Aid must help people, not governments

G8: Africa - The best way to keep Africans poor is to continue handing money to political elites wh

After more than US$400bn of overseas aid, channelled through African governments, the African people are on the whole poorer now than they were 30 years ago. Will doubling aid and channelling it through those selfsame governments change anything?

It is expected that the G8 leaders will approve at Gleneagles what Gordon Brown has called "a modern Marshall Plan for Africa". But the Marshall Plan for rebuilding Europe after the Second World War was driven by the principle of strengthening democratic institutions and free markets, using existing skills and putting money into productive investment. Whereas the Marshall Plan produced the intended results in Europe and Japan, the hugely vaster sum of aid to Africa has failed to produce results either in economic performance or the welfare of the people. Why is this?

One of the little-known facts about Africa is that it is a major exporter of capital. The World Bank estimates that by 1990, 39 per cent of sub-Saharan Africa's private wealth was held outside Africa; for south Asia, east Asia and Latin America, the figures were 3 per cent, 6 per cent and 10 per cent, respectively. According to another estimate, for the period 1970-96, capital flight from 25 sub-Saharan African countries was $193bn, growing to $285bn when interest was taken into account. This money is made up of the savings or surpluses produced by the efforts of Africans or siphoned off from the aid pump, and it represents lost investment and lost opportunities for entire economies and millions of people.

There is a strong underlying assumption in the UK-sponsored Commission for Africa report that strengthening the state will lead to development. Throughout most of Africa, strengthen- ing the state has led to more oppression, less accountability and greater underdevelopment. Since independence, political elites have suppressed or prevented the development of the civic institutions that strengthen society and provide a balance to the power of the rulers: not just an independent judiciary, civil service and news media, but popular groups such as churches, chambers of commerce, trade unions, universities and, of course, opposition parties.

One reason why South Africa has become one of the most mature democracies in Africa is that such institutions pre-date apartheid and could not be eradicated by the rule of a police state: these institutions not only survived but struggled against the system and eventually brought it down. Nigeria, on the other hand, does have elections, but it will take a long time to rebuild its institutions. Under military rule and one-party states such institutions, where they existed, were crushed. The primary focus of aid must be to rebuild these institutions - all the elements that hold society together and make governments accountable.

The more the African political elites consolidate their power and the more aid they get, the poorer Africans will become and the more African economies will regress or, at best, stagnate. The Swedish economist Fredrik Erixon has noted the inverse ratio between aid and growth and shown how aid diverts money from productive activity to inefficient statist projects. Aid has actually held development back. Politically, one of the unintended consequences of foreign aid is to make African governments even less accountable to their people because they do not need their taxes and therefore their consent: instead, their budgets come from aid donors who demand little accountability in return.

For any of the current initiatives to have a meaningful impact on Africa, they need to focus on support for the development and protection of the private sector and civil institutions. All modern schools of political thought, from Marx and Lenin to Hayek and Friedman, agree on at least one thing: the private sector is the driver of modern economic development. Like people everywhere, Africans want security and comfort, but the great majority of Africans face daily hunger, homelessness, threats of violence, actual violence, and starvation. Yet these suffering people are entrepreneurial and full of creative energy. They would be perfectly able to build their own security and comfort if only allowed to do it within a stable framework. In most African countries, however, it is illegal to start a business without a licence, and getting a licence usually involves bribery or good connections.

Few countries have any form of private land rights. South Africa provides a good contrast. It is one of few countries to have freehold embodied in its laws (so does Zimbabwe, but it does not have the rule of law any longer) - yet it retains communal ownership in the former bantustans or tribal homelands. This communal ownership is subject to the whims of chiefs and state: these areas have fallen far behind in any growth or poverty index, while the areas with freehold are sharing in South Africa's increasing prosperity.

The reason is quite simple: with no title to land, you have no reason to develop it; with no land, you have no collateral to raise capital to invest in it. Worse, most Africans have no access to open and stable financial institutions that could provide loans. The vicious circle closes tight around the poor. Even when peasants or entrepreneurs do have a surplus to sell, they face enormous internal barriers to trade. Agricultural produce is subject to compulsory purchase by national marketing boards (a legacy of British colonialism), which pay artificially low prices. If those producers do find demand for their goods in neighbouring countries, they face exorbitant customs duties - duties that are levied even on essential drugs for Aids and malaria. Finally, if their goods do get to the global market, they face market-distorting quotas; and what with subsidies (paid by European, Japanese and American taxpayers), smallholder farmers and basic industries cannot competitively trade their goods in world markets.

There are, of course, some exceptions in Africa to these general observations - in particular South Africa and Mauritius. These two countries are developing industrial economies that, if sustained over a significant period, could become important drivers for African development because of their emerging role as foreign investors in other parts of Africa.

At independence in 1968, Mauritius was a typical African country - small land mass, small population, single-crop economy (sugar) accounting for most of its export earnings and formal employment, multi-ethnic society and low per capita income. Today Mauritius is, next to South Africa, the richest non-oil- producing nation in Africa. It boasts an economy that is almost as diversified as South Africa's, with a per capita income that now surpasses South Africa's. This phenomenal achievement was driven by competitively priced, high-quality clothing and textile exports to world markets. Mauritius, like South Africa, has emerged as an important foreign investor in other African countries.

As these two countries show, the emphasis in Africa should be placed on strengthening national economies and democratic practice by freeing the private sector. Putting money in the hands of the political elite is futile; you have to put it in the hands of entrepreneurs, either as commercial loans or simply by allowing them to produce and trade freely.

During the past 40 years or so, vast amounts of time and money have been expended on promoting regional co-operation in Africa, largely to no avail. The pathetically low trade flows among African countries - excluding South Africa - have hardly changed from what they were a generation ago. As for promoting political reform, African leaders are notable for their reluctance to criticise their neighbours. So what can be done?

The real freedom Africans need is not just shows of democratic reform but real institutional reforms: property rights and the rule of law, allowing them to produce and trade freely, to save and to prosper, free of overbearing officials and institutional corruption. The real trade "justice" they need is free trade with each other, within their countries and with each other's countries, free of compulsory-purchase marketing boards, of customs barriers and of preferential licences. The real aid Africans need from the west is free trade without tariff barriers and other protectionist distortions - which happen to be burdens on western taxpayers, too. In fact, the money value to Africans of lifting these subsidies would far exceed the amount they receive in sterile aid. The real help Africans need is from business and industry, investing in production and investing expertise.

A practical example of commercial opportunity is Mali's cotton. Mali is the second-biggest producer in Africa after Egypt, yet it does not have a single cotton mill. With a fairly stable political and legal system, it is a straightforward candidate for a commercial venture that would make money producing even the basic grade of woven fabric. Ethiopia, with huge amounts of livestock, needs scientific management to improve the lot of the owners, who are unable to deal with disease and cannot afford better feed. Traditional farming is not quaint: it is subsistence, living on the edge, with very little reward for very hard work.

These examples show what Africa lacks most: not money but expertise. This is what generous donors could most usefully offer, sending out engineers, managers, accountants and so on. With stagnant economies and poor education systems, most Africans who are perfectly capable of learning all these skills have had no chance of acquiring them. Worse, many of those rich enough to get an education use it to work abroad: the UN estimates that 70,000 African professionals leave the continent every year.

The real debt relief Africans need is relief from the wasteful political elites with statist plans and Swiss bank accounts who ran up those debts. Imposing economic and political conditions on aid may well draw accusations of interference in sovereign affairs: that is just too bad.

Donors have to say loud and clear to African governments and to their constituents at home that aid is there to help people not governments, entrepreneurs not bureaucrats.

Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs, is the author of Perpetuating Poverty in sub-Saharan Africa, published on 30 June by International Policy Network. This is an edited version of a speech given at IPN in London on 29 June