Quarterly Bulletin

 Dambisa Moyo’s book, “Dead Aid” has aroused a lot of debate on development aid. Her thesis has mainly been that aid has not led to development but underdevelopment, corruption, and dictatorships. She has argued further that aid should be stopped in the next five years. Maarten de Zeeuw, an expert in the area of tax administration and tax policy working in Less Developed Countries and Mwangala Mubita, a Master of Business Administration (MBA) from Zambia, argue for a different view of aid than that of Moyo. They stress that aid cannot in itself lead to development but can address emergencies, lower the burden of hunger and disease, and help in the general welfare of lives of the poor.

However Dr. Moyo’s proposal is more radical than that. She wants African self-reliance to be brought about by a unilateral termination within five years (p. 144; or five to ten years, p. 76) of all development aid to all African countries, irrespective of their stage of development.

This abolitionist view, which advocates direct abolition instead of reform or intensification, is a point of view adopted before by Nobel Prize laureate Milton Friedman and the Britons, Peter Bauer and Graham Hancock. Nowadays they are joined by libertarians, business people and nationalists from recipient countries themselves, such as Dr. Moyo, but also the Kenyan self-taught economist James Shikwati, the Ugandan journalist Andrew Mwenda, the Ghanaian IT-pioneer Herman Chinnery-Hesse, the Ghanaian economist and democracy propagandist George Ayittey and the South African journalist and economist Moeletsi Mbeki (brother of Thabo Mbeki).

This powerful current provides multitude of arguments. Hundreds of billions of US dollars have been spent on development aid for Africa, but this has hardly resulted in growth of the Gross Domestic Product (GDP) of the recipient countries (at least those in Africa). Taking into account that the reconstruction of Western Europe thanks to the Marshall plan is not comparable, which country has achieved the status of a developed nation by means of aid? During the years of the Cold War, aid has been provided for improper (political) reasons, sometimes propping up extremely corrupt regimes. The aid industry is well aware of its own interests and projects an arrogant image. Aid is often a transfer to the Government, and thereby not conducive to the development of a market economy. Compared to the creation of the right incentives, financial and other resources are of subordinate importance, and the transfer of resources creates an incentive to a dependent attitude which is an obstacle for self-reliance. And the inflow of financial resources leads to revaluation of the exchange rate which undermines the incentive for exporting. It also creates a potential for inflation and corruption.

The main merit of Dambisa Moyo is to have arranged these arguments in two groups: aid allegedly not bringing any benefit for the recipient country (Chapter 3), and on the other hand having great disadvantages (Chapter 4). A cost benefit analysis on this basis must necessarily lead to the abolition of aid. In fact, even  with  immediate effect. It is not obvious why Dr. Moyo still proposes a term of five years in order to phase out aid. Support has been expressed internationally (the Financial Times published a superficial interview, available at: www.ft.com/cms/s/2/4121b1fa-ee5a-11dd-b791-0000779fd2ac.html) and in Zambia (available at: www.zambian-economist.com/2009/03/dead-aid-by-dambisa-moyo-review.html). Yet it is hard to find sound elements in Dr. Moyo’s line of argument.

ATTACKING THE CONCEPT OF AID

Moyo contrasts (like Max Weber in “Politics as Vocation”, 1919) the ethics of good intentions or ethics of conscience, and the ethics of responsibility, which   emphasise   the   actual  achievement of good results. Whilst Weber recommends to combine the two (one wonders how good results will be achieved by people without good intentions), Dr. Moyo’s Introduction and the section entitled “We Meant Well” (p. 28) unilaterally opt for the latter, rejecting the former. Those inspired by the parable of the good Samaritan (Luke 10) and others with good intentions may feel displeased by this antagonistic approach. It would better have been replaced by a discussion of the proper definition of criteria for success, and of the model to ensure that these results are achieved. For instance, when page xix promises “...a new model ... that offers economic growth, promises to significantly reduce African poverty, and most importantly does not rely on aid,” it seems that the key priority is not economic growth and poverty reduction, but self-reliance at all costs.

It is definitely necessary to debate whether international strategies to promote development put the right emphasis on investment, trade and aid. Such a debate is not served but sidetracked by a frontal, generic attack on the principle of aid to those in need itself. This is not just in the context of the relationship between the countries of the Organisation for Economic Cooperation and Development (OECD) and Africa or the LDCs, but in all social settings, even nations or more restricted social groupings concerned about the well-being of their least fortunate members and their own internal cohesion. That is what happens at page xviii in statements like:

“Deep in every liberal sensibility is a profound sense that in a world of moral uncertainty one idea is sacred, one belief cannot be compromised: the rich should help the poor, and the form of this help should be aid. The pop culture of aid has bolstered these misconceptions. .... We live in a culture of aid. We live in a culture in which those who are better off subscribe – both mentally and financially – to the motion that giving alms to the poor is the right thing to do.”

Harvard professor Ferguson at page ix concurs and calls this a “widespread Western belief.” Apparently they are not satisfied with this aspect of Western culture and would like it to change. But the idea that “the rich should help the poor” is not just a Western belief. It is almost universally endorsed by all cultures (it is questionable if culture in the normative sense can exist in its absence). It is rooted in the world religions including Christianity, but also in the philosophy of social democracy. For instance, the norm that ODA should be at least 0.7% of the GDP of the donor country is a norm of the United Nations, OECD member states, the African Development Bank, Australia, New Zealand, Japan, Korea, China, India, and the member states of the Gulf Cooperation Council. The claim that “[w]e live in a culture of aid” is unbalanced judging by the share of aid in GDP (0.3% in OECD countries, on average) as compared to the shares in GDP of consumption, investment and trade, all of which are driven by self-interest, not altruism.

AID EFFECTIVENESS

Aid expenditures for the benefit of health care, democratisation and care of the environment are not made to promote economic growth, but because health and democracy are valuable in themselves. It is not reasonable to expect that such expenditures, via investments and export or through other channels, will lead to higher growth of GDP. They do lead to lower mortality figures for mothers and children and a higher life expectancy of people living with HIV and AIDS and others. Measured by these yardsticks, they are definitely successful. Expenditures   for the benefit of  education  might, via higher productiveness, innovation and foreign investments, lead to growth, but only with a lag of more than five years. And expenditures for emergency aid will take place when a country is afflicted by a disaster, and will therefore be negatively correlated with economic growth. For these three reasons it is not so surprising that econometric research carried out between 1995 and 2004 found little correlation between the total aid amounts and economic growth. Researchers Clemens et al. (www.cgdev.org/content/publications/detail/2744) in 2004 started to take these considerations into account and found that the remaining aid categories which could have a positive effect in the short term were budget and balance of payments support, infrastructure, support to agriculture and industry -- 53% of all aid flows in their data). These were indeed effective, with a rate of return of 13%.

Dr. Moyo, who at p. 46 maintains that “study after study after study” has shown that allegedly aid has no impact on economic growth, shows no awareness of this development. She is therefore left with the so-called micro-macro-paradox that development aid at the level of projects is often demonstrably successful, from the construction of roads to the extinction of diseases. Her solution for this is to deny or ignore the evidence for success at the micro level.

Characteristic for abolitionism is the suggestion that hundreds of billions of US dollars spent on aid to Africa would be a big amount. Dr. Moyo says that 1 trillion of US dollars allegedly were involved (http://online.wsj.com/article/SB123758895999200083.html). But the authority on these statistics, the OECD’s Development Assistance Committee (DAC) (www.oecd.org/dac/stats), reports a cumulative amount of Official Development Assistance (ODA) over the period 1960-2007 of 413.5 billion dollars. This is a  discrepancy  symptomatic  for  the  way  Dr. Moyo uses her sources. This is less than Switzerland’s GDP in a single year; clearly insufficient to have a decisive effect over 48 years on a population at least a hundred times larger. The fear of aid addiction on a continental scale is definitely overblown.

Has there ever been a country that achieved development with support of development aid? Yes, and even undisputedly, because it is Dr. Moyo herself who mentions that the United States between 1957 and 1990 gave as much aid to South Korea as to all of Africa (p. 45). Among others Taiwan, all new member states of the European Union joining in 2004 - 2007, and in Africa, Botswana, started prospering after and partly because of aid. This was accompanied by democratisation, something Dr. Moyo has reservations about. In all these cases, there were simultaneously drastic improvements in the investment climate. The World Bank’s annual Doing Business Survey (www.doingbusiness
.org/CustomQuery/) shows how far Africa in this respect lags behind the rest of the world. This is in respect to the dozens of procedures and the hundreds of waiting days needed to start a company. There is also the construction licenses, rigidities concerning the employment of workers, the registration of property rights on immovable assets, the availability of credit, the protection of investors and the rule of law.

Dr. Moyo, who poses as a free market economist, does not make a single proposal for deregulation or improvement in these areas, other than distorting the tax system by tax privileges (p. 102) in a brief and inadequate section on what a typical African country needs to do to attract Foreign Direct Investment. If it is made almost impossible to the private sector to pursue wealth creation, it is not realistic to expect from development aid that it will play the role of growth engine (instead of catalyst). Dr. Moyo’s proposals exclusively concern the mobilisation of financial amounts for the benefit of Africa’s development, and hardly the rate of return which can be achieved on capital invested under Africa’s investment climate. However Africans themselves seem to be well aware of the problem that capital flight is enormous.

From independence till the middle of the 1980s, Africa was virtually a socialist continent. There was great waste and stagnation, documented in the case of Ghana, for example, by George Ayittey (www.cato.org/pubs/journal/cj7n1/cj7n1-11.pdf). Dr. Moyo ignores this, so that the stagnation in that period can be attributed to development aid and thereby to the West. The development business has gone through a development itself, as it has had to learn to help effectively and transparently. Innovations in the “aid industry” (departure from comprehensive Government planning and Cold War motives; local procurement wherever possible; ownership by the recipient partner; Poverty Reduction Strategy Papers) are however ignored. Thus the West looks like a stagnant monolith which never learns from its mistakes.

NEGATIVE SIDE EFFECTS

Dr. Moyo fears that the appreciation of the exchange rate as a consequence of the inflow of aid moneys will have a negative effect on export. She even believes that this effect (which she calls “Dutch disease” instead of resource curse) in the 1960s “devastated the Dutch export sector and increased unemployment” (p. 63). Of course every inflow of foreign currency, irrespective whether it is foreign investment, exports themselves or aid, puts the exchange rate under upward pressure. But it would be absurd (and self-contradicting) to consider such an inflow for that reason as something negative. The main issue is that there will be an adjustment problem looming if the inflow originates from a source that is finite.

Dr. Moyo like other abolitionists erroneously supposes that development aid is synonymous to budget support such as has been given (but recently suspended) by the Dutch Government to Zambia’s Ministry of Health. The only exception she admits is humanitarian aid, which she mainly excepts from criticism (p. 7) -- incidentally also an error. Terms such as “project aid” and “technical assistance” do not occur in her dictionary. She suggests that almost all development aid is transferred to recipient governments. Due to supposed enormous lack of accountability this merely promotes corruption. She fails to indicate how that would improve if governments would get international commercial loans; she offers no proposals for the strengthening of Internal Audit Departments and Auditor-General’s Offices. Most of her proposed alternatives for aid do not accrue at all to the main beneficiaries of aid: governments and NGOs.

MANAGING AID, NOT ABOLISHING IT

Dr. Moyo’s book rightly expresses the desire for self-reliance. But to seek this by first of all abolishing development aid would be putting the horse behind the cart. Development aid should be managed and optimised, not abolished. Botswana, which in testimony for the US Senate’s Subcommittee on African Affairs from 1996 (available at: www.cbo.gov/ftpdocs/47xx/doc4747/1996Doc11.pdf) is compared to Zambia, offers an example:

Botswana and Zambia received comparable amounts of aid in the 1970s and 1980s if measured relative to the size of their economies. However, it appears that Botswana was able to use its foreign assistance more effectively to contribute to its investment needs as identified in its National Development Plan. That Plan serves as a guide for public expenditure and investment; it does not plan the economy or control the private sector. It also serves as an investment guide for donors, since any project that is financed must be in the plan and the recurrent costs must be incorporated into the budget. That practice ensures that donors are undertaking projects that are in the best interest of Botswana, as identified in the plan. Through the development plan, the Government in essence takes on the role of donor coordinator, thus giving it greater influence in designing and establishing the projects. The Government encourages individual donors to specialise in particular sectors of the economy. By focusing on certain areas, donors have been able to learn from their experiences, and the staff of the Ministry of Finance and Development Planning works with the same organizations from year to year.”

Similarly, Botswana’s former president Festus Mogae maintains (http://unpan1.un.org/intradoc/gr
oups/public/documents/CPSI/UNPAN026975.pdf):

[4] The Plans, coupled with transparency, accountability and commitment to abide by the Plans, helped Government to access significant levels of Official Development Assistance and technical assistance. In fact, in the early 1980s, Botswana was one of the largest aid recipients on a per capita basis among the developing countries. The generous technical assistance we received ... enabled us to make effective use, not only of the capital assistance at our disposal,  but also and above all, of our own financial resources when they became available as a result of mining activities. (...) [6] External borrowing was undertaken after careful assessment of projects to be financed as well as realistic assessment of ability to pay back. In addition, Botswana took advantage of concessionary international finance and resisted borrowing at high costs from private capital markets and multilateral development institutions.

Dr. Moyo deals with Botswana’s case on the one hand categorically stating “...aid is not responsible for this achievement...” (p. 38), on the other hand claiming that Botswana has abandoned foreign aid and embraced the Dead Aid proposal (p. 144; 150). But in reality Botswana is still receiving technical assistance.

If aid will be proactively managed instead of abolished, and furthermore the investment climate in Africa would really be tackled, development aid to most African countries might indeed be abolished twenty or thirty years from now.

On 7 July 2009 Pope Benedict XVI in his encyclical Caritas in Veritate urged rich countries to allocate larger portions of their GDP to development aid to poor countries. Mercifully and wisely, he ignored Dr. Moyo’s proposal in her book.

Maarten de Zeeuw and Mwangala Mubita
Rotterdam, The Netherlands