Not-so-Humanitarian Aid

[Dead Aid ♦ by Dambisa Moyo ♦ Farrar, Strous, and Giroux, 2009]

[ed.: This review is available as a PDF.]

While slowly losing its dominance, foreign aid has characterized international efforts to lift Africa out of the poverty quagmire since the immediate post-war era. Monetary assistance, forwarded to the Dark Continent in myriad forms — charity, loans, grants, et cetera —, has not only failed to reach its objectives, but has actually created a trap. It has facilitated economic retrogression, making most Africans worse off than they otherwise would have been. The qualifier ‘most’ is important, because some have greatly profited on the good intentions of the West: corrupt bureaucracies which extract their incomes from inbound streams of money. Despite the harsh reality, providers are seemingly unaware of the deleterious consequences of their actions. In this environment, Dambisa Moyo’s Dead Aid is a welcomed bucket of ice cold water.

Moyo is particularly well suited to write on the topic. Born and raised in Zambia, endowed with a Western education, and with plenty of experience gained as a result of her involvement in the World Bank and with various other financial institutions, Moyo is not lacking in expertise. Dead Aid, though, does not piggy-back on its author’s credentials. Rather, it provides the reader with a set of convincing arguments backed by theory and evidence.

The book is presented in two parts. First, covering the history and effects of foreign aid, it explains why monetary assistance has failed. The reader is also taken through various counter-arguments, including alleged success stories. The second part offers an alternative to aid as a means of financing investment in African economies: inter alias, private finance markets, foreign direct investment, and trade. The opening half of Dead Aid is an indispensable addition to development economics, while the second should be approached with a bit more caution.

International aid on a mass scale began in earnest following the Second World War, originally targeting war-torn Europe. As means to this end, two key organizations were established at the 1944 Bretton Woods Conference: the International Monetary Fund (IMF) and the World Bank (a third was proposed, finally materializing in 1994 as the World Trade Organization [WTO]). Initially, aid to Western Europe piggybacked on the wealth of the United States, and it broadened during the late 1940s and early 1950s under the Marshall Plan. These programs met success, in that their targets experienced a relatively quick economic recrudescence. However, European markets enjoyed extensive existing infrastructure and governments willing to let them flourish. Financial help was not the principal cause of the Old World’s post-war resurgence.

The United States’ decision to take responsibility for Europe’s financial needs freed IMF and World Bank funds, providing these institutions fiscal space to look towards the developing world. It was thought that poorer countries, at that time considered “third world,” lacked infrastructure, physical and human capital, and the financing to spur domestic investment. Additionally, there existed a more sinister motive: the Cold War. Latin America, Africa, and much of Asia was soon embroiled in an oftentimes deadly competition between the Soviet Union and the United States to buy governments’ interest. Similarly, the immediate post war era witnessed the unraveling of colonial empires, and many former colonial governments were interested in maintaining their influence where they once ruled. As such, aid flows were politically shaped, all too often contrary to the interests of broader society.

During the 1960s, African governments began to heavily invest in public works, including such things as dams, roads, and other forms of infrastructure. To fund these programs, they accepted loans and grants from the developed world. This trend accelerated during the 1970s, when credit became more plentiful and relatively inexpensive. The oil shock of the early and mid-70s spilled into related markets, increasing food, energy, and commodity prices. This spurred an increase in focus on aid directed towards rural and agricultural development — more generally, Africa’s poor moved to the forefront of international concern. It was during these decades that aid flows drastically grew by many times their former size. Yet, these programs failed, and poverty became more extensive.

Not only had the opposite occurred of what the aid intended, but financial crises during the early 1980s led to “tight money” and rising interest rates. This inevitably pushed the developing world against the ropes, heavily indebted thanks to the credit that once came so cheap. Several African governments — Angola, Cameroon, and nine others — defaulted on their debt obligations, triggering a response by the IMF and the World Bank. These organizations quickly “restructured” the debt, essentially loaning debtor nations enough money to repay private commercial banks. However, as one can already see, this was merely akin to a debt transfer. The world was on the brink of financial ruin, and African had shown little for all its promise.

As the debt dilemma culminated, relevant politics were soon dominated by what has become known as the “Washington Consensus” — neoliberalism. Whereas previously the dominate model was one where the State allocated resources towards essential outputs, the new mantra became that of “privatization.” Some countries took off, such as South Korea, but not Africa. Increasing debt, coupled with a lack of economic growth, even caused the peculiar situation where outgoing debt payments were greater than incoming aid flows. Failure anew prompted a shift of focus to institutions, motivating impetus for “democratization.” Aid packages became tied to conditions aiming to reduce corruption and increase political pluralism, but these stipulations were only loosely regulated. Moreover, in advocating for democracy, the West seemed to put the cart before the horse — a correlation between greater wealth and democracy does not imply that the latter causes the former.

While the aid story has yet to end, and the latest chapter — what Moyo calls “glamor aid” — continues, we can already see that it revolves around one failure after another. Aid has been a spectacular disappointment, regardless of its form of delivery. Neither has public investment, in infrastructure and human capital, worked nor has public support of private markets. Dead Aid tells us the situation has actually become worse in some ways. Why?

Aid fosters corruption. It has tended to flow to the worst governments, which pocket most of it as income — very little, sometimes none of it, reaches its actual objective. From an institutional perspective, aid gives extractive governments something to extract. It gives shady leaders a means of placating a corrupt bureaucracy and military, allowing them to do so without having to extract through the tax system. High taxes, including relative to income, lead to disgruntled populations, but aid causes a breakdown of this political discipline. As such, not only does aid maintain and nurture corruption, but it undermines potentially positive social processes. There is little incentive for governments to introduce legal frameworks — i.e. protection of property rights — conducive to economic growth.

Where the middle class usually represents the forefront of a market’s productivity, in many African countries it instead represents a relatively small social strata competing for political connections. Aid-dependent corrupt governments also oftentimes attract the best and the brightest. Aid promotes social tension; in Africa, this has led to much civil strife and, very often, outright civil war. During the 1990s, 27 major armed conflicts were recorded to have taken place around the world — 17 took place on the African continent.

Economically, aid has two major undesirable outcomes. First, a large influx of foreign monies might make local currencies more expensive on the exchange market. This follows from the fact that recipients of dollars, or euros, or what have you, must buy local currency with it in order to spend locally. More expensive local money may lead to a fall in exports, constraining the ability of indigenous industries to tap international markets. Second, since most African countries lack the infrastructure and necessary financial services, “surplus” aid is dealt with in two ways. It might be “mopped up” by governments, which issue bonds in return for excess aid — they then have to pay interest both on loan-based aid and on the bond. Otherwise, it may instead be used towards unproductive consumption.

In short, not only is very little aid money actually allotted towards productive activity, but it actually serves to strengthen extractive institutions that hamper economic growth. More bluntly, aid can be counterproductive. What of the “success stories?” Dead Aid tells us that these exist despite of aid, thanks to domestic policies encouraging growth. In fact, successful developing nations are the ones which ultimately give up aid as a source of finance.

What alternatives do African economies have? Moyo offers several:  sovereign and private bond markets, foreign direct investment, international trade, and microfinance. Sovereign debt markets tend to be more disciplined than the institutions responsible for issuing foreign aid loans, meaning that to be considered attractive candidates African governments selling debt must achieve a certain degree of financial stability and maintain it. More than sovereign debt, though, success will come with the internal development of domestic financial industries — banks and stock markets. Microfinance offers an interesting solution, in that it overcomes the major initial issue of finding borrowers with sufficient collateral. This type of institution loans to pools of people, spreading the risk of one loan to an entire community — there is a strong incentive to repay loans.

African nations also benefit greatly from foreign direct investment (FDI). While most Western countries have historically preferred the aid route, or line FDI with political conditions, China has willingly invested billions of dollars without the same restrictions. The Asian giant has invested in infrastructure — roads, energy, et cetera —, in return for claims on some of the surplus. While China cares little about the status of the government, in regards to its humanitarian track record or its domestic policies, by fostering development it unintentionally builds the middle class that ultimately tends to challenge extractive bureaucracies.

Finally, international trade offers an opportunity that few African countries have taken advantage of. While there has been extensive exchange between Africa, the United States, and Europe, recently adding India and China, the continent suffers the great obstruction of internal controls and tariffs. That is, most damaging to individual exchange are the barriers African states place between themselves. This is especially important to note when considering the markets with little to offer other continents. Powerful economies like that of the United States and the European Union have also done much to destroy existing industries in Africa. For instance, agricultural subsidies in these markets hurt African farmers, who can’t compete with subsidized prices (both internationally and domestically). The liberalization of exchange markets is a necessary precondition to vibrant economic growth.

All of this is easier said than done, and this is where the reader should be wary of putting too much faith on Moyo’s solutions. Alternative sources of financing emerge as undeveloped markets grow, which in turn require institutional changes. Political change emerges from a dynamic relationship between markets, society, and bureaucracy, and can be non-linear. There is no neat, packaged plan a country can follow, because the implementation of these ideas are left to politicians interested in maintaining the status quo or furthering their interests, whatever these might be. Those distraught with the fact that foreign aid has failed, looking at Moyo’s alternatives with hope, should understand that the road to development is a long one.

Despite its shortcomings — limitations that bind any book that deals with development economics —, Dambisa Moyo’s Dead Aid is an indispensable addition to the literature. It ought to be required reading, not just for economists, but all those involved with helping the developed world. It is a reality check, but one that if more people took to heart we might be able to stop the vicious circle of aid, corruption, and impoverished stagnation.

4 thoughts on “Not-so-Humanitarian Aid

  1. Pingback: Dambisa Moyo’s *Dead Aid* (Review) « Economics Info

  2. M.H.

    Good review.
    But here’s a french article that has been pointed out to me.

    My translation of the most enlightening passage :

    “Since 1996, only 7% of the target of 30% of agricultural land owned by white farmers have been redistributed. Nkwinti gave no reasons for the failure to achieve the goal [of the target of 30%], but experts declared that one of the principal reasons is that 90% of the land redistributed to black farmers are not productive anymore.”

    The lack of economic freedom is commonly viewed by austrian economists as the principal factor that accounts for the poverty of Africa. But I doubt that it (or even humanitarian aid) could explain the fact that most of the land redistributed to black farmers are not productive anymore.

    1. JCatalan

      It’s the same thing that would happen had a small black population gained political control over a large white population, and had enforced policies that rewarded blacks while marginalized whites. Then, the black regime is overthrown and the new white government actively redistributes land from the privileged blacks to the downtrodden whites. But, whereas the black farmers had decades and years worth of experience, the new white farmers have none. To make matters worse, the new government is corrupt, doesn’t invest in infrastructure (e.g. irrigation, roads, et cetera), and creates an economic environment where the private sector doesn’t provide these either. So, new farms, ran by people who know comparatively less about the field, are less productive or even unproductive.

  3. Pingback: Remittances over Aid: Policy Question | Economic Thought

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