This is the main critics that Dambisa Moyo presents in her famous book Dead Aid – Why aid is not working and how there is another way for Africa. Personally, I was pleased to read a well structured and analyzed critics of the present aid system. For example in Finland, aid seems to be a tabu and we are lacking a critical analysis of the benefits of aid system. Funny thing is that both Erkki Tuomioja and Björn Wahlroos have recommended this book.
Moyo makes several interesting points by stating that actually aid is a problem, not a solution for the poverty. As Moyo highlights, over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum. For most countries a direct consequence of the aid-driven interventions has been a dramatic descent into poverty.
With respect to aid, poor economies face four main economic challenges: reduction of domestic savings and investment in favour of greater consumption; inflation; diminishing exports; and difficulty in absorbing such large cash influxes. Foreign aid does not strengthen the social capital – it weakens it. By thwarting accountability mechanisms, encouraging rent-seeking behavior, siphoning off scale talent from the employment pool, and removing pressures to reform inefficient policies and institutions, aid guarantees that in the most aid-dependent regimes social capital remains weak and the countries themselves poor. Aid inflows have adverse effects on overall competitiveness, wages, export sector employment and ultimately growth. Finally, economic researchers have found that countries with low financial development do not have the absorptive capacity for foreign aid.
Here Dambisa Moyo gives a great analysis on the World Economy in 2010
Born in Africa, Moyo focuses on analyzing Africa as an example. She says that Africa’s broad economic experience shows that the abundance of land and natural resources does not guarantee economic success, however. In the second half of the twentieth century, natural-resource dependence has proved to be a developmental curse, rather than blessing. According to Moyo, Africa’s failure to generate any meaningful or sustainable long-run growth must, ostensibly, be a confluence of factors: geographical, historical, cultural, tribal and institutional. However, it is also fair to say that no factor should condemn Africa to a permanent failure to grow.
Africa is not an absence of cash, but rather that its financial markets are acutely inefficient – borrowers cannot borrow, and lenders do not lend, despite the billions washing about. No country has economically succeeded without finding a way to funnel the risk capital to finance its small and medium-sized enterprises. For Africa, this is an imperative that must be heeded.
Moyo says that doing business in Africa is a nightmare. There are hurdles for investors to overcome. For the most part infrastructure is scant, and of poor quality, making the costs of overall production of goods and services steep – which explains why it is cheaper to make almost anything in Asia and ship It to Europe, than produce it in Africa, although the continent is much closer. However, physical constraints are nothing compared with man-made disincentives: widespread corruption, a maze of bureaucracy, a highly circumscribed regulatory and legal environment, and ensuing needless streams of red-tape.
African countries impose an average tariff of 34 per cent on agricultural products from other African nations, and 21 per cent on their own products. As a result, trade between African countries accounts for only 10 per cent of their total exports. By contrast, 40 per cent of North American trade is with other North American countries and 63 per cent of trade by countries in Western Europe is with other Western European countries.
The privatization of African state-owned enterprises across all sectors meant that the government stake of corporate equity fell from almost 90 per cent to just 10 per cent ownership in six years. The free markets gave African economies the freedom to succeed, but also the freedom to fail.
As well Moyo points out that 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.
Aid is the problem, not the solution
"What if, 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?"
According to Moyo without the inbuilt threat that aid might be cut, and without the sense that one day it could be over, African governments view aid as a permanent, reliable, consistent source of income and have no reason to believe that the flows won’t continue into the indefinite future. There is no incentive for long-term financial planning, no reason to seek alternatives to fund development, when all you have to do is to sit back and bank the cheques.
Democracy or Capitalism?
There are three fundamental truths about conflicts today; they are mostly born out of competition for control of resources; they are predominately a feature of poorer economies; and they are increasingly internal conflicts.
According to Moyo, what is clear is that democracy is not the prerequisite for economic growth that aid proponents maintain. On the contrary, it is economic growth that is a prerequisite for democracy; and the one thing economic growth does not need is aid.
She continues by saying that in early stages of development it matters little to a starving African family whether they can vote or not. Later they may care, but first of all they need food for today, and the tomorrows to come, and that requires an economy that is growing. Trade creates employment, improves trade balances, lowers the price of consumer goods through greater imports and generates income for the country’s exporters, but, perhaps most importantly, trade produces income that accrues to governments through tariffs and income taxes. Countries that have developed – in Europe, America, Japan, Asian countries like Taiwan, Korea and Singapore – have all believed in free markets.
Moyo asks, is it possible for a government to raise money in a free-market way and spend it on a socialist agenda? Her answer is yes: Sweden, Denmark and Norway are just three examples. Whatever the social, political and economic ideology a country chooses, there is a menu of financial alternatives, all better than aid, that can finance its agenda.
A World Bank study found that as much as 85 per cent of aid flows were used for purposes other than that for which they were initially intended, very often diverted to unproductive, if not grotesque ventures. When it comes to remittances, for every USD 100 sent to Africa, only USD 80 gets there – the middleman takes the rest – while from the US to Mexico USD 85 gets home and from the UK to India as much as USD 96 reaches its destination.
Do corrupt governments receive less foreign aid? Alesina and Weder conclude that aid tends to increase corruption. Svensson show how aid fosters corruption by reducing public spending; that by increasing government revenues, aid lowers the provision of public goods (things that everyone benefits from, but no one wants to pay for).
Corrupt governments interfere with the rule of law, the establishment of transparent civil institutions and the protection of civil liberties, making both domestic and foreign investment in poor countries unattractive. Greater opacity and fewer investments reduce economic growth, which leads to fewer job opportunities and increasing poverty levels.
China in Africa
Chinese are coming. And it is in Africa that their campaign for global dominance will be solidified. Economics come first, and when they own the banks, the land and the resources across Africa, their crusade will be over. They will have won. The mistake the West made was giving something for nothing. The secret of China’s success is that its foray into Africa is all business. China, on the other hand, send cash to Africa and demands returns. With returns Africans get good jobs, get roads, get food, making more Africans better off, and the promise of some semblance of political stability. It is the economy that matters.
In the last sixty years, no country has made as big an impact on the political, economic and social fabric of Africa as China has since the turn of the millennium. China’s economy has grown as much as 10 per cent a year over the past ten years, and it desperately needs the resources that Africa can provide. But rather than conquer Africa through the barrel of a gun, it is using the muscle of money. China has invested billions in copper and cobalt, in the Democratic Republic of Congo and Zambia, in iron ore and platinum in South Africa; in timber in Gabon, Cameroon and Congo-Brazzaville. It has also acquired mines in Zambia, textile factories in Lesotho, railways in Uganda, timber in the Central African Republic and retail developments across nearly every capital city. However, oil is the gusher. In total African countries provided roughly 30 per cent of China’s crude oil imports, Angola being the biggest supplier.
No one can deny that China is at least in Africa for the oil, the gold the copper and whatever else lies in the ground. But to say that the average African is not benefiting at all is a falsehood, and the critics know it. More people view China’s influence positively than make the same assessment of US influence.
Moyo presents her solution for Africa's problems. According to her:
First, African governments should follow Asian emerging markets in accessing the international bond markets and taking advantage of the falling yields paid by sovereign borrowers over the past decade.
Second, they should encourage the Chinese policy of large-scale direct investment in infrastructure.
Third, they should continue to press for genuine free market in agricultural products, which means that the U.S., the EU and Japan must scrap the various subsidies they pay to their farmers, enabling African countries to increase their earnings from primary product exports.
Fourth, they should encourage financial intermediation. Specially, they need to foster the spread of microfinance institutions of the sort that have flourished in Asia and Latin America. They should follow the Peruvian economist Hernando de Soto’s advice and grant the inhabitants of shanty towns secure legal title to their homes, so that these can be used as collateral. And they should make it cheaper for emigrants to send remittances back home.
Ideally African countries should aim for just 5 per cent of their total development financing coming from aid, 30 per cent from trade, 30 per cent from foreign direct investments, 10 per cent from capital markets and 25 per cent that is left should emanate from remittances and harnessed domestic savings.