Dambisa Moyo’s book, “Dead Aid,”has been receiving a fair amount of criticism from several quarters (see, for example, here, and here). My own take is that the book is right in the small, wrong in the large, and possibly right in the gargantuan.
The small point is that it would be better if Africa received private capital rather than foreign aid to supplement its own resources for investment. Everyone would agree with this in principle. If Africa were such an attractive destination for private capital that foreign aid was no longer needed (as is the case in many emerging markets), we would all celebrate. The problem is that Africa is not there yet. That’s why this is a small point.
The larger point is that the book claims foreign aid is largely wasted, and this is the part that has elicited the most criticism. People have pointed out that aid’s productivity has been increasing over time. But the fact is that Dambisa doesn’t need to claim that foreign aid is wasted in order to make the small point above. Even if aid is productive, it would be better if Africa received private capital flows because these require even higher returns.
Nor is it necessary to claim aid is wasted to make the bigger (gargantuan) point in the book: that aid creates incentives so that recipient countries remain dependent on aid and never make the transition to private capital financing. This is not the case in general, but there may be circumstances under which it is. Jean-Paul Azam, Steve O’Connell and I have a paper where we show that well-intentioned aid, even if it is productive, can lead to two equilibria: one with low aid and strong institutions (reminiscent of the East Asian countries), and the other with high aid and weak institutions (as in some African countries today). The intuition is that if there is learning-by-doing in raising tax revenues, then countries that receive aid to fill a fiscal gap may never “learn” how to raise domestic taxes. In our simple model (which we affectionately call the “ADO’C” model—say it with a French accent), one of the factors that determines which equilibrium you end up in is the quality of institutions at the outset—which may explain why the Asian countries were able to graduate from aid faster than some African countries have.
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