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The Poison Fruit of Aid: A Review of Dambisa Moyo's "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

DeadaidAfter the elections of 2006 in Uganda, it came to light that millions of dollars in aid given by the Global Fund to fight malaria, tuberculosis, and aids had been stolen, some to buy votes, some to line the pockets of aid bureaucrats.  The Fund requested an investigation and gave the government of Uganda money for the investigations and prosecutions.  Then came the revelation that even that money was stolen.  The scenario would be laughable were it not so serious.  As Charles Obbo opines in an article in Uganda's Daily Monitor, the entire aid bureaucracy is itself corrupt, with many aid workers complicit in kickbacks for projects they manage or outright pocketing funds.  Little aid money actually makes it to the people it is intended to help.

None of this would be news to Zambian-born economist Zambisa Moyo.  In the recently published Dead Aid, she makes a convincing case that the more than $1 trillion transferred from wealthy countries to Africa over the past several decades has not improved the lives of Africans but actually led to increased poverty, corruption, and dependency.  At the same time, nations that have ultimately rejected a dependency on aid --- like South Africa, Botswana, and Ghana --- are better off, seeing a reduction of poverty, less corruption, and better and more transparent governance.  Moyo argues not for a change to the aid regime but for its death.

The statistics are compelling.  With 700 million Africans living on less than $1 US per day, poverty has increased to the point where sub-Saharan Africa has over 50% of the world's people living in abject poverty.  Life expectancy has stagnated.  One in seven children die before the age of five.  Adult literacy has plummeted below pre-1980 levels.  Fifty per cent of the continent is under non-democratic rule.  The continent seems locked into a cycle of dysfunction.  While one might point to localized examples of change, on a macro level the aid model is an abysmal failure.  And while President Obama has paid lip service to the idea that, in his words, "the purpose of aid must be to create the conditions where its no longer needed," a sentiment often expressed by world leaders, the recent pledge of yet more aid by the G8 --- $20 billion dollars to help third-world farmers --- does not radically alter the fundamental assumptions of the aid model.

Moyo takes aim not at emergency aid or charity (though she notes that even they can be criticized as having unintended, harmful consequences) but at the large, systematic cash transfers from rich countries to African governments, whether concessional (below market rate) loans or grants.  Along the way, she provides an enlightening history of aid and its various foci over the years.  In the end, however, she concludes that while aid remains at the heart of the development agenda, there are compelling reasons to show that it "perpetuates the cycle of poverty and derails sustainable economic growth." With compelling anecdotal and statistical information, she demonstrates how aid is one of the greatest facilitators of corruption, reduces economic growth, leads to more poverty, and then leads to more need for aid.  Corruption analysts estimate that at least $10 billion --- nearly half of Africa's 2003 aid receipts --- departs the continent every years, stolen by corrupt leaders and funneled to private accounts.  She also shows how aid reduces savings and development, leads to inflation, chokes off the export sector, and creates dependency.  In short, with aid money flowing, African leaders need not look elsewhere for development strategies.

Having made her case for the negative impact of aid on development, Moyo devotes fully half of her short book to a prescription for a world without aid.  Her proposal envisions a gradual (but uncompromising) reduction in systematic aid over a five- to ten-year period.  First, she proposes that African governments access the international bond market, noting that the money is available and investor interest in emerging economies high, but simply awaits action by governments to secure appropriate credit ratings and woo the investors.  Uganda, for instance, is in a position to issue bonds (it has a credit rating), and yet thus far has failed to do so.  Why?  Likely because aid money is freely available and more easily misused without serious consequence.  A default on a bond issue can zap your credit rating and, at least for a time, have a chilling effect on investor willingness to lend.

A second opportunity is for African governments to open themselves to foreign direct investment, as in roads, railroads, power plants and other lasting investments, something the Chinese have done well.  But as long as aid is at the center of development strategy, few governments have the political will or incentive to take the steps necessary to improve the regulatory and infrastructure environment such that conditions will be friendly to such investors.

Third, Moyo suggests that trade should be a critical component of development, facilitated by better transportation infrastructure and western countries that will open their markets to African goods.  Exports increase tariffs and tax income, leading to a better stream of revenue for government.

Entrepreneurs will flourish, says Moyo, increasing trade, only when they have access to credit.  She advocates microfinance as the means by which people without assets (the unbankable) can obtain the small loans (not handouts) to finance their raw materials and tools of trade.  She notes that the default rate on these small loans (generally less than $100 US), is less than five percent.  Unlike aid, which either comes with no strings attached or with conditions that recipients know are often overlooked, nonpayment of these loans is rare because borrowers know that if they don't pay back the loans they have today, their lender will blacklist them, and they won't be able to borrow more tomorrow.  In addition, there is a community interest in ensuring repayment: loans are made to members in a group, and when default threatens, members of the group often repay the loan (with the idea that they will recover from the borrower later) in order to keep loans flowing to other members of the group.  This Grameen Bank model (pioneered by Nobel Peace prize winner Muhammad Yunus) has been very successful and yet awaits more widespread implementation.

Two other stimuli to develop are remittances (money sent home by Africans living abroad) and savings (money saved by Africans and deposited in banks or invested).  She says that remittances tend to be relatively stable sources of income that play an important role in paying for imports and repaying debt.  In addition, they are even used by some banks to securitize loans, thus expanding access to credit.  However, middleman tap these funds, often taking up to 20%, making it important for African governments to find ways to facilitate cheaper ways to send money home.  As to savings, Moyo argues that there is a lot of untapped capital in the hands of Africans, often hidden and not banked where it could finance development and bring greater financial stability.

Thus, Moyo argues for an end to aid as we know it and a multi-pronged, market-based development model, something South Africa and Botswana have already embraced.  Given that most African countries have already hit "rock bottom" (her words), she questions:

Isn't it. . . likely that in a world freed of aid, economic life for the majority of Africans might actually improve, that corruption would fall, entrepreneurs would rise, and Africa's growth engine would start chugging?  This is the most probable outcome --- that where the real chance exists to make a better life for themselves, their children and Africa's future generations, Africans would grab it and go.

Rather than giving something for nothing --- an approach that has bred corruption and a coterie of profiteering elites, isn't it time for something more radical, something based on proven market forces?

I recommend Dead Aid as an informative, illuminating guide to the existing development model and a stimulus to thinking about what will really help the poverty stricken millions of Africa.  At 154 pages, it's a quick read, not laborious but sufficiently illustrated by anecdotes that the non-economist can follow it. 

It's not enough to want to do good.  We have to know what in the long-term will lead to a sustainable good.  We have to be wise and discerning do-gooders.  Hopefully Moyo will follow this book with a second where she offers a critique of the work of charities in Africa and a prescription for a charity that will build sustainable communities that rarely if ever need charity but, rather, are able to help others.  Regardless, her book will hopefully provide fuel for lasting change in Africa.