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Monday, July 27, 2009

The Other Side of ‘Dead Aid’

Dr. Nii Moi Thompson
Dr. Nii Moi Thompson

By Nii Moi Thompson

FACT: Despite 50-plus years of foreign aid, most countries in Africa are worse off (by some measures) than they were at independence.

CHALLENGE: Explain this seeming paradox and offer solutions.
And this is where Dambisa Moyo fails miserably in her book, Dead Aid, a 188-page grab bag of hyperbole, bastardized statistics, superficial and disjointed analysis, and ultimately a policy “menu” of dubious nutritional value.

First is the exact scale of the “aid” that Moyo tells us, with irritating frequency, has been “transferred to Africa” over the past 50 years with seemingly no meaningful reciprocity. She parrots the oft-repeated claim of “US$1 trillion,” a figure whose origin and credibility remain murky, at best.

But that’s only half the problem of Dead Aid. The other (unspoken) half is the amount of money that poor countries have transferred to rich countries over the same period.

Perhaps for Moyo there is no data on this other transfer to warrant its discussion, but the case of Ghana (a poster child of the aid-underdevelopment paradox) shows why such an omission cannot be ignored for whatever reason.

In 1994 (five years before donors labeled it “heavily indebted” and “poor”), Ghana’s budget statement made the following grim disclosure about its 1993 performance: “In the second half of the year, Ghana also obtained a Compensatory and Contingency Financing Facility [from the IMF] equivalent to US$65.1 million. At the same time an amount of US$67.9 million was paid back to the IMF, thereby showing a net outflow to the IMF of US$2.8 million.” If every African country in 1993 sent out an average of US$2.8 million more to donors than it received, that would be about US$150 million in net transfers, a princely sum for a continent supposedly hard up for development finance.

Of course we cannot forget the well-known disparity between what donors publicly pledge to “transfer” (headline aid) and what they eventually give to, or for, poor countries (pipeline aid). For example, data from Ghana’s Ministry of Finance shows that between 1990 and 2006, donors promised some US$1.1 billion in aid to the education sector but actually disbursed US$766.9 million
But even here we must distinguish between “disbursements” and “transfers”. Some donors insist, as a matter of commercial policy, that a portion of disbursed aid (sometimes as high as 75%) be spent on imports, including consultancy services, from their home countries; very little money is actually “transferred” to the recipient countries.

Besides the well-known problems with such “tied aid”, poor countries also lose large amounts of their own monies to rich countries through such practices as transfer pricing (self-dealing) and invoice-tampering by unscrupulous multi-nationals, as well as the abuse of tax holidays granted to these multi-nationals ostensibly to help stimulate economic growth in poor countries. In Ghana, some multi-nationals have been known to sell off their assets to others, typically from their home countries, just as their tax holiday is about to expire for them to pay taxes. The tax holiday is effectively extended, depriving Ghana of resources for development and, paradoxically, deepening its aid dependence.

Perhaps rather than Dead Aid we should be talking about Reverse Aid.

Bastardized statistics aside, most of the arguments in Dead Aid are visceral rather than rational, resulting in a wanton disregard for logic and reason, fact or fiction.

For example, Moyo claims that “foreign aid foments conflicts” because “the prospect of seizing power and gaining access to unlimited aid-wealth is irresistible”. As proof, she tells us that a former Sierra Leonean rebel leader refused his country’s vice presidency until he was given the “chairmanship of the board controlling diamond-mining interests”. In Moyo’s view that is how “aid foments conflict.”

Also, to show how corruption in depraved Africa can threaten the security of pristine western societies, she sounds the alarm that “stolen money sent to European banks [by corrupt African leaders] can fund terrorist activities”. Cutting off aid to Africa, it seems, will take care of this Osamaesque specter – and western societies shall live happily ever after. Elsewhere in the book, Moyo even blames “aid” for “increased demand for locally produced goods and services,” including “non-tradables such as…foodstuffs”.

Foodstuffs of course are tradable (within and across borders) and an increase in their demand must be good for farmers. Certainly!
In the end, what Moyo offers as a “menu of alternatives to fund economic development across poor countries” is nothing more than warmed-over policy prescriptions whose rancidity either escapes her or she deliberately ignores. Trade, FDI, the capital markets, remittances, micro-finance, and savings make up the familiar entrees on this so-called “alternative” menu.

On trade, for example, she reminds us of how India “launched its own Africa manifesto” (thank you, Incredible India!) and benevolently extended “credit lines” for African importers and “duty free access” for African exports. What she fails to tell us is that this seeming benevolence from India is but a Trojan horse that ultimately will hurt, not help, Africa.

The so-called duty-free access would apply only to cash crops and other primary products, whose tariffs are already negligible, and whose prices have been known to decline over time (think poverty). By contrast, Indian tariffs on imported African manufactures, whose production would broaden and deepen African industry, create employment, raise national incomes, and help reduce the continent’s dependence on aid, remain prohibitively high. Raw hides from Africa to India, for example, attract 0.1% in tariffs while processed (manufactured) leather attracts 14.0%. By effectively keeping out African manufactures while simultaneously giving Africans “credit lines” (a form of aid) to import Indian manufactures, India’s gesture will actually aggravate, not ameliorate, Africa’s plight.

Having worked with an investment bank for nearly a decade, the author predictably (if naively) recommends “capital markets” as a sort of panacea to Africa’s growth-financing needs. But both research and experience have shown that lack of money per se, no matter the source, is not what ultimately impedes Africa’s growth and development. Dysfunctional institutions are. There is a reason, as the author herself acknowledges, that “virtually all…of the 35-odd African that had issued bonds in the international capital markets…had defaulted”. They have rotten institutions that can manage neither capital market money nor aid.

To be fair to Moyo, she does declare “the strengthening of institutions” as the “third stage in the Dead Aid model”, but then that’s all she does and nothing else. She instead treats us to a confusing patchwork of quotations from David Landes’ Wealth and Poverty of Nations and then makes one of her most outrageous declarations in the book - that “the four horses of Africa’s apocalypse – corruption, disease, poverty and war – can easily run across international borders, putting Westerners at just as much risk as Africans.” At a time when the xenophobic Right is on a gleeful ascendancy in Europe, they couldn’t have had a better ally in the bombastic Ms. Moyo. (By the way, contrary to the author’s claim, Ghana’s foray into capital markets in 2007 was over-subscribed by US$3 billion, not US$5 billion. But when hyperbole is your fare, what’s fact got to do with it?)

Africa’s problem, ultimately, is not “too much” aid or too little capital markets money – or even lack of fair trade with India. Africa’s problem is ultimately due to the absence of strong and viable institutions to generate and manage resources, including time, effectively, efficiently and transparently. But such institutions do not emerge and thrive on their own. It requires visionary leadership and, most important, a well-trained labour force - something Africa sorely lacks.

In the early stages of their development, Japan and South Korea, for example, gave financial and other incentives for their unskilled workers to migrate abroad, which explains the large Japanese and Korean populations in the Americas. Europe had the sparsely settled United States to absorb its unskilled workers, leaving behind a skilled labor force to develop it with domestic resources supplemented with looted treasures from distant colonies.

Africa, by contrast, has been losing its highly skilled labor to rich countries like the U.K. and the U.S. through push factors (bad governance) and pull factors (migration incentives from abroad). In recent times, the U.S., for example, has decimated the continent’s skills base with its visa lottery scheme which rejects unskilled winners in favor of the engineers, medical personnel, economists and policy analysts that Africa badly needs to manage its development, no matter how it is financed.

This deliberate and systematic emasculation of Africa’s knowledge base, and the associated aggravation of the continent’s institutional deficiencies, lies at the heart of Africa’s development conundrum. The “failure” of aid per se is only symptomatic of this deeper problem. Tackle this problem and we shall have dealt with more than half of Africa’s core developmental challenges. The rest will follow.

Yes, they will.

The author Dr. Nii Moi Thompson, is a development economist. He lives and works in Ghana.

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