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Dead Aid

Posted Jun 12 2009 6:42pm

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„In the past fifty years, over US$ 1 trillion in development-related aid has been transferred from rich countries to Africa. … but has (this) made African people better off? No, in fact …the recipients of this aid are worse off; much worse off. Aid has helped make the poor poorer, and growth slower.“

This is the verdict of Dambisa Moyo, a Zambian-born, Harvard- and Oxford-trained economist, who worked at the World Bank and was until recently Global Economist and Strategist at Goldman Sachs. Moyo has written Dead Aid, a devastating critique of the aid ideology and industry, which has been in place ever since the meeting in Bretton Woods (which saw the creation of the World Bank and the IMF) and Truman’s inaugural address in 1949 (in which he called upon the industrialized nations to share their scientific and economic advances with the „underdeveloped“ world).

For readers familiar with the history of development aid, Moyo doesn’t offer new insights, but sums them up nicely: she recounts the chain of ideologies following one another – from the big infrastructural policies of the 1960s and 70s (the dams, the green revolution) to the structural adjustment doctrines of the 1980s. Most of them with negative consequences for the countries in which they were implemented (a few hints will have to do: badly mismanaged resettlement, decreased biodiversity, dramatic cutting back of social systems, uneven trade regulations, huge debts).

It is a depressing read: Despite the millions flowing into the continent, Africas economic growth declined continuously, poverty levels rose and the level of corruption reached unbelievable heights. While asking President Reagan for debt relief, Zaire’s Mobutu leased Concorde to fly his daughter to her wedding in the Ivory coast.

Moyo is equally critical of the rise of glamour aid in the 2000s –

„the army of moral campaigners – the pop stars, the movie stars, new philanthropists… to carve out niches for themselves, as they took on the fight for more, not less, aid to be sent to Africa. … One disastrous consequence of this has been that honest, critical and serious dialogue and debate on the merits and demerits of aid have been atrophied. As one critic of the aid model remarked, „my voice can’t compete with an electric guitar“.

Aid is easy money
The main problem with aid is that it is easy money: it comes without conditions and accountability: a Word Bank study found that as much as 85% of aid flows were used for purposes other than that for which they were initially intended. Aid is like oil, enabling powerful elites to embezzle public revenues. Yet this diversion doesn’t have any consequences – the same countries who badly misuse funds, end up receiving even more.

Many studies point to the fact that aid increases corruption and dependency, prevents the emergence of trustworthy legal and civic institutions, thus making domestic and foreign investment in poor countries unattractive. Because aid flows are viewed as permanent income, policymakers in African countries have no incentive to look for other, better ways of financing their countries development.

Yet regardless of these findings, the aid industry dishes out more and more aid. Moyo, rightly, I believe, explains this with the internal dynamics of the aid institutions - The livelihood of approx. 500.000 people employed by aid organizations depends on lending. And for most development organizations, successful lending is measured by the size of the donor’s lending portfolio, and not by how much of the aid is actually used for its intended purpose. As shocking as it is, outcomes don’t seem to matter.

Cut of Aid permanently
What is special about Moyo’s book is not so much her critical take on aid – others such as Paul Collier and William Easterly have voiced the same arguments. What I liked about her book is that it offers a detailed alternative: cut off aid completely over the course of 5 years and develop alternative financial sources to finance the development agenda of African countries. 

Governments could find money for development through financial markets, both international and domestic, by issuing bonds.

Historically, the governments of those countries that have successfully developed funded investment by recourse to international markets. In order to borrow, they needed decent credit ratings; to get the ratings, they had to be transparent and prudent. The discipline of transparency and prudence were as important as the money in promoting development. Some of the stronger African governments have at last started down this road. She also sees huge scope for innovations in micro-finance, such as the group borrowing pioneered by the Grameen Bank in Bangladesh.

Moyo also advocades fairer trade rules for African countries, citing that Africa loses around US$ 500 billion each year because of restrictive (mainly Western) trade embargoes (largely in the form of subsidies by Western governments to Western farmers).

In a chapter „The Chinese are our friends“, Moyo is also optimistic about the impact the Chinese are having on Africa, writing that no country has made as big an impact in the economic and social fabric of Africa as China has since the turn of the millennium. (As of mid-2007, China’s FDI to Africa was US$ 100 billion.).

As Paul Collier in a review of Dead Aid, points out, Moyo is probably too optimistic, especially in view of the current financial climate. Nevertheless, I recommend the book as a valuable overview of why aid has failed and what could come to replace it to finance Africas development.

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