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A good introduction to the aid effectiveness debate - not more
am 14. August 2009
In this provocative and controversial book, Dambisa Moyo who worked as Global Economist and Strategist for Goldman Sachs as well as a consultant for the World Bank, argues (as the title suggests) that aid is dead. Moyo defines this aid as either bilateral or multilateral cash payments made directly to governments in Africa (for example in the form of direct budget support) and excludes humanitarian/emergency aid as well as charity-based aid from her discussion. Her hypothesis is that this kind of aid has failed to deliver the promise of sustainable economic growth and poverty reduction. Aid has created a vicious circle whereby it props up corrupt governments providing them with freely usable cash. These governments then "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 groyth, which leads to fewer job opportunities and increasing poverty levels. In response to growing poverty, donors give more aid, which continues the downward spiral of poverty."
Over the next 80 pages or so Moyo tries to make a case for her hypothesis. Some of the arguments she brings forward are already well known to the aid community and accepted. However, a number of her arguments are weak and lack concrete convincing evidence. In general, the book lacks examples and evidence and is rather a collection of controversial and provoking statements.
Moyo then outlines a better way for Africa to finance its economic development. She suggests the following:
- African governments to raise capital on international markets by issuing bonds, even if the interest on such bonds is much higer than on bilateral/multilateral aid loans. However, she fails to convincingly explain why governments would do this if aid money is freely available. There is also the issue of bad credit ratings and defaulting for which a number of African governments are famous for and Moyo fails to explain why creditors would give their money to such governments (even if interests earnings are relatively high).
- Attract foreign direct investment (FDI) from Africa's big friend, the Chinese. This is already happening on a large scale in Africa but what is China's exact motivation? According to Moyo, Africans shouldn't bother about China's agenda - for Africa it is about immediate needs! Human rights, rule of law etc. can be discussed later stage.
- Improved and free trade both within Africa as well as with Asia, Europe and the Americas. This would include removal of protective barriers and subsidies. This is indeed a good and well known and well recognized strategy within the aid community but unfortunately very much dependent on major global trade reforms.
- Provision of financial services to the rural poor and micro-credit. She cites the example of the highly succesful Grameem bank in Bangladesh. Indeed, microfinance is a good strategy to alleviate poverty but it also needs good framework legislation and regulation.
- Remittances from the diaspora, which indeed can help to bolster a country's economy.
- Increased in country savings. However, this requires a strong and well regulated banking sector which a number of African countries lack. Also, it would require strong fiscal discipline by the government in order to minimize inflation. It is good to save, but if the money is worth nothing in the end (greetings from Zimbabwe where the whole popluation lost its savings in local currency) there is no reason to deposit the money in an account.
All in all, this book is an excellent introduction into the whole discussion about aid effectiveness. Not more and not less! It does not provide a solution on how to generate sustained economic growth and reduce poverty in Africa. The strategies outlined by Moyo are interesting, however it has to be kept in mind that for these strategies to be implemented and effective, they require a strong and reliable (good) governance framework. Unfortunately, this framework is lacking in many African countries and Moyo wrongly sees good governance (or at least a stable and conducive governance framework, i.e. one that guarantees property rights and access to a fair and independant legal system) as a by-product of economic growth, not as a prerequisite.