Trade talks and the aid scam

January 8th, 2007

Although the Doha round of trade talks was suspended last year, there is still a possibility that an agreement could be reached. President Bush has until 30 June this year to negotiate a deal with the Europeans, following which his authority to negotiate directly will lapse. The Doha round collapsed following the failure of Europe and the USA to cut tariffs on agricultural imports and farming subsidies (respectively) enough to satisfy countries like India and Brazil. Cuts on agricultural subsidies won’t just mean that the poorer countries will be able to export goods to the USA – it will have a direct impact on how rich countries provide aid to poorer ones. A couple of years ago, I did some consultancy work for an NGO in Ghana. While there, I got into a discussion with one of the local employees of Catholic Relief Services (CRS). What he told me was a real eye-opener.

When the US pledges aid, it doesn’t actually write a cheque or transfer cash. For instance, CRS in Ghana got $1m in aid from the US. What actually arrived was $1m worth of wheat grain. CRS hired a warehouse to store the grain, and sold it on the local market to get their cash. They were then required by the terms of the aid to spend the majority of it on goods and services provided by US companies (attaching strings to aid, which is then known as “tied aid”, is very common in the US but less so in Europe). Let’s examine who are the winners and losers in this sequence of transactions.

US taxpayers pay the US government. The US government subsidises farming. The excess produce so generated is given by the US to an NGO in Ghana. The NGO sells the produce on the local market, thus depressing prices locally leading to Ghanaian producers making less from their grain. The money so generated goes to pay US-based private companies, who in turn pay taxes. Effectively, when the US gives aid what is actually happening is that US taxpayers and Ghanaian farmers are giving money to private US companies. Sure, the Ghanaian NGO gets to fund their project – but this is in many ways a helpful byproduct of these transactions, since there is no other way for the US to get rid of the surplus produce generated through subsidisation. So-called “anti-dumping” laws prevent such produce being sold on the international market at less than cost prices, and many disputes at the WTO arise over dumping.

The US is not alone. A friend of mine working for Reuters in Nairobi described waking up one morning to see a row of brand new Toyota SUVs parked up outside a local government ministry opposite his house. This, it turned out, was aid pledged by the Japanese. Rather than giving money, it made more sense for the Japanese government to supply SUVs to the same value. These were quite useless since they guzzled fuel at an astonishing rate and spare parts were unobtainable. One of my Serbian friends reports that German aid following the war was delivered in the form of old buses from East Germany that were being replaced.

Many countries deliver aid in this way when they can get away with it. Getting a real, multilateral agreement to cut subsidies and tariffs won’t just help poor countries by allowing them to export their raw produce1 – it’ll force rich countries to actually deliver money when they promise aid. If you’re in the UK, write to your MP or MEP. If you’re in the US, contact your representative. Ask them to put pressure on our leaders to reach an equitable, multilateral deal on tariffs and subsidies.


1Wondered why so many poor oil-producing countries are still poor? Apart from corruption, one of the major reasons is that the tariffs on imports of refined oil products to rich countries are very high and that IMF-enforced liberalisation policies have put Southern refineries out of business. It’s uneconomical to refine oil outside of the US and Europe, and so countries export crude oil instead and hence make a good deal less money. The majority of oil refineries are in the countries which consume the oil. Compare this list of oil refineries in Africa (note that the capacity in the table is given as MB/D when it should be thousands of barrels per day) with this report on US refinery capacity from 2002.

Note that the refinery capacity for the whole of Africa is around 3 million barrels per day – while that of California alone is 2 million barrels per day. As it says just above the table in the first report, “many African refineries have been forced to close a result of low worldwide refining margins, small local markets, high operating cost (due to small size), and poor yields. Following the World Bank/IMF insistence on market liberalisation in the early 1980s, many of the remaining refineries have faced significant challenges.”

  • Stacy

    You might find the following libertarian podcasts on foreign aid interesting (though they are long)

    (143. Foreign Aid Part 1 : 16 Mar 2006
    As you can imagine, since it is a government program, it is neither foreign nor aid)
    http://www.freedomainradio.com/Traffic_Jams/foreign_aid_part_1.mp3

    (144. Foreign Aid Part 2 : 17 Mar 2006
    A tasty medley of foreign aid disasters)
    http://www.freedomainradio.com/Traffic_Jams/foreign_aid_part_2.mp3

  • http://jchyip.blogspot.com Jason Yip

    This reminds me of Iqbal Quadir’s talk at TED. This kind of aid just reinforces power at the top and keeps the average person in the gutter.

  • http://www.dancingmango.com/blog/ marc

    Excellent post Jez,

    In your time in Ghana did you get out into the “bush”? Loads of examples of misplaced technologies transfered, rusting tractors etc. In one of the universities in Ghana, German aid had donated a computer system, complete with Windows and Office. Trouble was, it was the german version, and no-one in the department spoke German. Hmmm, sends me back… http://www.dancingmango.com/postcards/post8.php

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  • The truth

    The truth about economic hitmen is it is not limited to the USA. The germans are not saints either and Africa is now the new playground for EU ploys. Ghana is hot on the list not without reason.