Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

Dambisa Moyo's masterpiece is an economic blueprint intended to serve as a paradigm for weaning Africa off the debilitating aid-dependency syndrome that has kept the continent in perpetual economic stagnancy for decades. Using dependable statistics, Moyo argues that government-to-government or bilateral aid (which should be distinguished from charity-based aid) to Africa undermines the ability of Africans to conceptualize their own best economic and political policies. As she puts it: "The net result of aid-dependency is that instead of having a functioning Africa, managed by Africans, for Africans, what is left is one where outsiders attempt to map its destiny and call the shots."(66) Foreign aid does not only undermine economic growth, it keeps recipient countries in a state of endemic poverty. It is itself an underlying cause of social unrest and possibly even civil war.Moyo notes that the "prospect of seizing power and gaining access to unlimited aid wealth is irresistible."(59) To buttress her argument, she refers to Grossman (1992) who contends that the underlying purpose of rebellion is the capture of the state for financial advantage, and that aid makes such conflict more likely. In the past fifty years, Moyo observes, over US$1trillion in development-related aid has been transferred from the rich countries of the West to Africa. Yet, aid has helped make the poor poorer; economic growth slower.According to Moyo, the notion that foreign aid can alleviate systemic poverty, and has done so in Africa is tantamount to a myth. Millions in Africa, she notes, are poorer today on account of aid dependency. Indeed, aid has been and continues to be, an unmitigated political and economic and humanitarian disaster for Africa. Aid is not benign--it is malignant. In short, aid is not part of the solution; it is the problem. And here is how.Aid breeds corruption in Africa. If the world has one picture of the African continent, it is one of corrupt statesmen. With very few exceptions, African leaders have crowned themselves in gold, seized land, handed over state businesses to relatives and friends, diverted billions of aid-money to foreign bank accounts, and generally treated their countries like giant personalized cash dispensers. According to Transparency International, Mobutu Sese Seko of erstwhile Zaire is estimated to have looted the State to the tune of US$5billion.Roughly the same amount was stolen from Nigeria by President Sani Abacha and placed in Swiss private banks. The list of corrupt practices in Africa is endless. However, the point about corruption in Africa is not that it exists; the point is that foreign aid is one of its greatest aides. Aid creates a vicious cycle of dependency in Africa; a cycle that chokes off desperately needed investment, instills a culture of kleptomania, and facilitates rampant and systematic corruption, all with deleterious consequences for economic growth. It is this cycle, Moyo posits, that "perpetuates underdevelopment, and guarantees economic failure in the poorest aid-dependent countries" (49).Aid creates a fertile ground for rent-seeking, that is, the use of governmental authority to take and make money without trade or production of wealth. Because foreign aid is fungible--easily stolen, redirected and extracted-- it facilitates corruption. At a very basic level, an example of this is where a government official with access to aid money set aside for public welfare takes the money for his own personal use. Examples are legion in Africa. Foreign aid programs, which tend to lack accountability, and check and balances, act as substitutes for tax revenues.The tax receipts that aid releases are then diverted to unproductive and often wasteful purposes rather than the productive public expenditure (education, health infrastructure, etc) for which they were ostensibly intended. Moyo points out that in "Uganda, for example, aid-fueled corruption in the 1990s was thought to be so rampant that only 20 cents of every US$1 of government spending on education reached the targeted local primary school."(53)Strangely enough, Larry Diamond (2004) observes, Western aid agencies, notably the International Monetary Fund and the World Bank, continue to give aid to African states, with notorious authoritarian and corrupt governments. His list includes Cameroon, Egypt, Zimbabwe, Gabon, Angola, Eritrea, Guinea and Mauritania. Africa is the region that receives the largest amount of foreign aid, receiving more per capita in official development assistance than any other region of the world.Yet her social infrastructure is in a state of utter decrepitude! Moyo notes that any large influx of money into an economy, however robust, has the potential to create serious problems. With the relentless flow of unmitigated, substantial aid money to Africa, these problems are magnified, especially in economies that are, by their very nature, poorly managed, weak and susceptible to outside influence, over which domestic policymakers have little or no control.Moyo contends that increases in foreign aid are correlated with declining domestic savings rates. As she puts it, "As foreign aid comes in, domestic savings decline; that is, investment falls."(61) She further observes that with all the tempting aid monies on offer, which are notoriously fungible, the relatively few people who have access to it, spend it on consumer goods instead of saving the cash. As savings decline, local banks have less money to lend for domestic investment.Worse still, foreign aid has an equally damaging crowding-out effect: although aid is meant to encourage private investment by providing loan guarantees, subsidizing investment risks and supporting co-financing arrangements with private investors, in practice it discourages the inflow of such high-quality foreign monies. Moyo points out that empirical research has shown that higher aid-induced consumption leads to an environment where much more money is chasing fewer goods."(61) This almost invariably leads to price rises--inflation.Over and above, aid chokes off the export sector. This phenomenon is known as the Dutch disease, as its effects were first observed when natural gas revenues flooded the Netherlands in the 1960s, devastating the Dutch export sector and increasing unemployment. Moyo argues that aid inflows have adverse effects on overall competitiveness, export sector (usually in the form of decline in the share of those in the manufacturing sector and ultimately growth).In the oddest turn of events, the fact that aid reduces competitiveness, and thus the trading sector's ability to generate foreign-exchange earnings, makes countries even more dependent on aid, leaving them exposed to all the negative consequences of aid-dependency. In countries with weak financial systems, additional foreign resources do not translate into growth of stronger financially dependent industries.So if foreign aid harbors such adverse effects for African economies why are donors bent on doling it out? And why aren't recipients sagacious enough to put an end to the lethal cycle of aid? Moyo's Dead Aid model provides solid answers to these intriguing questions. She notes that "Africa is addicted to aid. For the past sixty years, she says, Africa has been fed aid. Like any addict, Africa needs and depends on its regular fix, finding it hard, if not impossible to contemplate existence in an aid-less world."(75) Her book provides an antidote, a road map for riding Africa of aid dependency.Arguing that the aid program in Africa has not worked precisely because it was never conceived with the intention of promoting the economic development of Africa, she proposes alternatives to foreign aid. She notes that like the challenges faced by someone addicted to drugs, the withdrawal is bound to be painful. Nonetheless, if implemented in the most efficient way, the solutions offered in Dead Aid will help to dramatically reduce Africa's reliance on aid money.Moyo cites Botswana as an example of an economic success story in Africa. Botswana began with a high ratio of aid to GDP but used the aid wisely to provide important public goods that helped support good policies and sound governance and laid the foundation for robust economic growth for the country.She says this stratagem can be replicated all over Africa. Her alternatives to aid, predicated on transparency and accountability, would provide the life-blood through which Africa's social capital and economies will grow. Her Dead Aid strategy leaves room for modest amounts of aid to be part of Africa's development financing strategy. Systematic aid will be a component of her Dead Aid Model, but only insofar as its presence decreases as other financing alternatives take hold. The ultimate goal, as far as Moyo is concerned, is an aid-free Africa.In a nutshell, Dead Aid proposes radical solutions to the pressing economic problems of our time. It offers a new model for financing development in Africa's poorest countries, one that offers economic growth, promises to significantly reduce endemic poverty, and most importantly, does not rely on aid. Though Moyo is not the first economic pundit to take Western aid donors to task, never has the case against aid been made with such rigor and conviction. She does not pull her punches."In a perfect world," she writes, "what poor countries at the lowest rungs of economic development need is not a multi-party democracy, but in fact a decisive benevolent dictator to push through the reforms required to get the economy moving."(xi) Her most radical proposal comes in the form of a rhetorical question: "What if," she asks, "one by one, African countries each received a phone call...telling them that in exactly five years the aid taps would be shut off permanently?"(xi)

In direct contention with the pervading assumption that international aid is critical for the survival and eventual growth of the most impoverished countries, Dambisa Moyo contends that aid has actually inhibited these countries from achieving sustainable economic growth. Instead of providing a basic level of sustenance for a country, aid encourages corruption and locks a country into a cycle of debt that prevents viable economic sectors from developing. In this opposition, Moyo recommends a combination of foreign direct investment, intentional and regional trade, bond markets, increasing domestic savings, and reducing the costs of remittances while tailoring these options to the specific circumstances of each country.Response:Moyo makes a compelling argument against broad intergovernmental aid. Nevertheless, one of the primary arguments of Jeffrey Sachs, the developer of the Millennium Development Goals and author of The End of Poverty, is that targeted aid to local communities that increases GDP per capita above $300 breaks the poverty trap and allows for economic progress to begin. Until that trap is broken, households cannot amass enough capital for reinvestment, which is critical for economic growth. As Moyo notes, massive flows of aid to any given country do not produce this effect. Rampant corruption, a lack of growth, and rent seeking by public officials become the norm. In short, aid may be able to alleviate poverty and jumpstart an economy but the problem is with the implementation. Unfortunately, there may not be a reliable way to deliver aid to local communities in Sachs' vision on a broad scale. In which case, stopping aid and pursuing other avenues for raising capital as Moyo advocates may still be the best way to spur economic development throughout Africa.Secondly, Moyo does not discuss the complexities of trade barriers thoroughly enough. There is little question that Western subsidies on agriculture create a severe impediment to growth throughout emerging economies. However, there is a valid geostrategic argument to be made for not removing the subsidies. Without subsidies, most Western countries would most likely import that vast majority of their food products, creating a potential weakness during conflict.Taking a realist perspective, removing trade subsidies would tilt the balance of power to countries that may violently challenge the Western hegemony, a risk not worth the increased growth in the developing world. There are also counterpoints to the geostrategic argument as well. A neoliberal would likely argue that increased economic prosperity will result in a greater adoption of democratic norms and then use democratic peace theory (democracies seldom fight each other, therefore, if every country is a democracy there should be relatively little war) to argue that concerns for the balance of power are largely irrelevant. Moyo merely acknowledges that there is a geostrategic argument but does not attempt to debase or critique it.The Bottom Line:A pivotal book. Moyo strikes an excellent balance between readability and thoroughness, referring to numerous academic studies throughout the book while keeping the writing and content easily accessible. Whether you are involved with development policy or have simply bought the latest (RED) iPod, you need to read this book.For more reviews and a summary of Moyo's main points, find us at Hand of Reason.