Slamming Aid

In 1947, following the deadly ravages of World War II, the United States introduced the Marshall Plan, a multibillion dollar effort to support the reconstruction of a withered Europe. At this point, American economic engagement abroad was intended for recovery rather than development, and it was not until 1954, when President Dwight D. Eisenhower amended the Mutual Security Act, that the U.S. created the foreign aid system as we know it today. The Act, which attempted to organize the multitude of foreign assistance programs from the postwar period, also introduced the concepts of development and security assistance--particularly for poor and underdeveloped countries in the world. This was exemplified by the Food for Peace program, which formalized U.S. food aid and, as President Eisenhower said, was intended to "lay the basis for a permanent expansion of our exports of agricultural products with lasting benefits to ourselves and peoples of other lands." Since then, arguments for and against foreign assistance have permeated the foreign aid intellectual establishment.

For example, in 1958, Milton Friedman argued that "despite the intentions of foreign economic aid, its major effect, insofar as it has an effect at all, will be to speed the Communization of the underdeveloped world." rand economist Charles Wolf Jr. countered in 1961: "[O]ften the effect of aid has been to reduce the encroachment by government on the private sector" and aid can indeed be useful for "reasonable" objectives. One year after Friedman's essay, Lord Peter Bauer suggested that foreign aid to India "would be much more likely to retard the rise of general living standards in India than to accelerate it, and to obstruct rather than promote the emergence of a society resistant to totalitarian appeal." And Walt Whitman Rostow, economist and adviser to Presidents Kennedy and Johnson, opined in 1960 that advanced countries have an "important role to play in assisting the laggard societies." So it would go for the next 50 years.

The modern day extension of this debate has been inherited by New York University economist William Easterly and Columbia University economist Jeffrey Sachs, whose foreign aid feud penetrated the development blogosphere and seemingly drew the line between aid champions and aid critics. Published in 2005, Sachs's The End of Poverty claimed that Africa could not achieve the Millennium Development Goals without another big push of aid from the West, which would allow the continent to kick start itself on the path to growth. The following year, Easterly published The White Man's Burden, which chided foreign aid "planners" for perceiving development as a mere technical challenge that can be resolved through clinical diagnosis and medicine in the form of foreign aid.

Dambisa Moyo, a Harvard- and Oxford-educated Zambian economist and author of Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa, falls on the side of Friedman, Bauer, and Easterly--and rightly so. The evidence assessing the impact of aid on economic growth (or the lack thereof) is comprehensive and convincing. In 1987, for example, a study by Paul Mosley and two of his colleagues found no statistically significant correlation between aid and economic growth in the developing world. Nearly two decades later, in 2005, the International Monetary Fund (IMF) conducted its own comprehensive assessment of the aid-growth relationship, concluding that there is "little evidence of a robust positive impact of aid on growth."

These days, it is difficult even for aid advocates to justify foreign assistance on the basis of its purported contributions to economic progress: Instead they generally suggest that well-directed aid in the appropriate policy environment can accomplish focused objectives such as reducing malaria infection rates, educating children, or feeding the hungry.

In her short but strident debut, Moyo takes up the argument that aid is often ineffective and can inhibit growth as if it were new, with eager urgency and passion, chiding the vast "development community" from liberal humanitarians to subsidy-craving farmers and from development economists to international celebrities. The New York Times even dubbed Moyo "The Anti-Bono" for her accusation that "the pop culture of aid has bolstered misconceptions" about development aid, making Africa "the focus of orchestrated world-wide pity." But, of course, the Dead Aid argument is anything but new.

These days, it is difficult even for aid advocates to justify foreign assistance on the basis of its purported contributions to economic progress: Instead they generally suggest that well-directed aid in the appropriate policy environment can accomplish focused objectives such as reducing malaria infection rates, educating children, or feeding the hungry. Bono's one Campaign, for example, does not attempt to make the link between aid and growth. And Bono himself is widely known in policy circles to acknowledge some of the critics' misgivings about foreign assistance.

The Dead Aid take on foreign assistance is merely another iteration of an irresolvable dispute over matters of principle (or, if you will, ideology) that has existed since the creation of foreign aid itself. The book adds little to this debate, lacking new quantitative data and only lightly referencing previous findings. But where it truly lags behind is in its understanding of a new growing consensus, which recognizes the inevitability of a foreign aid system that is motivated by political interests--both at home and abroad--and compelled by humanitarian concern. While the debate will inevitably continue, the majority of actors in the development community--philanthropists, entrepreneurs, NGO workers, and investors--have begun to move beyond it. These new stakeholders have changed their strategy, working to influence how and for what aid can be best spent.

In the first part of her book, Moyo attempts to summarize seven decades of foreign assistance history in a terse 19-page chapter. She breaks down foreign assistance into a category for each decade, starting with:

Its birth at Bretton Woods in the 1940s; the era of the Marshall Plan in the 1950s; the decade of industrialization of the 1960s; the shift towards aid as an answer to poverty in the 1970s; aid as the tool for stabilization and structural adjustment in the 1980s; aid as a buttress of democracy and governance in the 1990s; culminating in the present-day obsession with aid as the only solution to Africa's myriad of problems.

Moyo does not characterize the coming decade in foreign aid, but if existing evidence can be of any indication, it will be the decade beyond traditional development aid. In every sector--public, private, and non-profit--new innovations created over the past two decades have transformed the relationship of the rich world to the developing world.

In the public sector, the United States' Millennium Challenge Corporation (MCC) embodies this new tendency. Understanding that if aid is to work, it can only work in countries where institutions are consolidating, government is accountable, and people are becoming freer, the MCC developed an indicator-based approach to aid in which countries must make progress on a series of global benchmarks in order to receive assistance. Publicly available data on corruption, economic freedom, investment in people, and civil liberties allows the MCC to systematically assess the progress of recipient countries, and it also gives countries aspiring to receive aid a blueprint for reform. Guatemala, for example, adopted the MCC's indicator benchmarks in its reform plan, even though the country was not even eligible for MCC aid. And when these benchmarks are compromised, as in the case of Madagascar's recent military coup, aid is put on hold. Also acknowledging the risks of transferring money directly to government leaders, who with copious and consistent inflows of free wealth lose the incentive to tax their populace and be accountable to them, the MCC instead opens up the bidding for aid contracts to local businesses and firms. As lawmakers and voters demand more accountability, even the slow-to-react public sector has taken steps towards smarter development aid.

The public sector still lags behind the nonprofit world and private sector initiatives in terms of aid innovation, but considering examples like the Millennium Challenge Corporation, Moyo's sweeping caricature of government aid as "large systematic cash transfers from rich countries to African governments" is hard to swallow. The characterization invokes an image of a rich behemoth recklessly dumping money on helpless African states, even though the reality is much more nuanced than that. Nevertheless, the MCC is merely a trickle in the rapidly filling African aid bucket. While President Obama and his allies in Congress make the push for more development aid in their new strategy for "smart power," including by increasing the budget of USAID, the MCC concurrently has lost funding and political support. The fiscal year 2009 Omnibus Appropriation Act cut the organization's funding almost in half, from $1.5 billion to $875 million, limiting the MCC's capacity to expand to more countries and setting back existing projects.

Dead Aid, which has received enormous publicity in the policy hubs of Washington, D.C., New York, and London, could have used its valuable space to make the case to the Obama administration and his counterparts in Europe that smart power must also mean smarter aid. But the book leaves little room for new, reformed government aid programs, recommending instead that African countries get cash by issuing bonds in the world market. Moyo's background as a Goldman Sachs economist becomes evident in this chapter, as she discusses with expert detail possibilities for African governments to securitize bonds, pool risks, and guarantee credit in order to finance their cash-strapped coffers. Considering the path of the global economy since the book was written, the author's prescription would not only be bitter medicine for African countries, it also appears less plausible (and perhaps dangerous) within the current gridlock of international liquidity.

Nevertheless, development policy no longer resides exclusively in the realm of government. As the Hudson Institute's "Index of Global Philanthropy" reveals, private flows of aid from the developed world to the developing world--excluding remittances--are now twice as high as official flows of development assistance. In the United States, official development assistance makes up only 12 percent of the country's total economic engagement with the third world.

Nonprofit organizations and "social entrepreneurs," both in the West and in Africa, have been the beneficiaries of this uptick in private aid. And as individual donors and foundations give more, they have also become more discerning and demanding in their giving. Take for example Geneva Global, a for-profit philanthropic advisory service that helps donors design charitable projects and then monitors these projects using quantitative benchmarks. Such advisories mostly work with private donors, but their methods and techniques could soon be transferred to government-funded aid projects.

Then there is the Skoll Foundation, which invests in social entrepreneurs in the developing world with ideas that can permanently impact public policies. These innovators are often home-grown, dedicated to creating feasible and scalable solutions to local challenges. They operate similarly to business entrepreneurs and hope to replicate their impact at national and international levels. Social entrepreneurs came to prominence with the creation of Ashoka: Innovators for the Public, an organization designed to find and fund "fellows," in the 1980s. But in the past decade they have widened their reputation through innovations such as the PlayPump, a cheap and efficient water pumping and filtration system for African villages, and small start-ups like DotSavvy, a Kenyan internet company that built an e-learning application to train doctors and nurses on hiv/aids treatment. Such technologies produce immediate, marketable impact, so they are more attractive to Western donors and investors.

Dead Aid only skims this vast and growing field, mentioning Kiva.org, a California-based online philanthropy that allows American donors to fund microenterprises in Africa. But microfinance is only a drop in the ocean of enterprise solutions to poverty and in a fast-paced, technology-driven sector, one of its more antiquated ideas.

Western donors have learned that private-sector development needs more than liquidity, and they have supported diverse initiatives to bolster the capacities of businesses in the African private sector to market their products, build consumer bases, and refine technical business skills. The "base of the pyramid" (BoP) concept, introduced by professors C.K. Prahalad and Stuart Hart in 2002, approaches poor Africans in a new paradigm, as discerning producers and consumers who can be integrated into global markets. According to the World Resources Institute, there are four billion people in the world living on less than two dollars a day. Almost 500 million of them live in Africa, and they make more than 70 percent of the continent's total income. In the BoP paradigm, these Africans are not merely poor mendicants in need of humanitarian service--they are also picky buyers and potential links in indigenous African supply chains.

Western donors have learned that private-sector development needs more than liquidity, and they have supported diverse initiatives to bolster the capacities of businesses in the African private sector to market their products, build consumer bases, and refine technical business skills.

As Vijay Mahajan notes in his book Africa Rising, "[Africans] want cell phones, bicycles, computers, automobiles, and education for their children." This not only reflects a new way in which the West can interact with poor Africans (selling them products and services they need and ask for, rather than giving them what the West thinks they need), but it also reduces the paternalism that is coupled with traditional philanthropy. When people do business, the first priority is to get things done cheaply and quickly. There is little room for posturing or condescension. Take, for example, Western support in breaching the African "digital divide." Many Western firms, like the U.S. IT giant CISCO, now work with local African firms to lay cables and build telecommunications infrastructure.

In addition to designing new products and services specifically based on African needs, Western donors and entrepreneurs have created mechanisms to support and consult local businesses. Social venture capital organizations like Acumen Fund and Endeavor merge the rigor and profit-driven analysis of investment banks with the social goal of supporting indigenous entrepreneurs in the developing world. It is already a given that African businesses need to trade more and need more open markets to trade with. Social venture capitalists place more effort on improving African products and services to international standards, refining supply chains, and cultivating human resources. Trade in Africa should not be slave to fluctuating commodity prices, and budding entrepreneurs and their firms need technical support and business education in order to move up the value chain. That is where the Western donor's capacity can fill existing gaps.

The model for building trade capacity in the ideal Dead Aid world, on the other hand, would follow China's charm offensive in Africa. In the bluntly titled chapter, "The Chinese Are Our Friends," Moyo praises China's opportunistic investment style, noting that "rather than conquer Africa through the barrel of a gun, [China] is using the muscle of money." She acknowledges that the Chinese are in it for commodities such as oil and copper and attempts to present a nuanced assessment of the issue: While China's acquiescence to African human rights violations and support for corrupt African leaders are worrying, Moyo notes that the majority of Africans have favorable views of the Chinese and have benefited from the infusion of foreign direct investment. And African leaders have every right to prefer China's "straightforward approach" to the "endless nit-picking of the IMF." Moyo does not deploy this same nuance, however, in her analysis of Western objections to the Chinese presence. Western concerns--about China turning a blind eye to the genocide in Darfur or its support of Robert Mugabe in Zimbabwe--are merely rooted in the "Western liberal consensus" whose members believe "(often in the most paternalist way) it is their responsibility to look after Africa." By building a false dichotomy between a mutually beneficial Chinese-African relationship and a haughty and paternalistic Western-African relationship, Dead Aid leaves little room for the middle ground, which in this case would allow Western investors and donors to support local businesses and build trade capacity while working to secure human rights and improve social conditions.

But is it a total fantasy to envision, as does Moyo, a world without aid? Perhaps not. Imagine a corrupt, underdeveloped, post-conflict nation, suffering from high inflation, minimal savings, and stagnating exports. Led by an authoritarian general who came to power in a recent military coup, this country is so reliant on foreign economic assistance that the aid it receives accounts for more than half of the government's revenue. In fact, the nation's previous leadership, complacent with this assistance, designed policies specifically to maximize the amount of aid it received.

Now imagine that aid donors, finally fed up with the corruption, anti-democratic practices, and failing economic policies of its recipient, decide that within the next decade, they will irreversibly terminate all economic assistance to the country. The recipient nation, realizing it must stand on its own two feet, embarks on a series of swift and radical reforms and structural adjustments in order to restart its economy and make up for the imminent loss of free revenue. A generation later, the country has a thriving democracy, a highly educated populace, and has joined the elite club of OECD industrialized countries.

This donor-recipient tale is not merely an economic daydream. It is the true story of what happened in South Korea, arguably the most successful of all Asian Tigers. Recovering from the Korean War and heavily reliant on the United States for its economic buoyancy, South Korea was an early example of how aid can inhibit a country's progress and how the prospect of losing aid can catalyze its reform and economic growth. As Nicholas Eberstadt writes, "there is intriguing evidence to suggest that South Korea's transition to a regimen of outward oriented growth was a direct consequence of foreign aid polices: more specifically, of a warning by Washington that it would be terminating its programs for Seoul."

If Dambisa Moyo had her way, this would be the path of aid-addicted countries in Africa, whose fate of misery, corruption, and economic stagnation, according to her, has come as a consequence of unquestioned and unrestricted Western aid and not in spite of it. Moyo recommends that Western donors pick up the phone, call African leaders, and "[tell] them that in exactly five years the aid taps would be shut off--permanently." After this, they must no longer expect their ineffective and dysfunctional governments to be bankrolled by copious flows of well-intentioned official development assistance.

But the South Korean miracle and Moyo's dream of an African parallel are long shots rather than blueprints. In today's world, it is not realistic for aid to ever truly go away, simply because its purpose is not always economic growth or poverty reduction and because the political benefits of aid often outweigh its failures. Thus, many development actors have decided to refocus their attention on how aid is disbursed and spent. The above-described innovations of the development community suggest a world beyond aid rather than a world without aid.

Dead Aid has tinges of glamour and provocative assertions--the anti-celebrity bit has been embraced by mainstream media, and the proposal to cut off all aid in five years is a brazen challenge to the West from an African-born economist. It is also spot-on in its analysis of aid's side effects and unintended consequences. The West's aid policies will continue to harm Africans, as Moyo convincingly argues, if they cling to the status quo. Yet while Dead Aid would make it appear otherwise, much of the foreign aid community--donors, entrepreneurs, nonprofit volunteers--has moved beyond tired arguments such as "trade not aid." None of the new concepts or innovations are foolproof, and in fact many are deeply flawed, but they reflect the growing understanding among this diverse "development community" that while traditional foreign assistance has not worked and is often corrosive to the developing world, it will not go away anytime soon. The most critical question, then, is: What's next?

Apoorva Shah is a research assistant at AEI.

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