Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

by Moyo, Dambisa

  At the time of their inception, the exact responsibilities of the World Bank and the IMF were clearly delineated. In very broad terms, the World Bank was designed to facilitate capital investment for reconstruction, and in the aftermath of the war the IMF was to manage the global financial system. In later years, both institutions would come to occupy centre-stage in the development discourse, but the original mandate targeted reconstruction, rather than development per se.

  At its core, the reconstruction agenda assumed that the demands on post-war investment could not be met without some adequate means of pooling the investment risk between countries. There was wide acknowledgement that few countries would be able to fulfil the role of foreign lender; and the basic principle of the World Bank was that no matter what country actually did the foreign lending, all member nations should participate in underwriting the risk involved. Early financial transfers from international institutions included a US$250 million reconstruction loan to France signed on 9 May 1946, followed by reconstruction loans to the Netherlands, Denmark and Luxembourg in August 1947. These aid transfers were undoubtedly at the heart of the reconstruction process that almost certainly contributed to the economic powerhouse that Europe has become today.

  Alongside the World Bank, the IMF was mandated with the specific responsibility of promoting the stability of the world economy. At the time it began operations on 1 March 1947, the IMF was charged with promoting and supervising international monetary cooperation amongst countries, and thus forestalling any possible global financial crisis. By the end of the 1940s an aid-led economic framework was firmly in place, but it was not until later in the decade that the first large-scale government-to-government aid transfer occurred.

  On 5 June 1947, at Harvard University, the US Secretary of State, George C. Marshall, outlined a radical proposal by which America would provide a rescue package of up to US$20 billion (over US$100 billion in today’s terms) for a ravaged Europe.2 As Europe emerged from the devastation of the Second World War with little to sell for hard currency, and experiencing one of the worst winters on record, General Marshall argued for an aggressive financial intervention by the United States. In return, European governments would draw up an economic revival plan.

  Under the Marshall Plan, the United States embarked on an aid programme to fourteen European countries which saw the transfer of assistance worth roughly US$13 billion throughout the five-year life of the plan from 1948 to 1952. Among the top five aid recipients from the Marshall Plan were Great Britain, which received the lion’s share of 24 per cent, and France, Italy and Germany, which received 20, 11 and 10 per cent, respectively. In per capita terms smaller European countries received more support: Norway received US$136 per person, Austria US$131, Greece US$128 and the Netherlands US$111.

  The idea that the Marshall Plan is hailed as a success has remained, to a large extent, unquestioned. The plan was clearly successful in bringing Western Europe back onto a strong economic footing, providing the US with the vehicle to influence foreign policy, winning it allies in Western Europe and building a solid foundation for US-led multilateralism. Aid had restored broken infrastructure. Aid had brought political stability, restored hope and not only given a future to defeated peoples, to bankrupt nations and to broken lands, but also benefited the donor nation itself, keeping the US economy afloat while the world around it had crumbled.

  More importantly, if aid worked in Europe, if it gave to Europe what Europe needed, why couldn’t it do the same everywhere else? By the end of the 1950s, once reconstruction in Europe was seen to be working, attention turned towards other parts of the world, and specifically, in the context of aid, Africa.

  Africa was ripe for aid. The continent was characterized by a largely uneducated population, low-salaried employment, a virtually non-existent tax base, poor access to global markets and derelict infrastructure. Armed with the ideas and experience of the Marshall Plan, richer countries saw Africa as a prime target for aid. So aid began to appear.

  As the US funnelled large sums to Europe through the Marshall plan, World Bank and IMF resources were freed up. Monies that had been earmarked by the Bretton Woods institutions for postwar European reconstruction could now be directed towards the emerging (African) development agenda.

  Perhaps more crucially for the aid-based agenda that ensued, it was widely assumed that poor countries lacked the financial capital to spur development. In the wake of the Marshall Plan success, it became a widely accepted view that investment capital was critical for economic growth. In the absence of any significant domestic savings and lacking the physical and human capital to attract private investment, foreign aid was seen as the only way to trigger higher investment, which would thus lead to higher economic growth. As far as policymakers could see, there was no obvious alternative.

  There were of course other reasons why Britain, America and to a lesser extent France turned their attention to Africa. By the mid-1950s Africa was undergoing profound changes – with Western powers loosening the chains of colonialism, many countries were gaining their independence. Countries such as Ghana in 1957, Kenya in 1963, and Malawi and Zambia in 1964 broke from the colonial fold to become independent states between 1956 and 1966; in all, thirty-one African countries did so. Independent they may have been on paper, but independence dependent on the financial largesse of their former colonial masters was the reality. For the West, aid became a means by which Britain and France combined their new-found altruism with a hefty dollop of self-interest – maintaining strategic geopolitical holds. For the US, aid became the tool of another political contest – the Cold War.

  While the Cold War was peppered with outbreaks of physical hostility (for example, in Korea), much of the battle for world hegemony between the US and the USSR was fought economically and on foreign soil. The choice of weapon – aid. Africa saw many such battles. Aid became the key tool in the contest to turn the world capitalist or communist. The Soviet Union was, of course, a staunch supporter (and financier) of some of Africa’s greatest communists – Patrice Lumumba in Congo and Mengistu Haile Mariam in Ethiopia. And the US, by contrast, rewarded its supporters, such as Zaire’s Mobutu Sese Seko.

  As such, the aid imperative took on an added dimension: not how deserving a country might be or the nature of its leadership, but rather the willingness of a desperately impoverished country to ally itself with one camp or another – benevolent leader or vicious tyrant, as long as they were onside, what did it matter?

  It is impossible to know for sure what the true motivations for granting foreign aid to Africa were, but granted it was.

  The 1960s: the decade of industrialization

  By the beginning of the 1960s some US$100 million in aid had been transferred to the African continent. This was a mere trickle compared to the avalanche of billions of dollars of aid that would eventually make its way to Africa.

  The early part of the 1960s also saw the underlying shift towards a greater focus on aid funding for large-scale industrial projects. The prevailing view was that because these projects had longer-term pay-offs (for example, the funding of infrastructure projects such as roads and railways), they were unlikely to be funded by the private sector. One such example is the double-curvature, hydroelectric, concrete arch Kariba dam that straddles the border between Zambia and Zimbabwe; it was built throughout the decade. The dam, whose construction began under British colonial rule in the mid-1950s, was finally completed at a cost of US$480 million in 1977. Today it still ranks as one of the largest dams in the world.

  By 1965, when around half of sub-Saharan Africa’s roughly fifty states were independent, aid had already reached at least US$950 million. Ghana, which had won its independence from Britain in 1957, had received as much as US$90 million in aid flows. Zambia, Kenya and Malawi, all independent by 1964 had, on average, received about US$315 million each by the end of the decade. Statistical records from the 1960s are scant, and estimates of the miles of tarred road and railway tra
ck, the numbers of bridges and airports, that aid helped build remain unclear. As such, the true value of the surfeit of aid that had gone to Africa remains open to debate, but by the beginning of the 1970s there was still not much infrastructure to speak of.

  The foreign aid agenda of the 1970s:

  the shift to a poverty focus

  On 17 October 1973, Arab states placed an embargo on oil as a retaliation for US support for Israel in the Yom Kippur War. In just a few months, the price of petrol quadrupled, sending the global economy into turmoil. As oil prices soared, oil-exporting countries deposited the additional cash with international banks, which in turn eagerly sought to lend this money to the developing world. Lax economic and financial policies (for example, the low amounts central banks required commercial banks to keep in reserve) meant that the volume of lending to even the poorest and most un-creditworthy countries around the world was enormous. The wall of freely supplied money led to extremely low, and even negative, real interest rates, and encouraged many poorer economies to start borrowing even more in order to repay previous debts.

  In Africa, as oil prices rose many countries saw food prices rocket and recession take hold. In 1975 Ghana’s GDP contracted by 12 per cent, inflation rose from 3 per cent in 1970 to 30 per cent in 1975, and shot to 116 per cent in 1977. In Congo-Kinshasa, inflation rose from 8 per cent in 1970 to 80 per cent in 1976, and reached 101 per cent in 1979. Almost inevitably, food and commodity price shocks fuelled by rises in oil prices led to the shift towards a more poverty-based approach to development.

  Under Robert McNamara, the World Bank very publicly reoriented its strategies towards this more pronounced poverty focus. Donor countries followed suit: in 1975 the UK published its white paper More Aid for the Poorest and in the same year the US passed the International Development and Food Assistance Act, which stipulated that 75 per cent of its Food for Peace Program would go to countries with a per capita income of less than US$300.

  In practical terms this meant redirecting aid away from large infrastructure investment (power, transport, etc.), and towards projects in agriculture and rural development, social services (including housing, education and health), mass inoculation programmes, adult literacy campaigns, as well as food for the malnourished. The emphasis was now on the poor. By the end of the 1970s the proportion of aid allocated to social services had crept to over 50 per cent, up from under 10 per cent in the previous decade.

  Although in the mid-1970s nearly two thirds of aid was for infrastructure – roads, railways, water and sewerage, ports, airports, power stations and telecommunications, the proportion of poverty-oriented lending rose from 5 per cent in the late 1970s to 50 per cent by the early 1980s. In the year of the first oil spike (between 1973 and 1974) the volume of poverty-related aid flows increased threefold; it more than doubled at the time of the second oil jump between 1979 and 1980. It should be understood that, like the majority of the infrastructure aid, much of the poverty-related aid did not come for free. Aid costs money. And unless it’s in the form of grants, it has to be paid back, with interest. This point would later come back to haunt many African states.

  By the beginning of the 1970s the growth-oriented strategy was widely believed in policy circles to have failed in its mission to deliver sustained economic growth. Mounting numbers of people living in a state of absolute poverty, increasing levels of unemployment, rising income inequality, worsening balance of trade positions and a growing sense that sustained growth – real sustained growth – could not occur without materially improving the livelihood of society’s poor demanded a new aid strategy.

  Yet, despite the aid aimed at poverty alleviation, recipients under the programme in countries such as Zambia would later see their poverty levels skyrocket and growth rates plummet. Another shift was underway in the 1970s. Up until the early part of the decade the US government (under the auspices of the US Agency for International Development) had disbursed the largest amount of aid to the developing world. This changed under Robert McNamara’s presidency of the World Bank, and after its 1973 annual meeting the World Bank became the largest aid donor.

  The foreign aid agenda of the 1980s:

  the lost age of development

  By the end of the 1970s Africa was awash with aid. In total, the continent had amassed around US$36 billion in foreign assistance. With the commodity boom creditors were only too happy to provide loans. Although economic pressures and financial instability had been largely contained after the 1973 oil crisis, come the 1979 oil spike precipitated by the Iran–Iraq war, it was a different story.

  Foreign money had been flowing not only to Africa, but all across the world. Throughout the 1960s and 1970s Latin American countries borrowed vast sums of money, also to finance their burgeoning economies. Between 1975 and 1982, for example, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4 per cent. This heightened borrowing led Latin America to quadruple its external debt from US$75 billion in 1975 to more than US$315 billion in 1983, or 50 per cent of the region’s GDP.

  The 1979 oil crisis produced financial pressures of insurmountable proportions, and the official policy response did not help. The policy reaction, particularly by major economies such as the US and UK, differed drastically from the earlier approach of simply dumping in more aid to stave off the impact on the poor. Central bankers in the industrialized world reacted to the second price shock and fears of mounting inflation by tightening monetary policy – that is, mainly raising interest rates. Most of the bank loans to developing countries were based on floating interest rates, so as policymakers raised interest rates, so too the cost of borrowing increased – often to levels where debt was unsustainable.

  Africa’s debt service (interest payments and the repayment of principal) reached around US$8 billion in 1982, up from US$2 billion in 1975. Almost inevitably, the environment of higher international interest rates led to worldwide recession and, in turn, less demand for developing countries’ exports, and hence lower foreign exchange earnings. Eventually, as emerging countries were unable to service their accumulated debts there was only one alternative.

  On 12 August 1982 Mexico’s Secretary of Finance telephoned the US Federal Reserve Chairman, the US Secretary of the Treasury and the IMF’s Managing Director to inform them that Mexico would be unable to meet its 16 August debt obligations to its bank creditors. Other countries soon followed suit. In Africa alone, some eleven countries – Angola, Cameroon, Congo, Ivory Coast, Gabon, The Gambia, Mozambique, Niger, Nigeria, Tanzania, and Zambia – defaulted on their obligations.3

  The debt crisis threatened to undermine the very foundations of global financial stability. If emerging nations were allowed to default unchecked, this would have led to a complete collapse of the international financial structure. The survival of international creditors, such as banks, who relied on getting paid back for the loans was in jeopardy. Much like the risks surrounding the 2008 sub-prime credit crisis, this could have resulted in a catastrophic run on the banks, a global financial meltdown and all that it entails – unemployment, galloping inflation and economic depression.

  The solution to the crisis was to restructure the debt. Thus the IMF formed the Structural Adjustment Facility – latterly, the Enhanced Structural Adjustment Facility – specifically to lend money to defaulting nations to help them repay what they owed. Necessary though this was, the end result only served to increase poor countries’ aid-dependence and put them deeper into debt.

  This intervention was called a restructuring, but in reality it was merely a reincarnation of the aid model. Invariably, because international private lending markets dried up and as commercial banks were no longer willing to lend to poor countries, the Bretton Woods institutions would reclaim their central position as chief lenders to emerging economies.

  From the high hopes and ambitions of their early independence, many African countries had been reduced to a state of near destitution and renewed dependency. Facing
falling income from trade (prices of commodities such as oil and sugar had retreated to historically low levels: oil fell from US$38 a barrel in 1980 to US$15.10 in 1986 (a 60 per cent drop in just four years), and sugar from 65 cents per pound to a low of just under 7 cents per pound in 1978), weighed down by enormous debt burdens, high interest rates and declining demand for their goods, it was difficult to see what, if anything, had been achieved in the preceding twenty years. But amidst this financial chaos around the world, another fundamental shift in economic thinking was occurring; one which would again have implications for aid.

  Up until the 1980s the notion that governments were the ultimate arbiter of resource allocation lay at the core of economic planning, leaving little room for any sort of private sector. Government-led economic planning had appeared to work well in the Soviet Union, and many Western governments were keen to avert another great depression by cementing their influence in economic management. Socialist policies that had placed government at the centre of economic activity and nationalized much of private industry were believed to be the fastest route to economic prosperity. This was true across the developed world – for example, in Britain and France well before the 1980s – as well as in many African countries in the post-independence period.

  By the 1980s, however, there was a growing sense among leading policymakers that there were inherent structural impediments to the functioning of economic markets. Far from being a catalyst for development, excessive government involvement was viewed as the prime obstacle to growth; rather than facilitating healthy economic expansion, it was the source of economic distortion.