Archive for February, 2011

Dead Aid

I finally read the much hyped book by Dambisa Moyo, Dead Aid. This book’s overarching argument is that aid given to Africa to reduce poverty and drive economic growth has not only failed spectacularly, but is precisely the reason why Africa is poor. Moyo aims for a clean cut, straightforward argument — no ifs and buts — that aid has simply failed and worsened economic development in Africa by encouraging corruption and dependency. Hers is meant as a sort of shock therapy, and a way to make herself heard in the cacophony of the African economic development debate. Irrespective of the fundamental problems with her arguments, Dead Aid was a New York Times best seller and has received praise from Kofi Annan and Paul Kagame (President of Rwanda).

The elegant Dambisa Moyo (she’s beautiful too!) was born in Zambia, and completed a master’s at Harvard and a Ph.D. in economics at Oxford University. She worked at the World Bank as a consultant and at Goldman Sachs for 8 years. Such pedigree alone can be enough to sell a book. More so, as Harvard professor Niall Ferguson rightly notes, “the African discussion has been colonized as surely as the African continent was a century ago,” by economists such as Paul Collier and William Easterly, and rock stars such as Bono. Moyo’s book attracts attention in part because it is an African view of Africa’s problems.

The problem, however, is that it is impossible to make a clean cut argument, the kind Moyo trumpets, about why Africa is poor. The continent is as complex as its species of wildlife and as diverse as its ethnic peoples. Though economic development challenges are familiar across the continent, the solutions to them are not the same. In fact, part of the “failure of aid” is the myriad one-size-fits-all solutions that economists have proposed and implemented. Here are two of Moyo’s arguments discussed below.

The case of Botswana

Botswana is the darling child of aid agencies, and economists such as Moyo. The small country of 1.8 million people, has a per capita GDP of $13,700 (2008 estimate purchasing  power parity), one of the highest in Africa. Moyo argues that Botswana was successful because it did not depend on aid; rather Botswana “rigorously pursued numerous market economy options.” She continues that by the year 2000 donor aid to Botswana stood at 1.6 percent of the country’s GDP.

But, at its peak, aid to Botswana was 20 percent of GDP. This suggests that aid wasn’t a hindrance to Botswana’s development, but was an integral part of Botswana’s economy. In fact, aid probably buttressed economic growth. Aid to Botswana declined over time because year after year, Botswana’s economy continued to grow (Botswana’s average real per capita growth between 1968 and 2001 was 6.8 percent). Botswana did not grow because it ceased to depend on aid, as Moyo suggests, but because as it grew it needed less external help. Botswana’s pursuit of free market policies was key to economic growth and donor aid did not inhibit this process; rather, along with the economy, Botswana managed aid resources wisely bringing prosperity to its people.

Corruption is overrated

If you were to ask anyone, layman or expert, why Africa is poor, one of the first reasons you’ll hear is corruption. The image of a burly bureaucrat or autocratic leader dipping his hands freely in the nation’s coffers and indulging lavishly while his people barely survive is too stark to ignore. Moyo is no different. To be sure, corruption is much more pervasive in many African countries than the image of greedy bureaucrats suggest. Everyday, people all across Africa have to bribe to survive — teachers, police, judges, preachers, doctors – everyone.

But corruption as an obstacle to economic growth is an overstated logic. It is as if somehow, by eliminating corruption, all Africa’s problem will disappear and farmers living on barely a meal a day will suddenly own mansions. But India and China tell us a very different story. Two of world’s best success stories, they have lifted millions out of poverty and become a veritable player on the global stage. Yet, China and India have not loosened corruption’s grip. They know it as an everyday vice, too embedded to be diminished as rapidly as their fortunes have changed.

Corruption is not necessarily the show stopper of economic growth; rather, it is a tax, another cost of doing business. To the extent that this cost is not prohibitive and the potential for profit remains attractive in an economy, businessmen will compete for and do business.  It certainly helps if these costs are predictable — if it is not recurrent (for example a one-time bribe for a construction permit, instead of several unpredictable processes each requiring payment) –because businesses can better plan for it. One thing businesses usually don’t like is uncertainty.

One of the major hindrances to private sector development and economic growth, more than corruption, is poor infrastructure. Imagine an economy free of corruption, but without reliable electricity, without tarred roads to ferry your goods to and from the port, without properly functioning ports to facilitate import and export; imagine an economy where it takes a year to get a license to commence business and a year and half to get a building permit; imagine an economy where firing an unproductive employee is nearly impossible because of labor laws; imagine an economy where interest rates on loans are 30% and banks will only lend to the government. These are real obstacles that make doing business of any kind difficult. These are the problems African governments should tackle.

In many cases these inefficiencies are partly attributable to corruption, but it is conceivable that the business environment can be improved even if corruption remains rife. Ghana, for instance, has been growing on average at 5% since early 2000s, one of the fastest growth rates in the world, without any telling statistics that corruption has declined. In fact, if public perception of corruption is a good measure, corruption has been on the rise over the same period.The pie is bigger now, and everyone is reaching for a slice — legally or not.

Corruption shouldn’t be ignored, as, to be sure, African countries will be better off without it. Worthy of note too is that the same level of corruption can be more toxic to one economy than the other. China and India, for example, are rich in natural resources and have the world’s largest populations, making them every manufacturer’s dream. Hence, their economies are very attractive to businesses even if there is a high level of corruption. Tiny Rwanda, on the other hand, has very little natural resources or a large population to boast of. Arguably, a high level of corruption will be more of a deterrent to private investment in Rwanda than in China. It is no wonder that a hallmark of Paul Kagame’s regime is zero tolerance for corruption.

These issues notwithstanding, governments should focus on establishing and improving the institutions and infrastructure that make it easier to do business if they want rapid economic growth in the short term.

More to come on Dead Aid and international development.


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