Trade Not Aid – A Rallying Cry That Sounds Like A Good Idea.

“Trade Not Aid”

This has become a rallying cry for a number of causes and businesses.  It sounds like a good idea, particularly as it appeals to the Protestant ethic of work over charity as the preferred means of economic advancement.  But both terms in the equation are loaded with history and ambiguity.  This two-part essay dissects the argument and demonstrates that some aid is detrimental and some trade is beneficial but like with everything else in the world, simple formulations are simplistic and simplistic ideas are dangerous.

Part I: Why Not Aid?

Imagine this scenario…

It’s 1980, you work for a struggling company and the owner-President decides one day he’d like a new car but he doesn’t have enough money to buy one.  So, he goes off to negotiate a big financing deal with the car dealership and comes home with his new luxury sedan.  He makes some of the payments but quickly finds himself in a position where he can’t afford to pay for his car.  After missing a few payments, the car dealership sends in their collection agency who negotiates a deal by which the company, the one you work for, will assume the debt of the President.  All the employees have their pay docked in order to make the payments, but of course, none of you have ever actually driven the car.  Now, 10 years later, that President has left the company, the car was sold to give him a little travel money, and the company is still trying to pay off the debt.  Every time the collections agency renegotiates the loan, they capitalize the interest meaning that they add accumulated interest on to the principle owed by the company and negotiate a new rate of interest and payment based on this larger amount.  It’s the year 2000, you’ve retired and your children now work for this company and their wages are about the same as you made back in 1960.  Further, your pension is nearly non-existent because the debt for the car has grown so large that the pension fund has been liquidated to cover interest payments alone.  The press is saying your company is irresponsible because they continually miss payments or ask for extensions on their loans.  The original loan for the car was $25,000, your company now owes $100,000 even though it has paid a total of $35,000 over the years.  Oh and by the way, last seen, the President was holding down a cushy vice-presidency at the head office of the car dealership…Does that seem right to you?

If you’re scratching your head, trying to do the math or even figure out the ethics of this situation, then you’re in good company with a number of human rights agencies in developing countries who are questioning the ethical and mathematical reality of crushing foreign debt.  In the real world, Presidents are sometimes presidents of countries and sometimes presidents of private companies who eventually pass on their private loans to the public purse.  The car dealership represents Export Credit Agencies, arms manufacturers and other private industry, governments or banks in the developed world.  The collections agency is the International Monetary Fund (IMF) and the workers in the company are the citizens of debtor nations who are forced to accept structural adjustment policies in the name of paying the debt.  These adjustments have meant that real wages are at their 1960 levels and what few social services like education and health care that exist have been cut drastically in order to free up government money for debt service.  Further, these countries are forced to open their borders to foreign imports and investment, which cripple national and local industry, all in the name of acquiring foreign currency to pay the debt.

To give you an example of the lunacy of foreign debt, in 1982, Ecuadorowed US$6.3 billion. Between 1982 and 2000, it paid US$75.9 million as debt service and received US$65.7 million in new loans.  Thus, US$10.2 million was transferred to creditor agencies, banks and countries.  But, as of 2000, Ecuador’s foreign debt was a whopping US$13.6 billion dollars meaning that it had almost doubled despite the net transfer of money out of the country.  Put this way, it makes no sense.  To study a real life example, go to “CDES Ecuador Norway Debt.pdf” [link to annotated pdf page here] which details the case of a loan from Norwegian shipbuilding companies to an Ecuadorian banana company to buy four ships.  The company disappeared, as did the ships, and Ecuadornow owes US$50 million on an original debt of US$13 million (having paid back US$14 million) which they assumed from a private company under pressure from the IMF.[i]  The ultimate irony in all of this is that most of the loans from northern banks and credit agencies are called “aid” or “development assistance” despite the fact that the only development they assist is our own!

Let’s consider one more example of real life aid to drive home the point.  Way back in the 1970s, the World Bank was pushing large infrastructural development in poor countries to facilitate production for export.  One such project was the damming of the Senegal Riverto create irrigated farmland which would produce wheat and rice for export and make the river navigable for commercial purposes.  Three countries, Mali, Senegaland Mauritania, participated in the project because they all share the river.  The Manantali dam[ii] was built inWestern Mali and the Diama dam was constructed at the mouth of the river at the Atlantic coast to prevent salt water from seeping up the river with the reduced current.

Twelve donor countries and agencies (including CIDA who contributed US$46 million) gave ‘aid’ money to the project which means they paid their own companies to participate in construction but counted that money as part of bilateral loans to the three African countries – who themselves paid into the project.  Construction started in 1981 and was completed in 1988.  At that point, the river was not navigable, the slowed current facilitated the spread of malaria, schistosomiasis and bilharziasis, coastal fisheries were damaged and only 1/3 of the proposed irrigable land was irrigated.  It should be noted that when the river was not dammed, annual flooding of theSenegal Rivercovered 350,000ha with silt and nutrients for free and now farmers had to pay for diesel pumps to irrigate their lands – a cost many simply could not afford.

To make matters worse, the Mauritanian Moor (Arabic speaking) elite decided to oust the sub-Saharan Black minority who lived along the northern bank of the river so that they could benefit from the new irrigation system.  Some 70,000 Black Mauritanians were displaced, thousands were killed and injured and no one paid attention because coincidentally, a wall was crumbling inBerlin.  All told, about half a million people were worse off than before.  Wait, it gets even better…

In the 1990s, the World Bank and other donors realized that the project was a flop both financially and in terms of development of the region.  They put their thinking caps on and decided the whole thing could be turned around if the Manantali dam was converted into a hydroelectric generating station.  The electricity would be used by the capital cities ofMali,MauritaniaandSenegaland the money generated by its sale would help these countries pay off the debts created by the original dams and irrigation project.  In 1997, CIDA joined the list of donors, contributing US$30 million, along with the World Bank, African Development Bank, France, Germany, European Union, Islamic Development Bank, West African Development Bank andCanada’s EDC provided credit risk insurance to Canadian companies involved.  CIDA’s ‘aid’ package of $30 million was dispersed to SulzerCanadaofBurnabyBC($19.8 million) for turbines, to Tecsult International of Montreal ($6.8 million to install and supervise the turbines) and to Roche International of Sainte Foy QU (undisclosed amount to do a fisheries study).  That means more than US$26.6 million of this ‘aid’ package went directly into Canadian coffers.

Part of the plan with the new development was to reintroduce the annual flooding of the river to help farmers in the river valley.  However, only 30,000ha would be flooded two years out of three, and 50,000ha once every 10 years – hardly a return to annual flooding of 350,000ha.

In 1999, Hydro Quebec and a subsidiary of Suez Lyonnaise of France bought 34% of Senegal’s power company SENELEC which was to receive approximately a third of the power generated by Manantali and were planning to buy up to 49% once Manantali came on line .  So while the idea was to provide income to these states to allow them to pay their debts – money that largely enhanced foreign businesses in the first place – other institutions like the IMF were insisting that these countries begin to privatise state assets like electric companies so that much of the profit would flow out anyway!  Fortunately, President Wade ofSenegalterminated the privatization deal because in the short time (21 months) that the Canadians and French had participated in SENELEC, deteriorating equipment was not being replaced, local employees had been replaced with more expensive ex-patriot labour and local contractors had lost out to foreign suppliers.

So the moral of the story is that bilateral (between governments) and institutional (banks) aid is really just a way for developed countries to promote their own interests while increasing the indebtedness – and therefore the dependence – of southern countries, usually destroying jobs and subsistence along the way.

These stories are the norm rather than the exception and they affirm that large scale aid not only doesn’t benefit most of the people most of the time, but is downright immoral.  Of course, there are literally thousands of organizations who do promote positive development around the world on a much smaller scale and we should not impugn their version of aid in rejecting the usurious and sometimes murderous versions promoted by banks and governments.  Unfortunately, most NGOs are hamstrung by a lack of funds because they are not good business investments that return instant profits; their returns are vastly more significant in terms of improved quality of life but economists rarely devote much energy to measuring such things and investors do not consider a better global future adequate payback.

[i] Information for the Ecuador example comes from Centro de Derechos Económicos y Sociales (CDES Ecuador). 2002. “Upheaval in the Back Yard: Illegitimate Debts and Human Rights, The Case of Ecuador-Norway.”

[ii] Facts for the Manantali example come from NGO Working Group on the EDC. 2001. “Reckless Lending II: How Canada’s Export Development Corporation Puts People and Environment at Risk.”


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