Book-Blogging: Dead Aid, Chapter Two

This is part of my effort to read through a number of development-focused books. Previous chapters of Dead Aid: one

This was, without question, my favorite chapter of the book – but only because it was heavily expository and relatively devoid of opinion. Moyo walks through the modern history of aid, from the Bretton Woods conference in 1944 to the “Glamour Aid” of today. It’s worth walking through each stage; Moyo splits the past 70 years into seven.

First up: Bretton Woods, 1944 – the quiet New Hampshire town where the winners of World War II gathered in New Hampshire to

“restructure international finance, establish a multilateral trading system, and construct a framework for economic cooperation that would avoid a repeat the Great Depression of the 1930s…there was a clear recognition that in the post-war period the fractured nations of Europe would need a massive cash injection to spur a return their previous levels of development.”

The Bretton Woods Conference was where the World Bank, International Monetary Fund, and International Trade Organization were established; the World Bank was created to “facilitate capital investment for reconstruction,” the IMF to “manage the global financial system” – essentially, to help keep fixed exchange rates between currencies appropriate. In both cases, the focus was on reconstruction, not development.

As Europe recovered – thanks in no small part to the Marshall Plan and other reconstructive efforts — the World Bank and IMF became kind of aimless; reconstruction was effectively complete. Cue the next stage – the 1960s and massive cash injections into developing countries (called the “Third World” in those days, because the West was the “First World” and the Soviet East was the “Second World”). As Moyo notes, the thinking was that “because these projects had longer-term pay-offs, they were unlikely to be funded by the private sector.” Their intuition was – and continues to be – basically correct: the up-front costs of major infrastructure projects (dams, bridges, the American Interstate Highway System) are enormous, and their gains aren’t easily divisible (free-riders and what not), so it makes sense to have a government (or an outside funder) front the costs. There are reasons this may be less effective in the developing world – if money isn’t also allocated for maintenance and upkeep the investments will depreciate quickly (see: the Solow Model) – but the basic idea seems sound to me.

The 1970s led to the World Bank “very publicly [reorienting] its strategies towards [a] more pronounced poverty focus…the emphasis was now on the poor” for a number of reasons – most notably the oil price spike, which led to recession in many African countries (“in 1975 Ghana’s GDP contracted by 12 percent”). Infrastructure aid was still the lion’s share of aid, but “poverty-oriented lending rose from five percent in the late 1970s to 50 percent in the early 1980s.” High oil prices and lax international regulation of banking led to an enormous supply of money to be lent out, often to poor countries that probably should not have been lent to; this would cause problems, to say the least.

Next up, in the 1980s the world was reeling from a second oil shock (in 1979), and in panic the “central bankers in the industrialized world reacted…by tightening monetary policy – that is, raising interest rates.” As any Macroeconomics 101 professor teaches, raising interest rates leads to a higher cost of borrowing, which increases the likelihood that current borrowers with floating rates may default. A higher cost of borrowing led to a reduction in the demand for developing world goods, which reduced the tax base and made it difficult for developing countries to service their debt; this happened in eleven African countries in the early 1980s. As those of us who paid attention to the 2008 financial crisis in America quickly learned, letting one organization fail could lead to a cascade of failures; this is roughly what happened on a country level in the 1980s, with the IMF lending money to defaulting nations to help keep them afloat (through the “Structural Adjustment Facility”). Of course, lending money to pay off previous lending leads to a deeper hole for the borrower to dig out of.

At the same time, Margaret Thatcher and Ronald Reagan came to power with very specific ideas about the power of the free market, and with them

“the rise of neo-liberal thinking, which argued that governments should liberalized their economies in favor of the laissez-faire paradigm, which encompassed… the private market.”

Because the United States and the United Kingdom both wielded significant influence on the World Bank and IMF, this way of thinking was codified into “structural adjustment programs” – essentially, pre-conditions on which loans would be made, often including privatization, trade liberalization, and removing subsidies (known as the “Washington Consensus”). This drove borrower countries into the free market, which, as Moyo notes, “gave African economies the freedom to succeed, but also the freedom to fail.” Which they did.

The penultimate stage, according to Moyo, came about in the 1990s, when,

“the donor community converged on the idea that governance – good governance, needed for sustainable economic growth – was lacking across much of sub-Saharan Africa. Good governance was a euphemism for strong and credible institutions, transparent rule of law and economies free of rampant corruption.”

This is the period in which unreasonable expectations have been placed on African countries – the West expected (and still expects) democracy to happen in five years, when it took the West hundreds of years. These expectations – and the “failure” of African nations to live up to them – were a proximate cause of donor fatigue, which was problematic for countries that heavily relied on Western funds to subsist.

Finally, we make it to the current day and what Moyo calls “Glamour Aid” – the Bonos and Angelina Jolies, Live 8s and other relief concerts. Moyo’s contempt for this is palpable, but other than that not a whole lot is said about it.

So, it seems that foreign aid has failed to provide the “Big Push” Paul Rodenstein-Rodan predicted in the 1950s. What can the past 70 years tell us about the future of aid? First, I think we can take some measure of solace in the fact that the aid apparatus is constantly changing tack when one direction appears fruitless; it’s “failing slow” but still leads to change. The past should also teach us that progress takes an achingly long time; pretending otherwise leads to discouragement and no small amount of banging one’s head against the wall. Finally, we can use the past to recognize that one-size-fits-all solutions don’t work – the Washington Consensus may work in America but not Nigeria; we should look for community-based solutions that are appropriate for that specific community.

Leave a Reply

Your email address will not be published. Required fields are marked *