In which I actually (sort of) rush to the defense of Dambisa Moyo?

Charles Kenny and Andy Sumner take a swipe at Dambisa Moyo in a post a the Guardian:

So what’s behind all of this sudden income growth? Is it a story about aid? One prominent Zambian, Dambisa Moyo, has written of her country that “a direct consequence of the aid-driven interventions has been a dramatic descent into poverty. Whereas prior to the 1970s, most economic indicators had been on an upward trajectory, a decade later Zambia lay in economic ruin”. In the 1980s, aid to Zambia averaged about 14% of the country’s GNI. In the 2000s, a decade of strong growth, the same proportion was 17%. If Zambia’s ruin in the 1980s was the result of aid, is Zambia’s graduation to middle-income status in the new millennium a sign that aid now works really well?

Of course both the ideas that previous stagnation was all the fault of aid, or current growth was all the result, are ridiculous. The price of copper (Zambia’s major export) was depressed in the 1980s and saw its price rocket in the middle of the last decade as China and India’s economies grew and demand for the metal soared.

Kenny and Sumner are right about the determinants of Zambia’s growth – it has always been extremely closely linked to the price of copper. In the graph below, which starts after the initial slump of copper prices, you can see an upsurge in the price at the turn of the millennium is closely associated with Zamba’s uptick in growth. I don’t think anyone, including Moyo, would debate this.

Meanwhile, (not shown) aid as a percentage of GDP is moving in a roughly countercyclical pattern – surging in during the 90s, then trickling away (although some of this is due to the wax and wane of the denominator in the equation).

Yet, instead of worrying about the immediate effects of aid on growth, shouldn’t we be asking ourselves why, in nearly 50 years since independence, Zambia hasn’t managed to make itself less dependent on copper (Zambia experts, feel free to start pitching stones now, I’m wading into unknown territory)? It seems to me that a country needs a reasonable degree of governance and reliable institutions to dig itself out of primary commodity dependence.

After seeing plenty of evidence that aid might negatively affect governance in Malawi (anecdotal, although two straight years of close-up anecdotes add up to something), I’ve always been sympathetic to Moyo’s argument that large, indefinite aid flows don’t create the best incentives for recipient governments, and have the potential to be incredibly damaging to governance in the long run. Without as much aid during the copper cricis, might the Zambian government have been forced to think of alternative, more structural ways out of their hole, rather than just waiting for the demand for copper to soar again? Or might the country just been more mired in economic decline?

Again, this is when the Zambian experts need to start wading in – but I don’t think the impact of aid can be either quickly condemned or dismissed as suggested by Moyo or Kenny and Sumner.

Finally – why do we keep pretending like Moyo is still relevant in the aid debate? Hint: she’s not – she moved on to her next book tour a long time ago. The aid debate is fairly bereft of high-profile critics, especially since Bill Easterly and Laura Freschi ascended to a higher plane of being, so Moyo still feels like the most appropriate punching bag. Punch away, I suppose, but it won’t get us very far.

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.

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