Dead Aid

So I finally got around to reading “Dead Aid” by Dambisa Moyo, arguably her most famous wok, and one I see referenced quite often. Despite being written in 2009 (like many books that rely on economic data, it really doesn’t age that well), and despite an incredible amount of repetition (in his foreword Niall Ferguson was able to replicate Moyo’s entire argument in a handful of pages), Dead Aid raises a number of important issues and proposes numerous solutions to an important problem. Yes, as The Economist pointed out last week, Africa is “emerging”, but after more than a trillion dollars in aid shouldn’t this have happened far sooner and far more spectacularly?

A Zambian-born economist, Moyo is in a unique position to comment on the effect of aid in Africa. She is also quite frank; “Aid has been, and continues to be, an unmitigated political, economic, and humanitarian disaster for most parts of the developing world.” She continues; “The lives of billions rest on getting the right financing solutions to the problems of developing nations. After more than five decades of the wrong diagnosis, it is time now to turn the corner and take the harder but indisputably better road.”

On the face of it, the facts seem to back Moyo’s argument. While the economies of countries like Brazil, China, and India have exploded in the past three decades, the most aid dependent countries have had a negative growth rate. Since 1971 the number of Africans living in poverty nearly doubled. Aid dependent countries in Africa that once were far ahead of China in per capita income have since fallen far behind. And real income in many African countries is below what it was in the 1970s.

While Moyo does not directly address whether these examples would be worse without the trillion+ USD that has been sent Africa’s way, she does offer several reasons why aid has not helped. First, concessional loans can inflate African currencies and become unserviceable when interest rates eventually rise. Second, when aid comes in the form of direct services – and here she uses the example of African mosquito net manufacturers – aid can crowd out African businesses, driving both entrepreneurs and workers out of productive activity, and reducing investment and entrepreneurial incentives. Third, aid in the form of government transfers is often stolen or used to supplement tax revenue, which is then inefficiently spent and makes governments more beholden to donors than to taxpayers and citizens. Government transfers also greatly incentivizes internal conflicts and corrupt behaviour, as whoever controls the government will have control of aid funds. And finally, and largely through crowding out, aid undermines domestic saving and investment. In short, Moyo claims that aid disincentives productive activity (like starting a Mosquito net business), and incentivizes inefficient activity; like corruption, conflict, and theft.

In the place of aid, Moyo proposes that African countries look for new financial models. Firstly, African countries should encourage large-scale direct investment, the same thing that has driven China’s astounding growth. Second, Moyo encourages African countries to enter bond markets, something that will foster both accountability and oversight, and spur the foreign investment. Third, Africa should push for free trade deals within Africa, and with Europe and Africa – where it’s agricultural products will fetch better prices. Fourth, African countries need to follow the example of China, India and South America in better ensuring property rights, and developing micro finance organizations.

Since the book was released in 2009, some of these ideas have already been put into place or otherwise realized. For example, in 2011 alone Africa saw a 27% increase in foreign direct investment. An organization I am involved with has begun a micro finance project in a village in Malawi, which has already proven to be a success in empowering local entrepreneurs and is something we are looking to expand and replicate. But despite these successes and examples, and while Dead Aid has drawn praise from the likes of Kofi Annan and Wen Jiabao (not to mention a forward penned by Niall Ferguson), there are a few issues with it.

Moyo’s criticism of aid borders on fundamentalism, and her devotion to free market solutions borders on the puerile. It is more than a tad unrealistic to think that abruptly turning off the aid spigot will not lead to calamity and will lead to all of these ideas being full realized, and that something that works in China will automatically work in Africa. Furthermore, in focusing so stringently on the economic, Moyo has overlooked several aspects that define modern Africa. For starters, many African countries have exorbitant amounts of natural resources, and Chavez is a brilliant example of how an elected leader can behave without aid and with a steady stream of resource rent –  not beholden to anyone, especially the citizenry. Second, unlike China and like India African countries by and large do not have benevolent autocratic governments to ensure consistency, and do not have an ethnically and culturally homogenous citizenry. And lastly, Africa has a long, long way to go before it’s infrastructure will encourage the kinds of foreign investment that has drawn people to China. This is especially true of the countries in central Africa, who are increasingly the poorest countries due to their isolation. This infrastructure will take a lot of investment before it begins to pay off, and who will be willing to do that but aid donors?

This is a great book to stir debate and I agree with much of it. Moyo has countless examples and insights dotted throughout, and it is a brilliant book to read purely for its sections on the history of aid and aid in Africa. The problems lie more with its age (a lot has happened since 2009) and with the uncompromising nature of Moyo’s argument, rather than the underlying reasoning. But the most important thing is that I definitely learned something. Much recommended.