sorry but what you say does not stack up with the facts.

I could have chosen many other countries in Africa.


and you would have found the same conditions: countries that gained their independence when it wasn't profitable enough to keep colonised, but where the "independent" governments were chosen by the former colonisers, and aided and abetted in their mismanagement of the country. Do you really believe Congolese were content with the way Mobutu led the country and that he would have been able to pillage it and opress the populations the way he did without external support ? Do you think Bongo's son would have been elected recently had France not given its support ?


That said, I'm of the opinion that foreign aid isn't the solution for Africa, outside of some emergencies, since it encourages the local governments in their mismanagement.

[Earthborn]

Giving computer training to Rwandan villagers who live in a province with no electricity is still stupid IMHO.It may be, but it depends on how well the program was adapted to local needs and interests. It may have a high "look at this stuff you can't have" content, but it also may help these villagers get information they may desperately need about what happens outside their village (such as national politics) or provide better communication with other villages and towns. It also depends on how often that bus returns to the village. If it is once a week or so, villagers can actually learn to use it to their advantage. On the other hand, if it will be a one time event after which the bus visits other villages, then it will give these people a useless introduction into technology they likely will have difficulty to understand.

If this is similar to way people in the West who "don't know computers" are routinely treated -- shoving a course of Word and Excel down their throat -- then I agree that this does more harm than good.

[Flo]

What people constantly keep forgetting, even after being told like a hundred times: Africa is a pretty big place. The problems are not the same for every country. Much of Africa is quite poor, but not everywhere for the same reasons.

Not only that, but too many people picture Africans as an undifferentiate mass of murderous, uneducated, lazy/addicted to foreign aid, people, unwanting and unable to project themselves into the future, and perfectly OK with their leaders' abuses. In that picture, Africans as a whole are sitting on their asses and waiting for foreign aid, when they are not fighting with each others, and of course that explains how they could fail to develop their countries in a mere 40 years after independence. :rolleyes:

[rjh01]

<snip>
That said, I'm of the opinion that foreign aid isn't the solution for Africa, outside of some emergencies, since it encourages the local governments in their mismanagement.

We go different paths to get there, but I will agree with the above statement.

[geni]

I picked an African country at random Congo (https://www.cia.gov/library/publications/the-world-factbook/geos/cg.html). It gained its independence in 1960. Yet its GDP per person is only about $300. Its problems are war (with other African countries) and dictatorship. Sorry but what you say does not stack up with the facts.

I could have chosen many other countries in Africa.

Ah the good old DRC. Firsly the DRC chose the short straw in terms of being colonised. Most european powers would create at least a small strate of educated locals simply because it was less effort than trying to entirely run the place yourself. Leopold II of Belgium felt otherwise. Ran the country as a rubber planation useing terror. Takes a fair bit of time to recover that. On his death Belgium took over. They were a little better but not much. The result is when the country made it to indepence there were no organisations really able to hold the place together. Beligum took advantage of this to try and remain in control. Sortly afterawards things went further downhill.

Eventualy Mobutu managed to establish himself as a classic strongman leader backed by belgium the US and france. By sigifnificantly limiting freedom and the use of some rather brutal methods he managed to keep the place fairly stable untill the end of the cold war when he ceased to be useful.

So we reach 1994. Decades of colonialism of the worst kind followed by decades of western backed dictatorship. Is it any wonder the country was a mess? The overspill from the Rwandan Genocide kicked off the latest set of problems shortly afterwards.

[geni]

Giving computer training to Rwandan villagers who live in a province with no electricity is still stupid IMHO.

Got any better ideas? Farming isn't an option. Population growth results in not enough land to go around and last time tha happened the results were rather unfortunate.

[Last of the Fraggles]

If that really does not amaze you then you are clearly a lot wiser and financially savvy than I am.

If I'm surprised at the rate at all its only because I thought it would be higher. I know 25% sounds a lot but that's because you are used to Western banks loaning reasonable sums of money at lowish rate.

If you loan someone 50 dollars for a year and get back only 12.50 in interest it doesn't leave much to cover all the admin of making and collecting loans globally really does it?

I'm really surprised they don't pay interest though, as a functioning business model it shouldn't be based on donations but on everyone in the chain profiting from the transaction.

If Kiva were paying 5% to the investors, taking 25% for themselves and charging 30% to the loanees they'd probably take in a lot more money.

Is anyone aware of any microlending institution that works in this way?

[Francesca R]

If Kiva had been more upfront about the rates borrowers pay then I would have been less alarmed when I found out. All the information is there on the site if you know where to look for it but I'm quite sure a large proportion of the lenders are unaware of the rates charged on money they lend for free.I agree with that. Lenders do nobody any favours by not being very transparent about microcredit interest rates. It merely fuels sentiment that this is "just another exploitation of the poor" among irrational anti-globalisation types.

But there is nothing ethically wrong with charging rates of 25% if it is profitable for the borrower. FWIW I've read plenty on microcredit over recent years and although I have not kept much of a record I recall the typical APR to be more like 50% and upwards. If that enables a lady in Uganda to buy a cow, or a bike, or some mobile phone kit, and earn enough from rents to pay the loan back and pay herself income of $50-100 per month, then she's doing much better than she was before.

I'm really surprised they don't pay interest though, as a functioning business model it shouldn't be based on donations but on everyone in the chain profiting from the transaction.I think much microcredit does pay a return. It also benefits from risk pooling (although it is still high risk lending however diversified). As you say, if it depends on charity, then it is "smart aid" but no more than that.

Of course, microcredit and bottom-up market-augmenting solutions for African poverty don't exactly do the job of lifting populations out of squalor all by themselves. And there are limits to the extent to which rubbish governments can be bypassed, and sometimes no government beats a crap one (factoid--mobile phone density in Somalia is 40%, compared to 3.5% in Ethiopia).

Of the books I have read on development economics, most of them acknowledge the many downsides of aid, but few of them have any stellar top-down answers. (I think William Easterly's opening statement is that the big answer is "there are no big answers"). Paul Collier and Dani Rodrik have written well about this subject as well. I have yet to try Jeff Sachs (who is the "let's double aid" fan)

[drkitten]

One of the things that feeds my scepticism is the following:
Setting up a school in Africa is a good thing, but very cheap by western standards. I guess you could plonk down a functional school building in Congo for about a thousand Euro. But running the organisation that sets such a project up is quite expensive. Requiring an organisation with educated full time employees and an office building in a Western city.
What follows is that a significant part of the donations and subsidies go to running the organisation itself.

I fail to see the problem with this, frankly.

The same would be true if someone built a hospital. Or a power plant. And, heck, it's also true of most schools and universities in the States as well; physical plant is a tiny part of expenses, and the most expensive part of the operation is typically the people doing the work.

What's the other choice? Filling a building with desks and not having anyone qualified to teach?

It would be nice, of course, if the school could hire locally for its teaching and administrative staff. But the lack of people qualified to take those positions is exactly the problem the school is supposed to solve.

[Ziggurat]

So we reach 1994. Decades of colonialism of the worst kind followed by decades of western backed dictatorship. Is it any wonder the country was a mess? The overspill from the Rwandan Genocide kicked off the latest set of problems shortly afterwards.

Don't forget the flooding of Africa with Soviet weapons at basically below-cost prices.