Do Fair Trade and Foreign Aid work?

June 06, 2008

Like many people I've always been a strong supporter of foreign aid and argued for an increased commitment by the Federal government in a previous post on the 'Business of World Poverty'. But some question the notion that simply spending more money is necessarily a wise thing. The most vocal critics believe in a free market and want minimal government interference in market forces. Recently, Associate Professor Andrew Leigh from the Australian National University wrote an opinion piece in the Australian Financial Review (20th May, 2008) in which he was (constructively) critical of Fair Trade programs and foreign trade in general.

An economist's view

Andrew Leigh has an interesting site aimed at economists, students of economics plus, I guess, policy makers and interested people like me. It is one of a number of secular sites that I read that aren't in any way connected with my Christian networks and communities. While he says plenty of things that I don't agree with, he also applies his econometric skills to many topics that I'm interested in and he challenges some of my views. I see this as good! It helps me to sharpen my own arguments, learn new things and offers opportunities to participate in other virtual communities. There is great benefit in entering and participating in varied communities of interest and debate - that's what apologists should do! It is important to listen to other ideas shaped by different worldviews, to understand them, and to learn from them.

Andrew Leigh quotes the economist Tim Harford who suggests that fair trade coffee in some London stores costs an extra 25 pence per cup, but only about a tenth of the mark-up actually reaches the coffee farmer. Harford suggests that "A fair trade cappuccino might have given the drinker a warm inner glow, but it didn’t do much to reduce world poverty".

Leigh points out that the harshest of critics sometimes say the same about overseas aid.

"They point out that unlike the voters who judge domestic programs, the recipients of foreign aid cannot punish bad policy at the ballot box. Aid’s critics say that with a few exceptions – like disaster assistance – the world would be better off with less aid, not more.
With this year’s budget promising a major increase, Australia’s overseas aid is set to rise from 0.3% to 0.5% of national income by 2015. So the billion-dollar question is: does aid work?"

Leigh's key arguments

Here's a summary of Leigh's response:
  • It is difficult to identify the impact of foreign aid on a country’s level of development.
  • In the 1990s, a series of studies reached ambiguous conclusions about the impact of aid.
  • Burnside & Dollar (2000) found that aid did raise growth as long as the recipient country had good fiscal, monetary and trade policies.
  • Easterly, Levine & Roodman (2003) suggested these results were fragile, and did not hold up when more years of data were added to the analysis.
  • Paul Collier later conceded that even in badly governed Africa, poverty rates would today be much higher had the continent received no aid.
  • Jeffrey Sachs has argued that much foreign aid in the post-war era was directed towards winning the Cold War rather than helping the poor.
  • Sachs accepts though that we shouldn’t discriminate against countries with bad institutions; but instead we should be ruthless about not giving the wrong kind of aid.
Andrew Leigh suggests that ethically, it would be hard to justify withholding charity from some of the world’s neediest people. With this I strongly agree! Yet the research suggests that we need to understand that progress will be slow.

The second challenge Leigh highlights is the need “to distinguish between good and bad aid. This is a particularly thorny question at a time when the program is being expanded. This year, AusAID’s budget will rise from $3.2 to $3.7 billion.

A Christian response

The Bible is clear that we are to be generous, to give to the poor, that the most disadvantaged must be amongst the recipients
(Matt 25:31-46), and that we should give to aliens (Jer 22:2-4) as well as to those in the church. But how do I reconcile the work of economists like Andrew Leigh with the biblical imperative to be generous to the poor. Here are a few thoughts that I've had. First, three fundamental biblical foundations that give me hope:
  • I need to remind myself that my concern for justice in the world is an outworking of my faith in Christ, my gratitude to God and my desire to "act justly and to love mercy and to walk humbly with your God" (Micah 6:8).
  • I need to remember that my primary concern is first to see people of all nations hear the gospel of Christ - their souls saved not just their earthly needs met.
  • While God is not responsible for the suffering and injustice that concern me, and while I know that it will be part of God's fallen world, I need to remember that God is in sovereign control (Prov 19:21; 21:1; Dan 4:35; Rom 8:31; 35-37).
With the above as foundational, how might I respond to the fact that even within attempts to fight against injustice (e.g. the giving or foreign aid etc), the sin of mankind is undermining well-intentioned responses to injustice?
  • I need to continue at a personal level to try to give generously, indeed sacrificially to people I identify as needy. As I see need I must respond.
  • I should be wise in how I use the limited amount that I can give and I should target it at those in greatest need (e.g. those in the most life threatening situations, or those who have received less support).
  • I should make sure that agencies that I give to use the money wisely and that the funds generated from others and me reach the people in need (or as much of it as possible).
  • I should actively encourage governments and major aid organizations to use support wisely to help communities to become more sustainable and self-sufficient economically, agriculturally and educationally.
  • I need to be prepared to look more closely at foreign aid policy and participate in informed ways to seek better outcomes for the most disadvantaged. I need to understand the limitations of government-to-government aid (see this critique from the CATO Institute). I need to be prepared to speak out and lobby politicians when government aid policy appears to be shaped by a desire for strategic advantage (e.g. protection of our trade, access to foreign resources etc) rather than a response to the most acute need.
  • Finally, I need to support agencies where possible that have a desire to share the gospel of Christ as well as providing material support.
You can read the post from Andrew Leigh that prompted this post here

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