Column van Peter de Haan (verschenen in The Post)
The other day I passed by a bookshop in town and saw in the middle of the shop window a book with a striking title: Dead Aid. Its subtitle was: Why Aid is not working and how there is another way for Africa. The book was reviewed some time ago in The Post by Chola Makanga. As I am working in the domain of development aid, I wrote this column with a donor`s perspective in mind.
Dead Aid is written by Dambisa Moyo, a Zambian lady. Ms. Moyo has an impressive curriculum which includes a PhD in Economics at Oxford University. She also has wide experience in the financial world as Head of Economic Research and Strategy for sub-Saharan Africa at Goldman Sachs.
Zambians can be proud of her as her book is well written and it is a bomb shell of a book. Why is that? Because Ms. Moyo is angry about the poor performance of donors as they utterly failed in promoting Africa’s sustained economic growth and fighting poverty.
President Kagame of Rwanda was so inspired by the book that he called in Ms Moyo’s help to wean Rwanda off its aid addiction. European Ministers for Development Aid are frantically reading the book; some even have invited Ms. Moyo to lecture. In Lusaka, the book is the talk of the town amongst the aid community.
Is her harsh judgment on the donors correct, let alone fair? This is the question I will deal with. But firstly, I will summarize Dead Aid’s contents. The book consists of two parts. The first part is about the ‘World of Aid’, and the second is entitled ‘A world without Aid’. At the end of part one she rightly says that development aid critics before her, such as William Easterly and Paul Collier, did not really provide alternatives for failing aid. Ms. Moyo does offer an alternative route to development which I will deal with below.
Africa’s development
How did Africa fare during the half century, having more than one trillion of aid dollars. Ms. Moyo takes the reader through Africa’s development since Independence. African policy makers followed successive mainstream development philosophies. Firstly, there was the state-led development philosophy. However, mismanagement, inefficiencies and falling export prices prompted many African governments to borrow (easy accessible) capital, to the extent that in the early 1980’s quite a few of them were near bankrupt. This triggered structural adjustment, financed by donors such as the IMF and World Bank. Many African countries had to restore order in their macro-economic and monetary policies as well as had to liberalise trade. At the turn of the Century, it was felt that impoverished and debt ridden African counties would never be able to develop if they were not relieved of their debts. After all, paying off debt depletes a country`s financial resources which otherwise could have been invested in health, education and trade promotion. Hence, the enormous debt forgiveness wave, promoted by an odd combination of people such as Gordon Brown, Bono and the Pope!
Despite all the efforts, Africa’s real per capita income today is lower than in the 1970’s. While the number of the world’s population and proportion of the world’s people in extreme poverty fell after 1980 the number of Africans living in poverty nearly doubled`.
Donor’s role
Ms. Moyo concludes that it is impossible to draw on Africa’s aid-led development experience and argue that aid has worked. Why is that, one may wonder? Because even when aid has not been stolen, it has been utterly unproductive. Donors failed to constrain corruption and bad government, Moyo says. These statements are typical for her dealing with the donors: she puts the blame for Africa’s failure to grow squarely in their court. Ms. Moyo admits that Africa’s failure to generate long-term growth must be a confluence of factors: geographical, historical, cultural, tribal and institutional. Apart from the fact that this is rather an open door statement, she does not elaborate it at all. Instead, she puts the spotlight on the donors` role once again: ‘While each of these factors may be part of the explanation in differing degrees …. African countries have one thing in common-they all depend on aid’. I would like to add that, unfortunately, they have also a few other explanatory aspects in common, as Ms. Moyo herself so well characterized in her description of Dongo, a fictious African country, littered with man-made disincentives: widespread corruption, a maze of bureaucracy, a highly circumscribed regulatory and legal environment, and ensuing needless streams of red tape.
Ms. Moyo’s analysis of the donors` role can at best be described as polemic. That is a pity, because she could have applied her sharp analytical skills with more depth and fairness in analysing their role. True, she admits that it was not donors only role to help Africa grow; a lot of aid went to social development and humanitarian relief (often to help clean up the mess caused by man-made disasters), and to fight killer diseases such as malaria, TB and, more recently, HIV and AIDS. Yet, her main thesis is that aid props up corrupt governments who interfere with the Rule of Law and block the establishment of transparent institutions which hinder both domestic and foreign investment. Fewer investments reduce economic growth, which leads to fewer job opportunities and increasing poverty. In response to growing poverty, donors give more aid, which continues the downward spiral of poverty. But, are the donors the sole culprits? Donors are there to help countries develop, but if their leaders are not willing to do so, there is very little donors can do. What they then do is to try to prevent the situation from getting worse. I admit though that donors are sometimes persistent in supporting incompetent and/or corrupt governments.
Moyo’s solutions
Now, let us move to the second part `A world without Aid`. The solutions Ms. Moyo presents are in the domain of trade and development financing, with the exception of aid finance, of course. African countries should issue bonds in the commercial market place. Gabon has done so, and so has Ghana. Why are bonds a much better means to finance development than aid? Because the bond issuing country has to get a rating of its credit worthiness. However, to achieve this, the country has to put order in vital financial and governance aspects. Secondly, evidence shows that the returns on bonds of emerging markets are much higher than on home bonds. Generating finance from bonds is more expensive than, say, a soft loan from the World Bank. But the author says that the fine print of these concessional loans proves to be costly, as the status-quo of aid dependency guarantees reputational damage. Ever present corruption and the negative stigma also form part of hidden costs. How much better, she says, if a country pays the higher financial rate, and gets quality investment and an improved standing in the world!
One crucial assumption is that African countries do indeed get an acceptable rating. The second one is that international finance is available. When Ms. Moyo wrote the book, the credit crunch had not yet unfolded in all its devastating consequences. I fear that African countries will now have a very hard time to attract any foreign commercial financing. Moreover, Ms. Moyo admits that African countries have not improved their credit ratings over the past few years. Of the 35-odd African countries that had issued bonds in the international capital market around the mid 1990’s, virtually all of them defaulted. In the subsequent thirty years, none of them have returned.
Moyo has, rightly, an open eye for the economic potential of Africa’s poor. That potential should be unleashed through micro-credit, based on the Grameen Bank model, involving joint liability of small groups who together take loans and at the same time are encouraged to save. Then, there are remittances from Africans living overseas who send US$ 17 billion each year back home; much more than the amount of annual aid given. Invest those remittances productively, is what Ms.Moyo advocates, and introduce diaspora bonds. Lastly, there are home-grown savings as an important source of investment and growth. This is still untapped as many African financial markets are inefficient: borrowers cannot borrow and lenders do not lend, despite the billions of dollars floating about, notes Moyo.
The fictitious African country Dongo, Moyo concludes, should abandon the obsession with aid. It should plan for only 5 per cent of aid to finance its development; the rest is to come from bonds, trade, foreign direct investment, remittances and savings. The time to do so is more than ripe, now that Africa registers relatively high growth figures. Yet, governance has to be improved, because if money from the bond market is ill spent or embezzled, surely no fresh money will be provided. Moyo writes: ‘.. in a world of good governance, which will naturally emerge in the absence of the glut of aid, the cost (risk) of doing business in Africa will be lower’.
Turn to China?
Africa should turn to China for its future investments and development, says Moyo, not only because of its readiness to invest in health care and agriculture, but also because of China’s commitment to foreign direct investment. She notes that China’s African role is more sophisticated than any other country’s at any time in the post-war period. Apparently, Ms. Moyo is fond of China’s involvement in Africa, probably inspired by the notion that China will be a superpower before long, and because of its business-like attitude towards Africa. Hopefully, she will also watch China’s protectionist policies regarding cotton for example, and its involvement in Africa from a governance point of view, which she underplayed.
The second part of the book is much more critical of the performance of African governments. The author notes that economic growth won’t accelerate unless African policymakers remember that there are other developing regions where it is much easier to generate attractive returns with less hassle. This is probably not accidental –their leadership just cares more, Moyo states!
Dead Aid provides a road map to wean African countries off aid. With any addiction, that will not be easy. Ms. Moyo is not the first one to propose measures to get growth going. Does Ms. Moyo provide the solutions which will work? I am afraid not. Although her proposals would take away the negative effects of aid, she does not take into consideration the Dongo character of many African countries. Maybe this is because she is not living in one of them to experience the tremendous brakes put on any development by inefficient and corrupt governments and the very low quality of their education as well as the sorry state of their infrastructure. Maybe she is too optimistic about the effects of her development financing proposals. To tell you the truth, I`m not. I don’t think that even a healthy financing basis of countries like Gabon and Ghana will propel development. The typical African country`s institutions and accountability mechanisms are simply not yet good enough. Much more, including a lot of patience, is required. Ms. Moyo rightly states that this ‘much more’ involves dramatically improving governance. Well, it is precisely the promotion of good governance which donors are supporting. There is nothing wrong in donors doing so, provided they act tough on non-compliance, and that has –I admit- not yet always the case.
