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Review of Dead Aid written by Dambisa Moyo Jacqueline A. Natter NS4053

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  1. Review of Dead Aidwritten by Dambisa MoyoJacqueline A. NatterNS4053

  2. Dambisa Moyo • Zambia educated. 1990 coup shut down the University. Continued studies in US. • World Bank 2 years • Goldman Sachs 8 years • Harvard’s JFK School of Gov’t Masters • Oxford Doctorate in Economics • Written in 2009

  3. The Problem • “…aid has been, and continues to be, an unmitigated political, economic, and humanitarian disaster for most parts of the developing world” (xix) • 50% Africa non-democratic • 11 autocratic regimes, 3 heads of state came to power in the 1970s • Since 1996, 11 countries have had civil wars • Why locked in a cycle of dysfunction? Answer has its roots in aid.

  4. The Problem • Average per capita income roughly $1/day • Real per capita income today lower than in 1970s • 1981 – 2002, the number of people living in poverty doubled • By 2015, predicted to account for one-third of world poverty. Was one-fifth in 1990. • Only continent with life expectancy less than 60 years. • 1 in 7 children die before age 5. • “deep in every liberal sensibility is a profound sense that in a world of moral uncertainty one idea is sacred, one belief cannot be compromised; the rich should help the poor, and the form of this help should be aid” (xviii)

  5. Types of Aid • Humanitarian / emergency: • catastrophes or calamities – 2004 Asian Tsunami • Charity based: • Organizations to institutions or people on the ground - PEPFAR • Systemic: • Gov’t to gov’t (bilateral) or via institutions (multi-lateral) – IMF • “aid defined as the sum total of both concessional loans and grants. It is these billions that have hampered, stifled and retarded Africa’s development” (9)

  6. History of Aid • 1940s Bretton Woods • restructure international finance / multilateral trading systems • 1950s Marshall Plan • “altruism after independence” / Cold War • 1960s Industrialization • By 1965, $950 million in aid without much infrastructure • 1970s Answer to Poverty • 1975 International Development and Food Assistance Act • 1980s Stabilization and Structural Adjustment • Africa’s debt service = $8 billion • 1990s Buttress of Democracy and Governance • Blamed political leadership and weak institutions • 2000s Glamour Aid • Bono

  7. Aid is Not Working Asian Tigers, BRIC countries growing – why not Africa? • Jared Diamond, Guns, Germs and Steel (1997) • wealth and success depend on geography and topography • Natural Resource Curse • Big Push • 1950-1980 US put equivalent of aid to 53 African countries in South Korea • Paul Collier, “Africa: Geography and Growth” • Landlocked and resource poor makes a difference • Propensity for civil war if ethnically divided • Max Weber • British Protestant work ethic • Paul Landes, The Wealth and Poverty of Nations • ideal growth model guaranteed by political institutions

  8. Aid is Not Working • Micro-Macro Paradox • Short term intervention may not have sustainable long term benefits (free mosquito nets) • 2005 Food Aid Conference (Kansas City) • Allow 25% food aid in Food for Peace budget to buy food in recipient countries rather than shipping from U.S. • Fuels African Corruption • Props up corrupt governments with freely usable cash, fewer investments, fewer job opportunities fuels poverty. • Culture of dependency, which chokes off investment. • Estimated $10 billion in aid leaves the continent every year. Few entrepreneurs will risk investing with corruption, kills off growth. • 1 point improvement in the Corruption Perception Index (CPI) equals a 4% increase in GDP (Graf Lambsdorff)

  9. Aid Success Stories? • Marshall Plan • Limited and finite. 3% of country GDP for 5 years. • Africa development assistance almost 15% GDP. • Financial institutions already in place. Just restarted. • International Development Association graduates • 22 total, 3 from Africa – most notably Botswana • Aid almost 20% national income 1960s. • 2000 aid only 1.6% national income. • Good policy environments • Aid does best when country in good working order; policies • Democracy • Mancur Olson – democracy engenders peace dividend • Amartya Sen (nobel laureate) – democratically elected vigilant about preventing economic disasters

  10. Aid Recipient Challenges • Reduction of domestic savings and investment in favor of greater consumption. • Inflation. Increase in cash to economy, but not goods = higher prices. To combat inflation, domestic policymakers raise interest rates = less investment = fewer jobs = more poverty = more aid. • Dutch Disease: large inflow of currency, diminishing exports. Strengthening currencies hurt manufacturing exports, reduces long-run growth. • Engenders laziness. No need to pursue tax revenue. No social contract.

  11. Dead Aid Prescriptions Market Based • Capital Markets • FDI • Trade • Remittances • Micro-Finance • Savings • Perfect Mix: • 5% aid • 30% trade • 30% FDI • 10% capital markets • 25% remittances and domestic savings

  12. Dead Aid Prescriptions • Market Based: • Bond instead of aid. • Steps to acquiring bond • Acquire rating; woo potential investors; if compelling, get cash • Defaults not the end of the world • Debt markets are forgiving and investor memory is short • Domestic bond market • Prerequisite for country’s stock market • Optimism • Since 2003, 15 countries have obtained credit ratings, all high enough to tap the bond market • S&P assigned long term credit ratings to 4 banks in Nigeria. • 2 issued debt in international capital markets. • Regional coalition

  13. Dead Aid Prescriptions Foreign Direct Investment (FDI) • $1.4 trillion total • $400 billion into developing countries • Sub-Sahran Africa $17 billion in FDI, $37 billion in official foreign aid • Chinese FDI • Low production costs in textile industry has attracted Asian investors • ‘70s built 1,160 mile railway from Zambia to Indian Ocean. $500 million • Aggressively investing: ’00 – ’05 $30 billion. (‘75 $20 million) • Hurdles • Poor / lacking infrastructure raises production costs. Cheaper to make in Asia and ship to Europe. • Difficult business rules. • Negatives • China undercutting European Investment Bank and the World Bank

  14. Dead Aid Prescriptions Trade: will increase goods and services sold abroad and increase workforce productivity. • African global trade = 1%. 3% 60 years ago. • Between country trade only 10% of their exports. • 34% tariff on agricultural products from other African nations. • African farmers cannot compete with subsidized exports • ‘03 US $4 billion in cotton subsidies • ‘05 Second Conference of Chinese and African Entrepreneurs • ‘00 US African Growth and Opportunity Act (AGOA) • ‘01 Anything But Arms (ABA) – European legislation • Trading Partners: EU 26%, US 18%, China 11% • EU 40% in 1990. Time to turn to China. • ‘90-’00 China trade grew by 450% • Africa should dominate manufacturing

  15. Dead Aid Prescriptions Remittances33 million Africans living outside country of origin, almost 5% total population. • ‘06 $520 billion sent home. 40% Somalia’s GDP • $68 billion to Asia, $113 billion to Latin America. • World Bank estimates • Phillipines: 10% increase in remittances rec’d reduced poverty rate by 2.8%, 1.7% increase in school attendance • Taxed • $100 sent from US to Africa, $80 received; US to Mexico, $86 received; UK to India, $96 received. • Higher taxes encourage secret sending and discourages sending at all. • Alternatives • Latin America – International Remittance Network • Mobile Phone Technology – M-Pesa • But like aid, something for nothing.

  16. Dead Aid Prescriptions MicroFinance“Previously unbankable and excluded poor now part of functioning financial dynamic. Small scale banking to poor people has the capacity to create enterprise and growth in developing countries” (130). • Grameen Bank – Bangladesh. Nobel Peace Prize. • Loans to poor, mainly agricultural sector. Lack infrastructure and formal banking network. No collateral. 43 countries adopted model. Bonds of trust. • ‘83 36K members, $3.1 million / ‘97 2.3 million members, $230 million. Default rate less than 2%. • Reduces asymmetry of information, groups sort themselves. • 10K organizations today, over $1 billion loans annually • Kiva • Bangladesh, Cambodia, Brazil • Estimates only 5-10% customers reached. Africa needs to get involved. Only in Kenya and Zambia.

  17. Dead Aid Prescriptions Savings unlock latent resources • ‘05 India: gold exchange for cash • $200 billion untapped investment privately held. Injected more money into the economy than FDI rec’d in 2004. • Brought 700 million poor villagers into formal banking system. (have 2/3 of India’s gold)

  18. Dead Aid Review • Jagdish Bhagwati, “Banned Aid; Why International Assistance Does Not Alleviate Poverty” • Foreign Affiairs, 2010 • Moral duty and sense of humanity, “cosmopolitan altruism” • From WWII through the Cold War • Self Interest • Cold War lost it’s reasoning for aid; enlightened self-interest • Live Aid and other celebrity endorsements • Aid Targets Rarely Met • 2008 $35 billion shortfall on amount pledged by G-8 ($20 billion to Africa) • Unintended Consequences • Now not a question of whether to help, but how • Chief weapon in “war on poverty” not aid, but liberal policy reforms • Depends on who sets policy • “citizens and policymakers of the developing world who will seize the reins”