Dead wrong

If it is to become "the next big thing," Africa will need aid.

By Graciana del Castillo and Edmund S. Phelps

With Dambiso Moyo's new book, Dead Aid, hitting the bestseller list, it's easy to see why she might have thought she could have it both ways in her recent piece for Foreign Policy. On the one hand, Moyo argues that aid to Africa has fostered dependency, corruption, and poor governance -- and even conflict, poverty, and disease; while on the other hand she tries to make us believe that Africa can quickly be "the next big thing," that it is an economic miracle in the making. Unfortunately, the paradox defeats her. As a distinguished minister of foreign affairs told former U.N. Secretary-General Boutros Boutros-Ghali when he asked whether Africa had a future: "Yes, but probably not in the 21st century." It's a dire-sounding prediction, but much remains to be done before Africa can build economies of high dynamism and wide inclusion, allowing the continent to be weaned off aid once and for all.

In examining Moyo's assessment of Africa's economic health (the vigor of which she asserts will launch its renaissance), it is hard to put aside her problematic data. Annual GDP growth rates for countries such as the Democratic Republic of the Congo (8 percent), Liberia (7.5 percent), and Burundi (4.5 percent) are not as impressive as they sound if one takes into account that these countries still have per capita incomes below $150. Even accompanied by per capita incomes hovering in the $250-to-$300 range, high growth rates in Eritrea, Ethiopia, Madagascar, Malawi, Niger, Sierra Leone, and Sudan will fail to make much of a difference in the short run. Furthermore, nominal GDP growth often does not trickle down to create better living conditions for the population at large. More generally, it benefits only the elite.

In this context, Moyo's recommendation to close down aid to African governments within five years rings hollow. She advises countries to tap financial markets for funding, as if this is a universal solution for the problems that ail the continent. But Africa is not a monolithic place. After working at Goldman Sachs on Botswana and South Africa, two high-income countries by African standards with democratic governments, Moyo seems to believe that if other African countries want to borrow from the markets at competitive rates, all they have to do is to get a rating from the accredited rating agencies. But governments with low ratings often find it difficult to issue bonds, or they have to pay astronomical rates. Going even further, Moyo assumes that all countries will have an equally easy time boosting trade, foreign direct investment, and remittances across the board. This is like recommending the same policies for Brazil and Haiti, and expecting both countries to flourish.

Not only are her recommendations misguided, they are naive, based on a dogmatic belief in the market. Countries need an effective state not only for sound macroeconomic policymaking, but also to create the institutional, legal, and regulatory framework necessary for establishing an adequate business climate and a security system that will protect society, including the vulnerable.

Just look at Mexico, where a Moyo-type prescription of increased trade and capital flows was tried out in the early 1990s with calamitous results. Huge amounts of capita -- more than $90 billion -- flowed into Mexico between 1990 and 1993, accounting for roughly one fifth of all net inflows to developing countries. The resulting growth rate was only 3.8 percent -- inadequate for Mexico's large needs in infrastructure, social development, and security. In January of the following year (1994), the North American Free Trade Agreement came into effect and Mexico fell into a deep financial and banking crisis. Its northern neighbor had to come to its rescue to stave off depression. African countries would not have such a backstop.

And African countries face challenges far beyond Mexico's. As Moyo rightly points out, Africa is a strife-prone region. Conflicts are on the rise and aid dependencies are large, even in peace. The record in Africa and elsewhere is indeed dismal. Roughly half the countries that achieve a tenuous peace return to conflict within a few years, and of the other half, the large majority remains aid-dependent. Mozambique, for example, signed its peace agreement in 1992 and still relies on aid whose levels amount to a quarter of its gross national income.

Many countries in Africa do need to reduce aid dependence and increase market-based mechanisms for financing and trade, as Moyo correctly argues. The question then is, what kind of help will be most effective at moving countries into the market without collapsing them in the meantime? And one clear winner is a specific form of assistance known as reconstruction aid that promotes investment and employment, rather than simply consumption, as humanitarian aid does. For reconstruction aid to be effective it should be targeted toward improving infrastructure, promoting start-up companies, and reactivating small enterprises, services, agriculture, and mining. There is no question that countries coming out of conflict or at low levels of development need these sorts of official flows to achieve a baseline level of service provision. Only then are investors convinced to join in.

Moyo does right in calling attention to the dismal record of aid in Africa. But her attempt to have it both ways just ends up falling apart. If Africa is to indeed be the next big thing, it will need more concrete help than Moyo is providing.

Graciana del Castillo is associate director of the Center on Capitalism and Society at Columbia University and the author of Rebuilding War-Torn States. Edmund S. Phelps is director of the Center on Capitalism and Society, winner of the 2006 Nobel Prize in economics, and the author of Rewarding Work.

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