Dead Aid: Why Aid Is Not Working and
At the 2005 World Economic Forum in Davos, Switzerland, former Senator Bill Frist hosted a panel discussion on debt relief featuring a number of African leaders. At the conclusion of the discussion, Tanzanian President Benjamin Mkapa passionately described for mostly Western audience the tragic and widespread effects of malaria in his country. He appealed to the audience for help in buying bed nets for the millions of women and children in Africa at risk of contracting the disease. So moved by Mkapa’s plea, actress Sharon Stone—star of Basic Instinct and Casino—spontaneously rose from her seat in the audience and pledged $10,000 to help buy bed nets for Tanzania. Stone challenged others in the audience to make donations of their own: “Would any one else like to be on a team with me and stand up and offer some money and help him as well?” The man sitting next to Stone stood up and pledged $50,000. Soon verbal pledges, mostly in multiples of $10,000, emanated from around the room. Volunteers at the conference circled the audience, documenting the donations. Five minutes later, Frist estimated that the audience had responded to Stone’s challenge to the tune of $1 million. The news media trumpeted the outpouring of goodwill. “Stone raises $1million for bed nets in 5 minutes,” one headline read.
But what happened to the money? Columbia Economics Professor Xavier Salai– Martin, who was in the audience at Davos in 2005, returned in 2006 eager to find out. First, he learned from officials that despite the verbal commitments of many in the audience that day, Stone was only able to collect about $250,000. UNICEF was forced to step in to fill the $750,000 gap with its own funds. Sala–i–Martin then asked if the bed nets that were purchased actually arrived in Tanzanian villages. No one knew. It is often discovered that massive shipments of bed nets to Africa do not reach their intended beneficiaries. Border guards often steal the nets for their own families, and others are sold on black markets and turned into wedding veils and fishing nets.
Let’s assume, however, that at least some of the $1 million worth of bed nets safely reached their destination in Tanzania. What happens then? Certainly there are thousands of families who are now better off as a result of their new bed nets—an undeniable success. But this is only half of the story. In a small Tanzanian village thousands of miles away from Davos, there is also a small bed net supplier who sells nets to the local population at a modest price. Enter the shipment of the Sharon Stoneinspired nets. Thousands of free bed nets flood the market, admittedly providing help to thousands of Tanzanian families, but at the same time driving the local supplier out of business. The fifteen employees of the local supplier, each of whom was the sole financial supporter of around ten family members, are also now out of a job. Thus, 150 Africans have been driven into poverty as a result of the wellintentioned donations of the Davos attendees.
This is the state of foreign aid today—and it is hurting—not helping—Africa’s chances at success, according to the new book by Dambisa Moyo, Dead Aid: Why Aid is Not Working and How There Is a Better Way for Africa. Moyo, who was born and raised in Zambia, earned a Masters from Harvard’s Kennedy School of Government and a Ph.D. in economics from Oxford. She spent the past eight years as a specialist on sub–Saharan Africa at Goldman Sachs, before deciding that it was time to join the growing debate over the efficacy of foreign aid. For the purposes of her book, Moyo limits her claims to what she calls “systematic aid,” or development aid that governments or international institutions such as the World Bank give to African governments. She excludes from her discussion what she calls “humanitarian aid” and “charity–based” aid, which include aid given by private donors aimed at alleviating human suffering caused by natural disasters, famine, and disease.
Dead Aid makes three basic arguments: First, foreign aid to Africa has not worked in spurring economic growth or reducing poverty; second, foreign aid has actually compounded many of Africa’s economic problems; and third, alternative, market–based solutions will give Africa a greater chance at successful and sustainable economic growth.
With regard to Moyo’s first argument— that foreign aid has not worked—it is hard to argue with the facts. More than $1 trillion in development–related aid has been transferred from wealthy countries to Africa over the past fifty years, and the results have been less than desirable, to say the least. While the proportion of world’s population living in extreme poverty has declined overall since 1980, the proportion of the population in sub–Saharan Africa living in abject poverty increased by 50%. Fifty years ago, Africa was in a somewhat better position, with signs of growth and development emerging around the continent. Today, over half of the 700 million people on the African continent live on less than a dollar a day, and millions are killed every year by disease: one million African children die every year of malaria; two million die annually of diarrhea. Only making matters worse, African leadership is among the worst in the world, with most African countries consistently ranked at the bottom of Transparency International’s annual corruption index list. Perhaps even more frustrating is the fact that while Africa has stagnated, former developing countries in Asia, Eastern Europe, and South America have grown at neverbefore– seen rates—largely without dependence on development aid—with millions raising out of poverty in the process.
These statistics, while grim, are not in dispute. Instead, what is controversial is why aid has not worked. Proponents of aid argue that we have not seen success in Africa for several reasons: the conditions attached to foreign aid have not been strong or targeted enough; oversight of aid implementation has not been rigorous enough; or simply that wealthy countries have not given enough. Columbia professor Jeffrey Sachs, perhaps the most prominent aid advocate, argues that one reason aid has enjoyed limited success is because of the inefficiencies of development organizations: too much of the aid goes to consultants and administrators, and the aid that is left is not properly spread across sectors. By fixing these inefficiencies and targeting aid at ‘sustainable’ projects, we will see better results, says Sachs.
In Dead Aid, Moyo offers a different reason for aid’s failures. Not only does foreign aid fail to spur economic growth, aid itself has been a major cause of Africa’s stagnation. “No longer part of the potential solution,” Moyo says of development aid, “it’s part of the problem—in fact aid is the problem.” Moyo describes in detail a “vicious cycle of aid” in which donor countries give aid to corrupt governments that siphon off as much as possible for themselves and their families. This corruption kills growth and promotes poverty, thus attracting even more aid to the impoverished nation. The cycle continues.
Proponents of aid argue that the cycle Moyo describes is avoidable. By targeting aid at specific projects, or by bypassing African governments altogether, corrupt government officials need not get in the way of aid. In fact, we are seeing aid move in this general direction today—away from governmentto– government transfers, and towards more “sustainable” grassroots projects.
But Moyo is also quick to point out that African leaders are not solely to blame for aid’s failures. The aid community itself, comprised mainly of Western governments and international institutions like the UN and World Bank, is tragically and irrevocably flawed. Moyo argues that the entire aid system creates perverse incentives, in which donors confuse “inputs” and “outputs.” For example, in the Sharon Stone story mentioned earlier, Davos participants cared less about the number of Tanzanians who received bed nets, and more about the total amount of money donated to the cause. Given these incentives, there was little reason for the Davos participants to spend time monitoring the actual use of their donations.
Moyo argues that this phenomenon helps to explain aid inefficiencies at a macro level as well. She explains that development institutions are under a “pressure to lend.” Institutions like the World Bank and the IMF employ thousands of people and maintain enormous budgets devoted to both lending and grant–making (though Moyo argues that to distinguish between the two is meaningless). The result is a system in which “successful lending is measured almost entirely by the size of the donor’s lending portfolio, and not by how much of the aid is actually used for its intended purpose.” In other words, highly visible ‘inputs’—budget sizes and lending portfolios overshadow the “outputs” we should care about—growth rates, poverty rates, and health statistics. The more we give, the better. End of story.
Moyo’s critics argue that it is too soon to give up on aid, and that institutional changes can vastly improve aid effectiveness. Jeffrey Sachs, for instance, largely agrees that donors have failed to focus on ‘measurable’ results, and he has called on donor governments and international institutions to change their behavior in this regard. But at the core of Sach’s disagreement with Moyo is his belief that much of Africa is in a “poverty trap,” from which it cannot emerge without the partial help of foreign aid. Despite all of aid’s failings, Sachs argues, foreign aid is a necessary beast if Africa is to escape from poverty.
But this line of argument—that aid has not worked because it has not been implemented properly and there has not been enough of it— is the same argument the aid community has been making for decades, says Moyo. According to her, Africa is not in a “poverty trap” as much as it is in an “aid trap.” In her eyes, as long as aid is part of the problem, continuing the aid regime will only further hinder African growth. Moyo carries her assertions to their logical conclusion: if Africa is to succeed, it must begin to wean itself off of foreign aid.
Ending aid dependency is only part of Moyo’s solution. As the final component of her thesis, Moyo argues that there are workable alternatives to aid, mostly in the form of market–based programs. Specifically, Moyo presents four broad alternatives to foreign aid: first, rather than relying on loans and grants from other governments and development institutions, African governments should borrow money from international investors to finance development; second, African governments should make their countries more attractive to foreign direct investment; third, both African and Western governments should end the common practice of providing subsidies for domestic products, which often results in the ‘crowding out’ of foreign goods; and fourth, African governments should modernize their domestic financial markets and promote microfinance.
While these all sound like sensible steps, there are reasons to be skeptical. Moyo ignores a number of economic and political realities that will make the implementation and success of many of these solutions more difficult than she lets on.
For instance, in order to rely successfully on the international capital markets for funding, investors must be assured of a country’s financial and political stability. While it is laudable that select African countries have been able to secure loans in recent years, it is by no means clear that the international capital markets will be a stable source of funding for African development in the future. As Moyo points out, 35 African countries secured loans in the mid–1990s. All of them defaulted. As long as African governments believe that foreign aid will continue to provide a stable flow of income—probably a political reality in today’s world—there is no incentive to pay back debt.
Moreover, even if African governments were convinced that the foreign aid spigot would be turned off, they face serious obstacles in the capital markets. In order to secure loans successfully from private investors, African governments must be able to assure lenders that they are able to pay back those loans. This would require that African governments have the ability to identify and complete public projects that spur growth and development, which in turn would provide a source of tax revenues to repay debt. This is no small task. If well–intentioned development experts have not been able to implement top–down growth initiatives successfully in the last fifty years, it is a stretch to believe that African governments, plagued by corruption and with little expertise, will be any more successful, given essentially the same top–down approach.
Moyo also believes in the poverty–reducing powers of microfinance, and urges readers to become involved via the now–famous microfinance firm Kiva.org. But while the stories of those receiving microloans are indeed inspiring, the economic reality is unclear. Moyo presents no empirical evidence in Dead Aid showing that microfinance has any positive impact on growth or poverty levels. Indeed, empirical studies on the subject often yield mixed results, largely because of data limitations and the diversity of locations with vibrant microfinance sectors. While microfinance seems to be a worthwhile initiative, Moyo should be more sober in projecting its potential influence. Moyo says that microfinance “has the capacity to create enterprise and growth in developing countries,” but it hasn’t yet.
Perhaps the most compelling of Moyo’s recommendations is her call for both Western and African countries to open up for trade by removing trade barriers and ending agricultural subsidies. Rapid growth in emerging economies like China and India is due in large part to their vibrant export sectors. Africa’s export sector, composed primarily of agricultural products and natural resources, has floundered under the weight of Western agricultural subsidies. Wealthy countries spend almost $300 billion on agricultural subsides – almost three times the total amount of aid given by these countries to poor countries. Yet again, political realities complicate this proposal immensely. There is almost universal agreement in the aid world that subsidies inhibit African growth, as Africa has the potential to benefit tremendously from the export of its agricultural products and natural resources. Yet, domestic political currents in Western countries have largely prevented development in this area, thanks to powerful lobbying efforts by agricultural sectors seeking government subsidies. While Moyo convincingly outlines the damage that these subsidies inflict, she does not provide readers with a solution to the political barriers that have, for decades, prevented their removal. The strength of agricultural lobbies in developed countries makes it unlikely that this issue will be resolved soon.
Unfortunately, the one thing Africa is successfully exporting is its intellectual capital. In Dead Aid, Moyo explains that after receiving her education at Harvard and Oxford, “there seemed to be fewer and fewer reasons...to return, and more and more reasons...to stay away.” Every year, thousands of Africans like Moyo graduate from Western universities and see little incentive to return home, choosing instead to pursue their careers outside of Africa. This is the so–called “brain drain,” of which Moyo is a classic example. One has to believe that in a future, economicallythriving Africa, those like Moyo, with top–tier educations, will return to the continent to start businesses, open research universities and generally contribute to a flourishing economy. If the basic arguments in Dead Aid are right, and Africa is one day freed from the tyranny of aid, perhaps we will see the continent move in the direction of that future.
EVAN DARR is a senior in Columbia College majoring in Economics. He can be reached at email@example.com.
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