Does development aid do any good?

Africa needs free trade, not aid. That's according to Barack Obama and the author of a recent book. Are they right? Jody Clarke reports.

Why is the aid debate hotting up?

In a speech critical of Africa's dependence on international aid, US President Barack Obama told an assembly in Ghana this week that "Africa's future is up to Africans". Declaring that "Africa doesn't need strong men, it needs strong institutions", he asked why it is that South Korea is now far richer than Kenya, even though the opposite was true 50 years ago.

His speech comes on the back of a raft of recent books and studies suggesting that international aid to Africa is stifling economic growth.

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So aid does more harm than good?

So critics say. They've long argued that aid fosters dependence on rich donors, stifling entrepreneurialism. It also props up corrupt governments who "interfere with the rule of law, the establishment of transparent civil institutions and the protection of civil liberties, making both domestic and foreign investment in poor countries unattractive", argues Dambisa Moyo, in her book Dead Aid. As Obama pointed out in his speech, "No business wants to invest in a place where the government skims 20% off the top."

What does the aid community think?

Many African countries can't reach the bottom rung of the economic ladder because they lack the most basic infrastructure, says economist Jeffrey Sachs, author of The End of Poverty. He says the aid taps should only be turned off once poor countries have had a sufficient leg up. This would involve more than doubling global foreign aid to $150bn a year. Do that, he says, and extreme poverty (that's the 1.1 billion people in the world who live on less than a dollar a day) would be eliminated by 2025.

More money really does help, says Paul Collier, director of the Centre for the Study of African Economies in Oxford. "A reasonable estimate is that over the last 30 years [aid] has added around one percentage point to the annual growth rate of the bottom billion," he says in his book, The Bottom Billion. According to the International Monetary Fund, Sub-Saharan Africa will grow by 1.7% this year as much of the rest of the world contracts.

So who's right?

In 1967, Zambia, a one-party state until 1991, had a per capita income of $200 compared to South Korea's $120. Today, the average Zambian earns $490 a year; his South Korean counterpart earns $19,231. Yet aid from rich countries to Africa hit its highest level ever last year at $26bn, up 10.6% on 2007.

Part of the problem is that donors seem to care more about how much is spent, rather than what it's spent on. There are instances where targeted aid is useful, for example in funding HIV/Aids programmes (see below). But as much as 85% of aid flows are used for purposes other than that for which they were first intended, according to a World Bank Study.

This lack of accountability is why Moyo, and others such as William Easterly, author of The White Man's Burden, argue that only free-market reform can help Africa. As a continent that is home to 20% of the world's population, but has just a 2% share of its trade, there is a huge opportunity for trade growth in Africa.

What do Africans think?

Many are starting to support more trade. The free market isn't perfect because it's not free. As Moyo says, Western sugar subsidies have cost Ethiopia, Mozambique and Malawi $238m in total since 2001.

But it's not just international trade barriers. As Franklin Cudjoe, of Ghanaian think-tank Imani Centre for Policy & Education, says: if Africa scrapped regional trade barriers, it would earn an extra $1.2bn a year.It costs $1,500 to ship a car from Japan to the Ivory Coast, but another $5,000 to move it to Ethiopia from there.

What's more, a wealthier Africa could turn to international bond markets to raise money instead of requiring aid. Zambia did this in 2007. Looking for $750m, it was heavily oversubscribed to the tune of $5bn.

So is trade growing?

The picture is mixed. Rwanda and Burundi recently joined the five-nation East African trade community, giving them access to 120 million customers. But elsewhere, protectionist forces are growing amid the global slump, the African Competitiveness Report 2009 has warned.

However, Africa's leaders seem to be coming round. Liberia's Ellen Sirleaf-Johnson has called for her country to become self sufficient; Rwandan President Paul Kagame reportedly bought every member of his cabinet a copy of Moyo's book. "No country can depend on development aid forever," Kagame recently told Fast Company. "Such dependency dehumanises us and robs us of our dignity."

Does aid work?

Yes

1. Opportunities for trade are often limited because of regional and international trade barriers.

2. Many African countries lack the basic infrastructure, such as roads and telecommunications, required to trade successfully.

3. Targeted aid, such as that for treating HIV/Aids, can help where governments lack money and skills.

No

1. It fosters dependence, and props up corrupt regimes. Aid can end up in the pockets of corrupt government officials, as when Congo's President Mobutu Sese Seko used aid money to hire Concorde for his daughter's wedding in the 1980s.

2. Aid is often misspent, even when distributed honestly.

3. Free trade has been proved to work in southeast Asia.