Book Review: Dead Aid

Dead Aid: Why aid is not working and how there is a better way for Africa
Dambisa Moyo; Farrar, Straus and Giroux, New York: 2009

“The wisdom contained here—if absorbed by African and global policymakers—will turn this chronically depressed continent into an inspiring miracle of dazzling economic growth.”

—Steve Forbes

This quote can be found on the back cover of Dambisa Moyo’s recent attention-getting treatise on African aid. It is a particularly appropriate quote for a book that at its best is a lucid history of development aid and diagnosis of its problems, but at its worse thinks it is much, much more. Reading this quote, you might ask yourself, what person with a reasonable economic background thinks that a few simple policy prescriptions that can be handily reduced to witty chapter titles are the ticket to transforming sub-Saharan Africa into “an inspiring miracle of dazzling economic growth”? Well, Steve Forbes for one. And, unfortunately, Dambisa Moyo.

I say unfortunately because I, like many in the development community, had high hopes for Dead Aid. The idea of an aid book written by someone who was not only well qualified as an economist, but was also born and raised in sub-Saharan Africa itself, warmed the hearts of the white, male-dominated field of economic development. Bill Easterly and Jeff Sachs might each have their merits, but as outsiders looking in, do they really understand the issues plaguing Africa’s development? We hoped Dambisa Moyo would fill in the missing perspective.

In the book’s mainly solid first half, she does just that. She brings not only clear explication to her history of development aid from Bretton Woods to Bono, but also an impassioned indignation that feels justified from someone who spent the early years of her life witnessing aid’s inefficacy in her home country of Zambia. She needles the development industry’s paternalism and condescension toward the people they claim to champion: “There is, of course, the largely unspoken and insidious view that the problem with Africa is Africans—that culturally, mentally, and physically Africans are innately different. That, somehow, deeply embedded in their psyche is an inability to embrace development and improve their own lot in life without foreign guidance and help.” But Moyo is more than an outraged Zambian writing a personal treatise. She is an accomplished economist who has worked at Goldman Sachs and the World Bank and who studied at Harvard and Oxford. Her book deserves to be assessed as an economist’s book, and this is where it fails. In moving from the first half’s diagnosis of the problem to the proffering of buzz-word solutions, Moyo’s argumentation falls apart, her familiar prose becomes cloying, and the overconfidence in easy solutions summed up in Forbes’ quote remains Dead Aid’s lasting impression.

Moyo’s thesis is two-fold: 1) Aid is not only failed to solve Africa’s problems; it is directly contributing to them. Africa would be better off if aid were cut off all together. And 2) this is possible because Africa has a host of other options for “financing its development” available, including the capital markets, Chinese FDI, trade, and microfinance. She manages to prove the first half of the first hypothesis, and throws out some interesting ideas for the second, but ultimately falls short of leading the reader to her intended conclusion that all aid to the developing world should be cut off with as much haste as possible. This is not to say that the book is without strengths. For some who remain committed to the Sachs/Bono ideology that simply throwing more money and more Western intervention at a problem will fix it, Moyo’s book is a much needed wake-up call, and one that she is qualified to deliver. Once she has woken up her audience, however, she fails to provide them with realistic, evidence-based ideas of how to fix the problem. Unimpressed by her calls to end all aid immediately, they will probably return to sleep.

Moyo’s main problem is that she lacks both the careful research and the extensive experience working in development that would help back up her provocative claims. In their place, she provides us with anecdotes and allegories designed to “prove” her points. Early on, she gives an example of an African mosquito-net manufacturer put out of business by well-meaning donors dumping thousands of mosquito nets. Only, there is no African mosquito net manufacturer—the story is a rhetorical device. Later, she goes so far as to construct a fictional country to illustrate her arguments. It is supposed to be a typical sub-Saharan African nation, and she christens it “Dongo,” an unintentionally silly flourish that was the source of much amusement to my Zambian colleagues over the summer. Whenever there was a lull in conversation, one of us would say, “Let’s call it…Damibia,” or, “Let’s call it…Dotswana,” and the whole room would burst into laughter.

At the close of the book, to drive home the amazing potential of her suggested solutions for alternate financing, Moyo talks about “Dongo” going from 75 per cent of income from aid to five per cent in five years’ time. “For the first year, instead of 75 per cent, Dongo is now getting only 61 per cent of its income from aid. It now has to find an extra 14 per cent of money it requires from other Dead Aid means. In the second year, Dongo will have to find 28 per cent of its financial capital outside aid, and the year following, 42 per cent—nearly half its needs.” Perhaps she thinks this level of specificity about an imaginary country will trick her reader into thinking she has presented evidence for her proposals. One wonders if the time she spent dreaming up fake percentages would not have been better utilized digging up an example of a real country that gradually reduced its dependence on aid over a limited time span. Also exhibited in the above quote is the peculiar form of the third person Moyo employs to lend weight to her prescriptions, speaking of “Dead Aid proposals” and “the Dead Aid model,” when perhaps “my opinion” would have been the more appropriate designation. The opportunities for improvement in writing style are between her and her editor, but where I take issue with them is where they stand in for actual evidence that is sorely missing.

There are two areas of the book where evidence is lacking. The first is in showing that foreign aid actually harms growth, rather than just doesn’t help, and the second is in deciding what we should do about it. Unfortunately, these sections make up the majority of the book. In the early section, she tries to argue that aid has “killed” the growth of African nations who receive it in large quantities, by stating that all African countries with low growth over the years “have one thing in common—they all depend on aid.” This is the most egregious example of the “correlation equals causation” fallacy that Moyo is surely too smart to believe herself, but wants us to accept as evidence. The arguments that follow this dubious beginning are mostly sound—that aid may promote corruption, be inflationary, and even stir internal conflict—but how she links these mechanisms back to growth is severely wanting. For corruption, for example, she cites research by Greg Lambsdorff that “a one-point improvement in a country’s corruption score was correlated with an increase in productivity of 4 per cent of GDP.” Note the use of the word correlated. And yet she goes on to say “This implies that were Tanzania (placed 3.2 out of 10 on the 2007 Transparency International index) to improve its corruption score to the level of the UK (ranked 8.4 out of 10), its GDP could be more than 20 per cent higher.” Using this highly flawed argumentation, she draws the conclusion that Africa would be better off if aid were cut off entirely (by a simple phone call, as though all development money came from a single individual named “Aid”). What should Africa’s leaders do to get money instead? Moyo has four ideas.

Moyo’s first suggested solution is that African governments finance their own development through the capital markets. As evidence for the merit of this proposal, she cites the high returns of developing country bonds. “In some cases, dedicated emerging-market fund managers…look for net returns of at least 10 per cent per annum,” she writes. She neglects the fact that these high returns are the price on the excess risk that investing in the developing world carries, something she surely knows from her time at Goldman Sachs. The high returns fund managers look for are not a merit of emerging market stocks, they are an indication that these stocks are too risky to put capital into otherwise. People hold treasury bonds at little over an inflationary return not because they are too silly to find something with a higher return, but because they are interested in an exceedingly safe investment. Moyo adds, “In 2006, emerging market debt gave investors a return of around 12 per cent.” This, of course, before these investments plummeted with the global financial crisis. The global financial crisis brought with it more than a fall in emerging market fund returns, it also brought a global financial crisis. With it came an unprecedented drying up in the level of capital available to risky investments. Developing countries are one of the riskiest investments, as evidenced by their high returns, and thus are among the first on the chopping block for funding. Because of the volatility in the level of capital available to developing countries, and, particularly, the current dearth of it, it seems a bad time to suggest that all developing countries go out and get themselves a credit rating and get listed with the Standard and Poor’s.

Which, as Moyo herself points out, is not happening. She claims it is because developing country leaders prefer the cheap and easy credit of the World Bank and free money of aid agencies. While they no doubt prefer it, I would argue they would take money on the bond market, too, if they could get it (and even if it would be expensive to pay back). Zimbabwe’s experience has shown us that many African leaders would not be above taking quick cash at the expense of their long-term financial health. So what is stopping the multiple corrupt governments in Africa one can list off the top of one’s head from adding bond money to their treasure chest? I am guessing the more conventional, though less convenient for Moyo’s argument, answer that the money is not available because most investors find sub-Saharan Africa to be too risky of an investment is at play. Perhaps to overcome this reluctance to lend, Moyo suggests a possible loan guarantee from the World Bank. This was, apparently, tried with great success in Argentina, until Argentina defaulted. So much for great ideas. I am not saying that developing countries should not look to the capital markets for financing. In some cases, it might be appropriate for both the country and the investor. What I am saying, is that there is no evidence that it can be a one-size-fits-all solution for the myriad financing needs of developing countries, some of which are to provide critical services like health and education to its citizenry.

The next solution Moyo offers up is direct investment from the Chinese. She opens the chapter by describing compelling evidence that it is difficult to do business in, and hence invest in, sub-Saharan Africa. Once again, in descriptive mode, Moyo hits her stride, rightly taking the governments of LDCs to task for not streamlining their bureaucracy to attract FDI. However, the chapter’s prescriptions fail to build on the promise of its setup. Instead of offering up ideas that have been successful elsewhere in attracting FDI and extracting maximum benefit from it, Moyo makes the provocative argument that China’s involvement in sub-Saharan Africa has been good for growth. Whether or not this is true is somewhat irrelevant. China cannot be the solution going forward for African financing. China is only one country and, like any large-scale intervention in a developing country, its Africa involvement has its own issues (there are arguments, for example, that China’s involvement in Africa has be destabilizing, notably by Moyo’s compatriot, Zambian opposition leader Michael Chilfya Sata). How to manage these issues, and those that arise with any aid and investment partner, is not addressed by Moyo.

The third solution she offers is an old classic: that trade is the secret to Africa’s future development. I have myself been a champion of greater access to international markets for developing countries, and am glad to have Moyo’s voice added to this important conversation. As her chapter points out, so many developed countries say they care about the plight of the world’s poor, but would rather throw money at the problem than stand up to the powerful agriculture lobby and embrace truly free trade. But this, too, is not an automatic solution to Africa’s development problems. As work by Dani Rodrik, among others (see Rodriguez and Rodrik, 2000, for his earliest foray into the debate) points out, the link between free trade and growth is tenuous. There may be certain policies that promote growth (the EU has consistently delivered growth for its poorest members, but NAFTA has not) but removing trade barriers is only guaranteed to help rich-country consumers (see Birdsall, Rodrik, Subramanian, 2005). Moyo should be familiar with Rodrik’s work, she cites him credulously elsewhere when his findings agree with her thesis. Even if convincing rich countries to remove their trade barriers, and removing intra-Africa trade barriers, did result in an increase in agricultural exports, sub-Saharan African countries would still need to find ways to position themselves further up the value chain to capture maximum value from these trade routes. Recent industrial development literature provides some information on how to mirror the success of small-manufacturing powerhouses like Vietnam and Malaysia, but the road ahead would likely be long and complicated. Trade, again, may be one piece of the puzzle in promoting African development. What it is not is a magic bullet. It also is not a viable source of government revenue, since removing trade barriers would decrease government income, even if it promoted development.

Moyo’s final prescription for African development is the micro-finance miracle first started by Mohammed Yunis in Bangladesh. Microfinance is another promising solution that certainly offers some hope for Africa’s poor. However, microfinance has not been shown to drive macroeconomic growth, nor does Moyo claim it does. Rather, microfinance has demonstrated very strong individual success and repayment rates. However, this is not the standard of achievement that Moyo applies to aid, for if she did she would find that aid, too, has helped improve the lives of poor people (for a very good presentation of this argument, see the review of Moyo’s book on www.zambian-economist.com). Moyo also suggests remittances from former nationals could help fill th gap left by shutting off the aid tap. Unfortunately, the same arguments she employs about aid’s deleterious effects can be made about remittances, as work by Ralph Chami, Connel Fullenkamp, and others shows. Moyo also suggests that Africa look to the savings of its own people to finance development, telling an anecdote about $6000 buried in a Nigerian field for want of a trustworthy banking system. Moyo, once again deploying her maddening hypothetical argumentation, wonders aloud if there really is a capital shortage at all in Africa: “Might it be that there is a lot of cash in these poor countries—unseen, dormant ash, which simply needs to be woken? Could it actually be that the countless development agent and agencies and innumerable man-hours deployed to send cash to Africa have been for naught—attempting to solve a problem that doesn’t exist?” Despite Moyo’s insinuation that there might be “billions washing about,” she has no actual evidence of this hidden capital, only a single anecdote and plenty of rhetoric. Certainly Africa needs a functioning financial system, and certainly micro-savings and microcredit are two powerful tools to get poor people engaged in the financial sector. But wouldn’t an actual assessment of these tools’ strengths, weaknesses, and strategies for scale-up be more interesting than fairytales?

Such an assessment would require that Moyo take a more nuanced approach to Africa’s financial needs and the potential sources of money for each. Moyo only breaks down aid into three categories—emergency, charity, and government—based on their source. Of course the actual landscape of aid is more complicated than that, with each of those three categories co-mingling with the others, but more troubling is the fact that she doesn’t provide a breakdown for how this money is used in the country, only that money is needed for “financing development.” This allows her to skate by as though trade revenue, government bond issues, microfinance, and direct investment can all go into the same pool—development! But in actuality, developing countries need money for a variety of things, and her proposed solutions only provide for a few. Roughly, we can categorize the financing needs of a country as money for 1) infrastructure, 2) public services including health and education, 3) government function, and 4) private business ventures (in addition to personal expenditures). Investment from China might help with the first, and microfinance with the last, and perhaps she’d rather do away with the third all together, but that still leaves us with the second, the one area aid has actually had a large impact over its sordid history. While aid may not have any growth miracles to its name, it nonetheless plays an important role in financing the health and education infrastructure of impoverished countries. It is unclear whether malaria treatment, HIV tests, and children’s schoolbooks are included in the “tap” Moyo wants to shut off, but if they are, then she fails to think about how they will be replaced.

In its rejection of aid as a solution to development, Moyo’s book has been compared to Easterly’s The White Man’s Burden. Moyo admires Easterly’s book, but takes him to task for not explicitly offering “a menu of alternatives to aid.” But Easterly’s book had a far different intent. His book followed the recent high-profile release of Jeffrey Sachs’ The End of Poverty, and thus had the specific purpose of repudiating the idea that all that was needed to fix Africa’s problems was a “big push” of aid. Easterly sticks closely to this purpose, and rightly does not try to offer up easy feel-good solutions for what he explains is a complex problem. Easterly’s goal was to try to stop countries from adopting a policy, namely drastically scaling up aid, that he believed would be a mistake given the available evidence. Moyo, on the other hand, is arguing for the adoption of a new policy, which is shutting off the aid tap and leaving Africa and Africans to fend for themselves. “Development not a mystery,” she says. But development is a mystery. The last 20 years of development literature tell us just that. Some countries that seem to do everything right fail to develop, while others rocket ahead on policies the international community calls disastrous. Others get a good start for a while, and then fall back into poverty due to internal or external shocks. And herein lies the deepest disappointment of Moyo’s book. The utter arrogance of her claim that all developing countries need to do is adopt her proposal “wholesale, in its entirety” to leapfrog into prosperity is matched only by that of those who think an American check will do the trick, instead.

References
Abdih, Yassir, Ralph Chami, Jihad Dagher, and Peter Montiel. “Remittances and Institutions: Are Remittances a Curse?” IMF working paper (2008)
Birdsall, Nancy, Dani Rodrick, and Arvind Subramanian. “How to Help Poor Countries.” Foreign Affairs, Vol. 84 (2005).
Chami, Ralph, Connel Fullenkamp, and Samir Jahjah. “Are Immigrant Remittance Flows a Source of Capital for Development.” IMF working paper (2003).
Easterly, William. The White Man’s Burden. Penguin Press. New York: 2008
Rodríguez, Francisco, and Dani Rodrik. “Trade Policy and Economic Growth: a Skeptic’s Guide to the Cross-National Evidence.” NBER Macroeconomics Annual, Vol. 15, (2000), pp. 261-325.
Sata, Michael Chilufya. “Chinese Investment in Africa and Implications for International Relations, Consolidation of Democracy and Respect for Human Rights: The Case of Zambia.” Presentation at Harvard University, October 24, 2007.
Zambian Economist blog. “Dead Aid, by Dambisa Moyo (A review). Friday, 6 March 2009 Available: http://www.zambian-economist.com/2009/03/dead-aid-by-dambisa-moyo-review.html