Skip to content

The Development Delusion: Foreign Aid and Inequality

During the last decades of the Soviet Union, technocrats in Moscow managed to prop up the failing regime by telling a story. They knew that the economy was falling apart, but they refused to admit it. Instead, they hired propagandists to convince the public that everything was still going according to plan, that the Soviet Union was stable and eternal. Their aim was to distract people from the complexities of the real world to prevent mass confusion, panic, and dissent from breaking out. Of course, everyone secretly knew that this story was false—an illusion devised for the sake of political control—but they went along with it anyway. They chose to accept the illusion as real, because the truth was simply too difficult to swallow. Alexei Yurchak refers to this effect as “hypernormalization” in his book about the paradoxes of life in the USSR, Everything Was Forever, Until It Was No More. In a state of hypernormalization, reality no longer matters—all that matters is the story.

At first glance, these tactics seem foreign to those of us who live in Western democracies. We associate them with opaque, totalitarian states. But in fact, the tools of propaganda are routinely used even by governments in North America and Europe. The United States, for instance, has a long history of deploying “perception management” strategies to shape public reactions to everything from domestic legislation to foreign wars, with varying degrees of success. But nowhere is hypernormalization more apparent—and more totalizing—than when it comes to the question of global inequality.

In January 1949, President Harry Truman took the stage for his inaugural address—the first to be broadcast on live television. Most of his speech passed without anything remarkable, but toward the end, he laid out a vision for a fresh new program, and for some reason it struck a chord. “More than half the people of the world are living in conditions approaching misery,” he said. “Their food is inadequate. They are victims of disease. Their economic life is primitive and stagnant.” But he offered hope. “For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of these people. The United States is preeminent among nations in the development of industrial and scientific techniques. . . . 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.”

The idea—what Truman called “development”—captured the public imagination, and the newspapers glowed with approval. No program actually existed, and the plans were vague at best; but that didn’t matter. What mattered was the story. It was powerful because it gave Americans a compelling way to think about the misery of the global South and the vast inequalities that marked the international order. The rich countries of Europe and North America were ahead on the Great Arrow of Progress. Their success was down to their hard work and their superior intelligence. By contrast, the countries of the South were still behind, “underdeveloped” and struggling to catch up. This story was deeply affirming for Americans. It made them feel proud of their achievements and of their place in the world. And it gave them a way to feel noble, too: the advanced nations would stand as saviors to the rest of the world, reaching out to aid the suffering masses, boosting them up the development ladder.

In other words, Truman’s story explained the existence of global inequality and offered a solution to it in a single satisfying stroke. The story was useful because it erased the long and violent history of entanglement between the West and the Rest. Truman wasn’t ignorant of that history. He knew that the United States had long been intervening in Latin America to secure access to the continent’s resources. Indeed, drawing on the Monroe Doctrine and the Roosevelt Corollary, the U.S. military was invading and occupying states like Honduras, Cuba, and the Dominican Republic even as late as the 1920s and 1930s, during Truman’s own political career—at the behest of American banana and sugar companies—and was propping up authoritarian regimes in Nicaragua, Guatemala, Venezuela, and Mexico. And, of course, European powers had been controlling vast regions of the South from as early as the sixteenth century, drawing on colonial resources and the products of the slave economy to leverage their own industrialization, with devastating consequences for the colonized: the genocide of indigenous Americans, the horrors of the Atlantic slave trade, policy-induced famines in British India, and so on.

But all of this was airbrushed out of the story that Truman handed down. It was all a matter of perception management.

About a decade later, in 1960, the economist Walt Whitman Rostow published a book titled The Stages of Economic Growth. He advertised the book as a “non-communist manifesto”: The idea was to convince poor nations that underdevelopment was a technical problem, not a political one. If they really want to develop, they just need to get their institutions right, implement free market policies, and follow the West’s path to “modernization”—or so the argument went. Rostow’s work quickly became popular at the highest levels of the U.S. government, as it pulled attention away from the unfairness of the global economy—away from any demand for justice—and focused instead on internal pathologies. President John Kennedy hired Rostow into a senior role in the U.S. State Department, and President Lyndon Johnson promoted him to National Security Advisor. Following Truman’s lead, Rostow turned the story of development into a public relations exercise—this time not for American ears but for the ears of the rest of the world.

Today, nearly seventy years after Truman’s speech, this story remains very much alive. We encounter it in ads from Save the Children and World Vision; we hear it from rock stars like Bono and Bob Geldof, and from billionaires like Bill Gates. But for most of us it appears most forcefully in the narrative of foreign aid. As in Truman’s original story, the idea of aid overrides any suggestion that Western powers are in any way complicit in the suffering of the South. Indeed, aid stands as irrefutable proof of Western benevolence. After all, rich countries give out about $128 billion in development aid to poor countries each year. This is an enormous amount of money—more than all of the profits of all of the banks in the United States combined. But if we take a moment to look more closely, we see that it is vastly outstripped by financial resources that flow in the opposite direction. In reality, rich countries aren’t developing poor countries; poor countries are developing rich ones. The discourse of aid obscures this difficult fact by making the takers seem like givers. It tells a comforting, affirming story, and people buy right into it. Hypernormalization.

Aid in Reverse

Western politicians love to celebrate their commitments to foreign aid. The Obama administration frequently spoke of how U.S. aid was transforming the lives of poor people in developing nations. So too with the Hollande administration, which hailed France’s aid to the former colonies of West Africa. And former prime minister David Cameron often spoke proudly of Britain’s record of aid and development in the South—from India to southern Africa. These claims go down well with most voters. But for anyone who pays attention to how the global economy really works, they ring more than a little hollow.

At the end of 2016, the U.S.-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics published an extensive report on global financial flows. They tallied up all of the financial resources that are transferred between rich and poor countries each year—not just aid, foreign investment, and trade, but also transfers like debt cancellation, remittances, and capital flight. Their calculations revealed that in 2012, the last year of recorded data, developing countries received a total of about $1.3 trillion in total inflows. But that same year, some $3.3 trillion flowed out of them. In other words, the South sent $2 trillion more to the rest of the world than they received. What this means is that developing countries are net creditors to the rest of the world—the exact opposite of the usual narrative. Indeed, since 1980, these net outflows have added up to a total of $16.3 trillion. To get a sense for the scale of this, $16.3 trillion is roughly the GDP of the United States.

What do these large net outflows consist of? Some of it is payments on external debt. According to World Bank data, developing countries pay out around $200 billion each year in interest alone, with most of it going to creditors in rich countries—a direct cash transfusion that far outstrips the aid that flows in the other direction. In all the years since 1980, the South has forked over an eye-watering $4.3 trillion in interest payments on external debt. Importantly, much of the interest being paid out today is being rendered on decades-old loans that have already been paid off many times over. And much of it is being paid on principal that was accumulated by illegitimate dictators—many of them propped up by Western powers—who have long since been deposed. In fact, around $700 billion of sovereign debt in the global South today is considered illegitimate or “odious” by international standards.

Another major source of reverse flow leaves in the form of profits repatriated by multinational companies operating in the developing world—a practice that has grown rapidly since capital controls were liberalized beginning in the 1980s. Multinational companies repatriate close to $500 billion each year out of developing countries, which outstrips the aid budget four times over and roughly matches or even exceeds the amount of foreign direct investment that the South receives. Think of all the profit that Coca-Cola extracts out of Central American sugar plantations and banks back home, for example, or the income that Total pulls out of West Africa’s oil fields.

But by far the biggest source of outflows has to do with unrecorded—and usually illicit—capital flight. GFI calculates that developing countries lose about $700 billion each year through a practice known as “trade misinvoicing.” Basically, corporations, both foreign and domestic, report false prices on their trade invoices in order to spirit money out of developing countries into tax havens and secrecy jurisdictions, like Guernsey or the British Virgin Islands. This is remarkably easy to do, as rules introduced by the World Trade Organization in the 1990s require customs officials to take invoices at face value, even when they are obviously distorted, so their hands are tied when it comes to suspicious transactions.

Losses due to trade misinvoicing outstrip the aid budget by a factor of five or more. But this is just the tip of the iceberg. Multinational companies also suck money out of developing countries through a practice known as “same-invoice faking,” shifting profits illegally between their own subsidiaries by mutually faking invoices on both sides. For example, a subsidiary in China might dodge local taxes by shifting money to a related subsidiary in Luxembourg, where the tax rate is effectively zero and where funds can’t be traced. Same-invoice faking is very difficult to detect, but GFI estimates that it costs developing countries another $700 billion per year.

And, crucially, GFI’s figures only capture outflows through trade in goods, not trade in services. To include outflows through trade in services, GFI argues we need to bump the figures up by 25 percent. If we do, it brings total net resource outflows to about $3 trillion per year.

That is a mind-boggling sum. Three trillion dollars outstrips the aid budget twenty-four times over. In other words, for every dollar of aid that developing countries receive, they lose twenty-four in net outflows, simply as a result of how the global economy has been designed by many of the very nations that so love to tout their foreign aid contributions. Of course, this is an aggregate figure; for some countries the ratio is larger, while for others it is smaller. But, in all cases, outflows strip developing countries of an important source of revenue and finance that could be used for development and investment. Indeed, the GFI report finds that increasingly large net outflows are linked to declining economic growth rates and falling living standards in developing countries.

A Dream Deferred

Looking at the real picture of global financial flows deals a shattering blow to the aid narrative. But to really understand the gap between rhetoric and reality, we have to look at the history of the past few decades.

As European colonialism in Asia and Africa began to collapse in the middle of the twentieth century, and as Franklin Roosevelt’s Good Neighbor Policy suspended U.S. meddling in Latin America and opened the way for popular movements to challenge authoritarian regimes, states across the global South found themselves free to determine their own economic policies. Many were quick to adopt Keynesian principles, which were popular at the time: progressive taxation, social spending, capital controls, land reform, and decent wages for workers. They wanted to build their economies for their own national good, rather than for the benefit of foreign powers. Refusing to be simply exporters of raw materials and importers of Western manufactures, they sought to industrialize on their own terms—and to do this, they made use of policies like nationalization, import substitution, subsidies, and tariffs.

This was the era of what economic historians call “developmentalism.” It was not perfect, of course, but for the most part it delivered impressive results. The global South enjoyed high rates of per capita income growth during the 1960s and 1970s, averaging 3.2 percent per year—double or triple what the West achieved during the Industrial Revolution and more than six times higher than what the South experienced under colonialism. Poverty began to decline, and the per capita income ratio between the North and South began to narrow for the first time in history, shrinking by around 20 percent.

What is more, countries of the global South were reaching out to one another to build a network of mutual support and alliance. The Non-Aligned Movement was formed in 1961 to reject colonialism and neocolonialism by great powers on either side of the Cold War divide. Before long, the movement came to include nearly every country of the global South and became a powerful force demanding sovereignty, nonintervention, non-racialism, and economic justice. Three years later, they formed the G77 to advance this vision at the United Nations. And in 1973, they affirmed these ideals in the halls of the UN General Assembly, with a successful declaration for a New International Economic Order (NIEO) that enshrined their right to determine their own macroeconomic policy without threat of foreign intervention.

The South was rising, and they were doing so with a vision that—in contrast to the Truman narrative—saw underdevelopment as a political problem that demanded political solutions.

Now, given their rhetorical commitment to development, one might imagine that Western powers would be pleased with the results achieved by postcolonial governments. After all, they were bringing about real transformation in the living standards of their people. But Western powers were not amused. Developmentalist policies were threatening their access to cheap labor, raw materials, and consumer markets across the South, eroding the foundations of the world system that they had come to rely on during the colonial era. Unwilling to let this continue, they intervened across the South to depose democratically elected leaders and replace them with regimes—generally dictatorships—that would be more amenable to Western interests. As Noel Maurer points out in The Empire Trap (Princeton, 2013), these interventions were typically triggered when Western assets were put at risk by land reform, nationalization, or capital controls.

It started in 1953. Iran’s leader, Mohammed Mosaddegh, was brought to power on a popular developmentalist platform. After his election, he introduced unemployment insurance, abolished forced agricultural labor, taxed land rents to fund social spending, and sought to renegotiate ownership of the country’s massive oil reserves. This latter move caught the attention of Britain, which had controlled Iran’s oil since 1913, and provoked a retaliation: With assistance from the CIA under the Eisenhower administration, the British Secret Intelligence Service toppled Mosaddegh in a coup d’état. In his place, they installed Shah Mohammad Reza Pahlavi, who rolled back Mosaddegh’s reforms and ruled the country as a dictator for the next twenty-six years, most of that time with U.S. support.

The Iran coup was the first move in what amounted to a war on developmentalism. There were many more to follow. One year later, the same story played out in Guatemala. Guatemala’s president, Jacobo Árbenz, had just begun a program of land reforms that shifted unused portions of large private estates to peasants who had been dispossessed during the reign of Jorge Ubico, a U.S.-backed dictator who controlled the country during the 1930s and 1940s. The Árbenz administration paid full compensation in the process, but this wasn’t enough to satisfy the United Fruit Company, an American-owned firm that had significant land holdings in Guatemala. At the behest of United Fruit, which had close ties to the Eisenhower administration, the CIA intervened to topple Árbenz and install a military dictator—Carlos Castillor Armas—in his place.

The Guatemala episode marked the official end of Roosevelt’s Good Neighbor policy and revived America’s habit of projecting military power across Latin America. The following decades saw many more such interventions. Brazil was hit with a U.S.-backed coup in 1964 that deposed João Goulart, another pro-poor reformer. In 1965, the United States invaded the Dominican Republic in order to quash a popular rebellion against the U.S.-backed military junta that controlled the country. And then, of course, there was Chile, which remains probably the best-known case. In 1973, the CIA lined up behind disgruntled national elites to support a bloody coup against Chile’s democratically elected president, Salvador Allende, who had been swept to power three years earlier on his promise to create an economy fairer to the country’s peasants and workers. He was replaced by military dictator Augusto Pinochet, who swiftly reversed Allende’s reforms and pried the economy open to U.S. corporate interests.

The war against developmentalism wasn’t limited only to Latin America. Belgium, Britain, and the United States intervened in the Congo in 1961 to assassinate the country’s first democratically elected leader, Patrice Lumumba, who they feared would loosen their grip over the region’s vast mineral resources, and installed Mobutu Sese Seko in his place—the cartoonishly corrupt dictator who immiserated the country over the course of three long decades. In Indonesia, the United States supported a coup against President Sukarno in 1965, the national independence hero who played a key role in mobilizing the Non-Aligned Movement, in a bloody mission that left 500,000 people dead. A year later, Britain and the United States deposed Ghana’s Kwame Nkrumah—another founding member of the Non-Aligned Movement and a leading critic of neocolonialism. In 1971, Uganda’s Obote was deposed by the British and replaced with the murderous Idi Amin. And France intervened across West Africa to install puppet leaders through the secretive Francafrique network, rigging elections in Cameroon, Gabon, and the Ivory Coast in support of leaders who would maintain France’s access to the region’s oil and other resources into the postcolonial era.

Of course, many of these interventions were conducted under the banner of the Cold War—in the guise of fighting “Communism.” Yet few leaders in the global South who were deposed during this period identified as Communist; for the most part they were explicitly nonaligned. Indeed, they were really only mimicking the Keynesian policies that the United States and Europe had used themselves to such great effect. If we pull away the rhetoric of the Cold War, it becomes clear that the coups had little to do with ideology, and certainly nothing to do with promoting democracy—quite the opposite! The goal, rather, was to defend Western economic interests. It is tempting to see this as nothing but a list of crimes, but it is more than that. It reflects an organized effort on the part of Western powers to crush the South’s one promising shot at development. They simply would not tolerate development if it meant shifting the balance of power in the global economy. Yet this bloody history is absent from the official development narrative.

An Adjusted World

The tactic of resisting the rise of the South through covert coups d’état worked well enough for a time, but it was a piecemeal effort. As the 1970s wore on and voters became more sensitive to issues of human rights and national sovereignty, Western powers began to view it as a politically risky strategy. They needed a new plan. In 1975, the leaders of the United States, Britain, France, Japan, and West Germany met at Château de Rambouillet in northern France to form the alliance that—with the later addition of Canada—would become the G7. On the agenda was the task of figuring out how to counter the rise of developmentalism and the NIEO. Henry Kissinger, the U.S. Secretary of State at the time, proposed to divide the G77 by using aid as an instrument of control. The idea was to create a new group of so-called Least Developed Countries—the poorest and most desperate members of the global South—and offer them aid in exchange for siding with the West against the rest of the G77. Aid would be wielded as a tool to shatter the solidarity of the global South.

Whether this strategy would have been enough to reverse the South’s rise will never be known, because only a few years later something happened that changed the course of international history forever, giving Western powers the decisive upper hand.

It began with the Volcker shock. In 1980, U.S. Federal Reserve chairman Paul Volcker suddenly raised interest rates to as high as 20 percent. The move was designed to attack stagflation in the United States, but it had consequences around the world. The interest rates on Third World debt skyrocketed in turn, and many developing countries slid to the brink of default. Wall Street banks, which were set to lose hundreds of billions if such defaults occurred, demanded that the U.S. government step in to protect them. And that’s exactly what happened. The International Monetary Fund agreed to roll over the loans of developing countries on the condition that they would adopt “Structural Adjustment Programs.” The idea behind structural adjustment was that debtor nations would cut social spending and privatize public assets in order to redirect money to their creditors. In other words, the U.S. government used the IMF to appropriate the resources of poor countries in order to bail out Wall Street banks. But they didn’t stop there. Structural adjustment also required that poor countries radically deregulate their economies, slashing tariff barriers, abolishing capital controls, abandoning subsidies, and curbing labor regulations, all of which had been instrumental to the gains achieved under developmentalism.

In essence, structural adjustment programs allowed Western creditors to assume de facto control over economic policy in developing countries. Power over macroeconomic decisions was shifted from national parliaments and elected representatives in capitals across the South to bankers and technocrats in Washington, New York, and London. It was a coup, this time bloodless and invisible, that reversed the developmentalist revolution in one fell swoop.

The IMF promised that these free-market reforms would make the economies of poor countries more “efficient” and would attract foreign direct investment, setting them on a path toward growth and development. But they ended up doing exactly the opposite. Per capita income growth rates plunged from an average of 3.2 percent during the developmentalist period to 0.7 percent during the 1980s and 1990s. In Africa, which was hit particularly hard, income declined by 0.7 percent per year, and the number of people living in absolute poverty doubled. Progress in development was stopped in its tracks. Robert Pollin, an economist at the University of Massachusetts, calculates that developing countries lost roughly $480 billion per year in potential GDP as a consequence of structural adjustment—five times more than they were receiving in aid during the same period.

Structural adjustment turned out to be the greatest single cause of poverty in the twentieth century, after colonialism. And yet it is absent from the dominant development narrative.

How could the IMF and the World Bank get away with these policies when they were clearly not working—indeed, when they were actively causing harm? It’s partly because they enjoy “sovereign immunity” status, which means they cannot be sued even when their policies create mass human suffering. But it also has to do with how voting power is apportioned. Each member nation exercises votes according to their share of financial ownership. All major decisions require 85 percent of the vote. Because the United States holds 16 percent of the shares in both institutions, it wields de facto veto power, while low- and middle-income countries, which together constitute some 85 percent of the world’s population, have only about 40 percent of the vote. In other words, even if every single country in the South united in disagreement with IMF and World Bank policy, they would not be able to change it.

There’s no reason to believe that the staffers who designed the structural adjustment programs had ill intentions. They probably thought they were doing the right thing, operating in line with the principles of neoclassical economics. But it is clear that the United States and the other rich nations saw the forced adjustment of the South as beneficial to their own economic interests. Struggling with stagnant growth during the 1970s, they needed a way to restore corporate profits, and blowing open the markets of developing countries provided the perfect solution. For one, it opened up a whole new field of assets that had been off limits to private foreign investment during the postcolonial years. Consider the fact that the World Bank privatized more than $2 trillion worth of public utilities and firms in the developing world between 1984 and 2012. But more importantly, it allowed Western companies to rove the South in search of the cheapest possible labor (with the added benefit, in turn, of breaking the power of trade unions and driving down wages back at home).

Taking advantage of these new opportunities, U.S. investments abroad quickly grew to more than $10 trillion, and the rate of return on those investments shot up from 5 percent to over 11 percent. Structural adjustment may have caused misery across the South, but it jolted Western capitalism back to life.

From Charity to Justice

According to official estimates, there are presently around 4.3 billion people in the world living on less than $5 per day—the absolute minimum that scholars say is necessary in order to achieve basic nutrition and something approaching normal human life expectancy. That’s about 60 percent of humanity. And the number has grown rather dramatically since official measurements began in 1980. Meanwhile, global inequality has been getting worse. The gap between the per capita incomes of advanced Western economies and those of developing regions like Latin America, Africa, and South Asia continues to widen and is now three times larger than it was in 1960, at the end of the colonial period. The only regions that have been able to buck this trend are China and parts of East Asia—the very regions that, for the most part, were never subjected to Western intervention in the postcolonial era.

With statistics like these at hand, we have to conclude that the development industry is failing at its most basic objectives, and it is failing because of its own story. By erasing history and politics from view, it refuses to recognize and act upon the real, structural drivers of poverty and inequality. Once we manage to shake off the analytical constraints that the development story imposes, we will be able to understand that if we are to have any hope of addressing persistent poverty in the South, we will need to change the balance of power in the global economy.

Let me be clear: I do not mean to say that endogenous problems play no role in poverty and underdevelopment, or that the governments of developing countries bear no responsibility for their own misfortunes. They do. But to stop there—as the development industry tends to do—leaves us blind to the broader forces that are much more causally significant.

There are many effective solutions we might consider. One would be to democratize the institutions of global governance—like the IMF and the World Bank—so that nations of the global South have a real voice when it comes to decisions that affect them. Or, alternatively, we could shift the development-related functions of the IMF and the World Bank to a more democratic institution, like the United Nations.

A second move would be to aggressively reduce the debts of countries in the global South. This would roll back the remote-control power that rich countries exercise over poor countries and restore sovereign control over economic policy at the national level. It would also free developing countries to spend more of their income on health care, education, and poverty-reduction efforts instead of just handing it over in debt service.

Third, we need to put an end to structural adjustment conditions so that developing countries can gain access to finance while retaining the right to use tariffs, subsidies, capital controls, social spending, and other measures they might need to manage their economies and reduce poverty. In the South, some hope that the New Development Bank and the Asian Infrastructure Investment Bank—both capitalized largely by China—might provide alternative sources of finance that don’t demand painful economic conditions, but it is too early to tell.

Fourth, we need to shut down illicit financial flows out of developing countries. There are a number of ways to approach this. We could stop trade misinvoicing by fixing the WTO’s customs rules. We could close the tax havens or roll out financial transparency rules that would put an end to shell companies and anonymous accounts. We could require multinational companies to report their profits in the countries where their economic activity actually takes place. Or we could impose a global minimum tax on corporations, which would eliminate their incentive to evade national taxes altogether.

These are all important first steps toward creating a fairer, more democratic global economy. And implementing them would not require a single dollar of foreign aid. But it will need a political struggle, for those who extract so much material benefit from the present system will not cede their power voluntarily. Indeed, it is this kind of challenge that the development story was designed to forestall.

This article originally appeared in American Affairs Volume I, Number 3 (Fall 2017): 160–73.

Sorry, PDF downloads are available
to subscribers only.


Already subscribed?
Sign In With Your AAJ Account | Sign In with Blink