Monday, May 3, 2010

Bad Aid: Why Aid Is Not Working and How There Is a Better Way For Africa by Dambisa Moyo

The author was born and raised in Zambia. Her education there was interrupted by political unrest, causing her to depart for the US where she received a scholarship to continue her education. She spent two years as a consultant at the World Bank in Washington DC, two years getting a Master’s degree at Harvard’s John F. Kennedy School Of Government, and four years getting a PhD in economics at Oxford. Subsequently, she worked for eight years at Goldman Sachs where her focus was on global economics and strategies. Given her background it is not too surprising that her solution to Africa’s economic and political problems is to rely on traditional, sound economic policies to foster growth. Her focus, of course, is on the nations of sub-

Saharan Africa. The aid under discussion is not the charitable aid or emergency aid provided in response to natural disasters, but the huge grants and loans that are made by countries and international organizations that can contribute large fractions of a nation’s governmental income. She makes compelling arguments that the aid that has been and is now being provided is not working. She goes further to claim that not only is aid not a solution, aid is the problem. The support for this latter claim is less obvious, but, after a series of variations on aid policies over the last 60 years that were intended to make things better and failed, the circumstantial evidence is compelling. The book is structured to show that aid is not working, illustrate why it is not working, and to provide a better path to economic and political self-sufficiency.

This is a slight book of about 150 pages, yet it does provide a number of interesting insights. It is quite readable and the economics is not too dense. There is a short but excellent forward by Niall Ferguson, the conservative economic historian, that provides a good summary of the author’s conclusions. These few pages are worth reading for those who are interested in the subject but do not wish to commit to the entire volume.

The first part of the book is devoted to describing the history of aid to Africa and the effect it has had on the African nations. It is not difficult to believe that there is something inherently wrong when one is continually bombarded with tales of corruption, civil strife, and poverty. Moyo provides some quantitative data that provides a more relevant context for judging the state of affairs.

"Africa’s real per capita income today is lower than in the 1970s, leaving many African countries at least as poor as they were 40 years ago."

"Adult literacy across most African countries has plummeted below pre-1980 levels."

"A World Bank study found that as much as 85 per cent of aid flows were used for purposes other than that for which they were initially intended, very often diverted to unproductive, if not grotesque ventures."

"....although not as extreme as Gambia or Ethiopia where 97 per cent of the government’s budget is attributed to foreign aid."

Moyo has the task of explaining why other countries have received aid, profited from it, and moved on to self-sufficiency, while many African nations have fallen into a cycle of seemingly endless aid dependency. The answer presented is that the examples where aid produced positive results were often in countries with a history of strong civil institutions, and the aid was targeted and time-limited and small compared to the overall size of the economy. The success of the Marshall Plan in Europe is the most noteworthy example. None of these preconditions existed in most African states. When aid money began flowing, most African countries were European constructs just emerging from colonialism and beset by an array of geographic, historical, cultural, tribal and institutional issues. The author does not allow these initial problems to excuse the current unsatisfactory state of affairs. She proceeds to demonstrate how the influx of large amounts of "free’ money actually inhibited the establishment of healthy governments and economies. Unfortunately, the explanation involves a confluence of factors that are not easily summarized, although this paragraph is a good attempt.

"Foreign aid props up corrupt governments—providing them with freely usable cash. These corrupt governments 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. Greater opacity and fewer investments reduce economic growth, which leads to fewer job opportunities and increasing poverty levels. In response to growing poverty, donors give more aid, which continues the downward spiral of poverty."

The author provides a number of interesting insights that provide a basis for this summary statement. For example:

"One of the features of the Cold War was the West’s ability and eagerness to support, bankroll and prop up a swathe of pathological and downright dangerous dictators. From Idi Amin in the east to Mobuto Sese Seko in the west, from Ethiopia’s Mengistu to liberia’s Samuel Doe, the competition among these leaders to be more brutal to their people, more spendthrift, more indifferent to their country’s needs than their neighbors were, was matched only by the willingness of international donors to give them the money to realize their dreams."

She provides some thoughts on how aid can help slide a country into corruption and tyranny.

"In most functioning and healthy economies, the middle class pays taxes in return for government accountability. Foreign aid short circuits this link. Because the government’s financial dependence on it citizens has been reduced it owes its people nothing."

".... in a world of aid dependency, poor country’s governments lose the need to pursue tax revenues. Less taxation might sound good, but the absence of taxation leads to a breakdown in natural checks and balances between the government and its people"

"Africa is the most conflict ridden region of the world.....There are three fundamental truths about conflicts today: they are mostly borne out of competition for control of resources; they are predominately a feature of poorer economies; and they are increasingly internal conflicts......The prospect of seizing power and gaining access to unlimited aid wealth is irresistible."

Moyo puts the emphasis placed on encouraging democratic governments in an interesting light.

"What is clear is that democracy is not the prerequisite for economic growth that aid proponents maintain. On the contrary, it is economic growth that is a prerequisite for democracy.........In What Makes Democracies Endure Przeworski et. al. offer this fascinating insight—‘a democracy can be expected to last an average of about 8.5 years in a country with a per capita income of less that $1000 per annum, 16 years in one with income between $1000 and $2000, 33 years between $2000 and $4000, and 100 years between $4000 and $6000....above $6000 democracies are impregnable...’ It is the economy, stupid!"

If aid is so ineffective why continue to provide it? Again Moyo provides an interesting perspective.

"There is simply a pressure to lend. The World Bank employs 10,000 people, the IMF over 2500; add another 5000 for the other UN agencies; add to that the employees of at least 25,000 registered NGOs, private charities and the army of government aid agencies: taken together about 500,000 people, the population of Swaziland.....they are all in the business of aid.....their livelihoods depend on aid, just as those of the officials who take it."


The author provides a telling example of how short-term beneficial intervention can have unintended long-term consequences. She does not say if this is an actual example or an illustration.

"There is a mosquito net maker in Africa. He manufactures about 500 nets a week. He employs ten people, who (as with many African countries) each have to support upwards of 15 relatives. However hard they work, they can’t make enough nets to combat the malaria carrying mosquito.

Enter vociferous Hollywood movie star who rallies the masses, and goads western governments to collect and send 100,000 mosquito nets to the afflicted region, at a cost of a million dollars....and a ‘good’ deed is done....With the market flooded with foreign nets our net maker is promptly put out of business. His 10 employees can no longer support their 150 dependents (who are now forced to depend on handouts), and one mustn’t forget that in a maximum of 5 years the majority of the imported nets will be torn, damaged and of no further use."

This example is the point of departure for describing the path to African economic independence. The better solution, the long-term solution, would have been to support the extension of the local net making industry so that a sufficient and continuous supply could be made available and jobs would be created. Aid could be used in this way, but the country, and even the net maker himself, could also have accessed loans that could be used for this purpose.

The crux of Moyo’s plan is for African nations to wean themselves off of aid and establish for themselves a place in the world economy. The second half of the book is devoted to convincing the reader that this a practical path to take. Botswana is used as an illustration of a country that has greatly diminished the flow of aid funds and established a stable and growing economy by utilizing her approach. She lists and discusses six financing paths that can bolster African economies. They are, in rough order of importance or effectiveness: trade, foreign direct investment (FDI), capital markets, remittances, micro-finance and savings.

Moyo would argue that the first step a country should take to shed its aid dependency would be embark on the effort to obtain a credit rating so they can borrow money from the international financial markets. The advantage of this approach is that it requires the Africans themselves to do the planning and the marketing. The markets themselves will demand discipline from the Africans in terms of cost of credit or denying credit entirely if they establish a reputation for defaulting on loans. It is this demand for discipline and responsibility that has been lacking in the aid-dominated environment. Moyo argues that some African nations have already made this move successfully, money is available at moderate interest rates, and the economic benefits have been realized by both the borrowers and the lenders.

"...the beauty with bonds is that their very existence lends further credibility to the country seeking funds, thereby encouraging a broader range of high-quality private investment. More credibility equals more money, equals more credibility."

"The notion of a sovereign ceiling means that a company can never obtain a credit rating higher than that of its country. In places where a country has no rating the ability of companies to seek outside investment capital is hampered greatly."

" 2006, emerging market debt gave investors a return of around 12 per cent. The performance beat the 3 per cent return on US government bonds in the same year. Moreover, emerging-market debt has almost consistently outperformed international stocks over the past 10 years."

Foreign investment in African nations is clearly an effective way of injecting capital into a nation to create jobs and incomes. Unfortunately, Africa has not benefited from investment due to a number of factors:

"... wide spread corruption, a maze of bureaucracy, a highly circumscribed regulatory and legal environment, and ensuing needless streams of red tape."

In addition:

"In 2006, the $37 billion that Africa received as official foreign aid was more than twice the continents foreign direct investment, and today Africa attracts less than 1 per cent of global capital flows, down from almost 5 per cent a decade ago."

Moyo argues that a combination of business-friendly reforms by the African nations and a more aggressive stance by investors would be very profitable for both participants. Africa possesses some of the poorest countries on earth and yet is relatively wealthy in terms of natural resources. It should be an ideal candidate for foreign investment. She presents China as an example of a country that has made a concerted, and successful, effort to invest and trade with Africa and has had a profound effect on the continent. China has a vast need for energy and raw materials. Africa has an abundance of both. She argues that, acting in its own self interest, China is doing more to benefit African nations than are the western countries with their aid-based approach.

"Bartering infrastructure for energy reserves is well understood by the Chinese and Africans alike. It’s a trade-off, and there are no illusions as to who does what, to whom and why....Africa is getting what it needs—quality capital that actually funds investment, jobs for its people and that elusive growth. These are the things that aid promised, but has consistently failed to deliver."

" nearly all African countries surveyed, more people view China’s influence positively than make the same assessment of US influence."

Trade is perhaps the most straightforward way of improving the economic well being of a nation. Consider China’s approach compared to that of the western nations.

"In December 2005, at the Second Conference of Chinese and African Entrepreneurs, China’s premier, Wen Jibao, pledged that China’s trade with Africa would rise to $100 billion a year within 5 years. Forget the capital markets, forget FDI, forget the US $40 billion a year aid program, and forget trade with any other country in the world—this is trade only with 2015, just 5 years later, that would be $500 billion of trade income—50 per cent of the trillion dollars of aid that has made its way to Africa in the past 60 years. The difference is, of course, one is laced with bromide, the other steroids."

"Estimates suggest that Africa loses $500 billion each year because of restrictive trade embargoes—largely in the form of subsidies by Western governments to Western farmers.....EU subsidies are approximately 35 per cent of farmers’ total income. What this means is that each European Union cow gets $2.5 a day in subsidies, more than what a billion people, many of them Africans, each have to live on each day."

"Western farmers get to sell their produce to a captive consumer at home above world market prices, and they can also afford to dump their excess production at lower prices abroad, thus undercutting the struggling African farmer."

"But perhaps the most egregious examples come from Africa itself. African countries impose an average tariff of 34 per cent on agricultural product from other African nations, and 21 per cent on their own products."

The term "remittance" refers to the money that Africans living abroad send home to their families. This can be an important source of income to help in financing a country’s balance of payments. It is equivalent to a source of income for the families so blessed.

"...the money Africans abroad sent home to their families totaled about $20 billion in 2006. According to a United Nations report.....between 2000 and 2003 Africans sent home about $17 billion each year, a figure that tops even FDI which averaged $15 billion, during this period."

Finally, it is critical for Africa to provide its citizens with secure and effective financial institutions. Without them people will not deposit savings and make funds available to lend to entrepreneurs. The author is particularly impressed with the results attained through micro-finance approaches. She quotes a default rate on such loans in Zambia as being about 5 per cent. In fact:

"With the advent of Kiva, a California-based interface, pretty much anyone sitting anywhere with a keyboard can lend money to anyone across the planet. This is how it works: a woman in Cameroon goes on line seeking a $200 dollar loan towards her tailoring business. She makes her case, as best she can, and a man in Des Moines, Iowa lends her $25 of it, someone in Sweden lends another $25, and the balance is covered by someone in Japan. The loan is made for a set period, for a pre-agreed interest rate, and she regularly updates her lenders on her progress. In the week—just one week—leading into 19 April, 2008, over $625,000 was lent by almost 3000 new lenders....the default rates have been minimal. Thus far since Kiva’s inception in 2005, some $30 million has been lent, 45,000 loans made to people in 42 countries. A wonderful innovation—get involved."

This book has been an eye opener. Whether or not one agrees with all of the author’s conclusions, it will leave one with a new perspective, and perhaps, a new interest in the evolution of Africa and its diverse nations. It will certainly allow one to judge more

intelligently the Obama administration’s approach to Africa as it unfolds.


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