Aid Is Not Working – Dambisa Moyo

A few notes from Chapter 3 of Moyo’s book Dead Aid on why growth in Africa has been so poor and how aid as a policy to stimulate growth is so unsuccessful. Moyo believes aid to be detrimental to the future of the developing world.

  • Asia has witnessed strong economic growth in the last 40 years.
  • The BRIC economies have boomed and will reach per capita income levels of the West in the coming years.
  • Africa has been bypassed by this growth. Why is this?
  • Geographical determinism: environment and topography decide a nation’s wealth. Importance on ease of resource manipulation.
  • Resources have however been shown to be a development curse; Paul Collier in Africa: Geography and Growth, shows the remarkable difference between nations that are resource poor & own coastline, those that are resource poor & are landlocked and resource-rich nations with coastline. Those that were resource poor with coastline have consistently performed best.
  • Being landlocked and having resources are believed by Collier to reduce 1% from growth rates.
  • Historical influence: colonialism has undoubtedly played a massive role in determiningAfrica’s development. When nations are built ignoring ethnic divisions, with borders constructed arbitrarily, they are unlikely to succeed.
  • Tribes: there approximately 1000 tribes in Sub-Saharan Africa.Nigeria alone is thought to contain 450 tribes. Ethnic rivalry undoubtedly leads to conflict. Civil war is thought cost a nation four times its annual GDP. There are also considerable spill-over effects.
  • There are examples of very successful but ethnically divided nations (e.g.Botswana, Zambia & Ghana)
  • Absence of strong, transparent and credible public institutions: David Landes in the Wealth and Poverty of Nations argues that economic growth is built on public institutions.
  • Niall Ferguson argues strongly howGreat Britain gained from common law and explained how British-style public institutions have consistently promoted economic development.
  • Dani Rodrik argues that institutions that provide dependable property rights, a forum for managing conflict and maintenance of law and order, as well as politicians who align policy to public and social benefits are the four most important factors in long-term economic growth.

Does Aid Work?

  • $1 trillion of aid has been offered toAfricasince the 1940’s. Here are the reasons used to support continued aid to developing nations.
  • Marshall Plan success: the problem is that the economic differences between Europe in the 1940s and Africa during the 20th Century are very different. The EU was not aid dependent like many modern African states. European economies needed a short-term stimulus andEurope had a strong policy framework from which to build on. Most financing was spent on physical infrastructure. Aid inAfrica has continually been spent on the military, education, health and government institutions
  • Look at the IDA Graduates: 22 nations that previously received assistance, no longer require aid payments. For example: China, Colombia, Chile, South Korea & Turkey. For these nations aid has always been short and has been kept at less than 10% of national income.Botswana is an example that is always quoted. Between 1968 and 2001, the nations per capita income growth rate was 6.8% – this was achieved through consistent following of market-based policy, stable monetary policy and fiscal discipline.
  • Aid works with conditionalities: aid can be effective when its usage is ruled and regulated. Aid can be tied in three ways: 1) it must be spent on donor-nations goods and services, 2) the right to pre-select the sector or project on which funding will be spent & 3) the finance can be spent only under certain economic and political criteria. This has failed miserably in reality due to bad governance and corruption. World Bank studies have shown that 85% of aid is not used as agreed. Conditionalities don’t seem to matter in practice.
  • Aid successful in good policy environments: the much quoted Burnside and Dollar (2000) report proved this to be the case. It was latched onto by many in the aid policy world. The US pumped $5 billion into extra aid funding through the Millennium Challenge Corporation. Unfortunately the B&D report did not stand up to scrutiny in later empirical tests.
  • Democracy and aid are successful: many still believe aid fails to work when combined when combined with African-style democratic practices of corruption, economic cronyism, anti-competitive industries and inefficient production. Amartya Sen argues that in democracies, policymakers risk losing office in the face of economic disaster and therefore do everything they do to avoid this scenario. However, democracies can stunt growth in the initial stages of development – it can make it harder to push through beneficial economic measures. Some point to the development experienced under Pinochet’s Chile or Fujimori’s Peru as cases where undemocratic states have been economically successful. In reality, economic growth is a pre-requisite for democracy, not the other way round! In ‘What Makes Democracies Endure?’, Przeworski et al. explain that democracies can be expected to last 8.5 yrs where per capita income is under $1000, 16 yrs between $1000-$2000, 33 yrs between $2000-$4000, 100 yrs for between $4000-$6000 and democracy can be expected to last indefinitely when per capita income reaches above $6000.
  • Aid effectiveness – the micro-macro paradox: often aid can be totally destructive for developing nations due to its impact on the domestic economy at a micro-scale. There must be a sustained change to ensure that aid is used to support local industries and products instead of flooding markets with foreign, imported goods.
The Answer Is No
  • “They know it’s crap but it sells t-shirts” British Chief Economist for the Department of Trade
  • Clemens et al.  aid has no impact on development.
  • Boone (1996) ­– aid increases consumption but vitally does increase investment.
  • In the past 30 years, aid-dependent nations have grown at an average of 0.2% per annum…
  • Between 1970 and 1998, when aid flows were at their peak, poverty rose from 11% to 66% in the world’s poorest nations.
  • Currently 600 million of the 1 billion that live inAfrica, live their lives in poverty.
  • There is no other sector (in business or politics) where such poor and unsuccessful policies have been allowed to continue for so long.
  • Aid is not effective, it is actually part of the problem.