The beef with Dambisa

A few months ago Dambisa Moyo came to the World Bank to present her new book, Dead Aid. I had a favorable impression from her talk, but quickly became aware of a host of criticisms of the book (see, for instance, Owen Barder or Dani Kaufmann). 

Now that I've had a chance to read the book myself, I appreciate what the critics are getting at. Their criticism focuses on the first half of the book, where Moyo argues not only that aid has not worked, but that it is really an obstacle to development. (I should be quick to add that she is talking about what she terms "systematic aid" and not humanitarian or charity-based aid.) I summarize the main criticisms of her argument here briefly:

1. Correlation does not equal causality: Moyo points out that "over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum." However, critics of the book rebut that just because much of Africa remains poor and has received lots of aid does not mean aid was the cause. Kevin Watkins puts it well: "Using her logic, you could argue that fire engines cause fires because you find them near burning houses."
   
2. It really does depend on the context: Moyo attacks the notion that aid works even in good policy environments. Kaufmann counters that "the reality is more complicated and less PR-sexy, I am afraid: ‘Aid Can Work’, yet it can also fail miserably, as it has done in many countries. The mediating factor for aid effectiveness is governance and corruption."
   
3. Cherrypicking: Moyo cites selective data points to support her arguments, e.g. the democracy agenda is oversold because Senegal has been growing slowly but Sudan has grown quickly. However, a more systematic approach to the data (e.g. Do Democratic Transitions Produce Bad Economic Outcomes?) reveals that democracy does have a positive effect on growth, even in low-income countries. (This particular example is my own, but others also make this general point.)  

Without getting into the thick of the debate, I'll just say that I think these critics make valid points. My concern, however, is that having dismissed the first half of the book, the critics fail to take seriously the second half of Dead Aid. Moyo offers up a menu of alternatives to aid that could finance development: remittances, microfinance, foreign direct investment, the development of bond markets. It seems that almost all the reviews of the book downplay the importance of these alternatives (particularly the last in this list):

• Kevin Watkins is suspicious of investment banks: "Before the financial crisis, a few African governments were starting to raise money on international bond markets. These markets were never going to replace aid. But the global credit collapse has now firmly closed the door to bond markets for Africa. It has also served to underline the lesson that African governments, like all governments, should think twice about taking advice from international investment banks."
  
• Duncan Green thinks her proposals are feeble: "But it is Dead Aid’s purported alternatives to aid that seem particularly feeble: African governments should issue lots of bonds (not too many takers at the moment - bad luck on the timing there); trust in China (and thus get stuck in commodity dependence, let alone the human rights issues); rich countries should remove barriers to trade (fine, but it won’t make much difference except in a few particular products like cotton) and invest in infrastructure (does anyone disagree with that?) and access to microfinance needs to be increased (sure, but it’s not even close to a magic bullet).
  
• Shanta Devarajan thinks Africa's not ready for the big time: "...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."

What I find truly frustrating in all of these reviews is the out-of-hand dismissal of these alternative strategies. Any country that relies on a single source of foreign capital—whether aid or remittances or international capital markets—will be at the mercy of whoever is providing that capital. The costs of this kind of dependence are high. Just to take one example, see research by Homi Kharas on the high price exacted on developing countries by aid volatility.

While none of Moyo's alternatives on its own is sufficient, that is not really the point. Rather, countries ought to diversify their sources of foreign capital as much as possible, much like the portfolio of an investor. Even the development of bond markets is not as far-fetched as it might first sound. As of May 2008, Fitch had assigned ratings to 15 countries in sub-Saharan Africa and was predicting (subscription required) "more sovereign debt issuance by African countries in 2008 and 2009." Granted, the financial crisis has slowed Africa's progress in this direction, but the crisis will not last forever. One doesn't need to endorse Moyo's argument about aid to agree that diversifying development finance should be a priority. It would be a shame if that point were lost in the rush to attack the first half of Dead Aid.