How the Global North is profiting from foreign aid

aid; money

On 20 January 1949 Harry Truman, having been elected to a second term as president of the United States, was set to take the stage for his inaugural address. The dust was settling after the Second World War, European imperialism was collapsing, and a new American led world order was rapidly taking shape. It was with this backdrop that the concept of ‘development’ as we know it was born. Truman told the ten million viewers of the first inauguration to be broadcast on television that:

‘We must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas…It must be a worldwide effort for the achievement of peace, plenty, and freedom.’

But realistically the case for aid is a means of bypassing Western accountability for their colonial and neo-colonial treatment of now underdeveloped states, conjuring in its stead an image of the Global North reaching out across the divide arms open in loving care. Despite all the aggression the flow of aid would stand as irrefutable proof of Western benevolence. 

Indeed the aid budget is frequently cited to show we live in a fairer more compassionate world. Together governments, institutions and billionaire philanthropists of ‘rich’ countries give ‘poor’ countries about $128 billion in aid each year. The growing size of the aid budget sits right at the middle of the official development story. American economist Jeffrey Sachs former director of the Millennium Development Goals suggested that if rich countries would just increase their foreign aid contributions to 0.7 per cent of GDP we would be able to eradicate global poverty in only twenty years. 

But if we step back and look at this aid in context, we see it is vastly overtaken by the financial resources that flow in the opposite direction. The US based Global Financial Integrity (GFI) and Centre for Applied Research at the Norwegian School of Economics have published some truly eye-opening data on this.

Tallying up all the financial resources that get transferred between rich and poor countries each year they found that in 2012 (the last year of recorded data), developing countries received a little over $2 trillion, including all aid, investment and income from abroad. But more than twice that amount, about $5 trillion, flowed out of them in the same year. In other words developing countries sent $3 trillion more to the rest of the world than they received. 

They summarise their finding in this graph. Since the early 1980s, NRT for all developing countries have been mostly large and negative, indicating sustained and significant outflows from the developing world. The NRT line is largely negative regardless of whether it is in nominal terms (green line) or expressed as a percent of developing countries’ GDP (blue line).

Why is this happening?

Today poor countries pay over $200 billion each year in interest alone to foreign creditors, much of it on old loans that have already been paid off many times over. Since 1980 developing countries have forked over $4.2 trillion in interest payments – much more than they have received in aid and most of which have gone directly to Western creditors.

Nearly $500 billion in profits out of developing countries each year, most of which goes back to rich states. Developing countries have to pay an extra $60 billion per year to foreign patent owners under the WTO’s agreement on intellectual property rights, (TRIPS) in order to access technologies and pharmaceuticals often essential to public development and health.

By far the biggest chunk in outflows has to do with capital flight. GFI calculates that developing countries lose around $973 billion each year through leakages in balance of payments, $875 billion through trade mis-invoicing each year. Three trillion dollars in total net outflows per year is twenty-four times more than the annual aid budget. In other words, for every dollar of aid that developing countries receive, they lose $24 in net outflows. 

What this means is that poor countries are net creditors to rich countries – exactly the opposite of what we have been conditioned to assume. Furthermore Global South economies actually lose about $27 billion in GDP each year because aid disbursements are so volatile making it very difficult for them to investment and manage their budgets. 

This is a wakeup call that the systems which we have in place today are incapable of meeting the most serious humanitarian and structural challenges of the 21st century. We need a reordering of priorities. Long term investment over quick returns. Tighter security of financial flows in the right places; so quick to point the finger at familiar forms of corruption and ignore the tax havens and evasion. Understanding the bigger picture of the aid story begins with a relearning of a fundamental question we thought we knew. Who is aiding who?  

Philip Chennery is a SOAS Junior Digital Ambassador and Operations Team Member at SCRAP Weapons. He is currently pursuing a MA/PgDip in International Studies and Diplomacy.

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