These are some throwback notes that I came across from a few years ago. "Dead Aid" is a foundational work for anyone working in developing countries (formerly known as third world). It is controversial but that's kind of the author, Dambisa Moyo's, thing.
Key Takeaways:
- CENTRAL POINT: Aid drives and accelerates African poverty, stunts growth ix.
- 4 alternatives to aid:
- *Access interknational bond markets
- *Large scale direct infrastructure investment (China model)
- *Free agricultural trade (international community must stop their domestic subsidies)
- *financial intermediation via microfinance institutions x-xi.
- Economic development must trump multi-party democracy for poorest countries—in these countries a ‘benevolent dictator’ may be the best solution. Good luck finding a benevolent dictator xi.
- 5 year countdown to aid stoppage xi.
- “Africa needs to learn from Asia” xi.
PREFACE
- Important transition point is that from single party state to multi-party democracy xiv.
- Moyo emphasize the incredible linguistic, cultural, historical and political diversity of the continent and observes that even the states that have been prosperous can not exist as their own microcosms in the long term—surrounded by corruption, disease, instability, violence and infrastructure desolation.
PART I: THE WORLD OF AID (45 PAGES)
THE MYTH OF AID
- A glimmer of a revival has emerged since the beginning of the 20th century; there are contributing factors:
1. Surge in commodity prices that drives exports and associated revenue
2. Positive policy dividend due to 80’s market based policies
3. Increase in free and fair regular democratic elections—even though part of her argument is that these aren’t necessarily that important. This is more of an offhand statement at this point that actual quantitative proof of anything 3.
- Economically and from an investment standpoint, Moyo points to numerous positive
factors emerging throughout Africa. She picks and chooses her dates, countries and evaluation factors, however, leading most readers to question whether these are anomalies or true trends 4-5.
- Average per capita income of $1 a day in sub-saharan Africa. It must be noted that there lies a propensity among economists and political scientists to separate the continent of Africa citing cultural and ethnic differences. This is a disservice and handicaps many possible solutions. 5.
- Life expectancy in Africa in markedly lower, however, I question some of her hyperbole and numbers. She cites Swaziland as having a “paltry life expectancy” of just 30 years. Since 1960’s the world bank database shows it never being lower than 44 years old. 5.
- Moyo does a good job painting a bleak economic and political picture of Africa as it stands today, especially in comparison to the rest of the world.
- Moyo then lays out her research questions:
“Why is it that Africa . . . [is] locked into a cycle of dysfunction?”
“Why is it that . . . Africa seems unable to . . . get its foot on the economic ladder”
“Why . . . did seven of the top ten “failed states” hail from [the African] continent?”
“Are Africa’s people universally more incapable?”
“Are its leaders genetically more venal, more ruthless, more corrupt?”
“[Are its] policymakers more innately feckless?”
“What is it about Africa that holds it back, that seems to render it incapable of joining the rest of the globe in the 21st century?” 6-7.
*Moyo then lets out a teaser of her thesis: “The answer has its roots in aid.”
WHAT IS AID?
- 3 types of aid:
1. humanitarian or emergency aid
2. charity-based aid
3. systematic aid (bilaterally and multilateral) 7.
- While Moyo takes issue with the first two forms of aid, she discards them as small change compared to the billions in systemic aid. She also points out that the first two reflect a western mindset that all aid is good aid. 7-8.
- loans and grants have largely come to be viewed as nearly the same due to decades of corresponding policy patterns. This book treats them both as the same in its evaluation 8.
A BRIEF HISTORY OF AID
- Aid as we know it today originated during World War II in Bretton Woods, NH in 1944. 10.
- the evolution of post-war aid had roughly 7 stages
1. Birth at Bretton Woods
2. Marshall Plan in the 50’s.
3. Industrialization in the 60’s.
4. Aid as an answer to poverty in the 70’s
5. Aid as a tool for stability and structural adjustment in the 80’s.
6. Aid as a tool (buttress) for democracy and good governances in the 90’s.
7. Aid as the only solution to all of Africa’s problems today. 10.
- The Bretton Woods meeting was a precursor to:
The World Bank, the IMF and the International Trade Organization.
The Mandate of the World Bank and IMF originally was that of reconstruction (and an emphasis on risk diversification) 11.
- Marshall was a rescue aid package to repair existing infrastructure and was largely successful. 12.
- Aid’s success in Europe led many nations look to Africa as a good place for future aid.
- An assumption made by the IMF and World Bank was that if a country was poor, it would not have enough financial capital to encourage development—thus foreign aid was the only answer 13.
- Additionally, the decolonization occurring encouraging aid from an altruistic (guilt) and stability perspective. 13-14.
- Aid also became a weapon for the US and the Soviet Union during the cold war
THE 1960’S: THE DECADE OF INDUSTRIALIZATION
- aid was focused on ‘large-scale industrial projects’ thought to be neglected by the private industry because of their long-term nature. Unfortunately records from this era are lacking and its unclear how much infrastructure was built. Herein lies one of the major problems with infrastructure development—it also requires a capacity to maintain that infrastructure—something rarely done. 14-15.
THE FOREIGN AID AGENDA OF THE 1970’S: THE SHIFT TO A POVERTY FOCUS
- This era saw a pronounced new focus on poverty—even though much of this was lip service since the bulk of aid still went to infrastructure—although by the 80’s just over 50% was geared toward poverty reduction. This was done amidst an oil crisis that crippled African economies even further. Much of it was also done as loans—that most nations would never be able to pay back. 16-17.
- nearly none of the aid was effective
THE FOREIGN AID AGENDA OF THE 80’S: THE LOST AGE OF DEVELOPMENT
- by the end of the 70’s Africa had received $36 billion in foreign assistance. 17.
- with floating interest rates on the rise, numerous nations defaulted on their loans. 18.
- to deal with this crisis—the IMF came up with a debt restructuring plan. This amounted to two new programs that first emphasize stability and then structural adjustment (ex. Structural Adjustment, and Enhanced Structural Adjustment Facilities) 20-21.
- this amounted to budgetary aid with philosophical and practical strings attached. The nations would have to agree to “free-market solutions to developments.” Among many things it meant the privatization of most industries and the axing of subsidies. Practically this meant austere conditions for the common citizen 21-22.
- this period also saw an increasing shift toward grants. 22.
THE FOREIGN AID AGENDA OF THE 90’S: A QUESTION FOR GOVERNANCE
- with the Cold War a fading memory, the international aid organizations shifted their focus to that of good governance. This meant that aid was no longer doled out indiscriminately or as a proxy tool against the Soviets—nevermind that this only fueled cycle of corruption. 22-23.
- This focus on governance and democracy as the ultimate solution remains to this day. 24.
- two themes became prevalent: multilateral agency dominance as the lead in aid distribution and that of donor fatigue. Thus while substantial aid was still being doled out it was declining. Unfortunately for many African nations, the foreign aid was (and still is) the largest source of financial income. 25.
- the idea that if only the yoke of western debt could be thrown off, Africa could be free to thrive also emerged. 26.
THE FOREIGN AID AGENDA OF 2000’s: THE RISE OF THE GLAMOUR AID
- this era saw the rise of the celebrities seeking their own fundraising as a development solution (traditionally they had focused on emergency aid fundraising). 26.
- most hurtful was that this led to a dumbing down of discourse on aid and how it should be used most effectively (if at all).
- Moyo
displays a penchant for cliché at times: “the proof of the pudding is in the eating.” 28
- there is little evidence that any economic growth has occurred as the result of aid in the last 50 years. 28.
- today the west used aid as a moral tool/arbiter. This stands in stark contrast to the Chinese that are ‘human rights blind’ in their aid and investment. While the US human rights vetting may send a message to governments that we value this, it sends a contrary message to the common people of a country who feel they are being double punished—but a jerk of a dictator/presidents and by the lack of aid from the US.
CHAPTER 3: AID IS NOT WORKING
- traditionally there are 5 main reasons offered to explain dismal status of many African nations:
Geographical
Guns, Germs and Steel argument—economic record dependent on geography and topography.
Collier’s study showing that land-locked countries suffer most whether resource rich or not.
There are of course land-locked desert countries around the world that have overcome these obstacles. 29-31.
Historical
Colonial legacy that left behind administrative and bureaucratic structures ill-suited to the populations. It also created borders haphazardly—the OAU’s endorsement of the borders only aggravates the situation. 31.
Cultural
The racist, genetic argument that Africans do not have the same work ethic or intelligence.
Whether spoken or not, some variation of these sentiments no doubt lies behind the aid-dependency model for both the West and the African population—where they are almost treated as children instead of equal parties. 31-32.
That said, there is also a cultural dimension wherein a lack of nuanced understanding has led to policies that only hurt the population. An example of the cultural nuance is the prevalence today in microfinance to ensure the money/budget is handled by the matriarch—as they have been found to be most responsible.
Tribal
1000 tribes in Sub-saharan Africa. This can elevate the risk of civil/ethnic con
flict. 32-33. Moyo offers several assessments that certainly make sense anecdotally but anyone reading the myriad of analysis on the numerous conflicts finds out that it is never that simple. The most important takeaway is how different each and every situation is.
There are also cases where there has been peaceful co-existence and cooperation. Moyo closes this by saying that there is no policy prescription so it’s not even worth considering regardless. I think there may be policy solutions but they just require more study. 33.
Institutional
Economic performance is driven by level of competence in government institutions. Moyo gives most credence to this argument, pointing to success stories such as Mauritius and Botswana.
The problem in most African nations is that the institutions exists but in an impotent form—with the exception of the executive branch. 33-34.
- Moyo closes by giving credence to all of these explanations but holding aid dependency as the common thread in almost every African nation. 35.
DOES AID WORK?
- $1 trillion in aid has gone into Africa since the 1940’s.
- There are six examples most commonly given to show how aid CAN work:
The Marshall Plan
This is different from African aid because the European nations had other resources to draw upon than solely aid: 3% of GDP vs. 15% GDP in African.
The plan in Europe was finite—5 years and then it was over—versus 70 year flow of aid in Africa.
The plan in Europe was reconstruction of institutions that had once worked. In Africa there is not the collective memory or history of working institutions.
The plan in Europe focused almost exclusively on physical infrastructure—not so in Africa. 35-37.
The IDA graduates
Graduates of the International Development Association all relied on aid but no longer do so. However, they all took relatively small amount of aid for a finite period.
The 3 african graduates are Swaziland, Botswana and Equatorial Guinea. Botswana in particular focused on market economy solutions to quit their aid dependence. 38.
With Conditionalities
Normally 3 types of conditionality:
Procurement: Aid must be spent on goods and services and staff from
donor nation.
Preselection: Donor selects the sector/project for their aid money
Policy based: Aid is based on agreement to economic/political policies
- The biggest fault to all of these things is that most of the time, the nations ignored or obfuscated the conditionalities and the aid STILL flowed! 38-39.
In Good Policy Environments
Democracy is an important variable—but only at the RIGHT time. 44.
For all the studies trumpeting the linkage between economic success and a democracy—most often ignored is the fact that in its beginning stages democracies ADVERSELY affect the economy (and stability) of a country. 42.
Moyo points out that what many nations need at the onset is a benevolent dictator who can push through and enact the needed economic/market reforms—unfortunately benevolent leadership has been notably absent in Africa. She also point to numerous success stories in Asia and with Chile in Latin America.
Foreign aid has definitely increased democracy in Africa—but not necessarily liberalism. But democracy has not definitely increased economic growth. 43-44.
AID EFFECTIVENES: A MICRO-MACRO PARADOX
- most often aid is a short-term solution without long-term benefits. The example of the donor who gives 100,000 mosquito nets to a country and then puts all the mosquito makers out of business. In the short term, people were helped, but in the long-term there are no longer those businesses. 44-45.
- instead aid such as food aid needs to focus on local cooperation. Instead of shipping food from US, buy from local farmers etc. 45.
- aid is still being poured in despite the fact that it is still being diverted for other uses. 46.
- even the IMF has acknowledged the limited efficacy of aid—but all in in all—despite the numerous studies showing it as a poor solution at best—and a detrimental one at worst—aid continues to come in. 46-47.
CHAPTER 4: THE SILENT KILLER OF GROWTH
- “Corruption is a way of life” and occurs because of aid and natural resources looting 48.
THE VICIOUS CYCLE OF AID
- corruption leads to more corruption. In other words, the aid enable corrupt governments to continue to rule—these regimes abuse their power and prevent liberalism which hurts FDI and DI. This damages economic growth and raises unemployment which increases poverty—they then need more aid. 49
CORRUPTION AND GROWTH
- Corruption hurts growth and does NOT build up the civil service contrary to development agencies. Instead it is just another avenue to that enables graft and drives
away the principled servants, leaving posts filled by the second tier.
- this also happens with public contracts and government budgets. 50-51.
- Corruption is correlated to GDPs—higher the corruption, the lower the GDP. 51.
- opacity index: how much a country lacks clear and accurate business, investment and government practices. This affects per capita income and FDI. 51.
AID AND CORRUPTION
- estimates vary, but it is clear that from its onset aid has been misused—studies continue to show that aid increases corruption—countries often use is as a sub for tax revenues. 52-53.
AID GOES TO CORRUPT COUNTRIES
- Despite rhetoric to the contrary, aid continues to go to corrupt countries—there are no real or effectives checks and balances. 53-54.
WHY GIVE AID IF IT LEADS TO CORRUPTION
- there’s a pressure to lend because aid is a business—agencies are evaluated on the size of their donor portfolio—NOT on how the aid is used. They also need to “use it or lose it” due to FY budgetary concerns. Compliance be damned. 54
- no international agreement on what counts as corruption. Thus the corrupt countries can count on the aid money coming from somewhere 56.
CORRUPTION: POSITIVE OR NEGATIVE
- it would be one thing if the stolen aid money was invested and kept in Africa but unlike in asia, the money is Africa is quickly deposited in foreign bank accounts. 57.
AID AND CIVIL SOCIETY
- Africa does not have the middle class that it needs, largely because the government has made allegiance to the political elite more important than the economy
- Africa is missing the social contract of we pay our taxes and you provides us services. By and large, Africa doesn’t extract the taxes it needs. 57-58.
AID AND SOCIAL CAPITAL: A MATTER OF TRUST
- aid erodes trust or social capital because the government doesn’t need its citizens to trust it because it has all free unaccountable cash 59.
AID AND CIVIL WAR
- 3 truths about conflicts:
Start out of a struggle for resource controls
Mainly occur in poor economies
More often internal conflicts 59.
- Aid contributes to all three factors. Collier cites low average incomes and regressive economic growth as key predictors for civil wars. 60.
THE ECONOMIC LIMITATIONS OF AID
- Aid adversely affects poor countries in 4 key ways:
Aid reduces savings and investment
Increased aid is correlated to decline in domestic savings
Increased aid discourages high quality foreign investment 61.
Aid can inflationary
Increased demand for unavailable goods increases prices—this inflation
Erodes the economy 61.
Aid chokes off the export sector
Dutch disease: increase in foreign aid/currency causes an increase strength of domestic currency which causes an increase in export prices for goods on the international market. 62-63.
Aid causes bottlenecks: absorption capacity
Countries with poor financial development don’t always have the capacity to use the aid money immediately. If they just sit on it, they still owe interest on it. If they issue bonds on it, the domestic taxpayers are paying the interest on it. 64-65.
AID AND AID-DEPENDENCY
- Aid promotes sloth among African policymakers because they view aid as part of their permanent income.
- Aid also encourages governments not to pursue a tax base and collection—this erodes the social contract.
- The power of aid (and its parent governments and agencies) takes the power from African policymakers. 65-66.
AID OBJECTIONS
- these arguments still haven’t convinced the aid decision-makers
- one of the greatest problems is that viable alternatives have not been offered 68.
PART II: A WORLD WITHOUT AID (83 pages)
THE REPUBLIC OF DONGO
- Offers a proto-typical fictional country as a means to illustrate the plight/situation of mo
st African nations
- Point of the book: “How to finance development agenda so that . . . economic prosperity might be realized.” 72.
- Despite the fact that Moyo’s solution stems from a free-market solution, she is quick to point out that it can be used to finance a capitalist or socialist agenda—the financial alternatives to aid are multi-faceted. 73.
CHAPTER 5: A RADICAL RETHINK OF THE AID-DEPENDENCY MODEL
GOVERNMENT NEEDS CASH
- the government’s role is especially important in poor developing countries because a strong central intervention is required to set policies in place in a way that the private sector can’t fill. 74.
WEANING OFF THE ADDICTION: NO ONE SAID IT WOULD BE EASY
- Moyo calls for a solution that gradually lessens aid over a 5-10 year period.
CHAPTER 6: A CAPITAL SOLUTION
- Commercial bonds differ from aid in 3 ways:
1. Their interest rate is higher
2. Their maturity is much shorter
3. More severe default terms 77.
- Issuing bonds enables a country to finance development and/or day to day costs
- Assessing the bond market is relatively simple:
1. Get a rating. This is the fundamental starting point. It may not be the best rating but a country must start somewhere.
2. Court investors. This often means a tour/roadshow.
3. Receive your money. 78.
- A market for emerging countries exists!
1. When a country issues bonds, it encourages other private investment since it signals stability
2. Investors like the chance for high returns.
3. It offers portfolio diversification.
*Emerging market debt is often counter-cyclical to the global business cycle.
79-81.
- Challenges include a poor credit rating which affects the rating possibilities of private companies within the nation (sovereign ceiling) 84.
- The idea of contagion risk is diminishing meaning that investors are not as apt to punish one country because its neighbor defaults. 84.
- Borrowing is cheaper now than ever. 85.
REBOUNDING FROM A DEFAULT
- “Defaulting is not the end of the world” 86.
- If a country puts forth necessary reforms, the markets have a history of forgiveness. 87
Instead of reform though, most African nations just choose aid.
- No African nation has return to the bond market after defaulting in the last 30 years 87.
- It’s imperative that African countries develop domestic bond markets too—one reason being that they must be established prior to the development of a stock market. 88.
- Moyo discusses the world Bank’s GEMLOC program (a ten year program) that helps develop local currency bond markets among other things—thus far only Nigeria and South Africa qualify but there’s not reason other countries can’t in the future. 90-92
CAN DONGO TAP THE MARKETS?
- Most African countries haven’t accessed the bond markets because they didn’t want to NOT because they couldn’t. 93.
- In determining how much to borrow, countries can also consider pooling their risk (a collective bond) together as a region etc… 94.
- One can also offer insurance/risk guarantee:
Ex. South Africa’s Pan-African Infrastructure Development Fund (PAIDF)
Ex. World Bank can also guarantee 95-96.
- A final option is to securitize the bond: devote a certain budgetary portion of a resource to repayment (e.g. oil revenues). 96.
THE CHINESE ARE OUR FRIENDS
LET’S TRADE
BANKING ON THE UNBANKABLE
DONGO REVISITED
MAKING DEVELOPMENT HAPPEN
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