A list of notes from the Dead Aid by Dambisa Moyo.

The World of Aid

The Myth of Aid

Africa's growth in the 2000s cannot be attributed to aid. A rise in the price of export goods, dividends from market-based policies and more political stability were the main drivers of Africa's growth. However there are still challenges facing Africa: low per capita income with the average being less than 1$ per dsy, stagnant life expectancy mainly due to the HIV-AIDS pandemic, lower adult literacy levels compared to the 70s and political instability in the form of non-democratic rule and autocratic regimes.

Aid can be divided into three categories: humanitarian aid or emergency aid that is usually in response to disasters and catastrophes, charity-based aid that is given by charity organizations and systematic aid that is given by governments to other governments or through institutions such as the World Bank and IMF. Systematic aid makes up the bulk of aid to Africa and is given in the form of concessional loans or grants. Concessional loans are loans given at low interest rates (below market) and have very long repayment periods than ordinary* loans. Grants are monies given for nothing in return. Moyo argues that the distinction between grants and concessional loans does not exist in the African context. Concessional loans are frequently forgiven and restructured making them look more and more like grants.

The chapter is title "the myth of aid" but the writer does not talk about this claim. The chapter is more about setting a stage for later arguments in the book; it hardly addresses its title - I inferred that the myth is "aid helps", but it does not.

The notion that aid can alleviate systemic poverty, and has done so, is a myth. From the introduction

In the intro, Moyo makes this claim on the "culture of aid":

Deep in every liberal sensibility is a profound sense that in a world of moral uncertainty one idea is sacred, one belief cannot be compromised: the rich should help the poor, and the form of this help should be aid.

This felt like a very strong claim, and I kept asking myself is this idea is core to liberalism. All I found from my quick search that seemed close to this was the welfare state. I'm still not convinced by Moyo's claim.

A Brief History of Aid

Structured international aid dates back to the 1940s with the inception of the International Monetary Fund (IMF) and World Bank (as IBRD) at the Bretton Woods conference in 1944. The two institutions were created to help rebuild Europe after the second world war. The main agenda of the Bretton Woods Conference was to restructure international finance, establish a multilateral trading system and construct a framework for economic cooperation that would avoid a repeat of the Great Depression of the 1930s.

The post war decades:

The 1940s: The Bretton Woods conference and the formation IMF and World Bank. The 1950s: The Marshall Plan of US aid to Europe. It was considered a success and brought western Europe back onto a strong economic footing.

The 1960s: African states were becoming newly independent and lacked resources for growth. Aid seen as an avenue to provide capital for economic development that would reduce poverty. Most of the aid was for industrialization, that is, infrastructure development and industrial projects e.g. dams, roads, factories.

The 1970s: The oil crisis left African states in recessions. Aid focus shifted to poverty. The UK adopted a poverty focus with "More Aid for the Poorest" agenda. Infrastructure projects were abandoned in favour of social projects e.g. education, health, water, sanitation. World Bank becomes the largest aid donor surpassing USA.

The 1980s: The oil crisis of the 70s had led to a global recession. Donor countries were tightening their monetary policies and rasing interest rates on loans. Recipient states could not service their debts and structural adjustment programs where introduced by the IMF and World Bank to cope with the high default rate. Neo-liberalism took a foothold with Reaganomics and Thatcherism. Market-based policies, privatization, deregulation and trade liberation became the key conditions for aid. The socialist African states adapted to these conditions becoming leaner, privatizing state run corporations and adopting free markets. The Washington Consensus became the backbone of the development strategy of IMF and World Bank. It was a set of 10 economic policy prescriptions for developing countries; fiscal discipline , redirection of public spending from subsidies to investment in infrastructure, tax reform, interest rates liberalization, competitive exchange rates, trade liberalization, liberalization of inward foreign direct investment, privatization, deregulation and finally secure property rights.

The 1990s: Donor states started to notice the aid had not had the expected impact on the developing world. Governance ie the lack thereof was seen as the biggest impediment to growth. Aid conditions now required good governance reform: strengthening institutions, rule of law, accountability and transparency. The West pushed for more democracy in Africa. Donor aid started to decline towards the end of the decade. This was a reversal on the Cold War era policies, where western donors gave aid to African states to gain political influence and there was little regard to the political leadership of the recipient states.

.. the Cold War had provided richer countries with the political imperative to give aid monies even to the most corrupt and venal despots in Africa.

The 2000s: Celebrities and rock stars became the face of aid. Bob Geldof and Bono were notable examples.

Given Africa's current economic state it is hard to see how any growth registered is a direct result of aid. If anything, the evidence of the last fifty years points to the reverse - slower growth, higher poverty and Africa left off the economic ladder.

Aid is not working

There are several factors attributed to Africa's growth failures:

• geographical
  • geography affects people's ability to produce food, which as an economic impact.
  • landlocked vs coastal states: coastal state perform better economically
• historical
  • colonialism

    colonial powers delineated nations, established political structures and fashioned bureaucracies that were fundamentally incompatible with the way of life of indigenous populations.

• cultural
  • Africans viewed as being innately unable to development and improve themselves without external help.They are seen as children ;requiring guidance and supervision.
• tribal
  • ethnic divisions in countries; this is argued to lead to civil warring and political instability.
  • there are several states for who this isn;t an issue e.g. Botswana, Ghana
• institutional
  • absence of strong, transparent and credible institutions.
  • rule of law and strong institutions create a good environment for investment.

Moyo argues that alongside these factors, aid is common across Africa and it hasn't worked:

• aid has been given continually to African states without any time limits resulting in lack of long-term financial planning by the states. Aid is expected to be there in the future.
• aid has been given to states without strong political leadership and institutions required to manage the aid. It has lead to further weaking of institutions and political leadership through corruption.
• conditional aid has failed to be effective. Conditions have not been enforced by recipient states and violations are not punished.
• democracy conditioned on aid hasn't been a clear success.
• conditional aid has little long term benefits and maybe detrimental, for example aid that brings competition to local industries by importing goods from donor countries.
• studies have show that aid has no appreciable impact on development.

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.

The Silent Killer of Growth

This chapter covers the myriads of ways in which aid has stifled and even regressed economic growth in Africa.

Aid enables corruption. Aid given to corrupt governments make them more corrupt and the erode institutions and weaken domestic and foreign investment which makes the country poorer, and needing more aid. It creates a vicious cycle driven by aid. Corruption corrodes moral, making principled and educated persons in position of power susceptible to misusing the posts for personal gains, or in other cases driven out of government and their positions take by less qualified persons who are potentially vulnerable to graft. The reduction of corruptions is beneficial to national, a one-point increase in the Corruptions Perceptions Index is correlated with ~4% GDP growth.

Aid agencies and institutions are in the lending business. They are incentivized to lend money since for most success is measured by the size of their lending portfolio. This pressure to lend leads to lending to corrupt governments and little or no repercussions when aid conditions are violated by the recipient states. It sometimes creates an incentive imbalance where aid agencies are more willing to lend than the recipient states are willing to borrow.

Civil wars and conflicts are mainly born out of the desire to control resources. Aid contributes to this phenomenon since it's since as another resource by warring factions, for example, Somalia's civil wars have been attributed to the desire to control large food-aid donations, Michael Maren on somalia. Aid has also been diverted to finance wars with aid resources being used to buy weapons and fund military operations.

My experience in Beledweyne during the last few months has confirmed my growing suspicion that the Somali government is deliberately taking part in the diversion of refugee food, has deliberately inflated refugee figures in order to facilitate these diversions , and is now simply humoring donors by submitting itself to the impotent inspection and monitoring of the donors.

Michael Maren memo to head of USAID mission in Somalia, ~1979

Aid creates challenges for economic growth. It deters foreign investments as private investors are uncomfortable investing in aid-dependent countries. Aid can be inflationary; influx of foreign currency leads to increased demand of domestic and imported goods and services. In poor economies where there is little production, increased demand leads to increased prices. Influx of foreign currency can also lead to local currency strengthening which makes exports more expensive. This is the Dutch Disease phenomenon. It makes the locally produced goods to be more expensive in the international market, making the uncompetitive. Poor economies also lack the capacity to absorb the influx of foreign currency effectively. Policymakers have to come up with ways to manage the excess currency that can't be put to productive use, usually this involves issuing local-currency debt in order to soak up the excess aid flows. This leads to increased debt levels and debt servicing costs.

The presumed mechanism is that while revenues increase in a growing sector (or inflows of foreign aid), the given economy's currency becomes stronger (appreciates) compared to foreign currencies (manifested in the exchange rate). This results in the country's other exports becoming more expensive for other countries to buy, while imports become cheaper, altogether rendering those sectors less competitive.

The Dutch Disease, Wikipedia

A World without Aid