Sunday, 7 June 2009

Aid, Crony Capitalism and Dambisa Moyo (Guest Blog)

Camaelia and Sanjay’s (C & S) – “IMF’s Working Paper” referenced on Aid and Economic Growth post, is very helpful at this point in time when people seem to be consumed by Dambisa Moyo’s (DM) thesis.

As I have been pointing out – Moyo tended to concentrate on analyzing ‘aid’s failure’ literature. She ignored almost completely ‘aid- effectiveness’ literature. Camaelia & Sanjay have referred to some such studies. If Moyo wants Africa to succeed, she shouldn’t be spending time on defining how and why aid is destined to fail in Africa.

It is therefore a relief and timely to have C&S categorically conclude that: - development aid (DA) has a positive and robust effect on subsequent growth. That this growth is noticeable only in the long run should not surprise anyone.

It is obvious that a rural health centre, school or a mass literate community program – would not yield positive results overnight. It takes time before health of rural folk converts to dividends. Camelia & Sanjay’s study is also interesting for another reason – by pointing out that – aid effectiveness is influenced by such variables as donors’ characteristics and objectives. This means that donors who are genuine about aid giving and serious in wanting to disburse aid in an effective way – do indeed produce economic growth from economic assistance.

Again by C & S showing or alluding to the fact that – donors who concentrated on their own strategic interests, fail to achieve the aimed for economic growth in recipient countries, is ground for a need to focus on getting aid to work effectively.

That is – if only you can find a formula to make aid more effective, you would not be talking about aid being too large, wasted, misplaced, or not helpful. Africa has not benefited from this understandably huge resource transfer from the West – precisely because we have not found ways of getting aid from the West in an efficient and effective way. Conversely, all the by-products Moyo is citing are because the debate on aid effectiveness has been sidelined.

Bono & Geldorf have been pushing for more (quantitatively) aid out of – first, humanitarian concerns and secondly, in the belief that a problem of catastrophic proportions calls for large not minuscule aid packages. And once that money is donated, they figured it that it was now up to somebody else job to see that money was properly spent as intended and effectively.

Then comes Moyo to tell us that – large sums of aid money went to Africa with nothing to show for it. Okay, but so long as Africa still remains in the woods, advocating for aid discontinuation or reduction is not helpful. Instead, we should be seeking for ways to improve aid disbursement and reduction of waste.

Further, Dambisa Moyo seems to be committing other sins – first, in her book somewhere, she argues that Western countries should not be imposing “liberal democracy” as conditionality for giving economic assistance. She does so because she believes that democracy is not necessarily a prerequisite for economic growth. Moyo cites examples from the 3rd world like Chile and even China as countries which have achieved economic successes even though they were not democratic countries – Chile under Pinochet and China under Communist Party.

This is a dangerous proposition because it implies that she tolerates use of slave labor or dictatorship as a means to attain economic successes. And since South Africa’s Apartheid system was as such an economically successful model, should we hail it as good model to eradicate poverty? Yet every one knows that Apartheid was a terrible and abhorrent system against blacks. In USA, the country has been built on the backs of blacks and other minorities. Should we then praise that?

Even during Hitler regime, many scientific inventions and drugs were discovered. But should we hail it as good even though we know that some prisoners were used as guinea pigs in clinical trials? These are tough questions Moyo glossed over in trying to prove aid ineffectiveness.

There is an article in Toronto Star newspaper -  the return of crony capitalism, which according to me exposes the hidden fascistic agenda – led by China – that, in face of the Western capitalism weakness, “state capitalism/socialism” should be promoted or take over. Without knowing, Moyo is supporting this stand.

Indeed, if the West, principally US does not pull up its socks, we are heading for a resumption of world fascism. China does not care how it gets to the top of the economic ladder. But we should.

In short, we have to be careful that – just because the West has been lenient in disbursing aid, and not harsh in administering its conditionalities to the extent of expecting African leaders to impose tough economic policies on citizenry, should not imply that ALL aid going to Africa should be cut.

More so, if cutting of aid implies replacing it with private donors/investors as Moyo tends to suggest – that is even more troubling. Dambisa Moyo does not hide her preference for private investments as opposed to government to government economic assistance – because according to her, aid given to African governments spoils them. Because they expect to get aid from someone, she believes then that they have no more incentive to do better.

But counseling Africans to opt for private investments or use of bonds to raise funds is dangerous. It is a plot I think would end in Africans being run over. In one word – become extinct.

Strangely too, Moyo is arguing in favor of Chinese help. Why Chinese aid is better has not been established beyond saying that it has fewer strings. But since aid from China is okay – establishes at least one fact – that rejecting aid in totality is not the issue. Therefore, if aid is tolerable, then why don’t we just improve its flow? If aid from the West is defective because of conditionalities, then why not simply relax them? Moyo has never mentioned any other characteristics about Chinese help other than better conditions.

Given lack of more convincing arguments against aid – I would suggest that the manner and effectiveness of aid form the crux of the matter. Tackle the effectiveness of economic assistance – no matter where it comes from, you are home and free. It is this problem that we should concentrate on, not the amount or motives for giving or receiving aid.

Unless we can discuss some of these issues openly without being accused of assaulting Dambisa – the debate will not produce useful results. If so, then she/we would have contributed to making Africa worse off. I am happy that Zambian Economist has not fallen into this trap, and continues to focus on substance rather than emotions. 

Dr Kaela B Mulenga (Guest Blogger)
Economist, Columnist & Development Consultant
Email : zbia@hotmail.com

Disclaimer : The views expressed above reflects the author's personal opinions. They do not represent the views or policies of any organisation with which the author may be affiliated.

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11 Comments:

  1. As I have been pointing out – Moyo tended to concentrate on analyzing ‘aid’s failure’ literature. She ignored almost completely ‘aid- effectiveness’ literature.

    Dr.Mulenga,
    When you are conducting scientific research you always assume you are working within a paradigm. In order to argue for a credible change of that scientific paradigm you need to uncover lists of anomalies which the accepted paradigm cannot explain. And even that list of anomalies needs to reach a threshold in which a community of specialists working in that paradigm agrees necessitates the consideration a paradigm change or at least declaration of a paradigm crisis.

    That is how science research connected to replacing paradigms is conducted in both the social sciences and the physical sciences.

    Ms.Moyo's argument goes to the heart of how research is conducted. The current 'Aid industry' models and theories of development have matured enough for professionals within the field to begin compiling a list of anomalies that cannot be explained by the paradigm. In otherwords, systematically 'analyzing the failures' of the accepted aid models and theories of development. And where they fail they need to be reconciled and if they cannot be reconciled a paradigm crisis will emerge and new paradigm might be needed.

    I refer you to an interesting book:

    The structure of scientific revolutions by Thomas S.Kuhn

    The chapter VI. Anomaly and the emergence of scientific discovery

    The chapter VII. Crisis and the emergence of scientific theories

    Ms. Moyo is merely communicating what some economists such as Baur and others have listed which challenge the accepted paradigm on aid based development economics.

    You are basically arguing within a paradigm when the argument is being argued across paradigms. For your argument to be effective you need to take every single list of 'anomalies' Ms.Moyo, Baur, and others in the anti-aid camp have listed and then debunk them using the current accepted aid industry based paradigm. If on the other hand you cannot explain the anomalies raised then a crisis within the aid industry paradigm exists and a new paradigm which Ms.Moyo's book advocates is plausible.
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  2. Anonymous,

    Thank you for drawing my attention to Thomas S. Kuhn's book. I will take a look at it.

    ...."You are basically arguing within a paradigm when the argument is being argued across paradigms. For your argument to be effective you need to take every single list of 'anomalies' Ms.Moyo, Baur, and others in the anti-aid camp have listed and then debunk them using the current accepted aid industry based paradigm".

    That’s the point – it seems Dambisa Moyo has come to conclusions she has used for suggesting a paradigm shift ignoring a part of the whole. My argument is that – she brushed aside aid-effectiveness literature which, from the word go, from their stand point, refutes her thesis. Literature which if she had cared to look at would have at least moderated/softened her sharp distaste of aid.

    In other words you cannot safely say that aid has completely failed, where there is plenty of empirical evidence saying that is not so. It is not enough to simply find studies that agree with you. For the hypothesis to be soundly proved, you have to allow for all possible distortions including those you don’t like. Otherwise one unaccounted for variable can throw your results off.

    That is, I am pointing out that while a lot of what she says holds true but we should be careful and definitely must not take her thesis as Bible – especially that her postulations are drawn from a literature review and not from an empirical research. The purpose of skeptics like myself, is to help African countries (leaders) from jumping into something before understanding it fully. That is all.
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  3. In other words you cannot safely say that aid has completely failed, where there is plenty of empirical evidence saying that is not so.
    Dr.Mulenga,
    Thanks for your thoughtful response. I will now list what some in the anti-aid camp view as anomalies within the current ‘Aid industry’ models and theories of economic development which have been around for nearly 60 years (this list is not exhaustive):
    A1: With over a trillion dollars spent on aid to developing countries none of them have emerged from underdevelopment. Money continues to be poured into developing countries without positive results of economic development for the last 50 years.
    A2: Poverty levels in countries that have received aid has jumped more than 300% despite decades of receiving money.
    A3: The governments that are the recepients of aid money become less accountable to their local wealth creators and more accountable to foreign governments that give them this aid. This has the mixed result of the foreign national interests of the aid donors subjugating the local national interests of the wealth creators in countries which receive aid. In other words, governments receiving aid money stop listening to their wealth creators and pay more attention to the aid donors. The result is an alienation of the primary income generators of those governments that receive aid and a dependency cycle on the donors by the governments develops because the local income generators cannot generate enough to support the government.
    A4: In all case studies of economic development there is a focus on developing the private sector as the vehicle to lead wealth creation efforts that will help the government and population to raise capital to relieve poverty and develop the country. The current ‘Aid industry’ models and theories of economic development are not primarily targeted at developing aid recipient country private sectors. They are primarily directed at giving societal support against poverty not empowering developing country with the capital generation mechanisms to create wealth which their governments can use to reduce poverty in the form of taxes and job availability.
    Here is a list of countries that are available case studies for economic development:
    a. Most western European countries and the U.S
    b. Japan, China, S.Korea, Singapore, and other Asian tiger economies
    Some of these countries like S.Korea had the same poverty levels as developing countries like Zambia but today are developed economies because their governments supported policies created capital generation mechanisms not those offered by the ‘Aid industry’ models and theories of economic development. They followed the example of Japan. They did not need open ended aid and charity to develop what they needed was trade and that is what fueled their economic development.
    The bottom line is that the ‘Aid industry’ model and theories of economic development gives the these governments excuses not to be responsible to their own people and the economic development of their countries because they receive free money from donor aid. This is why you hear them plead for continuation of donor aid as we have had recently in Zambia.
    Ms.Moyo and others in the anti-aid camp are essentially taking those listed anomalies (and others) and focusing in on building wealth creation mechanisms as the key invariant in all countries that aspire to economic development. And they argue the ‘Aid industry’ models and theories of economic development does not provide adequate context for such mechanisms.
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  4. Anonymous,
    Comments noted.
    But let us assume that you – “the anti-aid activists” have made a point that aid to Africa has failed. If by examining that question the aim is to help Africa – then why put emphasis on “how” rather than the “why” it has failed?
    Put the “aid-effectiveness” literature – which does exist, into discussion; where is the rationale for categorically concluding that aid to Africa must be stopped? Isn’t there a case to study the “why” it has failed or conversely to find ways of “how” it can be made better? You have to excuse those who question the motive behind concluding that aid to Africa has failed.
    A conclusion that – just because aid has failed in Africa therefore it must be eliminated is what is at issue from our end. Using your A4 point to rebuttal that – you’re not suggesting aid elimination, but examining A4 more closely reveals other things.
    First, you suggest that aid via private sector is more preferable. Secondly, exemplifying this with Japan, South Korea, and even China tells one a story to support the case of finding ways of “how” it can be made effective. In other words these can act as living examples that aid can work, provided it is not like that going to Africa. Conversely, doesn’t the uniqueness of why aid to Africa fails reveal that there is something we are doing or is wrong in Africa? If that diagnosis is correct, surely a suitable prescription must be plausible. Isn’t it?
    All these cases you cite – show that rather than more direct financial transfers, other forms of aid such as technical know-how and trade can be successfully used. The question is can Zambia and other African countries emulate what these countries or economic tigers did? Why not?
    So long as the political will, good governance, strong institutions, etc., are in place – we know that it is quite possible. Dambisa Moyo herself puts out a case for good, functioning institutions as a pre-requisite for economic growth. But in the same breath, she jumps to recommend aid discouragement. Why?
    Japan, South Korea, and even China depended on technical know-how of its nationals. Knowledge acquired through training assistance (a form of aid) obtained from the West’s educational facilities (also aid) and infrastructure. In other words, these countries simply took advantage of Research & Development – all conducted in the West.
    These countries send thousands and thousands of students to North America and Europe. Why? It is partly because when they come back to their countries, can be used as implementers of other forms of economic assistance. The uniqueness of this vision is what makes a difference between them and us (Africans). Yes, Africans might have squandered or failed to take advantage of economic aid from the West. But to counsel total stoppage, is detestable.
    While as in Zambia and other African countries the brain-drain is mostly negative, theirs is positive. That is, South Korea retains its trained personnel or manpower, when Zambia loses even those it trains locally.
    Factors like this are the ones to blame and not aid flow per se. Added to these might be administrative, cultural, and sociological factors like those which make a Zambian civil engineer posted to Chipata being more prone to steal public funds than his counterpart in China or Korea.
    We need to spend more time on these sorts of variables rather than rushing to conclusions your camp is making. Also I think that opting for a private sector model as is being suggested, is not good for Africa. To “paperize” Africa’s assets – through say: bonds, equity, and property rights, is for the purpose of those wanting to lay their hands on its immense wealth and riches.
    For as you know – bonds, derivatives, and equity are forms of paper documents/instruments representing actual or real wealth/assets existing somewhere. Bonds are like promissory notes, which mature at presentation.
    Only a fool would stand by and look on when his/her house is being burglarized. Because I am no such a fool, that is the basis of my skepticism in this debate.
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  5. 1. But let us assume that you – “the anti-aid activists” have made a point that aid to Africa has failed. If by examining that question the aim is to help Africa – then why put emphasis on “how” rather than the “why” it has failed?
    Some of the reasons given ‘why’ aid has failed have been:
    a. The dependency syndrome which develops between the donors (western nations) and the recipient governments in developing nations (Africans) which disenfranchises the local private sector from being the primary wealth creation engine in a society. In developing countries that are dependent on donor aid the state machinery run by politicians does not have any incentive to listen and engage the indigenous private sector because it can get cheap money from foreign donors. The politicians primarily listen to ‘donors’ and then secondarily to FDI investors. A pro-neo-liberalist such as Dr.Moyo favors a combination of building the local private sector and greater emphasis on encouraging foreign direct investment (FDI) through the global markets. An anti- neo-liberalist bloggers would favor a greater focus on local private sector capacity building as the primary driven together with mild emphasis state intervention (ownership of strategic resources). But both agree that the wealth creators in the private sector must be the drivers of the wealth creation engine of the economy of a nation. They would disagree on the extent of local vs. foreign wealth creator participation and control of wealth creation efforts and the impact on nation development.
    b. The reason aid to developing nations has failed and will continue to fail to bring economic development is that it misses a fundamental key to economic development which the capitalist system has taught us:
    The private sector should be the primary wealth creation engine in a nation state. And the foundation of the private sector must be the wealth creators who are motivated by self-interest to create value with the state providing varying degrees of oversight of their activities to balance between individual and societal benefit from the work of these value creators.
    All the case studies on societies that have successfully emerged from underdeveloped to fully developed economies show features of a laser focus on building the capacity of wealth creators in the private sector within a context of ‘nearly’ purely private sector driven efforts like in the U.S and some western European nations and the more pragmatic mixed private and state sector driven development efforts in Asian economies like in S.Korea, Japan, and China.
    The open ended ‘aid-industry’ view that development aid is needed for things such as education, infrastructure, health, civil servant salaries, etc. is a symptom of an unhealthy national dependency syndrome by politicians running the state. The politicians have been receiving this aid type do not have any incentive other than lip service to building their indigenous private sector wealth creation engines through a combination of local and foreign wealth creators.
    S.Korea was able engage with the western nations on the basis of trade and any technological and capital transfers was not ‘aid’ but transactionally beneficial to both parties. No one denies that developing nations would need both technological, capital, and knowledge transfers. In order for developing nations to catch up with the rest of the world there would need to be a combination of transfers as well as local creation those three assets. What is at issue is whether the mechanisms under which these transfers happen should be on the basis of trade instead charity. Ms. Moyo and others in the anti-aid camp are advocating for a focus trade.
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  6. Cont.'d Another important point you raised:

    2. Put the “aid-effectiveness” literature – which does exist, into discussion; where is the rationale for categorically concluding that aid to Africa must be stopped? You have to excuse those who question the motive behind concluding that aid to Africa has failed.

    a. The fact that over the last 50 years there has been over $1 trillion dollars poured into development aid and there is no single case study that shows that a country has emerged from underdevelopment to fully developed economic status.

    b. The fact that over the last 50 years case studies of countries such as S.Korea, Singapore, and China have followed a pragmatic private sector wealth creation engine approach based on trade with other developed countries and this has raised income in those countries and their economies are fully developed.
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  7. I am very much enjoying this exchange over the Dead Aid Debate (which in my opinion is a much better topic overall to have dominating the news than celebrity scandals/weddings/pregnancies/etc.), and I appreciate the increasing degree of nuance being employed by the more dedicated disputants as the context grows. While I think that it is of paramount importance to ultimately view Western government to African government aid in terms of delivery to the intended civilian recipients on the ground, I also think that there is a dimension within Western politics that should be taken into account. Taken purely in simple partisan terms, government to government aid is how the political Left tries to leverage larger activist bases against the cash advantage of the political Right in exercising influence within less developed economies.

    The editorial boards of business journals and conservative newspapers have readily embraced the message of Dead Aid, not primarily due to their concern over the pace of African development, but because of so-called institutional combat within the bureaucracies of their various governments. Many academics and liberal newspapers have just as readily opposed the message, because to embrace it would be to somewhat diminish the resources at their own disposal. In electoral systems designed to be perpetually contestable, it seems that activists on both sides will battle feverishly for any and every advantage. This is particularly unfortunate in this case, because I do not think that Dambisa Moyo intended for her book to be interpreted in terms of domestic politics within Western nations. Certainly it is incumbent upon us to keep our eyes on the prize of real delivery on development promises, however as this debate goes forward we should keep in mind the fact that the more the issue is talked about, the more it will be subject to political manipulation and/or capture by political parties of certain nations.

    Of course the world is bigger than just the Western powers. I am not certain how Chinese investment is superior to Western government to government aid, given that PRC controlled corporations get their financing interest free directly from government coffers. The rationale seems to be that somehow the Chinese place few conditions on their investment of government funds, thereby freeing up African elected officials to listen to their own people. But then I see South Africa refusing the Dalai Lama a visa simply because it might upset the PRC, and editorials in the Times that warn against any mention of Taiwan as a nation lest it provoke the mighty Chinese. African nations from Sudan to Angola seem to be getting addicted to the flow of government "investment" from China just as quickly and easily as they have to Western government "aid", or investments by multinational resource extraction firms. To me this indicates that Zambia and other African economies may be addicted to external capital in general, and replacing one type with another will not cure the dependency.
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  8. Yakima,
    Thank you for amplifying my message. As you explain – switching from Western economic aid to the Chinese version does not eliminate ‘dependence syndrome’. Angola, Sudan, DR Congo and others are good examples.

    China’s Africa strategy is based on two premises – a) to take a dominant role, as regards the extraction of natural resources from the continent. If possible, tactfully block (using its newly acquired foreign reserves muscle) Western countries have access to it; b) Maintaining steady trade flow to Africa as a backup – just in case the West, led by U.S.A. pulls the plug. Protectionism Barack Obama is promoting would not only improve US balance of payments, but some of the outsourced manufacturing business would either come back or be revived.

    In this war of the tigers – once more Africa would become simply a jockeying ground. Unlike before when during the cold war, African leaders were playing Soviet Union against America – the Communist State would not permit that nonsense. Implications? African masses had better start preparing for worse working and living conditions, like their counterparts have been going through in the mainland China.

    China is the factory of the world today, because workers there get no wages to talk of. Workers are put in dormitory-like houses, feed them, and then provide small allowances for sending back home. Of course those who favor private sector model love this – because it maximizes profits.

    Given a choice, our people (Africans) would prefer to stay as they are: free in their villages. Poor - but free and happy.

    It is this that – we skeptics are fighting for. That, if you can’t make our people better-off (in the Pareto –optimal sense), do not disturb them for the benefit of someone outside the country. An analogous argument is the one I make against introduction of GMOs that – GMO bio-tech seed may produce higher yields than the local village planting seed – but we do not want it if it makes the village grower become completely dependant on it.

    The s-called “terminator seed”, has to be produced under the supervision of a qualified plant breeder and because it costs money, is problematic for the villager. Switching to it would result in the village grower losing the power to produce his/her own food. Thus, usurping food security power from the villager becomes, again in the Pareto-optimal sense, undesirable.

    By the same token, if you promote private investor sovereignty as Anonym & others are arguing – African wealth will be sucked out clean. Since us Africans, culturally or sociologically not greedy, unlike our ex-convicts Australian friends or American Cowboys – we would lose that competition.

    Though I am pro-aid, I detest it being wasted or pilfered. Using aid in as an effective manner as can be, is what I favor. I am not against private investor, but I want us to be mindful that – because of greed, which the private sector model encourages – it made Wall Street companies like: JP Morgan, Goldman Sachs, AMEX, Morgan Stanley, et cetera, and its European counterparts – run down the global economy.

    Therefore, since the economic meltdown is due to these “open-ended free capitalism” lovers, we can’t just sit down and say – ‘steady she goes’. No!
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  9. It’s not very complicated to understand. Simply put AID has failed because there are no economic indicators to show that it has succeeded. All indicators show that the more a third world country depends on AID, the more impoverished it becomes. It’s like taking medicine that does not cure the core disease but instead relieves you of the symptoms. The disease continues to develop whilst the head ache has disappeared. This is what AID has done to least developed countries. So you can rate AID a success by the fact that it cleared the headache associated with the core disease or you can go one step further and think out of the box, to realize that the core disease is nowhere near cured despite having received so much AID.
    In Zambia, my beloved country, residents of Lake Bangweulu demanded a means to provide for themselves. They wanted fishing nets and boats with which to fish. The fish would ultimately feed their families and allow them to buy necessities, once sold. The donors delivered treated mosquito nets to these residents in order to reduce the prevalence of malaria because they felt this was more important. Some residents used these nets as prescribed whilst others sold them in Lusaka and the rest used them for fishing. The end result was malaria infection rate dropped, lake shores were contaminated with the insecticide and the fish population dropped because the nets caught fingerlings.
    The donors choose to see that malaria infection reduced and as such they call the AID a success. Yet the experience on the ground is such that AID has failed because whilst the incidence of malaria may have reduced, the fish population had dropped, water was contaminated and the fishermen were still unable to feed their families. Therefore, poverty increased!
    To every AID action, there is an equal and opposite reaction. It is important to examine ALL reactions and not just the one that favours your thinking.
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  10. Underlying the lack of development is a simply factor:

    Money made from primary industries is not reinvested in other sectors of the economy.

    The money made from mining is not being put into agriculture, infrastructure, the consumer sector, etc. Instead, something called 'aid' is handed out, for the benefit of keeping this arrangement going. The west exploits Africa's raw materials for it's benefit.

    Change that, and stop chasing foreing corporations to set up business in Zambia would be a first step.

    I'm beginning to think that the most revolutionary thing to do is to build capacity - train tens of thousands of professionals. Create indigenous businesses to grow the economy.
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