Dead Aid; Why Aid Is Not Working and How There Is A Better Way For Africa, Dambisa Moyo, 2009

Africa is going through an economic revival based on the surge in commodity prices and a more open attitude to market-based growth accompanied by more predictable (stable) political environments. Yet, Africa still seems dysfunctional, not quite getting its foot on the economic ladder. Moyo sees aid as the reason, not the humanitarian or emergency aid programs that follow disasters, nor the charity-based donor programs that build some schools or dig wells, but large-scale government-to-government loans and grants that measure in the billions.

Aid, of this scale, started with the Bretton Woods agreement that established the IMF and World Bank (International Bank for Reconstruction and Development) primarily to rebuild a war-torn Europe. In Africa, and elsewhere, aid was a tool in the context of the Cold War, and the gradual releasing of colonial rule opened the government-to-government model to more African countries. By the 1970’s the focus of aid shifted form infrastructure building (roads, railways, water and sewage, ports, airports, power stations and telecommunications) to poverty relief. But aid money did not come for free. It came in the form of grants that had to be paid back.

Policy makers believed the path to economic prosperity started with governments at the centre but by the 1980’s policy makers saw this approach as a structural impediment to an open market. By 1989 the Washington Consensus on economic policy focused attention on governance issues. Poor leadership and weak institutions were (and still are) perceived as the chief impediments to prosperity.

So, why isn’t aid working? Reasons commonly put forward are geographical, historical, cultural, tribal and institutional, but don’t tell the whole story. While each of these reasons has some validity the common element in Africa is that nearly all the poor countries have been receivers of aid on a continuing basis for 60 years, permeating all aspects of the economy (civil service, political institutions, military, healthcare and education, infrastructure). Aid dependency is endemic.

Aid often has three conditions that attach to it. It is usually tied to procurement (from the donor country, of course); is usually targeted by the donor to their choice of project or sector; and requires the recipient country to agree to a set of economic and political policies (this usually means copying western democracy). However, aid-funded democracy may hamper development. Rival interests and competing loyalties often stymie progress if democracy is promoted too soon. Having a vote doesn’t feed a hungry family. Democracy isn’t the pre-requisite for economic growth. The reverse is.

Aid fosters corruption. Large inflows of capital into an economy with weak management structures underlies several problems. It reduces savings and investments in favour of consumption because of the availability of ‘ready money’; it is inflationary as price pressure mounts chasing scarce goods from abroad (tradables like TV’s, luxury clothes, tractors) and increases demand for local goods and services (non-tradables like haircuts, real-estate and food).

Suppose a corrupt official gets US $10,000 and buys a car. The car dealer buys new clothes. This knock-on effect puts pressure on prices down the line. Inflation then leads to raising interest rates, which means it’s more expensive to borrow and invest in new enterprises, so fewer jobs are created. More aid is needed.

Moyo suggests an aid-free strategy for financing whatever a country chooses, whether capitalist or socialist in political orientation. She offers a menu of alternatives to aid. Governments need money to provide the goods and services for their citizens especially where the private sector is not large enough to make big necessary investments (roads, railways, ports, etc.). Her suggestions include:

1. Issue government bonds for emerging economies instead of taking aid in the form of loans. This creates a history (rating agencies set risk rates on this) and experience in open market trading and it builds credit. The way to break into the market is to pool the risk (for example, the East African Union of Kenya, Tanzania and Uganda, or South Africa’s Pan-African Infrastructure Development Fund, PAIDF)

2. See Foreign Direct Investment (FDI) particularly from China as friendly, despite Western suspicions of insincerity. “No one can deny that China is at least in Africa for the oil, the gold, the copper and whatever else lies in the ground. But to say that the average African is not benefiting at all is a falsehood, and the critics know it.”

3. Trade deals are the future, like the one with China, announced in 2005, worth US $100 billion per year. There is room to grow trade (European Union 26%, US 18%, China 11%, the rest of Asia 11%). European and American trade barriers and subsidies for home-market goods remain a closed door. China is the future best trading partner, provided Africa can improve its infrastructure. India is another huge potential trading partner. So too, is trade between African countries.

4. The micro-loan movement (Grameen Bank); remittances from Africans abroad; increased savings and recognition of hidden investment potential (Hernando DeSoto: The Mystery of Capital) in unrecognized collateral.

 

See also: http://www.youtube.com/watch?v=dyf2Cf5GkTY

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