Thursday, May 23, 2013

Dead Aid, by Dambisa Moyo - A Free Market Apology for African Poverty-Related Deaths

By Bub,

    In Dead Aid, Dambisa Moyo attempts to draw a causal connection between aid and the lack of development in African states.  She follows these attempts by offering alternative policy prescriptions consisting of a menu of free market based solutions that are meant to reverse the decades of economic, political, and social damage alleged to have been done by aid.  Moyo’s attempts to draw a causal connection between aid and lack of development are controversial and intriguing, but ultimately fail.  Her policy prescriptions offer a mixture of innovative thinking and free market optimism that are both hopeful and dangerous.  Moyo supports her arguments by meandering between research studies, case examples, simple anecdotes and a priori reasoning.  This makes for vibrant and compelling reading but it leads the arguments to bump up against each other in contradiction along the way.  Dead Aid succeeds in part in its stated purpose of figuring out “how to finance the development agenda so that, whatever the development policy, economic prosperity might be realized (2009, p. 72)” by offering free market ideas tailored to the current African economic landscape.  Indeed any developmental fortune reversal for Africa will no doubt involve some if not all of Moyo‘s non-aid-related financing proposals.  But it falls short of offering a comprehensive guide to solving African developmental problems because it ignores the possibility, and increasingly the reality, of aid playing a major role in creating, and facilitating these and other innovative solutions.

    Dead Aid lays out a host of urgent problems that Sub-Saharan Africa is facing: poverty is rampant and increasing with per capita income around US$1 per day; economic growth rates are abysmal and stagnant or decreasing; life-expectancy in the region is going down, along with adult literacy rates;  tyrants rule, with half of Africa under non-democratic rule, and eleven civil wars waged in Africa over the past twenty years (Moyo, 2009, p. 4-6).  All of this grief is occurring in spite of aid being given to African states at unprecedented levels.  For Moyo, the grief caused is not in spite of aid, it is because of it.  And it, aid, needs to end.  Moyo acknowledges the fact that many scholars proffer different possible causes for Africa’s development woes, and that many others cite examples of aid working well,  But she proceeds to dismiss them without careful consideration of their plausibility.  She also altogether avoids the possibility of any mitigation of aid’s blameworthiness due to these acknowledged factors and examples.  This gambit fails because what Moyo gains in rhetorical cohesiveness she loses in credibility within the first three chapters.

    Her singular focus on aid as a catchall cause of Africa’s problems is, in its veracity, admirable.  But when presented as a legitimate argument for ending the vast majority of current aid to developing countries, it becomes over-simplistic and ineffective.  Moyo blames aid for everything in Africa from inflation to civil war, and even for undermining the element of trust in African societies.  The case for addressing the problems presented in the book is made convincingly.  Corruption; conflict; a lack of, or serious flaws in, basic governance institutions; these problems all permanently handicap African nations (to each a different degree, but overall to a large extent) in the absence of serious efforts aimed at ameliorating them or catalyzing them from their current inert state.  Aid is part of that inertia, but aid does not cause it.  Aid is not the primary cause of any of these problems.   And aid is being used to combat these all of these problems.

    Aid is (and in the Bretton Woods era always has been) evolving.  Mechanisms have been developed to help aid do everything from protecting human rights to preventing disease, and combating corruption.  The picture of aid that Moyo rails against is not reflective of current aid realities.  She acknowledges innovation and progress that has been made in aid policy over recent decades, but then argues against a one-dimensional caricature of aid in contradiction of that acknowledgement.  Moyo allows for intellectual flexibility when addressing her proposed free market solutions to African development problems in order to circumvent practical roadblocks, but she does not entertain the same possibilities for aid.  Aid is dead and it needs buried, Moyo intimates, but laissez-faire policy reminiscent of colonial exploitation is worthy of resurrection.  China will invest without imposing burdensome safety or environmental requirements, so let them.

    Some of Moyo’s proposals have real merit.  Micro-finance and is already underway transforming the economic landscape not just of Africa but of all the developing world.  Capital markets and free trade offer theoretical opportunity along with foreign direct investment but they also have downsides that would seem to dwarf any legitimate concerns over aid.  Remittances and savings have real impact on families in Africa and the developing world and they present a range of economic possibilities.  If her prescription pans out as anticipated, Africa will be in a much better place when it does.  However, Moyo’s ideological free market bias blinds her to possible pitfalls of her plan that would leave Africans susceptible to the same problems she currently blames on aid - from corruption and poverty to loss of sovereignty.  Thoughts of Moyo‘s former career as a Wall Street financial consultant are evoked by the callousness of some of her anti-aid arguments.  If Moyo’s prescription does not pan out as intended, incredibly serious consequences could result.  Without aid millions of people might die.  This is a risk Moyo seems too eager to take.  She argues that her eagerness is due to the gravity of Africa’s economic situation; that Africans have nothing of real value (including their lives) left to lose.  Such a stark characterization feels stilted and suspect coming from someone in Moyo’s station of relative comfort.

    Calls for such drastic measures made so casually raise questions about the possible willfulness of the previously mentioned blindness.  Is Moyo, not aid, the wolf in sheep’s clothing?  She has little reservation about imbuing Western donors with malicious motivations.  Does she harbor any herself?  It is a question that should be asked.  Is Dead Aid a clever ploy to convince the public of the moral necessity to end aid and turn its clients over to multi-national corporations?  Or is it trying to convince unwitting African leaders, who Moyo describes almost uniformly with disdain as myopic and corrupt, to eschew aid but retain Washington Consensus conditionalities for the good of their economies?  If it is, according to Moyo, it would be unnecessary.  Moyo points out that Western aid may be headed toward a precipice as Western nations struggle to cope with economic turmoil and are distracted with military engagements in Asia.  Democracy is on the rise in Africa and globalization continues to pervade.  Dead Aid hints that free market and institutional reforms, as well as an end to aid as we know it may be inevitable.  I do not believe that Moyo views these changes as inevitable (if so, why waste time writing a book to champion them?), but I do accept her sincerity in believing that they are necessary.  They are in fact neither.  Dead Aid’s value in the contemporary aid conversation is its injection of passion and controversy that has  inspired continuing dialogue about improving aid.  It urges one of the many possible paths to take at a potential crossroads after decades of policies of which have achieved only limited success at best.  Moyo’s path is to end aid in five years (decrease it down to 5% of GDP that is), forcing African governments to jump start market forces with policy reform in order to raise the necessary replacement revenue.  Africa will succeed, according to Moyo, only when you give it freedom to fail.  Why, we might ask, would she deny Goldman Sachs the same freedom?

    Moyo declares that aid is not working.  Africa is the perennial recipient of aid.  African economies and states depend on it, and bend to its demands.  Moyo asks why are African countries in such precarious financial situations to begin with?  One possibility is that economic fortunes are determined by geography.  Some states are endowed by nature with abundant resources.  Some states are not.  Those that are not face the challenge of not having enough resources to grow their economy.  But those that are naturally graced with resources face challenges too.  The ‘resource curse’ affects states with a wealth of a natural resources.  Resource deficient states do not have the luxury of imprudence.  Resource rich states find their leaders flush with cash which for Moyo makes them susceptible to thievery, corruption, and poor investment.  Climate and terrain also have some determinative impact on a state’s economic condition.  Some states can grow crops, others are pure desert.  Some states are landlocked, accessible only by mountain routes impassible for months out of the year, others have abundant coastline.  These features can give states advantages or disadvantages.  Some scholars such as Jeffrey Sachs argue that Africa is disadvantaged in this regard.  Factors present in many African nations such as malaria prevalence and physical isolation (such as landlocked at high altitude) greatly increase transaction costs for capital investment (Sachs, 2003) leading to poor economic growth.  Moyo retorts that Saudi Arabia is hot, and Switzerland is landlocked at high altitude and yet they are able to thrive.  Disadvantageous geographical factors such as those pointed out by Sachs can hamper a states ability to develop without assistance.  There are examples of states that have overcome such challenges, but it was not by grit and determination alone as Moyo implies.  Cameroon does not have the oil reserves or coastline that Saudi Arabia has nor does it have the regional economic integration and historically advantaged location of Switzerland.  Cutting off aid to a nation facing those challenges, in addition to not having a physical infrastructure in place would amount to an insurmountable blow rather than a genial prod to pull on one’s bootstraps.

    Other factors, many deriving from the legacy of colonialism, are entertained as possible causes of Africa’s development trouble.  Much ethnic conflict in Africa today can draw its roots to demographic fragmentation resulting from arbitrary political partition by European powers centuries ago.  Enduring colonialist attitudes of racism and paternalism cause and purport to explain the retardation of African development.  Alternatively, the imposition of foreign institutions of governance on cultures not conducive to the manner of societal structure imposed is also given as an excuse for the failure of African institutions.  Whatever the reason for poorly functioning institutions, their effect is a poorer economy.  Rodrik and Subramanian assert that “an increase in institutional quality can produce large increases in income per capita (Rodrik & Subramanian, 2003)”.  States without quality institutions lose out on that increased income.  Some scholars, like Moyo ally William Easterly, blame Africans for this loss for allowing the existence of ‘bad governments’ against whom apparently not enough courageous dissenters have fought yet to overthrow (Easterly, 2009).  The complex web of causality is hard if not impossible to disentangle.  Moyo does not waste much energy on such an effort.  The fact that institutions are important to economic growth is widely accepted across the ideological spectrum from Sachs, to Rodrik, to the multilateral lending institutions, to Easterly, and Moyo.  The disagreement is typically over exactly how much importance it has to growth.  Moyo believes that markets are key to improving institutions in Africa.   According to Moyo, in order to engender market solutions and improve institutions you must first end aid.

    Moyo argues that aid does not work.  Aid proponents that point to various examples of aid working are countered by Moyo explaining how it was not aid that provided the exemplary results, or at least it was not the kind of aid that she is talking about.  The Marshall Plan is probably the most touted example of a successful aid program.  Unprecedented amounts of aid were sent by the U.S. to rebuild Western Europe after WWII.  Given that Western Europe is again a preeminent world economic power the Marshall Plan seems on its face an aid success story.  Not so, according to Moyo, not in the way that aid is delivered to Africa today. 

    The Marshall Plan made up a small share of recipient nations’ GDP (2.5%-3%) when compared to the more significant share of African GDP made up by aid today (15%) (Moyo, 2009, p. 35).  Also, it was finite in duration with an express five year period stipulated from the beginning.  Africa’s stream of aid according to Moyo has been ‘constant and relentless’ (Moyo, 2009, p. 36) which has eliminated incentives for long term financial planning by African leaders resulting in, among other injuries, institution impotency.  Europe had functioning institutions before the war.  The Marshall Plan was in effect an effort to rebuild institutions that were already once in place, not to build functioning institutions out of non-functioning institutions.  Lastly, Moyo points out that the Marshall Plan mainly targeted physical infrastructure, in contrast to Africa where aid “permeates virtually every aspect of the economy… The more it infiltrates, the more it erodes, the greater the culture of aid-dependency (Moyo, 2009, p. 37)”.

    International Development Association ‘graduates’ are another famous example that aid proponents use to demonstrate aid success.  Countries formerly dependant on aid such as Chile, China, South Korea, Turkey, and Thailand have ‘graduated’ from their aid dependency to the thriving developed economies that these countries enjoy today.  Again Moyo argues that aid to these countries was smaller (10% GDP) and for a shorter term than that extended in Africa.  Next, Moyo tackles an African counter-example, Botswana, where 20% of GDP was from aid during the 1960s.  The country experienced a sustained high growth rate in the proceeding decades and had subsequently reduced aid to 1.6% of GDP by 2000 (Moyo, 2009, p. 38).  Moyo argues that Botswana is not an example of aid success, it is actually a triumph of free trade, stable monetary policy, and fiscal discipline; a success story of market policies and working institutions.

    What then does Moyo make of aid conditionalities that have been developed over time to encourage free market and good governance policies similar to those she credits for Botswana’s success.  Conditionalities do not work, according to Moyo, citing a World Bank study that showing that 85% of aid with conditionalities was not spent on its specified purpose.  An attempt to finance a power station might inadvertently finance a brothel.  A horrifying prospect to be certain, but by merely pointing out that conditionalities are not currently being followed and then concluding that aid does not work would be as emotional of a response as was meant to be elicited by the brothel scenario.  If conditionalities are not working then it would be worthwhile to examine how they might, especially if the ends they are promoting are precisely the ones you are arguing for.  Moyo does not do this, perhaps in order to sidestep the issue that oftentimes conditionalities do work.  The other 50% of African countries have functioning democracies with regular elections, freedom of the press, and basic human rights partially due to conditionalities.  Moyo then grasps at straws to counter the aid proponent that has satisfied all of her extenuating circumstances by asking about the prospect of aid to African countries with good policy environments - how would aid not work if it was designed to promote democracy and its accompanying institutions; a functioning legal system, contract enforcement, and property rights?  In these cases Moyo asserts that democracy might get in the way of good governance, by making it harder to pass economically beneficial legislation.  Moyo cites the Asian Tigers as examples of economic development occurring in less than democratic environments, and floats the desirability of a benevolent dictator over that of democracy for Africa‘s economic development.  The disconnect is staggering.  Moyo argues throughout the book that accountability for government officials is paramount to economic development.  One would think that a democratically elected leader would be more likely than a dictator to be responsive to his/her constituency’s economic needs and more readily held to account.  Moyo momentarily disagrees. 

    Moyo is only willing to concede that it is possible for aid to have some positive short term effects.  But she offers a hypothetical example of how short term aid success could result in long term harm.  The example involves an aid agency deploying mosquito nets to a country to combat malaria. Many lives are saved by the deployment, but the local mosquito net manufacturer is run out of business due to disappearing demand.  The country is left in as poor an economic position as before, but now after the nets deteriorate, they will also lack the capacity to replace them.  This is an example of where Moyo places arbitrary limitations on possibilities of aid, while imaginatively considering free market solutions.  When Moyo returns to this mosquito net example later in the book to demonstrate how a market based approach would have been preferable, she hypothesizes that once malaria had subsided due to access to healthcare due to economic growth due to her policy prescriptions, we would again be putting the unfortunate local net maker out of business by destroying demand.  In this case, the net maker is more industrious and allowed to reconfigure his/her business into making hair nets.  Why would the local net producer in the first example not transfer their skills to a related craft where demand had not run dry?  And why would they not return to net manufacturing if and when demand also returned?  Those assumptions would be made if applying a classical economic decision making model.  Those are the assumptions that Moyo bases her free market arguments on.  Yet those assumptions inexplicably do not hold here, where they would demonstrate that aid is not the force of evil that Moyo tries to argue that it is. 

    Moyo argues that aid kills growth primarily by causing corruption, but also by weakening the middle class, fomenting conflict, causing inflation, reducing savings, crippling exports, prompting the issuance of losing bonds, and breeding lazy policymakers.  Aid causes corruption when it is disbursed to governments that lack accountability.  Due to low incomes, the tax base in Africa is comparatively small.  When government revenue comes from aid rather than a tax base, leaders are no longer accountable to their constituencies, so the argument goes.  This argument presumes that we are not talking about a democracy even though there is a fifty-fifty chance that we are.  If we are talking about a democracy, Moyo would have us assume that due to the corrosive nature of aid it will be suffering some dysfunction such as a prevalence of patronage politics that will negate the responsiveness of the democratic process.  In either case, democracy or not, leaders’ paramount concern will be how to effectively exploit aid resources.  They will skimp on construction projects, for instance, and pocket the proceeds, building a bridge for appearance sake that is doomed to crumble unexpectedly one day.  Even though there are real life examples of this kind of behavior, that notion is offensive.  Leaders after all use bridges too.  So do their friends, and family, not to mention their fellow citizens and foreign visitors.  It is possible for African leaders to be as benevolent, visionary, capable, and responsive as any Western leaders.  One need only to look at the list of Nobel Peace Prize laureates over the past twenty years and note the five Sub-Saharan Africans on it.  African leaders can and do care about their constituencies.  African leaders can and do want the best outcomes for their countries and can and do put policies into place to achieve those ends.  Many African leaders turn down opportunities for corruption as readily as their Western counterparts.  Not all African leaders mind you, but more than Moyo conceives as possible.  And some take advantage of opportunities for corruption as readily as their Western counterparts too.

    The fact that some African leaders are corrupt, is not caused by aid, as Moyo argues.  Neither is it a reason to end aid.  African leaders do not lack some fundamental element of psychological constitution that compels them to steal whenever the chance presents itself.  If that were the case, then none of Moyo’s prescriptions would work.  The reality that corruption exists provides incentive for aid donors to guard against it, not to discontinue aid to corrupt and honest politicians alike.  If Moyo is right about the destructive affects of fueling autocrats with aid, fueling them with FDI or access to capital markets would be equally destructive, if not for the market mechanisms that discourage bad behavior.  This observation ought to lead to an argument for utilizing those mechanisms in the delivery of aid, not for arguing to cut aid off completely.  At least that way deserving governments that play by the rules continue to receive aid and only corrupt governments are cut off.  What happens when leaders are cut off?  Under Moyo’s prescription leaders would be left to the market.  When corrupt leaders are caught cheating the market do they suddenly become more responsive facing the prospect of becoming slightly less rich?  That is doubtful, I am sure even to Moyo.  Does that mean market solutions are failures as well?  Somehow her answer I would guess is no.  Her desire to vilify aid leads to important insights becoming muddled with implausible arguments to the point where it becomes difficult to discern one from the other.  But blaming aid is Moyo’s unique contribution to the literature.  Her policy prescriptions amount to promising reports on current market trends in the developing world.  A book exclusively detailing the benefits of microfinance and its ability to collateralize trust within the group-lending model would not have sold nearly as many copies but might have been more palatable to the intellect.

    Some of Moyo’s policy prescriptions struck me as equally galling as her abstruse aversion to aid.  Moyo‘s advocacy for entering the international bond market was sound in structure but not entirely persuasive.  In particular her explanation of the importance to this process of African leaders wooing international investors, and letting international corporations rewrite their tax policy in order to obtain a rating from the revered agency that sanctioned the credit-default swaps and mortgage-backed securities that wreaked havoc on our global financial system, in order to join a more exclusive club, to get richer investors to come expecting more tax concessions and more intensive ‘wooing‘ left me shuddering at the thought of what exactly that might mean.  There are benefits to being a winner in the bond leagues - lowered borrowing costs, access to more capital, etc.  But this raises the question of why must aid be excluded from the implementation of this type of solution.  Moyo indicates that it would be beneficial for African countries to get the World Bank to offer a provisional guarantee for their initial bonds as Argentina had done previously (Moyo, 2009, p. 95).  The difference between that strategy and one where the guarantee money is granted to a country to use for that purpose and to obtain future bonds once the initial bond is paid off is without a distinction save for the satisfaction it affords people like Moyo in knowing that aid is not being doled out.

    Moyo’s book sent me reeling, groping for balance, only to regain my ideological footing once the novelty of her argument gave way to its substance.  Dead Aid challenged the conventional aid wisdom and forced an uncomfortable and frank, but beneficial, conversation among academics.  Dialogue on aid has expanded as a result, prompting donors (I imagine) to more carefully consider the true impact of aid.  Moyo did not succeed in making aid obsolete.  Her policy proposals call for the continuance of various financing innovations at work in Africa today, and more importantly urges the continuing innovation of finance.   Granting access to markets in innovative ways to people in poverty around the world has the potential to make a large, lasting, positive impact on livelihoods in Africa.  FDI is already reaping benefits and causing growing pains and reciprocal benefits in African economies across the continent.  New trade avenues in Asia could provide the means for economic development in agriculture that has been stymied by Western protectionism, and spark growth in industry, and services too.  These processes are supplemented with aid.   Aid will continue and will change in response to new challenges as they come.  Aid is not a single entity or even the process of giving money for a non-commercial purpose.  It is the process of assisting those in need of assistance.  Moyo’s critique of aid is reserved specifically for state to state aid transfers.  But even she sees room for innovation in this particular form of aid in conditional cash transfers.  Aid will fail at times.  This will necessitate a change in aid, not in a cessation of assistance.

Citations

1    Easterly, W.  "Geography Lessons: Correcting Sachs on African Economic Development." Huffington Post. May 29, 2009.
2    Moyo, D.  Dead Aid: Why aid is not working and how there is another way for Africa. New York: Farrar, Strauss and Giroux, 2009.
3    Rodrik, D., & Subramanian, A. "The Primacy of Institutions and What This Does and Does Not Mean." Finance and Development. June 2003, pp. 31-34.
4    Sachs, J.  "Institutions Matter, But Not for Everything." Finance and Development. June 2003, pp. 38-41.
5    Sachs, J.  "Aid Ironies," Huffington Post.  May 24, 2009.