Dead Aid

Dead Aid by Dambisa Moyo

The subject matter—how to better develop African states—and the author’s bio—a Zambian woman who received a master’s at Harvard, a doctorate at Oxford, and worked at Goldman Sachs and the World Bank—pulled me to this book. And the first sentence of Niall Ferguson’s foreword only added to this: “It has long seemed to me problematic, and even a little embarrassing, that so much of the public debate about Africa’s economic problems should be conducted by non-African white men” (ix). Before beginning it, I was excited.

Moyo’s brief book, Dead Aid, can be divided up into two arguments: (1) firstly, that aid is not working, and (2) secondly, that a handful of innovative, market-based strategies should act as a new strategy for financing the economic development of sub-Saharan African states.

And at the end of her book, I largely agree with her two arguments. Nonetheless, I believe that each argument could have been made a bit more convincingly. With the first argument, Moyo is big on sensible anecdotes and sparse on hard, academic evidence. Perhaps because this book is a bestseller (written for a general audience), and not a piece of academic writing published by a University press, the book shies away from using enough hard data to support her argument. Instead, Moyo seems to believe that the argument against aid is obvious enough that it doesn’t need hard data. “The proof of the pudding is in the eating, and ever so clearly the preponderance of evidence is on this side” (28), she writes early in the book.

The Missing Link
And she is somewhat correct: the proof that aid is not working is glaringly obvious. Just look at the history of African states since post-1960 independence. They have failed miserably to economically develop, and, once filled with promise and optimism, they have regressed. Once ahead in GDP per capita of fledging “Asian tigers,” they have fallen well behind. And all along they have been flooded with aid.

These two facts—that African states have been inundated with aid, and that they have not economically developed—are unquestionable. It’s Moyo’s ability to link the two, and explain the connection between them, that seems weak. The reader knows aid is not working. The reader can see that more aid seems to destine a state to higher levels of poverty and less economic development—that states that have received less aid have fared better. But the reader is not given a firm enough explanation of why aid is not working and why aid seems to be a curse in the guise of a blessing. This is where, Moyo could have used hard data to strengthen her argument—in linking and explaining the relationship between aid and macroeconomic regression.

So, first, I’ll summarize why based on Moyo’s writing, I believe aid is not working and why aid is bad for economic development.

Moyo’s argument against aid
Aid isn’t inherently bad. Emergency aid in the time of natural disasters is necessary to save lives and mitigate suffering. Additionally, aid has historically worked in some contexts. Most notably, the Marshall Plan is a shining success story for aid. The US sent a massive amount of cash to Europe following World War II, and this aid enabled Western Europe to get back on their feet and become the economically stable, cozy democracies that they are today; because of this aid, Europe regained its economic strength and political stability. But this aid—known as reconstruction aid—and the aid that natural disaster-struck states receive— known as emergency aid—are different from the aid that has flooded sub-Saharan Africa.

With the Marshall Plan, aid was used to reconstruct institutions and infrastructure that formerly existed. The billions of dollars of aid that African states have received has been to build and develop institutions and infrastructure that never existed (except in the form of antiquated colonial institutions). And, aid has shown to be inherently bad in this role. Aid is a terrible form of development. Why is this?

One reason is that aid promotes consumption, rather than investment. Moyo cites research that has shown a negative relationship between receiving aid and saving money. The more loans (with interest rates below the market average) and grants (which are basically free cash) that a state receives, the more they spend. Which makes sense. Aid is mean to be spent, isn’t it? But the problem with this is that in order to create sustained economic growth, a state must invest and save this money. This is the only way to fuel sustained growth and lead to bigger, greater growth in the long run. Creating a culture of consumption and spending is detrimental to economic development. And aid does just this. It promotes a greater percentage of the GDP to be put towards consumption (often of corrupt, extraneous things) when a greater percentage of the GDP should be put towards investment and saving. It does not help that aid often comes with strings attached that require consumption. For instance, procurement requirements force an aid-receiving state to turn around and spend the aid they receive on the donor nation’s foreign goods. In addition to forcing consumption, rather than savings, procurement requirements also hurt local industries that are crowded out of selling their goods on the domestic market because of this.

There are also economic reasons that Moyo gives for why aid does not work to economically develop a nation. (I’ll admit, I don’t have as firm a grasp on these reasons as I would like, but here it goes.) For instance, aid can promote inflation. When a state is flood with aid money, it creates a high demand for goods. Suddenly the government (and businesses/people that receive aid) has a lot of cash that can be spent on local goods. Oftentimes, however, supply is not able to keep up with this sudden spike in demand. Thus, there is an overly high demand for a limited amount of supplies. This can raise prices tremendously and lead to runaway inflation. Aid can also weaken a developing state’s ability to export goods. This is a bit complicated to explain. Basically, a large inflow of a foreign currency (aid) requires that this cash be converted to the local currency. This creates a huge demand for currency conversion, which sort of shocks a local currency’s exchange rate (that is if the local currency is free-floating—meaning not pegged). A huge demand to convert foreign currency into a local currency with limited reserves strengthens the local currency (meaning one US dollar converts to less Kenyan shilling). And this stronger local currency makes exported goods more expensive and less attractive on the international market. So, long story short, aid and the huge infusion of cash it brings, can hurt developing economies.

Another quick point that Moyo makes is that some forms of aid can just be plain stupid and myopic. She gives the example (which I think she took from William Easterly) of the mosquito net producer. In this example, a local mosquito net producer makes 100 mosquito nets a year to help prevent malaria. The mosquito net producer’s business is doing well, but people still need more mosquito nets. So along comes Bono singing about malaria and demanding that a million mosquito nets be donated to the mosquito-net producers home nation. This huge infusion of free mosquito nets is good for the short-term: many people without mosquito nets now have them, and more importantly, Bono feels pretty damn good about himself.

However, this donation puts the local mosquito net producer out of business. Now this entrepreneur and the people he employed are all out of business; they are poorer and with less options than before. And to make matters worse, the mosquito net problem has not been solved. Now there are no existing local mosquito-net producers. So when the donated mosquito nets become torn in five years, it will require another huge infusion of donated mosquito nets to replenish the supply. Instead of a promoting a local industry that already exists, aid has put it out of business and created more poverty and more frustrating dependency.

But this, admittedly, is an example of stupid aid. It does, however, underlie another of Moyo’s points: aid is unsustainable and unpredictable. Aid is unsustainable in that it can’t be relied on forever. Instead of creating growth, it creates a need for more aid. And a strategy that relies on continually receiving more aid can’t last. Aid may be scaled back in the face of global financial recessions or may dry up because of donor weariness. Aid flows to African states are unpredictable and could dry up.

All of these points are good, but I was expecting one simple and overwhelmingly strong answer to why aid cannot fuel economic growth. Sure aid can be stupid (in the case of the mosquito nets), but it doesn’t have to be. Likewise, aid can promote consumption rather than investment, but (if procurement requirements are abolished) it doesn’t have to. African governments can be more austere with aid money and invest more of it. And lastly aid can cause inflation and hurt exports, but if it is given and received intelligently, it doesn’t have to.

This is not to say that these are not all very good reasons for why aid is a bad route for development. It’s just to say that Moyo’s points don’t extinguish the hope that aid can work. I want to stress that I think that this list is more than enough to show the dangers of aid, and to make rational policy makers search for new strategies to economic development. But I was hoping for an irrefutable reason of why aid does not work. Moyo showed why aid is very difficult to have work, but I believe more would be needed to convert the myopic, humanitarian Bonos of the world.

And this brings me to her final, most powerful, and yet most frustrating reason for why aid does not work. Moyo argues that aid promotes lazy and (more importantly) corrupt governance. She argues that aid (or any type of free money or discounted loans) encourages governments to pursue foolish, myopic, and oftentimes corrupt policies because they know they will receive an unending flow of aid money. Aid money enables bad governments to continually make mistakes and it sustains corrupt governments that might otherwise fail. Aid thus subverts smart, uncorrupt, democratic regimes. What’s more, aid promotes instability and violence. Since an aid-receiving government will be awash with a free (and unquestioned) cash flow, the fight over this cash cow will become fiercer. The bigger the aid flow, the greater the reward there will be for sitting atop it. And since, aid will flow regardless of the violence or corruption of the ruling power, violent tactics will emerge as strategies to gain power. In short, the bigger the aid pie, the more militarized a state can become.

Additionally, these governments are able to tax constituents less. While this may sound good, it means that citizens have less of a stake in the functioning of their government. An untaxed person is less likely to demand a fair, functioning regime than a taxed person. Thus, any nascent middle class is less likely to push for democratic reform and less likely to build civil society.

I believe this point—that aid encourages corruption—is Moyo’s strongest and most attractive point. And yet, I believe it is also her most tenuous point. There’s no questioning that aid that is given to a corrupt government sustains their existence. For instance, aid given to Mobutu Sese Seko of then-Zaire, enabled his dictatorial regime to exist for as long as it did. Had the aid flows been cut off from the then-Zaire, a less corrupt, fairer, and smarter regime would have emerged much more quickly. But Moyo’s point that aid encourages corruption and laziness does not receive the evidence is deserves. For instance, if aid is given to a democratically elected regime with no history of corruption, will it make them corrupt? Will it engender sullied hands and lazy policy?

Moyo argues yes—and I agree with her—but I believe that this is an essential question for future development strategies and must be better answered. A convincing study must be published to show that aid destabilizes and corrupts democratic regimes, in order to answer aid-advocates of the world.

I should note that the Moyo believe that, in theory, the idea of giving aid based on certain economic and political benchmarks. That way, aid is only given to un-corrupt states that undertake “smart” economic policies. However, this brings up too many questions about what is “corrupt” and what is “smart.” What’s more, Moyo argues it’s impossible to enforce, and thus an unrealistic plan.

Moyo’s alternate suggestion for non-aid ways to fund/fuel development

Moyo spends the second part of Dead Aid articulating an alternate strategy for funding and fueling development. Moyo suggests that foreign aid should be lowered from 75% to 5% of a nation’s income (75% is the approximate average that most sub-Saharan states receive in aid, as a percentage of their income). In its place, new tools such as: trade, foreign direct investment (FDI), capital markets (meaning among other things, selling bonds on the international market), savings, remittances, and micro-finance should be used in a new strategy for funding development.

I largely agree with these suggestions.

Moyo is at her strongest in explaining why and how African states can benefit from FDI, capital markets, trade, and microfinance.

Moyo’s argument for greater trade (to be added later)

Moyo’s case for FDI and capital markets go hand-in-hand with her case against foreign aid. While foreign aid facilitates (and likely promotes) corruption and ineffective policy-making, FDI and capital markets incentivize fair and effective governance. It seems counterintuitive that borrowing money at a higher interest rate would make all the difference, but Moyo argues that it does. And I’m mostly (but not entirely) convinced. By selling bonds on the international market, African states can take the first steps towards integration into the international finance. They can enter the financial world as real actors rather than as special aid cases. And by selling international bonds, regimes will be forced to improve their functioning. If leaders funnel this money towards corrupt and extraneous uses then they will default on their loans and will not receive a subsequent loan. Selling bonds pressure states to act responsibly and intelligently. What’s more states pay off more and more loans, their image improves and they attract more investment. It’s a tool in which African states are treated with the respect and challenge that other states are treated. Emerging markets often are extremely attractive to investors. They give back higher annual rates of return (on average) than most Western markets. This (I think) is because investors can lend at higher rates and because developing states have the potential for greater national growth (8 to 10% of GDP annually, while economies like the US average 4-6% in good years).

The Gabon Example
There are, however, serious cautions to Moyo’s free-market prescriptions. Her prescriptions are not destined to work by simply flipping on a policy switch. The example that I think of is Gabon. On page 93, Moyo writes, “In the past ten years forty-three developing countries have issued international bonds – only three were African: South Africa, Ghana, and Gabon.”

Moyo implies that African states must follow the example set forth by these nations. African states must make themselves attractive to foreign investment. They must rid themselves of corruption. They must increase political stabilize and endorse strong, sound, and fair policy. Otherwise, international investors will shy away from them. And without these investors, African states will be unable to sell international bonds that are essential to funding development. And once, African states have attracted foreign capital, this will incentive further stability: the course towards development will be on track.

Yet, in the past week Gabon has become increasingly unstable. Although Gabon’s economy may have been stable and attractive enough to enable it to obtain a credit rating, this stability and attractiveness was short-lived (and never guaranteed). In the past week, following the election of the late-dictator, Omar Bongo’s son, Ali Bongo, riots broke out throughout the nation. Gabon, which was starting to appear as a stable economy to invest in and give market-rate loans to, now appears to be falling into the all-to-familiar instability and political violence of a disputed election. Clearly, the free-market tools of FDI and capital markets are not strong enough to ensure that regimes are stable and peaceful. Power struggles still can emerge. Violence can still break out. And investors can still be frightened off. Although stability and sound governance may be incentivized, these futures were not etched in stone. Resource curses (in this case, Gabon’s oil wealth) and national histories (in this case, Gabon’s history under colonial rule and Bongo dictatorial rule) can create a situation of paranoia, frustration, and instability that underlies a surface of sound, stable investment. Thus, the tools that Moyo prescribes are strong, but can fall subject to the same forces that aid has fallen to. (As a side note, how wasGabon able to obtain a credit rating in the first place—after all it was under Omar Bongo’s rule for so long, and in the past year it has seen the death of its ossified leader and the emergence of many contenders for his political post. How would this in anyway make foreign investors believe that Gabon was a stable and attractive nation to invest in? Was it just the oil wealth that attracted them?)

Moyo’s Prescription (Continued)
The case for foreign direct investment (FDI) is similar. With FDI, Moyo essentially argues that African states barter their energy reserves for infrastructure. Foreign direct investment can create local jobs, it can transfer technology, it can bring capital into African nations and attract further investment, and most importantly it can build infrastructure. The example that sticks out in my mind is the one that Moyo uses at the beginning of chapter 7; she describes the surprise of a rich mine-owning motorcycle enthusiast who rode his motorcycle form Cairo to Cape Town and found that approximately 85% of the roads he travelled on were paved just as they would be on any US highway. According to Moyo these roads were paved largely by the Chinese government and Chinese private firms. Foreign states and companies that invest in African resources have an interest an ensuring that the good they obtain are done so in the cheapest and safest way. Having to worry that their goods will be stolen by corrupt government officials, or will take months to travel along unpaved roads are unattractive options. Thus foreign investors have an incentive to see African states develop, and African states have an incentive to govern effectively in order to attract more foreign investment that can fuel economic growth.

The FDI Caveat
There are, however, large caveats to using FDI as a tool of economic growth and development.

Firstly, local governments must regulate it. They must ensure that foreign investors hire locally and that their foreign companies ensure safety standards. What’s more host governments must be sure that this is part of greater plan. They can’t let foreign investors simply mine their lands until they’re exhausted of resources. Governments must ensure that investment in extractive commodities is a stepping stone towards low-tech industry and future high-tech industry. African governments must ensure that investors help build infrastructure and fund education. They must ensure that, in addition to giant oil derricks, textile companies must be established in African states. The path that Asian tigers have followed form textile production to state-of-the-art technological production must be paved, just as the roads to transport extracted commodities must be paved.

African states must get the best damn deal they can get for the FDI that’s rightfully interested in the continent.

And African states must do all they can to attract American and European FDI. After all, Moyo explains that it makes much more sense for Europeans to buy manufactured goods from African states since they have weaker economies and are closer in proximity than Asian states. Yet, until African states can improve governance and infrastructure, African states will be unable to harness their full FDI potential.

Yet, there despite these large caveats regarding FDI and capital markets, serious questions remain. While Moyo’s technocratic prescriptions are strong, they have dangers to them.

Concluding Points
One last quick point. Throughout the course of her writing, Moyo refers to the Republic of Dongo—a fictitious African state, meant to act as the typical African state to which Moyo can prescribe her solutions. My only complaint here is for lack of creativity. Republic of Dongo? Really? Moyo just dropped the C from Congo. What a stale name for a fictitious nation. Interestingly enough, there is a town in Angola and a village in C.A.R. called Dongo. I would suggest that Moyo instead have created a state called the “Central African Republic”—a state generic enough to sound like any on the continent, but obviously this nation exists in reality.

Finishing the book I remain excited. I want find evidence that can better support Moyo’s ideas, but I also want to learn to challenge them. I want to better understand the economic concepts that I am not yet capable of using comfortably and adeptly; and I want to explore in greater focus and detail Moyo’s ideas.