If you only read one thing this week…

Is “Dead Aid” talking about “us”? by ifyouonlyreadonethingthisweek
February 2, 2010, 3:01 pm
Filed under: Uncategorized

Dambisa Moyo’s book, Dead Aid: Why aid is not working and how there is a better way for Africa made quite a stir when it was published last year. In case you haven’t read it yet, our own Devan Wardwell has written an excellent summary (see below) that makes you feel as though you have read the book in detail!

The Basics:
  • Moyo is from Zambia, and is an economist. She says she doesn’t give development advice. Instead, she gives economic advice on ways to administer aid that lead to economic prosperity.
  • For the purposes of this book, Moyo characterizes “Aid” as “Official Development Assistance” – basically government to government loans and subsequent debt relief, facilitated by the World Bank and the IMF.
  • She dismisses “humanitarian aid” (MC’s type of assistance) both as small fry compared to governmental aid/debt relief and as merely an extension of the “culture of aid” that permeates the west and has become a cultural commodity since pop stars have taken up its banner.
  • She is not entirely against aid, stating, “It might well be the case that more modest aid programmes that are actually designed to address the critical problems faced by African countries can deliver some economic value. The DA proposal does allow for this perspective, leaving room for modest amounts of aid to be part of Africa’s development financing strategy.”
Her argument:

Aid is a drug, and countries are addicted. The cycle is self-perpetuating and poor African nations are in so much debt that they need loans just to make their interest payments. The constant flow of loans with “soft” terms and debt forgiveness makes countries entirely dependent on this flow of cash.
Not only is aid dead, but it is to blame for every major problem in Africa today. Aid doesn’t just get misappropriated because of corruption, is the cause of and exacerbates corruption. Countries become complicit and dependent. Because of this, the cycle of aid also:
  • Decreases a country’s incentive to save
  • Eliminates the governmental balance provided by taxation and representation,
  • Exacerbates civil wars
  • Chokes off the export sector (“Dutch Disease”)
  • Discourages private foreign investment
  • Engenders lazy policy making
  • Eliminates the incentive to reform governmental institutions
A bit of History:
In short, the much of the present situation was caused by two global economic shifts:
#1. In the late 70’s global oil prices spiked significantly which in turn lowered interest rates, especially for developing countries. This caused African nations to borrow heavily, and in a few years their debt was spiralling out of control.
#2. In 1982, a host of countries announced that that were defaulting on their loans. This was a situation very similar to what happened in 2008 with America’s big banks. If these nations had been allowed to default it would have thrown the global economy into crisis.
So the IMF and World Bank stepped in. They gave poor African nations loans with extremely favorable terms so they wouldn’t default on their private debt. Private lenders stopped lending to these countries and their only recourse was through direct economic assistance from various governments.
Poor nations slipped into the cycle of dependency because there was no accountability or enforcement. Institutions lent with no real control for where money was used, no punishment when funds were misappropriated and most importantly they began a policy of debt forgiveness when countries couldn’t pay their loans back. In essence this meant cutting governments one big check, and the line between grants and loans blurred.
Then of course it all got misappropriated. One study of World Bank funds found that 85 percent of aid was not used in its intended direction. Mugabe got a private jet, aid money never reached poor people, and institutions grew stagnant and entrenched.
Her solution:
Cut off all “aid” in 5 – 10 years.
  • Issue bonds in the international market – she says this will attract private investors and ensure accountability. At the end of the day governments DO need cash and this is a way to provide it without cutting them a blank check.
  • Encourage foreign direct investment (FDI), particularly from China. She argues that China’s investments in Africa, while purely business-minded and geared towards harvesting resources, has more of a positive impact than Western development assistance. She advocates that countries should open up more to these opportunities because the benefits trickle down from private business development and the accompanying investments in infrastructure and job creation.
  • Increase exports, cut more free trade deals and stop American agricultural subsidies. By increasing exports, particularly in agriculture, it stimulates the local economy.
  • Finally she argues that micro-finance and related financial services are necessary and important in generating a middle class. Remittances are also beneficial and barriers should be removed to make this easier and cheaper.

1 Comment so far
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Nice summary, you should also read “White Man’s Burden.” The problem with IMF and World Bank is that they have strayed from their mission. The problem with Western Aid in general is that it is prescriptive rather than empowering. How many times have we responded to an RFP not based on what we know a country needs, but based on what the donor wants and unfortunately you have to otherwise you won’t win the grant. Also, because aid is prescriptive projects are often not kept up, a community has to be invested in a project otherwise a facility will be built and in three years it will need repairs. In speaking with a friend who works for Mott MacDonald in Iraq, he said he visited a village with the American military, the head of the village told the US soldier that the village need a health clinic and a well. The soldier told him they were getting a school and something else (eye-roll) here. I agree with the author about direct aid to governments and I think aid organizations can focus on smaller programs outside the central government that empower people.

Comment by tianatozer

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