Everywhere a Hammer on a Nail

by | 4.1.2009 at 1:18pm | 53 Comments
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Children in school

Children in school

When holding a hammer in your hand, every problem can look like a nail. Dambisa Moyo’s book Dead Aid gives fresh meaning to this old adage, applying the perspective of a top-tier investment banker to the plight of the poorest people in Sub-Saharan Africa. The Economist recently panned the book by likening it to caricature. The underlying weaknesses are found in both its diagnosis and prescription.

On the diagnostic side, Moyo’s very selective use and misuse of evidence leads to a blanket condemnation of the entire aid process. The book flogs the time-honored marketing technique of throwing out big aggregate numbers to try to intimidate readers. “A trillion dollars” are said to have been wasted in Africa over the past 60 years, with no results to show. The analytical rigor is roughly equivalent to writing a history of the countless billions of dollars worth of shady Pentagon contracts over the decades, and then drawing the conclusion that the U.S. military should be disbanded.

A couple of key faults in the logic stand out. The first lies in the trillion dollar number itself. Any reference point going back to the year 1949 is odd, to say the least. More importantly, the historical foreign aid numbers are small by any reasonable unit of measure. According to the official data maintained by statisticians at the OECD, when we add up all global aid to sub-Saharan Africa net of debt cancellation since 1960, the sum is roughly $800 billion in today’s dollars. When we divide all the aid across the population of Africa and convert it to annual flows, it works out to approximately $35 per African per year. This includes all the politically motivated Cold War dollars, and can hardly be considered a large number.

Nor can the aid flows be considered large when total worldwide aid to Africa now equals roughly $35 billion per year alongside a $600 billion annual Pentagon budget and a multi-trillion dollar government program to stimulate the US economy and subsidize “toxic” bank assets. The entire US bilateral aid budget to Africa is itself only $6 billion per year, a figure comparable to recent annual bonus pools at some investment banks (e.g., $3.6 billion in publicly subsidized December bonuses at Merrill Lynch).

Health worker and child

Health worker and child

Second, the book overlooks the fact that foreign aid has supported enormous successes, most notably since 2000. International support to cut school fees has resulted in more than 30 million more children in school since the turn of the decade. UNICEF and the Red Cross worked together to help cut measles deaths by 90 percent in the six years from 2000 to 2006, saving more than 1,000 children’s lives per day. The Global Fund to Fight AIDS, TB, and Malaria and the US President’s Emergency Fund for AIDS Relief (PEPFAR) have together turned the tide on the AIDS pandemic by increasing the number of Africans on modern treatment from less than 10,000 in 2001 to more than 2 million today. Malawi has received support to finance fertilizer and seeds for 2 million farmers, helping the country to nearly double food production, now three years in a row. Meanwhile, foreign aid has supported the distribution of tens of millions of modern bednets in countries like Ethiopia, Kenya, and Rwanda, typically producing a 50 percent reduction in morbidity or more.

And while foreign aid for targeted, outcome-driven programs has increased in recent years, African economies have also enjoyed a boost in macroeconomic performance. IMF data show that countries are averaging more than 5 percent real economic growth in recent years while inflation is down, foreign reserves are up, and governments are making major strides in increasing their domestic revenue base.

Indeed one of Moyo’s most remarkable claims is that, “In the 1970s 10 percent of the population [in Africa] was living in dire poverty. That number is now over 70 percent” (e.g., on March 25 Charlie Rose show). The source for this statement is unclear. The most rigorous international poverty estimates are produced by Shaohua Chen and Martin Ravallion (2008), who trace the data back to 1981. They indicate that poverty rates in Sub-Saharan Africa have barely changed since 1981, although with slight improvements in the years since roughly 1999 (see table).

mcarthur_table_moyo_review

Unfortunately, the book fully skips the most central question regarding foreign aid: What makes some programs so successful and others less so? In turn, how can we increase funding to scale up the ones that work well? Citing the inefficacy of Cold War payouts to Mobutu is banal. But among the many nuances across the landscape of successful foreign aid programs, a few key points of diagnosis stand out. Programs have worked well when African technical, political, and community leaders craft and implement clear and accountable plans on which the international community provides objective technical evaluation and which rich countries then help to co-finance.

On the prescriptive side, the book is equally problematic. It highlights the benefits of trade but confuses the crop-specific issues around agricultural subsidies and overlooks the considerable literature pointing to the small scale of gains to trade liberalization in countries with very limited productive capacity (see, for example, the review of evidence on pp. 176-182 of “Ending Africa’s Poverty Trap.”)

http://blogs.ei.columbia.edu/wp-content/uploads/2009/04/sub-sahara-aids_635.jpg

The book is right to highlight the merits of foreign direct investment (FDI) and the potential of China to increase its activity in this area, but here it meets two core issues. One is that FDI in Africa goes overwhelmingly to the select locations with natural resource wealth. The evidence shows that companies will go almost anywhere to extract minerals, irrespective of governance. But there are very few locations where the per capita value of this natural resource wealth is significant, so other parts of Africa need a solution too. The other issue is that Moyo is a big fan of Chinese investment and foreign aid. In effect she is refuting her own argument by advocating for increased foreign aid, but from China rather than from “the West.” (My own view is neutral on the sources of foreign aid. As long as it meets core standards of human rights, transparency, and results, all credit to those who are practical.)

The book’s most novel recommendation is that poor African countries should cut themselves off from almost all foreign aid and switch to debt-based financing. Although one can only be positive on the long-term goal for countries to develop to market-based financial structures, there are several key problems with the book’s prescription.

  1. It is a recommendation to saddle the poorest countries and people in the world with vastly more debt, in effect advocating sub-sub-sub-prime lending. We have learned the risks to sub-prime lending in the rich world. Do we really want to engage full scale in extending the predictable risk in the poorest parts of the planet?
  2. The book cites Ghana and Rwanda as models of modern African leadership. Ghana’s 2007 debt issuance amidst the global credit bubble is cited as a success story to be emulated everywhere. The reality is that Ghana and Rwanda receive some of the most annual foreign aid per capita in Africa. In 2006, the most recent year for which official statistics are available, Ghana received $56 of aid per capita and Rwanda received more than $62 per capita, at the same time as they pursued private investment and fundraising strategies. Both have received billions of dollars of aid in recent years. Both rightly avoid Moyo’s false choice by pursuing aid and private investment and trade.More broadly, Moyo writes that many African leaders have a desire to see their countries excel (p. 78). Many of those same leaders are putting aid to good use, thereby contradicting the book’s other point that aid is making leaders worse and countries poorer.
  3. The world is in the middle of a prolonged global credit crisis when even the bluest of blue chip companies cannot issue debt. Which low-income African countries would possibly be able to issue low priced bonds in such an environment? And do we tell the AIDS and malaria patients in Africa that they have to stop taking medicine to stay alive in the years when investment bankers make big mistakes and credit dries up?
  4. The book repeatedly uses the term “emerging markets” to refer to all developing countries. This falsely bundles typical low-income countries that have per capita GDP of perhaps $300-$500 with middle-income countries like Brazil and Turkey that have per capita GDP of more than 10 times that amount. The fundamental differences are (a) ability to repay, and (b) ability to withstand negative shocks.
  5. The bond prescription overlooks the fundamental nature of extreme poverty and the lack of ability to repay in core social sector investments, which are different from infrastructure investments that have a more direct economic return. If a country needs to borrow money to pay for primary school, do we expect the children to earn enough income to repay the school fee five years later? Do we ask their parents to pay off the cost five years later? Issuing bonds for social programs is in effect asking poor people to repay the cost, plus interest, in the future.
  6. We have been down the path of poor countries taking private loans before. The most poignant lesson came in 1982, when U.S. Federal Reserve chairman Paul Volcker raised U.S. interest rates to tame inflation, triggering a global debt crisis. At the rate of current monetary expansion, it is very likely that interest rate hikes will be needed to tame global inflation in the next few years. Should the world’s poorest people be asked to bear that cost?

As a final point, the book reveals a fundamental gap in homework by repeating a vignette about a local artisan making bednets whose business is hurt by foreign aid-financed imports. This highlights a lack of knowledge on the basics of malaria control, which has been one of the most important and broadly researched aid-financed policy breakthroughs of the past five years. The modern norm of life-saving bednets is something called a “long-lasting insecticide treated net.” It is powerful and cheap due to a sophisticated manufacturing process that embeds insecticide into the weave of the nets. They cost roughly $8, cover two people in a sleeping site, and last five years. Sumitomo is the largest manufacturer and has a major production facility in China in addition to a joint venture facility with AtoZ Textile Mills in Arusha, Tanzania (another is planned for West Africa).

Bednet factory

Bednet factory

Suggesting that rural Africans should buy bednets made by their village neighbors is analogous to saying that they should buy antiretroviral medicines made by their neighbors. Some modern goods require modern technology and, in order to be as affordable and effective as possible in saving lives, require mass production in specialized sites. As with so much of the book, a bit more review of basic evidence would illuminate a much more important story.

Amidst the global economic crisis, the poorest countries of the world are reeling – losing export earnings, bank credits, foreign investment projects, remittances, and other sources of income. They are suffering extreme duress caused by shocks emanating from Wall Street. In such times of economic and political crisis, when so much damage has been caused by such a small share of the world’s richest and most powerful people, let us resist the simplistic headlines to ensure that evidence and clear heads prevail.

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53 Responses to “Everywhere a Hammer on a Nail”

  1. Gurminder says:

    The results are really very drastic and the poverty is growing up as per the data. Aids and other problems are also on the main concern and the people now would have to take major steps to save themselves.

  2. Devon Hotels says:

    The problem is aid is not reaching the right people. The intention is there but the execution is clearly lacking.

  3. […] [This review was originally posted at the Earth Institute's blog page] […]