Dead Wrong

Dead Wrong

Dead Aid, a book by former Goldman Sachs economist Dambisa Moyo, has been in the spotlight recently. Moyo, a Zambian, argues that development aid has not only failed to reduce poverty in Africa but has in fact perpetuated it by fostering corruption and dependency. She also claims that development should be funded through enabling poor countries to access the bond markets and international trade. Since then, Moyo joined Time Magazine’s list of the world’s hundred most influential people in 2009, and the Financial Times has hosted a debate about Moyo’s polemical and quite widely read book.

This success is no surprise. Moyo’s résumé is well-suited for such highly effective conservative media campaign. Her book is part of an influential tradition that rejects welfare policies, whether domestic or international. There have already been plenty of attempts, in history, to relieve the wealthy from guilt by claiming that assistance to others is in fact harmful to them. Moyo’s book is no more than a poor contribution to this long tradition.

The contribution is a poor one because a better constructed argument could have helped the debate about official development assistance move forward. The countries cited as examples are precisely those that have attracted the greatest aid inflows. Countries such as Ghana, Botswana, Mozambique, and Tanzania, which recorded the highest growth rates in Africa prior to the global recession, also happen to be the donor community’s “aid darlings.” Yet, aid can hardly be said to have hindered development in these countries.

In fact, the author misses the main point about development aid, which has been reiterated in countless publications over the past 50 years, namely that all forms of external aid bring with them negative side-effects that have to be taken into account. One example of this is the syndrome known as Dutch disease: injections of foreign currency, whether as loans or donations or private or government funds and whether granted on a for-profit or a non-profit basis, affect the balance of payments and damage the country’s competitiveness (a syndrome known as the “Dutch disease”). Moreover, the more highly centralized the management of aid inflows is, the higher the risk of corruption. Had Moyo discussed these issues more substantially, she would have been forced to recognize that there is almost no difference, in terms of unwanted side-effects, between issuing bonds and receiving a loan or donation from an official development agency. Net benefits depend on the way funds are made to work and on productivity gains generated by these funds in recipient countries.

But Moyo does deserve praise on one point. She echoes a type of criticism which receives wide coverage in Africa, and has a degree of genuine legitimacy. By focusing on welfare issues such as health care and education on the one hand, and on good governance on the other hand, many donors and NGOs have lost sight of the macroeconomic framework in which their investments operate. Crude interpretations of the Millenium Development Goals have fostered dependency and caused government spending levels that are out of tune with recipient countries’ budgets. This has led to increasing calls from African countries to prioritize infrastructure, agriculture, and the private sector, and these calls are echoed by Moyo in Dead Aid.

Moreover, an overview of the effectiveness of development aid in general should proceed with caution. During the African debt crisis (1985-2000), aid was used mainly to refinance debt and lessen the social burden of budgetary adjustments. As a result, human development indexes were maintained throughout the period instead of declining at the same rate as GDP. Yet aid inflows were too small to have a much larger impact, and inflows even declined by half, reflecting the decline in Africa’s geopolitical importance after the fall of the Berlin Wall.

Hope returned after the turn of the century, with growth in African countries taking off for structural reasons such as urbanization, fiscal consolidation, and rises in commodity prices. Ironically, stronger growth is already enabling countries to develop along the lines recommended by Moyo, which involves prioritizing investment and the private sector. This course has already been taken by several donors, and is confirmed by recent growth in foreign investment in Africa. In this sense, Dead Aid is preaching to the converted. But this does not mean, unfortunately, that the moment has come to cut off official development aid to Africa. Had Moyo’s former employers read Dead Aid, perhaps they would have abstained from their massive withdrawal of investment from the continent during the 2008-2009 crisis.

Instead, official development agencies had to mount last-minute rescues, pouring in the funds that countries needed to keep good investment projects running. Dead Aid is also ill-timed because the continent’s most dynamic countries are now asking industrialized countries for massive transfers of funds to compensate for climate change and to combat the effects of the global recession.

Mediocre contributions can sometimes spark worthwhile debates. Dambisa Moyo’s book has the merit of reminding development assistance devotees that aid can have unwanted structural repercussions and the high priests of free-market economics that their own approach can produce similar effects. Between the approaches lies a twofold reality: growth can only come from a dynamic private sector. And no market is sustainable without regulation, welfare, and redistribution policies. While these policies have obvious drawbacks, these are easily outweighed by the benefits.

Jean-Michel Severino is CEO of the Agence Française de Développement (AFD) and a founding member of the blog www.ideasfordevelopment.org