Should World Bank give aid to Africa?

There is one school of thought, championed by economists like Jefferey D.Sachs, advisor to Kofi Annan on Millenium Development Goals and Jean Dreaze (advisor of Sonia Gandhi - championed the Rural employment Guarantee scheme, pseudo-socialist in my opinion) which says that developed nations should share their spoils with developing and third world nations so that they can be lifted out of poverty. The idea of 0.7% GDP contribution came from leaders like Tony Blair and billionaire philanthropists like Gates and Buffet in the G-8 summit last year. Jeffrey Sachs also came up with innovative ideas like transit fee for all trans-national air traffic, international vehicle licenses to fund this Aid Africa effort and write off African debts. Their economics is compelling and intentions noble, but does Africa deserve it?

True, a debt write-off may greatly reduce the burden off the shoulders of the governments, but such efforts are not new. World Bank has always assisted Africa with soft loans with pay back period of 25 years or more with interest of guess what, 0.75 percent!!! If these nations had just put the money in US T-bills which yields anywhere between 2.5-3% based on fed interest rates, they would have still paid back the money. But why haven’t they?

Most of these nations are run by autocratic governments who wouldn’t care less about people and divert the loans to fund their luxuries (remember Idi Amin?) And these nations don’t have strong democratic institutions – courts, election commission and the like. Nehru was a dreamer and glib talker but he was right once, when he said ‘Strength of Indian democracy is its institutions’. This is why India, for all its corrupt political and bureaucratic systems, has never defaulted in its international loan repayments, even during 91’ crisis. World Bank, which now thinks about writing off African debts, charges whopping 10% or more interest to loans given to India. All this to cross-subsidize African bad debts. India should never privy to this.

So what should be done? Not all African nations are run by autocratic regimes. Nigeria is poor despite good institutions and vast reserves of oil. Such nations should be eligible for debt write-offs and others contingent to their cleaning up their systems. This would prove a sufficient incentive for autocrats to mend their ways. Gadaffi, after facing international isolation for long, recently confessed to 1998 US embassy bombings in Libya and agreed to pay compensation to victims.

Carrot and Stick sometimes works better than one-size-fits-all approach.