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Date: Wed Jan 06 2010 - 23:29:52 EST
Banned Aid
Why International Assistance Does Not Alleviate Poverty
January/February 2010
Jagdish Bhagwati
JAGDISH BHAGWATI is Senior Fellow in International Economics at the Council
on Foreign Relations and University Professor of Economics and Law at
Columbia University. He served on the UN secretary-general's Advisory Panel
on International Support for the New Partnership for Africa's Development
from 2005 to 2006.
Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.
By Dambisa Moyo. Farrar, Straus & Giroux, 2009, 208 pp. $24.00.
If you live in the affluent West, no public policy issue is more likely to
produce conflicts in your conscience than foreign aid. The humane impulse,
fueled by unceasing televised images of famine and pestilence in the
developing world, is to favor giving more aid. But a contrasting narrative
has the opposite effect: Emperor Jean-Bédel Bokassa of the Central African
Republic used Western aid to buy a gold-plated bed, and Zaire's dictator,
Mobutu Sese Seko, spent it on personal jaunts on the Concorde. Such
scandals inevitably lead many to conclude that most aid is wasted or, worse
still, that it alone is responsible for corruption.
These debates have largely been the province of Western intellectuals and
economists, with Africans in the developing world being passive objects in
the exercise -- just as the 1980s debate over the United States' Japan
fixation, and the consequent Japan bashing, occurred among Americans while
the Japanese themselves stood by silently. Yet now the African silence has
been broken by Dambisa Moyo, a young Zambian-born economist with impeccable
credentials. Educated at Harvard and Oxford and employed by Goldman Sachs
and the World Bank, Moyo has written an impassioned attack on aid that has
won praise from leaders as diverse as former UN Secretary-General Kofi
Annan and Rwandan President Paul Kagame.
Moyo's sense of outrage derives partly from her distress over how rock
stars, such as Bono, have dominated the public discussion of aid and
development in recent years, to the exclusion of Africans with experience
and expertise. "Scarcely does one see Africa's (elected) officials or those
African policymakers charged with a country's development portfolio offer
an opinion on what should be done," she writes, "or what might actually
work to save the continent from its regression. . . . One disastrous
consequence of this has been that honest, critical and serious dialogue and
debate on the merits and demerits of aid have atrophied." She also
distances herself from academic proponents of aid, virtually disowning her
former Harvard professor Jeffrey Sachs, whose technocratic advocacy of aid
and moralistic denunciations of aid skeptics cut no ice with her. Instead,
she dedicates her book to a prominent and prescient early critic of aid,
the development economist Peter Bauer.
Moyo's analysis begins with the frustrating fact that in economic terms,
Africa has actually regressed, rather than progressed, since shedding
colonial rule several decades ago. She notes that the special factors
customarily cited to account for this tragic situation -- geography,
history, social cleavages, and civil wars -- are not as compelling as they
appear. Indeed, there are many places where these constraints have been
overcome. Moyo is less convincing, however, when she tries to argue that
aid itself has been the crucial factor holding Africa back, and she verges
on deliberate provocation when she proposes terminating all aid within five
years -- a proposal that is both impractical (given existing long-term
commitments) and unhelpful (since an abrupt withdrawal of aid would leave
chaos in its wake).
Moyo's indictment of aid, however, is serious business, going beyond Africa
to draw on cross-sectional studies and anecdotes from across the globe.
Before buying her indictment, however, it is necessary to explore why the
hopes of donors have so often been dashed.
THE CHARITY TRAP
Foreign aid rests on two principles: that it should be given as a moral
duty and that it should yield beneficial results. Duty can be seen as an
obligation independent of its consequences, but in practice, few are likely
to continue giving if their charity has little positive effect. Beginning
in the years after World War II, those who wanted the rich nations to give
development aid to poorer ones had to address the challenges of building
domestic support for greater aid flows and ensuring that the aid would be
put to good use. But their unceasing efforts to produce higher flows of aid
have led aid advocates to propose the use of tactics that have ironically
undermined aid's efficacy, virtually guaranteeing the kind of failures that
understandably trigger Moyo's outrage.
At the outset, aid was principally driven by a common sense of humanity
that cut across national boundaries -- what might be called cosmopolitan
altruism. Aid proponents in the 1940s and 1950s, such as Gunnar Myrdal and
Paul Rosenstein-Rodan, were liberals who felt that the principle of
progressive taxation -- redistribution within nations -- ought to be
extended across international borders. This led to proposals such as those
to set an aid target of one percent of each donor nation's GNP, playing off
the Christian principle of tithing (giving ten percent of one's income to
the church) or the Muslim duty of zakat (which mandates donating 2.5
percent of one's earnings to the needy).
How was the one percent figure arrived at? According to Sir Arthur Lewis,
the first Nobel laureate in economics for development economics, the
British Labour Party leader Hugh Gaitskell had asked him in the early 1950s
what figure they should adopt as the United Kingdom's annual aid obligation
and Lewis had settled on one percent of GNP as a target because he had a
student working on French colonies in Africa, where French expenditures
seemed to add up to one percent of GNP. Such a target, of course, implied a
proportional, rather than a progressive, obligation, but it had a nice ring
to it.
The problem was that the one percent target remained aspirational rather
than practical. Outside of Scandinavia, there was never much popular
support for giving away so much money to foreigners, however deserving they
might be. So aid proponents started looking for other arguments to bolster
their case, and they hit on enlightened self-interest. If one could
convince Western legislatures and voters that aid would benefit them as
well, the reasoning went, the purse strings might be loosened.
In 1956, Rosenstein-Rodan told me that then Senator John F. Kennedy, who
bought into the altruism argument, had told him that there was no way it
could fly in the U.S. Congress. A case stressing national interest and the
containment of communism was needed. And so the argument was invented that
unless the United States gave aid, the Soviet Union would provide it and,
as a result, the Third World might tilt toward Moscow. In fact, the Soviets
had already funded the construction of Egypt's Aswan Dam, a project the
United States had turned down. The only catch was that if the Cold War
became Washington's rationale for giving aid, it was inevitable that much
of it would end up in the hands of unsavory regimes that pledged to be
anticommunist -- regimes with a taste for gold-plated beds, Concordes, fat
Swiss bank accounts, and torture. By linking aid payments to the Cold War,
proponents of aid shot themselves in the foot. More aid was given, but it
rarely reached the people it was intended to help.
FROM ALTRUISM TO SELF-INTEREST
When the Cold War began to lose its salience, the search began for other
arguments to support aid. The World Bank appointed two successive
blue-ribbon panels to deliberate on ways of expanding aid flows, the
Pearson Commission, in 1968, and the Brandt Commission, in 1977. The group
led by former West German Chancellor Willy Brandt, although emphasizing
that there was a moral duty to give, fell back nonetheless on an
enlightened self-interest argument based on a Keynesian assertion that made
no sense at all: that raising global demand for goods and services through
aid to the poor countries would reduce unemployment in the rich countries
-- an argument seemingly oblivious to the fact that spending that money in
the rich countries would reduce unemployment even more.
Other feeble arguments related to immigration. It was assumed that if aid
were given wisely and used effectively, it would reduce illegal immigration
by decreasing the wage differentials between the sending and the receiving
countries. But the primary constraint on illegal immigration today is the
inability of many aspiring immigrants to pay the smugglers who shepherd
them across the border. If those seeking to reach El Norte or Europe earned
higher salaries, they would have an easier time paying "coyotes," and more
of them would attempt illegal entry.
Lewis, who was a member of the Pearson Commission, therefore despaired of
both the altruistic and the enlightened self-interest arguments. I recall
him remarking in 1970, half in jest, that development economists should
simply hand over the job of raising aid flows to Madison Avenue. Little did
he know that this is exactly what would happen 20 years later with the
advent of the "Make Poverty History" campaign, supported by Live Aid
concerts and the sort of celebrity overkill that many Africans despise. Of
course, this has meant the revival of the altruism argument. Aid targets
have therefore returned to the forefront of the debate, even though they
are rarely met: in 2008, there was a shortfall of $35 billion per year on
aid pledged by the G-8 countries at the Gleneagles summit in 2005, and the
shortfall for aid to Africa was $20 billion.
One of the chief reasons for the gap is not just miserliness but a lack of
conviction that aid does much good. Aid proponents today try to overcome
this doubt by linking aid-flow obligations to worldwide targets for the
provision of primary education and health care and other laudable
objectives enshrined in the 2000 UN Millennium Development Goals (which are
uncannily reminiscent of the Brandt Commission's proposals). But the
question Moyo and other thoughtful critics properly insist on raising is
whether aid is an appropriate policy instrument for achieving these
targets.
And so one returns to the old question of what Rosenstein-Rodan termed
"absorptive capacity": How much aid can be absorbed by potential aid
recipients and transformed into useful programs? Arguments that aid can and
should be used to promote development seem reasonable but have run into
problems -- not just because corrupt dictators divert aid for nefarious or
selfish purposes but because even in reasonably democratic countries, the
provision of aid creates perverse incentives and unintended consequences.
The disconnect between what development economists thought foreign
assistance would achieve and what it has actually done is best illustrated
by a close look at the earliest model used to formulate development plans
and estimate aid requirements. The model was associated with two
world-class economists, Roy Harrod of Oxford and Evsey Domar of MIT. In
essence, the Harrod-Domar model used two parameters to define development:
growth rates were considered a function of how much a country saved and
invested (the savings rate) and how much it got out of the investment (the
capital-output ratio). Aid proponents would thus set a target growth rate
(say, five percent per annum), assume a capital-output ratio (say, 3:1),
and derive the "required" savings rate (in this case, 15 percent of GNP).
If the country's domestic savings rates fell below this level, they
reasoned, the unmet portion could and should be financed from abroad.
Economists also assumed that aid recipients would use fiscal policy to
steadily increase their own domestic savings rates over time, thus
eliminating the need for aid entirely in the long run. With such matching
efforts by the recipients to raise domestic savings, so the logic went, aid
would promote growth and self-reliance.
The problem with this approach, widely used throughout the 1970s, was that
although aid was predicated on increased domestic savings, in practice it
led to reduced domestic savings. Many aid recipients were smart enough to
realize that once wealthy nations had made a commitment to support them,
shortfalls in their domestic efforts would be compensated by increased, not
diminished, aid flows. Besides, as Moyo notes, the World Bank -- which
provided much of the multilateral aid flows -- faced a moral hazard: unlike
the International Monetary Fund, which lends on a temporary basis and has a
"good year" when it lends nothing, the World Bank was then judged by how
much money it disbursed, not by how well that money was spent -- and the
recipients knew this.
PAVED WITH GOOD INTENTIONS
Similar problems involving the mismatch between intentions and realities
are present in today's battles over aid. Now, as before, the real question
is not who favors helping the poor or spurring development -- since despite
the slurs of aid proponents, all serious parties to the debate share these
goals -- but rather how this can be done.
Many activists today think that development economists in the past
neglected poverty in their quest for growth. But what they miss is that the
latter was seen as the most effective weapon against the former. Poverty
rates in the developing countries did indeed rise during the postwar
decades, but this was because growth was sporadic and uncommon. And that
was because the policy framework developing countries embraced was
excessively dirigiste, with knee-jerk government intervention across the
economy and fears of excessive openness to trade and foreign direct
investment. After countries such as China and India changed course and
adopted liberal (or, if you prefer, "neoliberal") reforms in the last
decades of the century, their growth rates soared and half a billion people
managed to move above the poverty line -- without question, the greatest
and quickest progress in fighting poverty in history.
Neither China nor India, Moyo points out, owed their progress to aid
inflows at all. True, India had used aid well, but for decades its growth
was inhibited by bad policies, and it was only when aid had become
negligible and its economic policies improved in the early 1990s that its
economy boomed. The same goes for China.
If history is any guide, therefore, the chief weapon in the "war on
poverty" should be not aid but liberal policy reforms. Aid may assist poor
nations if it is effectively tied to the adoption of sound development
policies and carefully channeled to countries that are prepared to use it
properly (as President George W. Bush's Millennium Challenge program
recently sought to do). Political reform is important, too, as has been
recognized by the enlightened African leaders who have put their energies
into the New Partnership for Africa's Development (NEPAD), which aims to
check the continent's worst political abuses.
But unfortunately, despite all these good intentions, if the conditions for
aid's proper use do not prevail, that aid is more likely to harm than help
the world's poorest nations. This has been true in the past, it is true
now, and it will continue to be true in the future -- especially if some
activists get their wishes and major new flows of aid reach the developing
world simply because it makes Western donors feel good.
Moyo is right to raise her voice, and she should be heard if African
nations and other poor countries are to move in the right direction. In
part, that depends on whether the international development agenda is set
by Hollywood actresses and globetrotting troubadours or by policymakers and
academics with half a century of hard-earned experience and scholarship. In
the end, however, it will be the citizens and policymakers of the
developing world who will seize the reins and make the choices that shape
their destiny and, hopefully, soon achieve the development progress that so
many have sought for so long.
Copyright © 2002-2009 by the Council on Foreign Relations, Inc.
All rights reserved.
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