A recent article in The Age describes Australia’s new approach to foreign aid. Some countries are reducing their expenditure on foreign aid as a reaction to the global financial crisis, and risk aversion in financial markets have meant that there is less capital available for lending to poorer countries. However, Australia is gradually increasing its commitment to foreign aid, with a target of 0.5% of GDP by 2015-16.
The article reports that a significant percentage of Australian foreign aid is shifting from governance to education, healthcare and food, with the aid of raising living standards in the recipient countries. Although the main emphasis of Australia’s aid program will always be local, the amount of aid allocated to the world’s poorest continent, Africa, is increasing. The approach is commendably generous, but it may be based on an overly-optimistic hope of what aid can achieve.
There is no doubt that foreign aid is effective at stopping people from starving at times of crisis, such as during wars or famines. However, government-supplied aid has been far less effective at producing sustained economic development. As has been discussed extensively on this blog, the available research indicates that sustained economic development depends on properly functioning markets, and foreign aid tends to distort markets rather than assisting them.