Why is Dead Aid is more important than Dead Capital?

Who wants some? Ash prepares to take on the Evil Dead of Aid and Capital.

"Who wants some?" Ash prepares to take on the Evil Dead of Aid and Capital.

If you’re interested in development, you’re probably familiar with Dambisa Moyo. She’s the young Zambian economist who earlier this year published Dead Aid to enormous fanfare. She was on the news, in the debates and even had the privilege of being labelled ‘cruel’ by Jeffrey Sachs. Though fierce criticism of the quality of her arguments has dimmed her own personal star, there is no doubt that the intellectual thunderstorms that accompanied her book have persisted, and that aid has come to occupy the central position in the discourse on development in non-conflict Africa.

Rewind one decade. At the turn of the century, a Peruvian named Hernando de Soto published his own treatise on the failure of development. A brilliant thinker and polymath who took ideas from the philosophy of mind, legal theory, the histories of culture, economy and law as well as modern and classical economics, de Soto’s work was called The Mystery of Capital. In it he mentions aid three times. His focus was on the central importance and current absence of socially acceptable, easily accessed forms of legal property. He argued that legitimate, functioning national systems of property rights are the crucial innovation that every single prosperous capitalist nation had to make to achieve economic development. Such a system transforms mere physical property into capital – a fungible, divisible, and secure economic asset that powers the capitalist system which exists only in pockets outside of the West.

De Soto’s work and his prescription that legitimate property systems must be created was widely hailed as a watershed in thinking about development. The New Statesman put him ‘in the pantheon of great progressive intellectuals’. He remains one of the most highly thought of thinkers in world development.

Despite the continuing high regard de Soto’s work commands, I cannot think of any serious attempts to put his ideas about property systems into practice in Africa. Meanwhile, the reform of aid and its efficacy has never had a higher profile. We in the development community have chosen to focus extraordinary energies on an agenda based on aid that does not appear to have the anything like the untapped potential that property does. We have silently but decisively decided that dead aid is a greater problem than dead capital. The evidence does not seem to support this. Consider the following:

  • De Soto’s team measured at least $9.3 trillion dollars dead capital in the third world, certainly an underestimate given that he counted only real estate. The potential value of this dead capital, when unlocked by a national, legitimate formal property system, would be multiplied several times over.
  • By contrast Moyo (and other aid critics) focus centrally on the failure of aid to achieve a result. By various reckonings this is anything between $300 billion and $2 trillion of dead aid – and after a decade of aid-growth regressions it’s clear we have little idea what, if any, multiplicative effect it has.
  • Probably the most robust critique of the aid system comes from Bill Easterly, who argues that the central planned approach to aid is too risky because we don’t know what works, favouring instead a bottom up approach through entrepreneurs.
  • De Soto takes as his starting position that the capacity of entrepreneurs is fundamentally restrained by their participation in a pre-capitalist system; the absence of any property system linking all such entrepreneurs and their assets into a single system is what prevents them from fulfilling their potential to lead bottom-up development.
  • In contrast to the more recent data set of recently developed and currently developing countries that aid critics tend to focus on, de Soto’s arguments about property systems tally remarkably well with the latest thinking among historians concerned with the process by which Europe and America pulled away from the rest of the world in its developing process. The European conception of alienable property was of central import. It also tallies with what we know about Japan, Korea and Taiwain since the 1920s.

Unfortunately, I believe those aspects that make de Soto’s work so important are the same ones that hamper efforts to translate them into to real development programmes.

What makes de Soto so insightful when compared to the majority of aid-centric approaches to development (either pro- or anti- aid) is that he offers a genuinely multi-disciplinary and systematic view of the economy as a structure, one that in less developed countries remains fundamentally different to what we know from the developed world. His is an analysis of what capitalism is: a specific system of economic organisation distinct not only from socialism, but also from feudalism, and other forms of peasant and bonded-labour economic organisation. He understands that capitalism is the most dynamic form of the economy, but equally that its emergence and subsequent dominance in the West depended on hundreds of years of social, legal and economic change – and chance. The fact that it emerged without being planned for in Europe and America does not mean that it will always ‘naturally’ evolve. His painstaking analysis of US legal reform shows what a violent, political and uncertain process the emergence of capitalism there was.

Paradoxically, it seems to be this systematic and thoughtful view of the economy that makes development agencies and professionals so reluctant to translate his ideas into active policy. Consider the following characteristics of his analysis and solutions:

  • The central focus of his analysis is on an intangible concept: capital. His argument hinges on the idea that capital is potential that is realised by legal property systems which imbues it with useful characteristics that are not visible and whose their functioning as economic tools remain little understood. Focusing on something few people understand is not a great way to get people to implement these ideas.
  • De Soto makes it clear that his policy recommendations will look very different in different places. Legal representations of property, to be legitimate, must respond to the existing social conceptions of property and must constitute an acceptable social contract for the poor. Knowing what this looks like will not be easy and will require detailed research in each country.
  • Beyond the technical difficulty of working out the appropriate laws, reforming the laws of property is also a political struggle. It cannot succeed without high level political support because the elites will often be against the process since the status quo favours them.
  • It is primarily a domestic process. Some TA might be helpful, and perhaps some funds to conduct surveys, but de Soto’s suggestions are ultimately domestic issues that require domestic actors to address them.

By contrast, approaches to development that focus on aid are far more tangible. The money we disburse, the goods we purchase and the projects we implement are all clearly visible as results. Aid programmes are also far more commonly replicated in all their major characteristics in many places: it’s far less planning-intensive to do. And for the most part, aid programmes can be delivered without widespread political support, though it certainly helps if sustainability is an aim. Most obviously, reforming the aid process is something that is largely in the hands of the donors. They control how aid works.

This last point seems to be the big one. It seems to me that development policy has become increasingly focused on things that we can do or influence heavily from the outside. It’s for this reason that aid, with its relatively smaller financial value and its much more muddied thinking, has become so central to development discourse. Property, capital and the systematic structures of the economy are left to the side because they’re harder for us to influence.

It hardly seems the best way to approach development, does it? I actually don’t think de Soto has all the answers, but he’s got some of them, and they’re important. Just because it is work that we can’t do directly shouldn’t mean it isn’t as important. We need to move our debates on. Aid is a useful debate because there’s a lot of it, and it could be done a lot better. But there are plenty of other debates out there which need just as much attention. We shouldn’t lose sight of them.

3 thoughts on “Why is Dead Aid is more important than Dead Capital?

  1. E Aboyeji

    December 6, 2009 at 7:42am

    I just wanted to add that what is most unfortunate about this live/dead aid debate in development is that its focus is on what the west can do to develop Africa. You must either trade or donate. The funny thing is that both have been done without a good measure of success.

    The west so desperately wants a lead role in development even to the detriment of Africans. The annoying part is that this role does not exist. DeSoto’s ideas are ideas that can be applied to Africans, by Africans with some level of support from the west.

    Dead Aid will always be more important than dead capital because its a debate the west can afford.

  2. Ranil Dissanayake

    December 7, 2009 at 6:09am

    I definitely think there’s an element of truth to your comment. But I don’t think it’s down to desire for the lead-role, but a much more moral desire to help. But wanting to help inevitably leads one to focus on what one can do oneself rather than what most is most needed to be done, regardless of the actor who performs that action.

    This interacts with the far, far, far greater power that the West has in development debates vis-a-vis domestic governments in most of Sub-Saharan Africa (due to aid dependence – excepting of course South Africa, and possibly even Nigeria, where oil wealth reduces donor influence). The power they have gives their distortionary impulse to focus on their own contribution to development far more weight than it should have compared to what domestic actors should be doing, especially when they require action by domestic actors to make aid more effective.

Comments are closed.