Altruism and trade barriers
I am writing in reply to Pia Jägerholm’s text, Because no country can thrive in isolation. In the text she makes solid points on what are the problems facing Somalia and we all agree on the fact that there are problems which need to be solved. But the solution she gives in her text is not only lacking but idealistic.
First of all, I will be referring to developing countries in this text and not countries torn by natural disasters needing disaster relief. I will show that giving people money with “no strings attached” is not only ineffective but also detrimental to the growth of the developing economies. Also I’ll try to offer other solutions by looking at a newly developed nation in the world and its journey to prosperity.
Many proponents of foreign aid use a certain statistic to critics – that statistic being that, according to the World Bank, between 1981 and 2010, the number of poor people fell by 700 million. On this information alone we are led to believe that foreign aid works. The truth behind this statistic is that out of that 700 million, 627 million are Chinese. And that over a quarter of Sub-Saharan countries are in fact poorer now, compared to 1960.
Leading economists have been questioning the so called positive effects that foreign aid has on developing countries – one of these critics is the 2015 Nobel Prize in Economics winner, Angus Deaton. Deaton, whose opinions are based on thorough research and numbers, says that foreign aid stagnates the economies of developing nations and keeps corrupt leaders in power. Not only are the recipients of foreign aid being duped but so are the givers.
In the past decade, there have been numerous accounts of how the majority of the money given to humanitarian organizations ends up being used to navigate through endless bureaucracy and red tape. Take for example the Red Cross in Haiti – building four homes after being given $500 million in donations. The argument given by the Red Cross was that they spent the money on contracts with outside groups and bureaucracy. Even if we give foreign aid that works, it is still incredibly uneconomical and ineffective in the long-term.
Above all else, we must rethink the notion that foreign aid is this altruistic gesture by developed nations in order to help less developed countries. And to understand this, we must understand trade barriers. Trade barriers are types of legislation taken by governments to safeguard their own economies and keep jobs for their citizens.
One such example is the EU and its trade barriers regarding coffee. If a Ghanaian is looking to export non-roasted coffee beans to the EU, the beans will not be taxed. But if the beans are roasted they’re taxed at 7.5 per cent. Fransisco Mari, an expert at the German Protestant Development Service, EED, said “If Arabica coffee would be roasted in Africa, the import tariffs would be 100 or 120 percent,”. These types of actions incentivize African countries to export raw materials, thus African companies stay stagnant and do not develop and do not move into the lucrative business of processing materials.
The whole of Africa, in 2014, made $2.4 billion from coffee beans and in the same year, Germany made $3.8 billion from processing exactly the same coffee beans. If developed nations were truly altruistic in their mission to reduce global poverty they would stop these trade barriers and practice free market economy leading to a more prosperous Africa. The hard truth is we are not truly altruistic in our effort to help Africa. We are willing to help as long as it doesn’t affect our job markets.
Should we be angered about this? No, if you are a European coffee processor. But if you are a European coffee consumer or an African coffee producer then yes. Not only do these trade barriers inflate the price of coffee in the EU but they also keep the poor coffee producers from moving into more profitable processing.
In her text, Pia Jägerholm also defends remittances, calling them a “crucial lifeline”. I would rather call them the biggest single reason for inflation and unemployment. We are having a similar discussion in Finland about the welfare trap – the trap being that people are less incentivized to find low paying jobs if they are already paid more to do nothing. In reality a person who gets $100 a month in remittances will then not be incentivized to work for a similar amount. This then leads to employers not being able to find employees and businesses failing.
Numerous developed countries came up on cheap labour and heavy industries. If people are already receiving money from outside relatives to help them survive, they will not be incentivized to go and find meaningful work. Even though many times the diaspora think they are helping out relatives by sending them money, in reality it raises the inflation in the country. This leads to higher prices and the suffering of the poorest people, the people with no relatives to send them money.
Remittances in the form of direct investments are greatly welcome in the way of funding infrastructure projects like roads or housing.
The argument of coming up on cheap labour has been shown to be effective throughout history, for example in the 1800’s industrial era in Europe. But the closest example we have is that of South Korea. The success story of a nation, riddled with poverty and war, that overcomes these obstacles to become a major player in the economic landscape of the world. Not through begging but through sheer will and determination. After the Korean war, in which the country split into two, North and South, the government of South Korea took drastic measures to invest into production. With the taxes from these factories, they invested in their citizens by funding better housing and making schools mandatory. Slowly the country moved from cheap labour to higher paying jobs. This created a boom like no other. A country torn by civil war, split into two parts with no natural resources – sound familiar?
While there are no truly perfect examples of countries Somalia can follow, there are certain methods. One of those methods is not the current type foreign aid we have in Somalia. We have tried following that method for the last 20+ years to no avail. What we need in Somalia is for the citizens to recognize their government and hold it accountable. We need to leave behind this anarcho-capitalist way of thinking and come back to the real world. Nothing will change if Somalis themselves don’t change. Also developed nations must be truthful in their actions and admit that there actually is a price on poverty and that is losing our own jobs and industries to cheaper labour markets.
The author studies at Aalto university