Have We Been Here Before?

Like many people working in development, I’ve been affected by a strain of aid angst in the last few years, and have blogged about this in a previous incarnation.

Aid’s internal crisis is gathering steam: Dambisa Moyo is the centre of a great deal of attention; Bill Easterly has been mud-wrestling with Jeffrey Sachs; and in relative sotto, others such as Yash Tandon have been more virulent in their criticisms, with deeper flaws in their analysis. The problems in Moyo’s Dead Aid analysis have been autopsied sufficiently, but the central premise retains power: aid has had significant unintended consequences, and has achieved relatively little against most macro-indicators of development, especially in Africa.

Historically, aid is a relatively recent phenomenon. In fact, if we acknowledge the profound structural, motivational and political differences between the goals and methods of the Marshall Plan and other efforts of economic generation and regeneration that have followed wars, aid in its current form is still in its infancy as a component of historical processes of development. As a result, some of the most interesting writing on the process of development assumes no aid at all.  One such example (here greatly abridged and simplified) is particularly instructive. Indeed, it gives us a strong sense of what the alternatives to aid are, given that it barely considers it to be a possibility.

In 1954, Michal Kalecki wrote a paper entitled ‘The Problem of Financing Economic Development’. Kalecki was a Marxist, which may put off some readers, but this is incidental to many of the insights he raises in his analysis. Put simply, his central concern is how the rapid increase in investment required to generate and sustain an increase in the productive capacity of an economy can be financed without causing undue pressure on inflation or real wages, and without causing other unintended social or economic consequences. He does this through a model of the economy which examines the production of consumption goods and investment goods, through the investment, consumption, savings, taxes and trading behaviour of capitalists, workers and small proprietors. It’s this approach that demonstrates his Marxism; however, his concern with macroeconomic stability in the face of stimuli to demand and supply reflects a very modern sensibility.

The central challenge in an economy that does not receive international capital flows (aid, loans or direct investment) is that to develop, the economy must demonstrate an increase in productivity and production of mass industrial consumption goods (i.e. through investment) as well as in agriculture, near-simultaneously. Failing this, one or more of several problems may occur, chief among which are the dangers of inflationary spirals, under-utilised capacity, locally concentrated unemployment and restrained effective demand.

Continue reading