Aid has failed the Pacific

This paper argues that far from helping the Pacific to grow, aid has damaged it and Australian policy makers will have to change aid policies accordingly if they are to combine compassion with effective economic policy.Since 1970 the Pacific has received US$50 billion in aid. But because aid flows are not earned income, they create economic ‘rents’ that distort economies. Aid flows are fungible. They can be spent on projects and programmes of the recipient’s choosing—on consumption rather than investment. Because they bias an economy against the private sector, they undercut employment and growth and lead to corruption. Super-profits from rich mineral deposits similarly create economic rents that also have negative economic effects, leading to public waste.The Australian stance most likely to be effective would be to suspend all aid and thus to provide the catalyst for change. A softer alternative, still taking into account the potentially damaging effect of aid, would be to insist on the principle of mutual obligation in Australian aid to the Pacific. Australian aid funds must be removed from Pacific island budgets where they encourage waste and corruption. Aid should only be spent on mutually agreed development projects and programmes designed and monitored by teams nominated by the sovereign recipients and donors. Funds should only be disbursed on the evidence of met targets and audited expenditures. Without such changes, Australian aid will continue to damage the Pacific. For greater aid efficiency and effectiveness, Australia should move funds from multilateral to bilateral aid. Experience has demonstrated that Australia cannot rely on the IMF, the World Bank and the Asian Development Bank for the conditionality that was supposed to make aid effective. These organisations have their own internal agendas that have failed to stimulate growth and have led the Pacific into debt. Loans have also been spent on consumption and are hence unsustainable.