A recent article on the Economist magazine makes a very direct (if rather obvious, on the second thought) argument that diagnoses why underdeveloped states do not attract resources for development. Specifically, in underdeveloped states, there is complete lack of popular confidence on proper functioning of bureaucracies, enforcement of laws, and legal acknowledgement of written agreements as stipulated in their terms. The article seeks to establish that”lack of trust,” particularly on societal institutions, is the root cause of economic failures.  

There exists a systematic lack of trust in institutions that leads to an assumption that transactions, business or otherwise, will be incapable of being completed as intended.  The cost of transaction will be infinitely increased as investors deal with unmitigable risks of not being able to keep even initial capital (not to mention returns) sunk into the underdeveloped destination. In addition to this, the contractors and suppliers fear that the devoted labor and physical resources  will not be compensated by investors.  Owing to their appalling lack on faith in the legal institutions, for enforcement of their contractual obligations, legal institutions cease to develop in terms of accountability.

While the article goes to argue that use of technologies to make transactions more transparent, and thus more accountable, could increase societal trust in institutions, the author is more interested in something else related to his own work; how the presence of aid can help entrench a widespread sense of distrust in institutions.  For the purpose of this argument, “institutions” are defined as those formalised by the state as written rules for economic operations (laws, policies, and state players that are created by the local government to govern how businesses are to be conducted).

Persisting  weakness of state economic institutions has led to some NGOs being perceived as viable substitutes for the state.  But because NGOs have no intentions to replace the state (that obviously, would lead to the NGOs being shut down overnight) and in most cases, work outside state institutions, their operations alley the local populations from providing feedback to state institutions for improvements (and thus capacity to gain trusts).  After all, locals see a perfectly good alternative in an NGO’s presence for assistance, over having  the hassles of governmental displeasure.

Moreover, distrust in governmental institutions are furthered by the increase in trust, in feebler “institutional alternatives” offered by aid-giving organisations.  A simple example would be, the agricultural or educational subsidies through government programs usually involve lengthy application process, hampered by the monetary and political costs of getting needed approvals and documentations from relevant authorities.  In contrast, getting money from aid organisations is, more often than not, simply about begging harder and longer, triggering sympathetic response that lead to flexible change in “rules” that favor those who beg.

The trust in those ever-changing “rules” are backed by a change in reception towards emotional displays, usually through the means of shamelessly pandering a mix of factual and fictional economic difficulties at the individual level, fully believing that foreign aid organisations are basically charity cash cows with endless flow of cash to be doled out to the most needy.  In the process, the economic rationale of aid, needed to ensure hand-outs are used in the most productive ways, are scoffed at as mere “stinginess,” making government development programs using such methodology even less trusted by the populace.

Such ignorance among locals that aid is fundamentally not sustainable over time is difficult to dispel.  An aid-organisation that runs out of money is usually replaced by a whole bunch of other ones, even having their own “rules” of raining cash on poor communities.  This leaves the locals feeling much disincentivized to undertake regular profit-seeking business activities, dampening any enthusiasm for local governmental authorities to create better business environments through focus on institution-building.  As the focus dims, institutions languish, conceivably becoming even less trustworthy over time.

It is hard to say whether great reductions in aid will automatically lead to refocus on governmental institutions.  After all, institution-building requires resources, and aid-dependent economies will simply not have resources to spare when aid-giving stops.  At that time, riots by a populace used to asking money from foreigners are more likely to destroy, rather than help improve, whatever is left of the already weakened governmental institutions.  Ironically, if that happens, that will be owing to the popular trust in government capacity to alienate money-rich foreigners.

The author, Xiaochen Su, is a Chinese-American, an avid world traveler, a Yale and LSE graduate, and has worked in Japan, Korea, Southeast Asia, Taiwan, and is currently working in Africa.