The correlation is certainly suggestive, even if the causation may be debated. Over the past thirty years, according to Moyo, the most aid-dependent countries have exhibited an average annual growth rate of minus 0.2 per cent. Between 1970 and 1998, when aid flows to Africa were at their peak, the poverty rate in Africa actually rose from 11 per cent to a staggering 66 per cent. Why? Moyo’s crucial insight is that the receipt of concessional (non-emergency) loans and grants has much same effect in Africa as the possession of a valuable natural resource: it’s a kind of curse because it encourages corruption and conflict, while at the same time discouraging free enterprise. Moyo recounts some of the more egregious examples of aid-fuelled corruption. In the course of his disastrous reign, Zaire’s President Mobutu Sese Seko is estimated to have stolen a sum equivalent to the entire external debt of his country: US$5 billion. No sooner had he requested a reduction in interest payments on the debt than he leased Concorde to fly his daughter to her wedding in the Ivory Coast. According to one estimate, at least US$10 billion – nearly half of Africa’s 2003 foreign aid receipts – leave the continent every year. The provision of loans and grants on relatively easy terms encourages this kind of thing as surely as the existence of copious oil reserves or diamond mines. Not only is aid easy to steal, as it is usually provided directly to African governments, but it also makes control over government worth fighting for. And, perhaps most importantly, the influx of aid can undermine domestic saving and investment. She cites the example of the African mosquito net manufacturer who is put out of business by well-intentioned aid agencies doling out free nets. Moyo offers four alternative sources of funding for African economies, none of which has the same deleterious side effects as aid. First, African governments should follow Asian emerging markets in accessing the international bond markets and taking advantage of the falling yields paid by sovereign borrowers over the past decade. Second, they should encourage the Chinese policy of large-scale direct investment in infrastructure. (China invested US$900 million in Africa in 2004, compared with just US$20 million in 1975.) Third, they should continue to press for genuine free trade in agricultural products, which means that the US, the EU and Japan must scrap the various subsidies they pay to their farmers, enabling African countries to increase their earnings from primary product exports. Fourth, they should encourage financial intermediation. Specifically, they need to foster the spread of microfinance institutions of the sort that have flourished in Asia and Latin America. They should also follow the Peruvian economist Hernando de Soto’s advice and grant the inhabitants of shanty towns secure legal title to their homes, so that these can be used as collateral. And they should make it cheaper for emigrants to send remittances back home.
This passage was actually taken from the foreword, which I believe was written by Niall Ferguson. I thought it to be a pretty good summary that introduced the book concepts, and decided to highlight it here.
Not that I think it should or can be simplified, but the central concept in this book is that giving aid to developing nations can actually set them back. Of course, a lot depends on what kind of aid is given and how it is deployed. Generally, unfetterred access to aid from local governments only increase corruption while crowding our local enterprises.
It also reminds me of this concept called systemic vulnerability I once read from a paper, used as a framework to explain the rise of states such as Singapore, Taiwan and South Korea. The fact that these states had ‘broad coalitions’, a potential ‘external threat’ and lack of natural resources actually compelled these nations to maximise their resources and build strong developmental states instead. Whereas our neighbours, which might have had more natural resources, were never in position where their ruling elites needed to do so.
In certain cases, less is more. I find parallels with that of promoting creativity as well. Constraints and limited resources compel you to find new innovative solutions instead of simply spending your way out.
