Thursday, 22 October 2009

DAMBISA MOYO's "DEAD AID"

I have been so immersed in my ongoing research on China-Africa economic relations since January, including a brief stint as Research Director of the Centre for Chinese Studies at the University of Stellenbosch, South Africa, during the first half of this year, that I totally missed all the furore made around Dambisa Moyo’s book "Dead Aid" on the (in)effectiveness of aid to eradicate poverty in Africa.

This has been a recurring theme in this blog since I started it. However, my critique of the aid industry always fell short of calling for a total halt to it and… of writing a book on the subject! As put in her dubbed "Anti-Bono (another recurring subjet in this blog) interview" for the New York Times Magazine, “you are perhaps the first African to request in book form that all development aid be halted within five years.”

The Economist follows the same thread: “(…) Yet the intellectual arguments about aid are still conducted largely within a small circle of Western white men. So it is good to welcome a new voice to the debate, and a black African woman too, Dambisa Moyo, a Zambian economist at Goldman Sachs. It is remarkable that so few voices have been raised in Africa, supposedly the main beneficiary of the world’s largesse, about how the aid money should be spent, or even whether it should be received at all.”

It then goes on to argue that “unfortunately, Ms Moyo’s contribution ends there, for “Dead Aid” does not move the debate along much. Yes, she has joined the chorus of disapproval—and that in itself might surprise a few diehards who think that Africans should just be grateful for the aid and shut up. But her arguments are scarcely original and her plodding prose makes her the least stylish of the critics. Moreover, she overstates her case, almost to the point of caricature. There is almost nobody left, even in the aid lobby, who seriously thinks that bilateral (government-to-government) aid is the sole answer to world poverty, as she suggests. “Trade not aid” is only one of several newish mantras among aidniks that seem to have passed her by.”

A review of reviews by The Complete Review on "Dead Aid" concludes: “No consensus -- and the global financial-world meltdown makes for bad timing for the argument.”

I couldn’t find the time to read the book yet, so it was with great pleasure and gratefulness that, while gradually catching up with ‘all the fuss about it’ (which included Moyo's nomination by Time Magazine as one of the 100 most influential people in the world), I came across what is certainly one of the most meaningful reviews made of it. Meaningful on various counts: it was one of the first among the many published so far; it was written by a Zambian; it was made by an economist; it was by my good friend Cho. And, above all, it was a thorough, insightful, thought-provoking and analytically-sound review too. Moreover, it was enriched by the interesting debate it generated among his readers. I am sorry that I missed it at the time, but having read it in the last few days I can only strongly recommend it to my readers as well. Here’s the gist of it:

"The central argument of Dead Aid is that aid is the fundamental cause of poverty and therefore eliminating aid is critical to spur growth in ailing African states. Aid is the disease that we must treat to bring us back to full economic health. A bold and daring statement built around the central belief that aid distorts incentives among policymakers and society at large. It makes governments less accountable to their citizens and has led to civil wars, rampant corruption (electoral and otherwise) and has been central to an undercurrent of irresponsibility culminating in increased and self-reinforcing poverty since independence from colonialism. None of these arguments are new of course, but Dambisa is probably the first economist to boldly claim that aid causes poverty.

If aid is the disease that causes endless bleeding, to stop the bleeding you simply need to stop aid, the only challenge therefore is how to do it. The Dead Aid solution is a five year exit strategy built around the idea of incentivising poor countries to access finance on international markets, supported by the tripod of microfinance, trade/FDI and remittances. In the Dead Aid world there’s a stash of money out there on the international financial markets that is just waiting to be tapped by any African country willing to invest in a credit rating. If African countries can enter these markets and borrow, it would provide the right incentives to spark good governance since the international markets would be more willing to “punish” bad behaviour compared to those that provide aid at infinitum. In other words, borrowing through international financial markets is a sort of "self commitment mechanism" to good governance, and with that comes better long term prosperity. It is certainly likely to be slightly more expensive than “easy money” that concessional loans and grants bring, but by rejecting these overtures nation states will find themselves on a better path to prosperity. The trouble is that African governments have limited incentives to do this on their own, though some have made progress in this direction, so they need to be compelled through the Dead Aid proposal of terminating aid completely within a five year period.

(…)

I am afraid to say, and with deep sorrow, that the Dead Aid proposal falls far short in many areas, with at least four worth highlighting.

First, there’s a general lack of clear analytical rigour evidenced by elementary confusion in key areas : correlation/causality issues; definitional problems; poor evidence on policy counterfactuals; incomplete and unbalanced citation of evidence; and, perhaps more worryingly lack of general familiarity with refined areas of existing literature.

Secondly, the treatment of aid in a homogeneous and aggregate way is particularly problematic. Dead Aid defines aid as the “sum total of concessional loans and grants”, but excludes “emergency aid” e.g. help for Darfur or the Asian Tsunami. There’s no distinction within Dead Aid between budget support, infrastructure aid, person to person aid, heath related aid, grants or concessional loans for discretionary spending. It is all discussed under one umbrella and handed the same fate.

Thirdly, Dead Aid is characterised by a plethora of inconsistent arguments. A key example that stands out is the emotive issue of Chinese investment. Dambisa dedicates a whole chapter explaining why the “Chinese are our friends”, largely arguing from their historical involvement in Africa and their renewed commitment to trade and FDI. However, against a backdrop of Dead Aid’s “anti-dependency” rhetoric , the chant for China appears odd. Let us be clear, China is not only bringing FDI to Africa but it has also brought concessional loans and long term dependency. Zambia’s external debt has now risen to about $2bn since the HIPC completion point, a significant part of that is through new agreements with the Chinese government and Chinese businesses. A closer look at Angola reveals the same truth. Not only is China investing heavily in that country but in exchange it is tying Angola and other countries to China for a long time reducing their options to renege in the future. That is not necessarily bad, but if the central worry is that dependency leads to ineffective governments with poor incentives we should be honest enough to consider the possibility that China’s closeness to many African governments (which are not all democratic) may have similar negative impacts as aid.

Fourth and finally, the solutions proposed by Dead Aid are ineffective. This is not surprising because without a clear definition of the problem, it is inevitable that the solutions would not work. But even if one was to accept Dead Aid’s basic premise that aid is bad, its solutions come far short. It’s quite obvious to any ordinary analyst that in order to assess whether any proposals would present an overall improvement beyond the status quo, we need to define what happens in the counterfactual carefully and then judge that against proposed policy initiatives.

(…)

In short on both theory and practice, Dead Aid falls far short of what is expected of a book advocating such a radical proposal of “turning off the aid tap”. If there’s any consolation in this assessment, it is that Dead Aid will hopefully not find any intellectual traction. The analytical consensus remains that aid is important and the challenge is how to make it smarter, better and ultimately beneficial to the poor. This question has never been more urgent given the limited aid resources around. Dambisa is certainly right about one thing, now is the time to examine these issues and we can certainly do better than the present!"
I have been so immersed in my ongoing research on China-Africa economic relations since January, including a brief stint as Research Director of the Centre for Chinese Studies at the University of Stellenbosch, South Africa, during the first half of this year, that I totally missed all the furore made around Dambisa Moyo’s book "Dead Aid" on the (in)effectiveness of aid to eradicate poverty in Africa.

This has been a recurring theme in this blog since I started it. However, my critique of the aid industry always fell short of calling for a total halt to it and… of writing a book on the subject! As put in her dubbed "Anti-Bono (another recurring subjet in this blog) interview" for the New York Times Magazine, “you are perhaps the first African to request in book form that all development aid be halted within five years.”

The Economist follows the same thread: “(…) Yet the intellectual arguments about aid are still conducted largely within a small circle of Western white men. So it is good to welcome a new voice to the debate, and a black African woman too, Dambisa Moyo, a Zambian economist at Goldman Sachs. It is remarkable that so few voices have been raised in Africa, supposedly the main beneficiary of the world’s largesse, about how the aid money should be spent, or even whether it should be received at all.”

It then goes on to argue that “unfortunately, Ms Moyo’s contribution ends there, for “Dead Aid” does not move the debate along much. Yes, she has joined the chorus of disapproval—and that in itself might surprise a few diehards who think that Africans should just be grateful for the aid and shut up. But her arguments are scarcely original and her plodding prose makes her the least stylish of the critics. Moreover, she overstates her case, almost to the point of caricature. There is almost nobody left, even in the aid lobby, who seriously thinks that bilateral (government-to-government) aid is the sole answer to world poverty, as she suggests. “Trade not aid” is only one of several newish mantras among aidniks that seem to have passed her by.”

A review of reviews by The Complete Review on "Dead Aid" concludes: “No consensus -- and the global financial-world meltdown makes for bad timing for the argument.”

I couldn’t find the time to read the book yet, so it was with great pleasure and gratefulness that, while gradually catching up with ‘all the fuss about it’ (which included Moyo's nomination by Time Magazine as one of the 100 most influential people in the world), I came across what is certainly one of the most meaningful reviews made of it. Meaningful on various counts: it was one of the first among the many published so far; it was written by a Zambian; it was made by an economist; it was by my good friend Cho. And, above all, it was a thorough, insightful, thought-provoking and analytically-sound review too. Moreover, it was enriched by the interesting debate it generated among his readers. I am sorry that I missed it at the time, but having read it in the last few days I can only strongly recommend it to my readers as well. Here’s the gist of it:

"The central argument of Dead Aid is that aid is the fundamental cause of poverty and therefore eliminating aid is critical to spur growth in ailing African states. Aid is the disease that we must treat to bring us back to full economic health. A bold and daring statement built around the central belief that aid distorts incentives among policymakers and society at large. It makes governments less accountable to their citizens and has led to civil wars, rampant corruption (electoral and otherwise) and has been central to an undercurrent of irresponsibility culminating in increased and self-reinforcing poverty since independence from colonialism. None of these arguments are new of course, but Dambisa is probably the first economist to boldly claim that aid causes poverty.

If aid is the disease that causes endless bleeding, to stop the bleeding you simply need to stop aid, the only challenge therefore is how to do it. The Dead Aid solution is a five year exit strategy built around the idea of incentivising poor countries to access finance on international markets, supported by the tripod of microfinance, trade/FDI and remittances. In the Dead Aid world there’s a stash of money out there on the international financial markets that is just waiting to be tapped by any African country willing to invest in a credit rating. If African countries can enter these markets and borrow, it would provide the right incentives to spark good governance since the international markets would be more willing to “punish” bad behaviour compared to those that provide aid at infinitum. In other words, borrowing through international financial markets is a sort of "self commitment mechanism" to good governance, and with that comes better long term prosperity. It is certainly likely to be slightly more expensive than “easy money” that concessional loans and grants bring, but by rejecting these overtures nation states will find themselves on a better path to prosperity. The trouble is that African governments have limited incentives to do this on their own, though some have made progress in this direction, so they need to be compelled through the Dead Aid proposal of terminating aid completely within a five year period.

(…)

I am afraid to say, and with deep sorrow, that the Dead Aid proposal falls far short in many areas, with at least four worth highlighting.

First, there’s a general lack of clear analytical rigour evidenced by elementary confusion in key areas : correlation/causality issues; definitional problems; poor evidence on policy counterfactuals; incomplete and unbalanced citation of evidence; and, perhaps more worryingly lack of general familiarity with refined areas of existing literature.

Secondly, the treatment of aid in a homogeneous and aggregate way is particularly problematic. Dead Aid defines aid as the “sum total of concessional loans and grants”, but excludes “emergency aid” e.g. help for Darfur or the Asian Tsunami. There’s no distinction within Dead Aid between budget support, infrastructure aid, person to person aid, heath related aid, grants or concessional loans for discretionary spending. It is all discussed under one umbrella and handed the same fate.

Thirdly, Dead Aid is characterised by a plethora of inconsistent arguments. A key example that stands out is the emotive issue of Chinese investment. Dambisa dedicates a whole chapter explaining why the “Chinese are our friends”, largely arguing from their historical involvement in Africa and their renewed commitment to trade and FDI. However, against a backdrop of Dead Aid’s “anti-dependency” rhetoric , the chant for China appears odd. Let us be clear, China is not only bringing FDI to Africa but it has also brought concessional loans and long term dependency. Zambia’s external debt has now risen to about $2bn since the HIPC completion point, a significant part of that is through new agreements with the Chinese government and Chinese businesses. A closer look at Angola reveals the same truth. Not only is China investing heavily in that country but in exchange it is tying Angola and other countries to China for a long time reducing their options to renege in the future. That is not necessarily bad, but if the central worry is that dependency leads to ineffective governments with poor incentives we should be honest enough to consider the possibility that China’s closeness to many African governments (which are not all democratic) may have similar negative impacts as aid.

Fourth and finally, the solutions proposed by Dead Aid are ineffective. This is not surprising because without a clear definition of the problem, it is inevitable that the solutions would not work. But even if one was to accept Dead Aid’s basic premise that aid is bad, its solutions come far short. It’s quite obvious to any ordinary analyst that in order to assess whether any proposals would present an overall improvement beyond the status quo, we need to define what happens in the counterfactual carefully and then judge that against proposed policy initiatives.

(…)

In short on both theory and practice, Dead Aid falls far short of what is expected of a book advocating such a radical proposal of “turning off the aid tap”. If there’s any consolation in this assessment, it is that Dead Aid will hopefully not find any intellectual traction. The analytical consensus remains that aid is important and the challenge is how to make it smarter, better and ultimately beneficial to the poor. This question has never been more urgent given the limited aid resources around. Dambisa is certainly right about one thing, now is the time to examine these issues and we can certainly do better than the present!"

1 comment:

Cho said...

Koluki,

Many thanks for your kind words!

Yes, the book had raised a bit of a storm!