India to Britain: Your Money Is No Good Here

The flap between Britain and India shows that foreign aid is about elites, not the poor.

It is customary in India to refuse a gift several times before reluctantly accepting it. But India wasn't playing social games recently when it tried in vain to end decades of British giving. What this flap eloquently demonstrates is the futility of foreign aid: Countries that most need it can't use it effectively, and countries that can use it effectively don't need it.

Evidently President Obama hasn't learned this lesson yet, given that his 2013 budget proposes to up, rather than end, America's overseas noblesse oblige.

A memo leaked to the British press this month revealed that Indian Finance Minister Pranab Mukerjee last year asked Britain to stop sending aid. England's $440 million annual commitment, he maintained, was "a peanut" in India's total development expenditure and not worth perpetuating the image of India as a poverty-stricken country dependent on foreign alms.

But the British aid establishment—including the administration of Prime Minister David Cameron, a Conservative—begged India to reconsider. The U.K. Department of International Development pleaded that canceling the aid would cause the British government "grave political embarrassment," since it had expended significant "political capital" selling it to voters.

In other words, the point of the aid wasn't to save India's poor but to save British face. It wasn't about making India's impoverished feel better, but making the British establishment feel good.

But if England's aid is about national aggrandizement, so is India's refusal to accept it. Even though India has cut the ranks of its poor in half since it liberalized its economy, well over a third of its population lives on less than $1 a day. There are more people living in abject poverty in three Indian states than in all of sub-Saharan Africa.

So why would a government that truly cares about its poor not accept help on their behalf? Because it doesn't care. India's ruling classes largely represent the aspirations of the country's middle classes and nouveau riche. And they are so inured to the poverty around them that it is no longer even visible to them. Malnourished children with distended bellies begging at traffic lights might shock outsiders. But Indians, as V.S. Naipaul observed in An Area of Darkness, have a unique gift of not seeing the disagreeable right under their noses. Hence they can honestly believe that changing India's image as a poverty-stricken country requires not actually alleviating poverty but expanding their chests in a collective show of pride and spurning aid. But what India won't confront, it can't cure.

If this doesn't prove that India's lopsided national priorities make it an unfit candidate for aid, consider this: Buoyed by its post-liberalization economic growth, it has decided to emulate its Western benefactors and dole out money to other poor countries (not to mention vanity space projects). It is now a net donor rather than a recipient of foreign aid, accepting development assistance from only five countries that it regards as worthy donors and giving assistance to 23. Its aid to Africa has been growing 22 percent every year. It is the fifth-largest donor to Afghanistan, giving it several billion dollars since 2001 to build highways, hospitals and other infrastructure projects, something it's also been doing in Nepal, Bhutan, Bangladesh and Sri Lanka. Ironically enough, it is even establishing an agency to ensure that its aid isn't misappropriated by corrupt governments.

That, of course, is a problem that India knows a little something about. From 1951 to 1992, India received $55 billion to provide schools, hospitals and other basic facilities for the poor, making it the world's largest recipient of foreign aid. But India's late Prime Minister Rajiv Gandhi himself acknowledged that bureaucrats entrusted with the aid pocketed much of it, with only about 15 percent reaching its intended beneficiaries. For example, an investigation by India's auditor general found that education chiefs used British aid meant for TVs in classrooms to buy themselves cars.

The bigger problem is not the foreign money that is abused, but that which is not. Aid inevitably props up the status quo, thwarting broader reforms. It is widely accepted, for example, that foreign aid gave India's misguided Fabian socialistic model of development much more staying power than it otherwise would have had. In a bid for economic self-sufficiency (and oblivious to the contradiction), India closed itself to trade with the outside world, opting to produce capital equipment needed for industry and agriculture itself rather than buying it more cheaply from abroad. The upshot? Prices for food, clothes and other basic goods soared, putting them out of the reach of everyone except the relatively well off. India's recent progress in eliminating poverty occurred because it scrapped such failed policies, not because it suddenly started using aid more effectively.

Western aid regards poverty as a problem of money rather than of institutions. However, countries without functioning institutions can't use aid effectively, and the ones with them don't need it.

Professional British do-gooders obviously are undeterred by this truism. But so is Obama. He is requesting $56 billion for foreign aid next year—2 percent more than last year. There is no reason to believe, however, that other countries will use American aid any better than India has used British aid.

Scrapping it should therefore be a no-brainer for Congress. Further burdening debt-ridden Americans without doing a thing to help the poor abroad isn't generosity, it's vanity.

Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where this column originally appeared.