Is foreign aid doing any good in Africa?

[Eddie Dane]

I know little about the subject, so the objective here is to educate myself.

My wife works for an aid organisation. Although I never say so, I'm highly sceptical of the use of the activities they deploy. She and her colleagues are very motivated, well meaning people.

One of the things that feeds my scepticism is the following:
Setting up a school in Africa is a good thing, but very cheap by western standards. I guess you could plonk down a functional school building in Congo for about a thousand Euro. But running the organisation that sets such a project up is quite expensive. Requiring an organisation with educated full time employees and an office building in a Western city.
What follows is that a significant part of the donations and subsidies go to running the organisation itself.

all the people who work with my wife accept a salary that's lower than it would be if they'd work for a commercial organisation. But they still have a director who drives a decent car.

I'm also shocked by some of the projects I hear about. BBC radio recently did an item about a bus that tours Rwanda. In the bus there are desks and computers so that people in villages can experience working with a computer.
Why? Well, most of Rwanda has no access to electricity, so this is the way to teach people about computers. I just went WTF! Shouldn't they be teaching basic agriculture, literacy and bicycle repair? You know, stuff people can use?

And what happens to a local economy when a ship full of food shows up and starts handing out grain? Will that economy still have traders and farmers after a few years of being on the dole?

I'm sure there are bad organisations and good ones. I'm inclined to think micro credit is a good idea, (thinking of donating) but I'd like some good information about it.

So, I'd like to discuss the good, the bad and the ugly in the world of foreign aid.

Did anyone here look into the issue and to what conclusions did you come?

 

[shuize]

I agree with you about micro credit. In fact, I tried to open an account with Kiva a few months ago. That didn't turn out so well. There was a problem with my credit card (I think it was because I tried to use a U.S. card from Japan, but I can't say for certain since I use it to buy from Amazon in the States all the time), and I was unable to make the minimum credit card payment of a few hundred dollars to open an account. I emailed them and offered to write a check but they responded that they'd only take a check if it was for a minimum of $1,000 USD.

WTF?

Here I am trying to give them money and they basically told me to piss off if my check wasn't big enough. Hey, Kiva, don't take my money. That'll sure show me ... ?!?

I guess I post all of this to say, I think some of the aid organizations really have their heads up their asses.

 

[Francesca R]

WTF?

Here I am trying to give them money and they basically told me to piss off if my check wasn't big enough. Hey, Kiva, don't take my money. That'll sure show me ... ?!?

I guess I post all of this to say, I think some of the aid organizations really have their heads up their asses.

It's a non-profit firm. If it incurs high costs processing squillions of cheques for $200 each then maybe it would have to charge loan-shark interest rates to get that back. But no worries, you've got a copper-bottomed case for trashing them now, right?

 

[shuize]

It's a non-profit firm. If it incurs high costs processing squillions of cheques for $200 each then maybe it would have to charge loan-shark interest rates to get that back. But no worries, you've got a copper-bottomed case for trashing them now, right?

Yeah, have it your way. I'm the bad guy.

 

[WildCat]

IShouldn't they be teaching basic agriculture, literacy and bicycle repair? You know, stuff people can use?

People in Africa are quite able to grow crops. What they aren't able to do is compete in the world market with the heavily subsidized crops from the US and Europe.

It's even worse when these places, out of the goodness of their hearts, dump donate their excess crops into Africa. Then the African farmers can't even sell their crops there, because you can't compete with free.

The best thing that could be done to help Africa would be for the US and Europe to end their agricultural subsidies. Besides being a wasteful use of tax dollars at home they are destroying the economies of developing nations.

 

[Last of the Fraggles]

I'm sure foreign aid is doing 'good', what I'm not so sure about is if it is making any long term difference.

If we just left them alone to sort themselves out would that improve things or make it worse? Not sure of the answer there either.

 

[GreyICE]

Yeah, have it your way. I'm the bad guy.

Why does this have to be about bad guys? Maybe you're a good guy, and they're a good organization, and logistical difficulties made things tough for both of you.

 

[Matty1973]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back. Of course there are reasons for it - high costs of managing small loans, local inflation rates etc and it does compare favourably to the other local borrowing sources which are something like an average of over 80% APR.

I have made a few loans through them and am very impressed with the way the whole thing operates but once I found out the rates borrowers have to pay I stopped putting more money into the account. Having said that none of my borrowers have defaulted so far so I guess they do find it a viable.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

 

[Matty1973]

Looking slightly closer on the site the rate is actually 35.38%.

This is how they define it:

Average Interest Rate and Fees Borrowers Pay (Portfolio Yield):
Kiva uses a calculation called "portfolio yield" to express the average interest rate and fees that Kiva entrepreneurs pay to the Kiva Field Partner administering their loan. Portfolio yield is defined as all interest and fees paid by entrepreneurs to the Field Partner divided by the average portfolio outstanding during any given year.

The portfolio yield is a better indication of the cost of borrowing money from a Kiva Field Partner than the simple interest rates reported by our Field Partners because it:

includes any fees associated with loans and
is expressed in one-year increments (similar to the way an APR works)
For more information about portfolio yield and interest rates, please visit the Kiva Help Center and click "Interest Rates/Portfolio Yield".

 

[Last of the Fraggles]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back. Of course there are reasons for it - high costs of managing small loans, local inflation rates etc and it does compare favourably to the other local borrowing sources which are something like an average of over 80% APR.

I have made a few loans through them and am very impressed with the way the whole thing operates but once I found out the rates borrowers have to pay I stopped putting more money into the account. Having said that none of my borrowers have defaulted so far so I guess they do find it a viable.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

So once you determined that this option was better than all the other options that may or may not have been available you decided to stop funding it?

I had a look at this Kiva site and it looked interesting but I couldn't find if the donators received interest on their loans or not. Can anyone clarify?

 

[geni]

People in Africa are quite able to grow crops. What they aren't able to do is compete in the world market with the heavily subsidized crops from the US and Europe.

It's even worse when these places, out of the goodness of their hearts, dump donate their excess crops into Africa. Then the African farmers can't even sell their crops there, because you can't compete with free.

Questionable. In recent years we've become fairly good at limiting food dumps to where their is an actual shortage. It is posible for african farmers to make money. For exampler zimbarwe before the place got more messed up than usual.

The best thing that could be done to help Africa would be for the US and Europe to end their agricultural subsidies. Besides being a wasteful use of tax dollars at home they are destroying the economies of developing nations.

Every time we suggest that the french start setting fire to things.

 

[Bob from NJ]

How much are corrupt African governments to blame for the bad situations?

 

[Francesca R]

Talking of Kiva something that surprised me was the interest rates charged to the borrowers. I think the average is over 25% APR (it is on the site somewhere) which must make it difficult to pay back.

I don't have a source, but I think that typical rates on micro-lending are a lot higher than that.

once I found out the rates borrowers have to pay I stopped putting more money into the account.

That is mystifying, unless you've found a way to lend direct and only charge 5%.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

Not really. Similarly, for billions of people, a great way to help them would be to find them a job that paid $2 per day. Great compared to not doing anything that is.

 

[Francesca R]

How much are corrupt African governments to blame for the bad situations?

Neither guns nor butter would melt in their mouths.

 

[Matty1973]

So once you determined that this option was better than all the other options that may or may not have been available you decided to stop funding it?

I had a look at this Kiva site and it looked interesting but I couldn't find if the donators received interest on their loans or not. Can anyone clarify?

I had already funded the account when I quite naively thought that since the donators don't receive interest that means the borrowers are not paying interest. When I found out the rate charged was so high I thought twice about putting in a further larger amount as had been my original intention.

I did try and persuede my dad to also join but it is very hard to explain the system with out sounding like a loan shark when you are suggesting money should be loaned to the poorest people on the planet at rates that are quite simply uncomfortable.

One good thing about the Kiva website is that it is very easy to relend money as it is gradually paid back by other borrowers. Rather than withdraw the money you just pick another borrower and it goes out to them right away. So for now I'm sticking to that. Pretty much every month enough gets repaid by the current borrowers to lend enough (minimum $25 of the total loan) to a new borrower.

 

[Fronzel]

How much are corrupt African governments to blame for the bad situations?

I'd say somewhere between 99 and 100%.

Not only that, but foreign aid helps them maintain their rule and petty little wars.

 

[JJM 777]

And what happens to a local economy when a ship full of food shows up and starts handing out grain? Will that economy still have traders and farmers after a few years of being on the dole?

Many politicians inside and outside of USA have complained about USAID practice of sending American food to Africa, which dumps the price of food for the local farmers in Africa, instead of sending money to Africa to buy the local food for a fair price.

European mainstream politicians complain that this American practice is a clandestine form of farm subsidies, and thus a breach of the trade agreements between EU and USA. This is typical America: talk about free trade to others, while subsidizing and protecting your own market as much as you ever can.

 

[Matty1973]

I don't have a source, but I think that typical rates on micro-lending are a lot higher than that.

Kiva did use to have some information regarding the typical rates charged in each local community displayed next to the rate charged by the Kiva lending partner. Typically from memory the rates were between double and quadruple the Kiva rates.

Now however they have a comparison described as "Median for MFI Peers in Country" which appears much lower than the rates they listed previously. To give some examples for some of my loans: Cambodia Kiva partner lends at 29% & the country median is 36%. Nicaragua it's 17% compared to 31% and worryingly in Senegal its 25% when the country median is only 20%.

That is mystifying, unless you've found a way to lend direct and only charge 5%.

If Kiva had been more upfront about the rates borrowers pay then I would have been less alarmed when I found out. All the information is there on the site if you know where to look for it but I'm quite sure a large proportion of the lenders are unaware of the rates charged on money they lend for free.

It does seem amazing that the best way to help the developing world is to charge the locals 25% APR.

Not really.

If that really does not amaze you then you are clearly a lot wiser and financially savvy than I am.

 

[geni]

I'd say somewhere between 99 and 100%.

You will withdraw that insult. Even the French empire was more competent than that. The idea that the colonial administrators were so bad at their job that their work could be entirely undone within a few decades is deeply insulting to those hard working men and the latter business expat communities.

Not only that, but foreign aid helps them maintain their rule and petty little wars.

Hey. People were makeing serious money looting the DRC. Hardly petty. Got any electronics that contain Tantalum? You sure the stuff wasn't worth fighting over?

 

[rjh01]

I'd say somewhere between 99 and 100%.

Not only that, but foreign aid helps them maintain their rule and petty little wars.

I would second that answer.

Also I suggest that China has received very little foreign aid since 1990, yet in now the economy is booming and has been for many years (from a very low base). So foreign aid is not needed for development.