NN42, June 2009
A Safari Towards Aid Effectiveness?
Missing the Point with Moyo
By Kevin Watkins, Global Monitoring Report, UNESCO
Email: k.watkins@unesco.orgKeywords
Dambisa Moyo; Dead Aid
Summary
This article argues that we are spending too much time debating Dambisa Moyo?s book, Dead Aid, that doesn?t merit serious discussion, and too little discussing a subject that does: namely, how to increase the effectiveness of international aid in the world?s poorest countries.
This is really a debate about two separate issues. The first is Dambisa Moyo?s book and its claim that aid is an exercise in throwing money down the proverbial rat-hole. The second issue is touched on by William Wallis in his introduction to the blog: namely, why has Dead Aid generated such a heated and wide-ranging debate.
My view is that we are having the discussion on the wrong things. We are spending too much time debating a book that doesn?t merit serious discussion, and too little discussing a subject that does: namely, how to increase the effectiveness of international aid in the world?s poorest countries. The problem is not that Moyo is too critical of aid: in some areas, like corruption and the failure of African governments to tackle inequality, she is not critical enough. The real problem is that Moyo misses the point.
Perhaps it?s worth recalling what is at stake. Half of sub-Saharan Africa?s population ? some 300 million people ? live on less than $1.25 a day. Most of them go to bed hungry. There are 3 million children in the region who don?t live to see their fifth birthday. Most of these are killed by poverty-related infectious diseases. Around one-in-three primary school age children in the region are out of school. Those in school are often being taught in dilapidated buildings, without books and pencils, by poorly trained teachers.
In the world according to Moyo, aid not only fails to address these problems ? it compounds them. If she?s right, ethical responsibility and economic common sense dictate that it?s time to turn off the aid taps. So is she right?
Her argument runs something like this. Africa has received ?a trillion dollars in aid? over the past half century or so (never mind the fact that the figure is wrong). Meanwhile, economic growth has stagnated and poverty has increased. The charge is essentially one of guilt by association: there?s an awful lot of aid sloshing around in countries that are doing badly. Using the same logic, you could argue that fire engines are best avoided because you tend to find them clustered around burning buildings.
To be fair to Moyo she does have a shot at establishing causality. While Oxfam and Save the Children see aid as a lifeline for poverty reduction, Dead Aid treats it as a toxic stream that poisons political systems and distorts economies. It corrupts politics, in Moyo?s account, because it relieves government of the need to develop a domestic tax base and establish accountability to their citizens. And it undermines economic growth by driving up the exchange rate, hurting small farmers in export markets ? a syndrome known as ?Dutch Disease?.
If these arguments sound familiar that?s because they are second-hand. Most of them are recycled fragments from aid critiques developed by William Easterly, Raghuram Rajan and others ? and none of them meet even the most basic criteria for viable evidence.
Let?s start with the association between aid and economic growth. This is a subject that has been subject to intense scrutiny. The best evidence suggests that development assistance has a variable but positive growth effect. The growth effect is strongest in the near-term when aid is directed towards economic infrastructure, and weakest ? as you would expect ? when it is directed to humanitarian emergencies. Best estimates by Steven Radelet and others at the centre for Global Development in Washington, suggest that each $1 in aid yields about $1.64 in creased income.
The economic growth effects are aid are far weaker than they should be. And this is a subject that merits debate. But Moyo?s claim that aid undermines growth is just not backed by evidence.
What about ?Dutch Disease?? In Moyo?s account this is a fatal affliction with no known antidote. Here, too, she adopts the tried and tested method of over-simplifying an important debate.
The sensible version of the Dutch Disease argument is as follows. Increased aid boosts demand for both imports and domestically produced non-tradable goods, including health care and education. When development assistance is directed through public spending, so the argument runs, the price of non-tradables must rise, pushing up the exchange rate and shifting resources away from tradable goods. Many of the same arguments have been used by Paul Collier and others to describe the economic distortions that can result from a surge in foreign exchange linked to the exploitation of oil, gas, and minerals ? the so-called resource curse.
Dutch disease is a potentially serious problem for countries that are highly dependent on aid. However, the relationships are not automatic. Exchange rate distortions are likely to be strongest in countries where trade is restricted and production is at full capacity. If aid boosts supply capacity, for example by facilitating the access of small farmers to inputs, strengthening rural road systems, and building infrastructure, the macro-economic impact of aid will be more limited. This has been the case in countries such as Mozambique and Senegal. Similarly, governments can choose to sterilise the liquidity impact of aid through the sale of government securities or sterilisation bonds ? an approach adopted in Uganda.
There is a more fundamental problem with Moyo?s approach to Dutch Disease. In the last analysis, the macro-economic effects of aid are no different to the macro-economic effects of exploiting copper or oil. While managing the revenue streams from mineral resources poses difficult questions, no credible economists argue that countries should leave oil and copper untapped.
The point of all this is that Dead Aid just fails to engage with the real issues. Instead it offers grandiosely vacuous historical sweeps that point out the blindingly obvious. Take the observation that, going back over a few decades, aid has been associated with limited growth and increased poverty. Given that so much of it was distorted by Cold War priorities and pumped into the Swiss bank accounts of robber barons like Mobuto Sese Seko, Mengistu and, of more recent vintage, Daniel Arap Moi, why would you expect aid to generate growth and poverty reduction?
In some ways it seems a shame to introduce evidence into the fact free zone of the Dead Aid debate. But there is real evidence from the past decade that aid has made a difference. While the depth of Africa?s poverty and the scale of past failures have to be acknowledged, so do the achievements. Let me mention a few:
? Economic growth. Up until 2008 sub-Saharan Africa?s economies were experiencing growth of 5-6 per cent a year, equal to that for the developing world as a whole (excluding China and India).
? Poverty reduction. Improved economic performance has translated into poverty reduction. During the 1990s the incidence of extreme poverty in sub-Saharan Africa was unchanged ? it started and ended the decade at around 58 per cent. With population growth, numbers in poverty increased by some 60 million. Since 2000 and before the economic downturn, poverty incidence had fallen to 51 per cent with 4 million coming out of poverty.
? Human development. Since 2000, sub-Saharan Africa has reduced its out-of school population by 10 million. Primary school enrolments are growing at six times the rate of the 1990s. Countries such as Zambia, Senegal and Mozambique have been making extraordinary progress. Progress in child survival has picked up dramatically in countries like Ethiopia and Tanzania. Other indicators are also improving, including the prevalence of HIV/AIDS.
Nobody in their right mind would argue that these are ?aid success stories?. But it would be fanciful to believe that the progress achieved in poverty reduction, education, and health could have been sustained had the aid taps been turned off.
None of this is to detract from some of the real problems that have to be addressed. Moyo is right to highlight the importance of corruption. The problem is that she has nothing of note to say on the subject. Michela Wrong?s superb book on Kenya, It?s our Turn to Eat, captures the institutional malaise that feeds the problem. It should be mandatory reading for all NGOs and aid agencies, partly because it documents the way in which so many ? the World Bank, DfID and others ? colluded in the cover-up of practices that were asset stripping the Kenyan budget on an epic scale.
This brings us to the second point. Why is it that Dead Aid has tapped into such a deep well of support? It?s not surprising that usual suspect aid cynics like William Easterly are leading a Greek Chorus of approval. But when Paul Kagame, prime minister of Rwanda, joins the fan club you have to ask what is going on? After all, Rwanda receives around $30 per capita in aid ? and development assistance has played a key role in supporting his country?s recovery.
Part of the problem is that the debate on aid has been conducted on the ?two legs good, four legs bad? model. Aid over-enthusiasts implausibly argue that more aid means less poverty, essentially reducing poverty reduction to an exercise in plugging financing gaps. Aid cynics echo the Moyo refrain.
The upshot is that critical issues have been swept under the carpet. Corruption and the home-grown failures of poverty reduction should be more actively debated. So should the governance problems on the donor side, including weak coordination, a failure to use national systems and build national capacity, and an ongoing tendency to use aid as a lever for reform.
All of this begs the question as to why is Moyo generating so much media interest. As we are constantly reminded in the marketing blurb, she is young, female, African and an economist who has spent time in Goldman Sachs and the World Bank. If you?re looking for a counterfoil to Bono, Sir Bob and Jeff Sachs and you want to have a ?two legs good four legs bad? debate on aid, what better approach than to pitch a young African woman against European rock stars and an eminent American economist.
Writing as a non-marketable, non-African, non-economist who has worked for Oxfam and the UN, two of Moyo?s target groups, perhaps I should stay out of it. But perhaps participants in the debate might want to reflect on the thoughts of an eminent female economist who has also worked in the World Bank, and was the first woman to be elected as leader of an African country. This is how Sirleaf Johnson, President of Liberia, sums it up:
?Reducing aid would slow private-sector growth, stall poverty reduction, and undermine peace and stability in countries that are struggling to become part of the global economy.?
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