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1489215900108In Part I of this series we described the assertions about poverty and why nations fail from the excellent book by Acemoglu and Robinson, “Why Nations Fail”: With many examples they revealed a single and consistent factor as being the one contributory cause of failure and poverty; the EXTRACTIVE nature of economic and political institutions in any country. These are structured to extract resources from the many by the few and fail to protect property rights or provide incentives for economic activity. They also concentrate power in the hands of a few, who will then have incentives to maintain and develop these institutions for their own benefit and use the resources they obtain to cement their hold on political power. 

So, how does Foreign Aid play a part in this, and is it a helping or hindering force? Here is a simple, unbelievable but true example from Acemoglu and Robinson:

Things were looking up for Afghanistan. A majority of the Afghan people were longing to leave the Taliban behind. The international community thought that all that Afghanistan needed now was a large infusion of foreign aid. Representatives from the United Nations and several leading NGOs soon descended on the capital, Kabul. What ensued should not have been a surprise, especially given the failure of foreign aid to poor countries and failed states over the past five decades. Surprise or not, the usual ritual was repeated. Scores of aid workers and their entourages arrived in town with their own private jets, NGOs of all sorts poured in to pursue their own agendas, and high-level talks began between governments and delegations from the international community. Billions of dollars were now coming to Afghanistan. But little of it was used for building infrastructure, schools, or other public services essential for the development of inclusive institutions or even for restoring law and order. While much of the infrastructure remained in tatters, the first tranche of the money was used to commission an airline to shuttle around UN and other international officials. The next thing they needed were drivers and interpreters. So they hired the few English-speaking bureaucrats and the remaining teachers in Afghan schools to chauffeur and chaperone them around, paying them multiples of current Afghan salaries. As the few skilled bureaucrats were shunted into jobs servicing the foreign aid community, the aid flows, rather than building infrastructure in Afghanistan, started by undermining the Afghan state they were supposed to build upon and strengthen.

What happened in Afghanistan is not an isolated incident. Many studies estimate that only about 10 or at most 20 percent of aid ever reaches its target. There are dozens of ongoing fraud investigations into charges of UN and local officials siphoning off aid money. But most of the waste resulting from foreign aid is not fraud, just incompetence or even worse: simply business as usual for aid organisations.

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Nepal:A Failed State in-Waiting!

We worked in Nepal for 10 years as a U.K. Charity with our own NGO. No British worker was paid and the Nepali staff were paid local rates. Our focus was education, primary education, not to build schools physically but to train teachers and develop the schools educationally. Here are two examples of the Extractive nature of Nepal’s institutions and officials.

1. Earthquake Relief

In April 2015 a massive earthquake hit the country, many were killed, many more were injured and tens of thousands lost their homes. Financial and material aid poured into the country along with expertise and manpower. Yet two years later many are still living in makeshift shelters, (including one of our nephews who lost his home in Kathmandu)children go to school in tents, huts or tin shack structures. Trauma counselling has been sporadic and ineffective. Little or no money has been handed over to the bereaved or homeless for rebuilding. Typically the government spent almost the first 12 months posturing in parliament and committees to set up an Infrastructure or Restructuring Ministry or Department  to create a recovery strategy. When the new Head of Department was appointed, what seemed like a good start of sending finance to the affected regions soon became acrimonious because the funding was distributed via central lawmakers and local officials. I don’t think we need to describe what took place!

2. Kathmandu Education 

The operation of our teacher training programmes in Kathmandu needed the approval and sanction of the Ministry of Education, naturally and quite right too! But the bureaucracy that was put in our path was horrendous and eventually led to our withdrawal. First there was the registration and annual reregistration of our organisation. Easy in year one, but in subsequent years with increasing demands made for a “fee” to be paid which was a percentage of the running costs transferred into Nepal. Clearly the more we were successful the more we had to pay to not one, but various government offices. That was then added to by demands from local officials for “payment” to deal with our paperwork after it had been placed at the bottom of the pile for several weeks! The final indignity was a demand from various District Education Offices to send an official to sit on and observe EVERY course we ran, paying them a fee to do it, plus a payment to the observer for his salary, lunch, travel and other expenses. We couldn’t continue under these conditions since it would have completely blown our strictly controlled budget away. We closed down our operation completely despite having trained 2000 teachers and developed 200 schools in 5 years.

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These are REAL examples of foreign aid actually feeding the Extractive institutions. Far from eradicating poverty, helping the needy, developing the country, improving its infrastructure, building capacity ……. The exact opposite is happening. Extractive institutions are being maintained, new ones are created, individuals in positions of power see opportunities to extract more and more, and the vicious circle continues. Foreign aid in its current form is therefore part of the problem, NOT part of the solution and in Part III of this series we will highlight just how big a part it is playing. 

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