Dambisa Moyo’s book, “Dead Aid,”has been receiving a fair amount of criticism from several quarters (see, for example, here, and here). My own take is that the book is right in the small, wrong in the large, and possibly right in the gargantuan.

The small point is that it would be better if Africa received private capital rather than foreign aid to supplement its own resources for investment. Everyone would agree with this in principle. If Africa were such an attractive destination for private capital that foreign aid was no longer needed (as is the case in many emerging markets), we would all celebrate. The problem is that Africa is not there yet. That’s why this is a small point.

The larger point is that the book claims foreign aid is largely wasted, and this is the part that has elicited the most criticism. People have pointed out that aid’s productivity has been increasing over time. But the fact is that Dambisa doesn’t need to claim that foreign aid is wasted in order to make the small point above. Even if aid is productive, it would be better if Africa received private capital flows because these require even higher returns.  

Nor is it necessary to claim aid is wasted to make the bigger (gargantuan) point in the book: that aid creates incentives so that recipient countries remain dependent on aid and never make the transition to private capital financing. This is not the case in general, but there may be circumstances under which it is. Jean-Paul Azam, Steve O’Connell and I have a paper where we show that well-intentioned aid, even if it is productive, can lead to two equilibria: one with low aid and strong institutions (reminiscent of the East Asian countries), and the other with high aid and weak institutions (as in some African countries today).  The intuition is that if there is learning-by-doing in raising tax revenues, then countries that receive aid to fill a fiscal gap may never “learn” how to raise domestic taxes.  In our simple model (which we affectionately call the “ADO’C” model—say it with a French accent), one of the factors that determines which equilibrium you end up in is the quality of institutions at the outset—which may explain why the Asian countries were able to graduate from aid faster than some African countries have.

Topics

Debt

Poverty

Authors

Shanta Devarajan

Senior Director, DEC and Acting World Bank Group Chief Economist

More Blogs By Shanta

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rovingbandit

April 08, 2009

Looks like a very interesting paper, how does natural resource dependence enter though? Presumably in a similar (and additive) manner to aid. Could this mean that for certain heavily resource dependent countries the quantity of aid has very little impact either way upon tax effort?

Shanta Devarajan

Shanta

April 08, 2009

You raise an interesting point, Rovingbandit. There is a symmetery between natural resource revenues and aid insofar as both have relatively little accountability to citizens. With aid, governments feel they are accountable to donors. With resource rents, they accrue directly to the government, so that citizens don't necessarily feel it's "their money" that is being spent. As a consequence, the quality of public expenditures in resource-rich countries is relatively poor.

ColoredOpinions

April 09, 2009

Dambisa Moyo has started a healthy debate on the relation of Africa with Europe and the US. Many conservative political parties in the west have readily accepted it as an argument against development aid. African rulers, even undemocratic dictators like Paul Kagame, invite her as a hero for standing up against the west and in order to hide the real reasons while aid has been wasted.

The real uneasiness with aid in western countries stems not from it's ineffectiveness, but from the unwillingness of development aid organisations to engage citizens both in receiving and donor countries in a transparant process in order to achieve clear and defined objectives.

Waskesiu T

April 14, 2009

Shanta, by leaving the word "African" out of your last sentence, you ended up with a generalized observation that is far from reality. With the exception of Africa, the quality of public expenditures in resource-rich countries is relatively good. Therefore "resource-rich" cannot be shown to be related to "quality of public expenditures".
A couple of suggestions:
1) Look into all aspects of governance when appraising the relative quality of public expenditures.
2) Take a[nother] look at the works of Hernando de Soto. (economist)

Joe Richard Opiyo

April 15, 2009