Thursday, March 07, 2013

231. Dead Aid - Why Aid Makes Things Worse - and How there is another Way for Africa by Dambisa Moyo

Dead Aid - Why Aid is not Working and How there is another Way for Africa (Penguin, 2009; 208) by Dambisa Moyo takes a revolutionary look at how Africa's development is financed and whether aid has had any significant impact in Africa to merit its continuous existence.

Divided into two parts - A World with Aid (Part I) and A World without Aid (Part II) - Dambisa argues, with researched facts and figures to support her argument, that aid, instead of lifting the majority out of poverty, does nothing of that sorts and that  it could even make countries become poorer and become encumbered and frustrated with debt and its servicing. In Part I, she discusses the Myth of Aid, provides A Brief History of Aid, shows why Aid is not Working, and why it could be The Silent Killer of Growth. Her arguments are compelling and would make the reader think twice. Though I'm not capitalist in thought (I'm what one might refer to as a Social Capitalist - using a country's resources - human and material - to generate the necessary capital to trigger development, instead of relying on globalisation which can destroy a country) Dambisa's argument made me think some more. 

She describes the changing focus of aid as it shifted from infrastructure to poverty reduction in the late 1970s so that almost 50 percent of aid went to poverty reduction compared to 5 percent in the previous years. Regardless of this, poverty rates over the succeeding years skyrocketed and growth rates plummeted. The premise for Dambisa's Dead Aid thesis is that though several trillions of aid money have been pumped into the continent, there is nothing to show for it. Rather, African countries are so much riddled with debt that between 1987-1989 the cost of debt servicing became more than aid inflows to the tune of US$ 15 billion resulting in the net outflow of finance from poor countries to rich countries. According to her, donors give money to whoever is there to be given to. It matters not who the person is. In the Cold War, aid was used as an incentive to attract and maintain alliances (or allegiances); so that leaders like Mobutu Sesseseko, who was an American ally and who replaced Patrice Lumumba - after the latter's assassination, got enough aid money that he is famed to have been richer than his country. Idi Amin, regardless of his tyranny, was supported. Mengistu of Ethiopia was provided with aid by the Russians to keep his allegiance. Even 'emperor' Bokassa, whose coronation cost US$ 22 billion, was 'aided'. Thus, the character and the type of government was irrelevant. This, coupled with the long-term  repayment period of such 'soft' loans and their below market interest rates meant that most leaders saw such funds as extra money, instead of loans that are repayable at a point in time. Consequently, they became corrupt and appropriated the funds to themselves with nothing to show for. Yet, this didn't prevent them from receiving more money from developed countries. The greater the poverty, resulting from misuse of aid funds, the more aid was doled out to alleviate poverty. Furthermore, most of these donor agencies worked within a financial period and any unspent funds means that one's budget will likely be reduced in the new financial year. This unfortunate situation created a scenario where donors chase begin to countries for loans.

In the 2000s aid became a rockstar project with Bono, Geldof, and co playing lead role. These individuals appealed to the conscience of guilt-tripped developed countries, who see the contrast between the rich and poor too stark to be comfortable, to provide more aid to release the masses from the clutches of poverty. The solutions to Africa's problems were searched for from all sorts of sources except from Africans. Everybody thought they had the magic wan to cast poverty into oblivion and this magic wan is more aid, which according to Dambisa, led to more debt and graver poverty and then back to more aid. 

In discussing why aid has not worked and is likely not to work, Dambisa traced aid from when it was used to lift Europe out of poverty after the Second World War in the Marshall Plan. But she provided the reasons why that aid worked for Europe. Europe had institutions that worked effectively; their GDP to aid ratio was minimal, sometimes 2 percent, unlike what most African countries have at the moment where it is around 70 percent in some countries. Again, the aid was targetted and was provided for a duration. However, in Africa all these are lacking. Aid has become the main source of money; the institutions are not working and governments misuse loans because they are assured of its flow. She further argued that even the so-called International Development Assistance (IDA) graduates - countries which used to depend on aid but no longer does, including Equatorial Guinea, Swaziland and Botswana - Dambisa argued that the aid-GDP ratio of such countries were small. Besides, they also embarked upon aggressive open-market policy and trade that made them competitive and that aid in itself has nothing to do with their current state.

She further argued that conditionalities, which was attached to aid to make aid work by focusing loans, never worked and that in most situations where compliance to these conditions were far below 50 percent, disbursements would be over 90 percent or almost complete. This clearly shows that the main idea of aid is to give aid. In discussing this she stated that economic growth is a precursor to development and not the other way round as most donors and developed countries are wont to think. She argues that people hardly think of the type of government if they are hungry and it is only when development takes place that people will begin to think of the type of governance they have. Dambisa boldly stated that even democracy, at an early stage of a country's development, can hamper development as "democratic regimes find it difficult to push through economically beneficial legislation amid rival parties and jockeying interests." According to her "what poor countries at the lowest rungs of economic development need is not a multi-party democracy, but in fact a decisive benevolent dictator to push through the reforms required to get the economy moving (unfortunately, too often countries end up with more dictator and less benevolence.)" This is an argument I completely share with and that which resonates with my thinking. For instance, Dr Mahathir, credited with transforming Malaysia's economy served for 22 years and during that period transformed the the basic structure of the economy. Imagine what might have been had his leadership been curtailed by any of those elections he won. Again, no one can doubt China's development now. The cynics can say all they want but China's aggressive growth - responsible to the drastic decline in world poverty rates - cannot be denied by anyone. The linkage between aid and corruption was lucidly discussed. Besides, a country that is heavily aid-dependent is not accountable. This is because since the people didn't contribute to this revenue, and the government knows this, the people are unable to demand accountability from the government and the government remains unaccountable to the people, leading to financial misappropriation. Logically, because most wars are fought over control of resources, aid can and do influence civil wars; it also has its inflationary consequence to the recipient country.

However, Dambisa didn't leave off there like most writers do: she didn't just diagnose the problem; she offered solutions. Though the reader - like myself - may not completely agree with her solutions, they are - again - compelling. First, she argued, that countries should seek high credit-rating and borrow at commercial rates. Here the risks alone will force governments not to misapply the funds. Besides, since it's tax revenue that would be used to finance it at maturation, the people can demand accountability. For instance, failure to repay will mean a downgrade in credit-ratings leading to a higher cost of borrowing. Another solution proffered is the development of a country's domestic and international bond markets to raise the necessary capital. Again, if a country fails to repay its debtors, those from whom it has sold this promisory notes, it loses out of the market. Improving investor climate through the provision of infrastructure, removal of bureaucracies, improved legal system and others will attract Foreign Direct Investment (FDI) which will boost a country's resources. Here she discussed why China is becoming more attractive than the traditional West; the Chinese offer something for aid. The rails, roads, housing units are built and the people see them, unlike the West who will request changes in governance system knowing that people will need to eat first before they will begin to ask questions. However, in all the solutions Dambisa discussed, the one bothering on levelling the field for trade was what I leaned to the most, especially when she discussed the negative market-protection practices by the US and Europe where huge subsidies given to their rice and cotton farmers distort international prices, pushing poor African farmers out of the market. She writes
In the United States alone, the total annual amount of farm subsidies stands at around US$ 15 billion, and that number is rising. As a share of farmers' income, subsidies rose from around 14 percent in the middle of the 1990s to around 17 percent today. The 2002 US Farm SEcurity and Rural Investment Act gave US farmers nearly US$ 200 billion on subsidies for subsequent ten years ... The Europeans are just as protective. The Common Agricultural Policy (CAP) eats into around half the European Union's budget of Euros 127 billion (direct farm subsidies alone are worth Euros 40 billion), and EU subsidies are approximately 35 percent of farmers' total income. [115]
The effects of these ginormous subsidies means that African farmers, who are poor and receive no such subsidies, are unable to compete with these farmers and are therefore crowded out of the market leading to chronic poverty. She writes
In 2003, US cotton subsidies to its farmers were around US$ 4 billion. Oxfam has observed: 'America's cotton farmers receive more in subsidies than the entire GDP of Burkina Faso, three times more in subsidies than the entire US aid budget for Africa's 500 million people.' Yet, the livelihoods of at least 10 million people in West and Central Africa alone depend on revenues from cotton, including some 6 million rural households in Nigeria, Benin, Togo, Mali, and Zimbabwe. [116]
Dambisa's book will move the reader to think and think again. She also discussed why donors continue to give aid though they know it isn't working. This is a classic book that all finance ministers in Africa should read, even if they disagree for then they can disagree with cogent reasons and not mere speculations about the role of aid in development.

Coincidentally, I read Kofi Annan's Interventions - A Life in War and Peace after reading this book. In some sections Annan tried responding to some of the issues Dambisa has addressed, most importantly why aid is dead. In fact, so direct were the responses that one could say that Annan was directly referring to Dambisa's work. According to Annan, Dambisa's Dead Aid thesis might have been reasonable if it had been posited by 1975; currently, according to him, it is no longer valid. He stated that the data post-1975 shows that aid is working and that more aid is needed (contrary to Dambisa's view, needless to say). According to Annan, Cold-War aid was aimed at obtaining allegiances (agreeing with Dambisa) but post-Cold-War aid comes with conditionalities. However, Annan failed to address Dambisa's argument that even when these conditionalities have not been halfly implemented, the loan would have been almost fully disbursed. In this argument and counter-argument, I believe Dambisa is more convincing though her arguments have merit it is also difficult to completely agree with her. These are excerpts of Annan's responses
Some are of the view that aid does no good and is frittered away by corrupt governments, or that aid can actually do harm. They quite rightly question the impact of, for example, over $1 trillion of aid transferred this way to Africa over the last fifty years. Between 1970 and 1998, when the majority of aid these transfers were made, the share of the world's poor people living in Africa rose from 11 percent to 66 percent. The implication is that aid is without value and should end. Trade and private investment should replace it, the argument goes, given these have proved the prime means through which countries have achieved sustained economic development in the modern age. [Interventions; 247]
He went further to state that
There are significant flaws in this argument that must be exposed. First, the characterization of aid as without value is based primarily on pre-1990 figures, when most of the total aid sum was transferred. These figures utterly misrepresent the current role of aid. There is a fundamental difference between development aid given during the Cold War and aid given since. Before 1990, most aid money was designed to buy allegiance in the context of the superpower struggle, not international development. Foreign donors showed little interest in the ruling styles of the benefactors and saw no reason hold them to account for corruption. [Interventions; 247]
Annan proposal is more aid, at least 0.7 percent of the GDP of developed countries should go to aid; further he talked about the involvement of 'Hollywood actors and rock stars' in aid. These are two extremely divergent opinions for the same objective - development.

Yet, this is a book, that needs to be read by all. She comes from a point of understanding. She knows her numbers and knows her Africa. She talks as a businesswoman who believes that Africa needs to do business will talk. She is a complete capitalist and after having worked with Goldman Sachs et al. it comes as no surprise.
About the author: Dambisa Moyo holds a Doctorate (D.Phil) in Economics from St Anthony's College, Oxford University; her 2002 dissertation is titled "Essays on the Determinants of the Components of Savings in Developing Countries". In 1997, she earned a Master of Public Administration (MPA) from Harvard University's Kennedy School of Government. She also earned a Master of Business Administration (MBA) in Finance and Bachelor of Science (BSc) in Chemistry from American University in Washington DC.

Moyo worked for the World Bank as a Consultant and at Goldman Sachs where she worked in debt capital markets and as an economist in the global macroeconomics team. In addition to this work, she is the author of How the West was Lost: Fifty Years of Economic Folly - and the Stark Choices that Lie Ahead (2011) and Winner Take All: China's Race for Resources and What it Means for the World (June 2012).

Moyo has travelled to more than 50 countries over the last decade, during which time she has developed a unique knowledge base on the political, economic, and financial workings of emerging economies, in particular the BRICS and the frontier economies in Asia, South America, Africa and the Middle East.

Her work examines the interplay between rapidly developing countries, international business, and the global economy, while highlighting the key opportunities for investment. 

In 2009, Dambisa was named by TIME Magazine as one of the "100 Most Influential People in the World," and to the World Economic Forum's Young Global Leaders Forum. Her writing regularly appears in economic and finance-related publications such as the Financial Times and the Wall Street Journal. (Source)

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