Why Foreign
Aid is hurting Africa
By
DAMBISA MOYO
MARCH
21, 2009
A month ago I visited Kibera, the largest slum in Africa. This suburb
of Nairobi, the capital of Kenya, is home to more than one million
people, who eke out a living in an area of about one square mile
-- roughly 75% the size of New York's Central Park. It is a sea
of aluminum and cardboard shacks that forgotten families call home.
The idea of a slum conjures up an image of children playing amidst
piles of garbage, with no running water and the rank, rife stench
of sewage. Kibera does not disappoint.
What is incredibly
disappointing is the fact that just a few yards from Kibera stands
the headquarters of the United Nations' agency for human settlements
which, with an annual budget of millions of dollars, is mandated
to "promote socially and environmentally sustainable towns
and cities with the goal of providing adequate shelter for all."
Kibera festers in Kenya, a country that has one of the highest ratios
of development workers per capita. This is also the country where
in 2004, British envoy Sir Edward Clay apologized for underestimating
the scale of government corruption and failing to speak out earlier.
Kibera, Kenya, the largest slum in Africa, is home to more
than one million Kenyans.
Giving alms
to Africa remains one of the biggest ideas of our time -- millions
march for it, governments are judged by it, celebrities proselytize
the need for it. Calls for more aid to Africa are growing louder,
with advocates pushing for doubling the roughly $50 billion of international
assistance that already goes to Africa each year.
Yet evidence
overwhelmingly demonstrates that aid to Africa has made the poor
poorer, and the growth slower. The insidious aid culture has left
African countries more debt-laden, more inflation-prone, more vulnerable
to the vagaries of the currency markets and more unattractive to
higher-quality investment. It's increased the risk of civil conflict
and unrest (the fact that over 60% of sub-Saharan Africa's population
is under the age of 24 with few economic prospects is a cause for
worry). Aid is an unmitigated political, economic and humanitarian
disaster.
Few will deny
that there is a clear moral imperative for humanitarian and charity-based
aid to step in when necessary, such as during the 2004 tsunami in
Asia. Nevertheless, it's worth reminding ourselves what emergency
and charity-based aid can and cannot do. Aid-supported scholarships
have certainly helped send African girls to school (never mind that
they won't be able to find a job in their own countries once they
have graduated). This kind of aid can provide band-aid solutions
to alleviate immediate suffering, but by its very nature cannot
be the platform for long-term sustainable growth.
Whatever its
strengths and weaknesses, such charity-based aid is relatively small
beer when compared to the sea of money that floods Africa each year
in government-to-government aid or aid from large development institutions
such as the World Bank.
Over the past
60 years at least $1 trillion of development-related aid has been
transferred from rich countries to Africa. Yet real per-capita income
today is lower than it was in the 1970s, and more than 50% of the
population -- over 350 million people -- live on less than a dollar
a day, a figure that has nearly doubled in two decades.
Even after the
very aggressive debt-relief campaigns in the 1990s, African countries
still pay close to $20 billion in debt repayments per annum, a stark
reminder that aid is not free. In order to keep the system going,
debt is repaid at the expense of African education and health care.
Well-meaning calls to cancel debt mean little when the cancellation
is met with the fresh infusion of aid, and the vicious cycle starts
up once again.
In Zambia, former President Frederick Chiluba (with wife
Regina in November 2008) has been charged with theft of state funds.
In 2005, just
weeks ahead of a G8 conference that had Africa at the top of its
agenda, the International Monetary Fund published a report entitled
"Aid Will Not Lift Growth in Africa." The report cautioned
that governments, donors and campaigners should be more modest in
their claims that increased aid will solve Africa's problems. Despite
such comments, no serious efforts have been made to wean Africa
off this debilitating drug.
The most obvious
criticism of aid is its links to rampant corruption. Aid flows destined
to help the average African end up supporting bloated bureaucracies
in the form of the poor-country governments and donor-funded non-governmental
organizations. In a hearing before the U.S. Senate Committee on
Foreign Relations in May 2004, Jeffrey Winters, a professor at Northwestern
University, argued that the World Bank had participated in the corruption
of roughly $100 billion of its loan funds intended for development.
As recently
as 2002, the African Union, an organization of African nations,
estimated that corruption was costing the continent $150 billion
a year, as international donors were apparently turning a blind
eye to the simple fact that aid money was inadvertently fueling
graft. With few or no strings attached, it has been all too easy
for the funds to be used for anything, save the developmental purpose
for which they were intended.
In Zaire
-- known today as the Democratic Republic of Congo -- Irwin Blumenthal
(whom the IMF had appointed to a post in the country's central bank)
warned in 1978 that the system was so corrupt that there was "no
(repeat, no) prospect for Zaire's creditors to get their money back."
Still, the IMF soon gave the country the largest loan it had ever
given an African nation. According to corruption watchdog agency
Transparency International, Mobutu Sese Seko, Zaire's president
from 1965 to 1997, is reputed to have stolen at least $5 billion
from the country.
It's scarcely
better today. A month ago, Malawi's former President Bakili
Muluzi was charged with embezzling aid money worth $12 million.
Zambia's former President Frederick Chiluba (a development darling
during his 1991 to 2001 tenure) remains embroiled in a court case
that has revealed millions of dollars frittered away from health,
education and infrastructure toward his personal cash dispenser.
Yet the aid keeps on coming.
A nascent economy
needs a transparent and accountable government and an efficient
civil service to help meet social needs. Its people need jobs and
a belief in their country's future. A surfeit of aid has been shown
to be unable to help achieve these goals.
A constant stream
of "free" money is a perfect way to keep an inefficient
or simply bad government in power. As aid flows in, there is nothing
more for the government to do -- it doesn't need to raise taxes,
and as long as it pays the army, it doesn't have to take account
of its disgruntled citizens. No matter that its citizens are disenfranchised
(as with no taxation there can be no representation). All the government
really needs to do is to court and cater to its foreign donors to
stay in power.
Stuck in an
aid world of no incentives, there is no reason for governments to
seek other, better, more transparent ways of raising development
finance (such as accessing the bond market, despite how hard that
might be). The aid system encourages poor-country governments to
pick up the phone and ask the donor agencies for next capital infusion.
It is no wonder that across Africa, over 70% of the public purse
comes from foreign aid.
In Ethiopia,
where aid constitutes more than 90% of the government budget, a
mere 2% of the country's population has access to mobile phones.
(The African country average is around 30%.) Might it not be preferable
for the government to earn money by selling its mobile phone license,
thereby generating much-needed development income and also providing
its citizens with telephone service that could, in turn, spur economic
activity?
Look what has
happened in Ghana, a country where after decades of military
rule brought about by a coup, a pro-market government has yielded
encouraging developments. Farmers and fishermen now use mobile phones
to communicate with their agents and customers across the country
to find out where prices are most competitive. This translates into
numerous opportunities for self-sustainability and income generation
-- which, with encouragement, could be easily replicated across
the continent.
To advance a
country's economic prospects, governments need efficient civil service.
But civil service is naturally prone to bureaucracy, and there is
always the incipient danger of self-serving cronyism and the desire
to bind citizens in endless, time-consuming red tape. What aid does
is to make that danger a grim reality. This helps to explain why
doing business across much of Africa is a nightmare. In Cameroon,
it takes a potential investor around 426 days to perform 15 procedures
to gain a business license. What entrepreneur wants to spend 119
days filling out forms to start a business in Angola? He's much
more likely to consider the U.S. (40 days and 19 procedures) or
South Korea (17 days and 10 procedures).
Even what may
appear as a benign intervention on the surface can have damning
consequences. Say there is a mosquito-net maker in small-town Africa.
Say he employs 10 people who together manufacture 500 nets a week.
Typically, these 10 employees support upward of 15 relatives each.
A Western government-inspired program generously supplies the affected
region with 100,000 free mosquito nets. This promptly puts the mosquito
net manufacturer out of business, and now his 10 employees can no
longer support their 150 dependents. In a couple of years, most
of the donated nets will be torn and useless, but now there is no
mosquito net maker to go to. They'll have to get more aid. And African
governments once again get to abdicate their responsibilities.
In a similar
vein has been the approach to food aid, which historically has done
little to support African farmers. Under the auspices of the U.S.
Food for Peace program, each year millions of dollars are used to
buy American-grown food that has to then be shipped across oceans.
One wonders how a system of flooding foreign markets with American
food, which puts local farmers out of business, actually helps better
Africa. A better strategy would be to use aid money to buy food
from farmers within the country, and then distribute that food to
the local citizens in need.
Then there is
the issue of "Dutch disease," a term that describes how
large inflows of money can kill off a country's export sector, by
driving up home prices and thus making their goods too expensive
for export. Aid has the same effect. Large dollar-denominated aid
windfalls that envelop fragile developing economies cause the domestic
currency to strengthen against foreign currencies. This is catastrophic
for jobs in the poor country where people's livelihoods depend on
being relatively competitive in the global market.
One watchdog group estimates that former Zairean President Mobutu
Sese Seko, above in 1995, took billions from the country.
To fight aid-induced
inflation, countries have to issue bonds to soak up the subsequent
glut of money swamping the economy. In 2005, for example, Uganda
was forced to issue such bonds to mop up excess liquidity to the
tune of $700 million. The interest payments alone on this were a
staggering $110 million, to be paid annually.
The stigma associated
with countries relying on aid should also not be underestimated
or ignored. It is the rare investor that wants to risk money in
a country that is unable to stand on its own feet and manage its
own affairs in a sustainable way.
Africa remains
the most unstable continent in the world, beset by civil strife
and war. Since 1996, 11 countries have been embroiled in civil wars.
According to the Stockholm International Peace Research Institute,
in the 1990s, Africa had more wars than the rest of the world combined.
Although my country, Zambia, has not had the unfortunate experience
of an outright civil war, growing up I experienced first-hand the
discomfort of living under curfew (where everyone had to be in their
homes between 6 p.m. and 6 a.m., which meant racing from work and
school) and faced the fear of the uncertain outcomes of an attempted
coup in 1991 -- sadly, experiences not uncommon to many Africans.
Civil clashes
are often motivated by the knowledge that by seizing the seat of
power, the victor gains virtually unfettered access to the package
of aid that comes with it. In the last few months alone, there have
been at least three political upheavals across the continent, in
Mauritania, Guinea and Guinea Bissau (each of which remains reliant
on foreign aid). Madagascar's government was just overthrown in
a coup this past week. The ongoing political volatility across the
continent serves as a reminder that aid-financed efforts to force-feed
democracy to economies facing ever-growing poverty and difficult
economic prospects remain, at best, precariously vulnerable. Long-term
political success can only be achieved once a solid economic trajectory
has been established.
The 1970s
were an exciting time to be African. Many of our nations had just
achieved independence, and with that came a deep sense of dignity,
self-respect and hope for the future.
Aid did help
Europe!
Proponents of
aid are quick to argue that the $13 billion ($100 billion in today's
terms) aid of the post-World War II Marshall Plan helped pull back
a broken Europe from the brink of an economic abyss, and that aid
could work, and would work, if Africa had a good policy environment.
The aid advocates
skirt over the point that the Marshall Plan interventions were short,
sharp and finite, unlike the open-ended commitments which imbue
governments with a sense of entitlement rather than encouraging
innovation. And aid supporters spend little time addressing the
mystery of why a country in good working order would seek aid rather
than other, better forms of financing. No country has ever achieved
economic success by depending on aid to the degree that many African
countries do.
The good news
is we know what works; what delivers growth and reduces poverty.
We know that economies that rely on open-ended commitments of aid
almost universally fail, and those that do not depend on aid succeed.
The latter is true for economically successful countries such as
China and India, and even closer to home, in South Africa and Botswana.
Their strategy of development finance emphasizes the important role
of entrepreneurship and markets over a staid aid-system of development
that preaches hand-outs.
Ghana has recently seen encouraging developments, including the
spread of mobile phones.
African countries
could start by issuing bonds to raise cash. To be sure, the traditional
capital markets of the U.S. and Europe remain challenging. However,
African countries could explore opportunities to raise capital in
more non-traditional markets such as the Middle East and China (whose
foreign exchange reserves are more than $4 trillion). Moreover,
the current market malaise provides an opening for African countries
to focus on acquiring credit ratings (a prerequisite to accessing
the bond markets), and preparing themselves for the time when the
capital markets return to some semblance of normalcy.
Governments
need to attract more foreign direct investment by creating attractive
tax structures and reducing the red tape and complex regulations
for businesses. African nations should also focus on increasing
trade; China is one promising partner. And Western countries can
help by cutting off the cycle of giving something for nothing. It's
time for a change.
Dambisa Moyo,
a former economist at Goldman Sachs, is the author of "Dead
Aid: Why Aid Is Not Working and How There Is a Better Way for Africa."
Corrections
& Amplifications
In the African
nations of Burkina Faso, Rwanda, Somalia, Mali, Chad, Mauritania
and Sierra Leone from 1970 to 2002, over 70% of total government
spending came from foreign aid, according to figures from the World
Bank. This essay on foreign aid to Africa incorrectly said that
70% of government spending throughout Africa comes from foreign
aid.
Source, Wall
Street Journal.
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