Developing Jen

Dead Aid is a highly controversial new book written by Dambisa Moyo, who was born in Zamibia and has an impressive resume: Master's in Policy from HKS (not my program), PhD in economics from Oxford, 8 years at Goldman Sachs, and time at the World Bank.  Her book has two main points: 1) that aid has done more harm than good in Africa and 2) that the solution to growth is for the government to raise money from capital markets and use industrial policy to encourage private investment. 
 
Dead Aid is written for a mass audience, so I can understand why there aren't any regression tables.  Still, I found it lacking the evidence and acknowledgment of obvious objections needed to make it convincing if you know much about development.  There is a good review by a Zamibian economist no less here that articulates these analytical deficiencies much better than I could.  I'll just use this review to outline some of the key questions that were raised in my mind when reading the book.  

The first part of Dead Aid is about how aid has done more harm than good.  We've all heard it before, the West has spent $1 trillion on aid and has nothing to show for it.  There have been empirical studies on aid and growth - though what they have taught us is missing from the book.  But Moyo takes it a step further and specifically calls out institutions and corruption as the link between aid and the lack of growth.  The book claims aid distorts incentives for politicians, erodes institutions, and fosters corruption, though it refers to no studies that support the claim.  My sense is that we don't have a handle yet on the interplay with aid and institutions, we're still debating the role of growth and institutions.  Moyo is raising a critical issue we should be paying attention to: how aid effects institutions -- but I bet it's too early to draw any conclusions.

The second part is her answer to economic development: independence through reliance on capital markets for government budgets, trade, foreign direct investments and remittances.  I just finished a semester of development theory where we learned about why countries are poor and what makes economies grow, so I can definitely appreciate the importance of the right industrial policies to incentivize private investment.  But I also spent a semester studying international trade and finance, and so the idea of governments issuing bonds and relying on international investors for financing their budgets sent chills down my spine.  See Latin American debt crisis.  See Asian financial crisis.  These are critical examples of government borrowing and capital market liberalization gone wrong, and they are not even addressed in Dead Aid.  If governments were to adopt Dead Aid's proposal, what happens if they incur unsustainable debt?  Do they go bankrupt?  Or does the IMF bail them out?  What happens if another African country goes bankrupt, causing international capital flight through contagion?  These are huge questions that amazingly aren't even addressed in the book.  I would loose sleep worrying a financial crisis would set African countries a decade back in their development.  This is the part of the Dead Aid that feels reckless and dangerous to me.

My final issue is that the book implies that the institutional deficiencies of African countries would practically evaporate if aid was out and capital markets were in.  I am inclined to believe that institutional change is a much harder nut to crack than that.

These are just the things that came to my mind when reading the Dead Aid.  I'll be the first to admit I have a ton to learn before I really know where Moyo is right and where she is wrong.  I think she's raising the right issues but I'm not sure she has enough of a handle on the literature to draw the right conclusions.

 
Finally, I owe Dambisa Moyo and enormous thank you.  Her book has gotten me thinking about one of development's most important issues more than any class I've taken all year in my development program.  It's just that after two semesters of advanced economic training geared towards the issues she addresses, a few things didn't sit right with me.