Re-restructuring Foreign Aid: A Response to Dambisa Moyo
DEVELOPMENTS
The Government of Rwanda recently declared its intention to significantly decrease its dependence on foreign aid within the next five years. For a country that relies on donors for between 60-70% of its government expenditures, this statement might seem brash and irresponsible. However, Dambisa Moyo, the former Head of Economic Research and Strategy for sub-Saharan Africa at Goldman Sachs and a former employee of the World Bank, believes that rejecting foreign aid is the only way to ensure lasting development in sub-Saharan Africa. Moyo’s arguments are provocative, but to reject foreign aid entirely is to discount the benefits aid has brought and can continue to bring to Africa. Rather than rejecting it, foreign aid should be restructured to strengthen the capacities of, and synergies between, governments and the private sector.
BACKGROUND
Dambisa Moyo’s argument suggests that foreign aid is partially responsible for exacerbating poverty and causing economic stagnation or recession in many developing countries. And she is correct, particularly with regard to the general absence of sustainable advancements in global health.
Nonetheless, short-term donor strategies have been critically important. When one examines the incentives and priorities of international donors and the interventions that they usually support, a significant proportion of funding is directed towards emergency responses to infectious diseases and natural disasters. It is erroneous to claim that donors and their implementing partners have not brought tremendous benefits to developing countries. The millions of people who are on anti-retroviral drugs, sleeping under bed nets, or accessing clean water is a testament to what the international community can achieve in the face of disaster. Most foreign aid is aligned with specific, measurable, and tangible outcomes; the system in place tends to select for projects that can be achieved in three to five years or less. As a result, many of the longer-term, often systemic, underlying challenges in developing countries are not adequately addressed by the billions of dollars in foreign aid that flow into the developing world each year.
As Moyo and others claim, policies associated with foreign aid have created local dependence on donors’ well intended interventions. Moyo argues that foreign aid has increased corruption and lethargy in sub-Saharan Africa. Donors have tried to control for corruption and poor leadership by strengthening the grant application and monitoring and evaluation processes. But ironically, the shift towards performance-based grants has decreased funding for badly needed longer-term projects because of the inherently difficult in measuring outcomes. Although the amount of money donated specifically for global health has increased dramatically over the last decade, many of the health commodities never reach their intended recipients. Sustainably strengthening delivery systems requires effective and accountable government systems, an area that donors have been either slow to address, or as Moyo suggests, have actually been exacerbated in the long run by the creation of parallel systems.
Counter-arguments to longer-term approaches focus on the cost-effectiveness of interventions. However, cost-effective analysis is limited by its reliance on short-term indicators that do not account for time lags. Countless short-term interventions that initially appeared to be cost-effective ultimately ended in failure. Short-term interventions with clear measurable targets will often appear to be more cost-effective than the often murky longer-term interventions, but we must consider time lags, social and environmental factors, and value to the intended recipient as part of cost calculations. Rather than pointing an accusing finger at foreign aid, the discussion should focus on how to re-structure aid such that it focuses on longer-term objectives that sustainably enhance local capacity.
ANALYSIS
It is essential to strengthen local governments’ capacity to provide public goods, such as health care, that cannot be guaranteed by the market. The need for greater access to long-term financing in developing countries is echoed by the private sector’s request for greater access to "patient capital" (longer-term and lower-interest financing). Strengthening the private sector in developing countries through increasing access to patient capital would lead to a larger and more skilled workforce, create a more informed and educated populous, improve accountability in leadership, alleviate poverty and its associated infectious diseases, and indirectly enhance government capacity due to a larger tax base.
Market-based and government interventions should not be treated as mutually exclusive approaches. Through incentivized entrepreneurial activities, the government will ultimately be in a better position to meet the demand for public goods and services. A robust private sector would not only increase the formal tax base for the government, it would also improve government accountability and finally produce effective leadership, something for which much of Africa has waited for far too long. Instead of waiting for effective leadership to arise from corrupt systems, donors should actively support environments where effective leadership arises as a product of a vibrant and entrepreneurial economy. Although microfinance is an integral part of strengthening the private sector, entrepreneurship goes beyond starting a vegetable stand or a secondhand clothes stall. In the majority of markets in sub-Saharan Africa, the same commodities are available in stall after stall. The focus is on who can do the best job of getting potential buyers’ attention; a more robust economy would promote product differentiation, sophisticated marketing, and the development of appropriate industries.
Dambisa Moyo suggests, “engagement with the markets is the proper way to deliver long-term growth and to reduce poverty.” However, her belief that this should occur in the absence of foreign aid is unrealistic and troubling. Bilateral and multilateral agencies and foundations should play an integral role in the development of the private sector through models such as public-private partnerships. The Acumen Fund is a non-profit venture fund that promotes long-term systemic growth in developing countries by supporting “transformative businesses to solve the problems of poverty.” A to Z Textile Mills Ltd., an Acumen Fund investee in Tanzania, manufactures the only World Health Organization fully certified bed net for malaria prevention. It benefited significantly from a multinational public-private partnership to increase its annual bed net manufacturing capacity by 6000% from 300,000 nets in 2004 to 19 million by 2008 according to a Global Health Delivery Case Study.
In addition to continued emergency assistance, foreign aid should enhance governmental capacity by encouraging innovative and socially and environmentally responsible business responses to the plethora of challenges and opportunities in developing countries. Adapting foreign aid to better support government and private sector enhancement will require clearly defined benchmarks, which demonstrate progress toward the long-term goal of creating healthy and sustainable societies.
To recommend disengagement from foreign aid as Moyo does in her book Dead Aid sends the wrong message. Although she is correct that foreign aid has to a large extent stifled economic diversification and entrepreneurship in sub-Saharan Africa, she risks alienating Africa at a time when donors are likely looking for opportunities to cut back on official development assistance. The key point should be one of adaptation: how can we implement aid to support economically, socially, and environmentally sustainable development of societies? In an increasingly interconnected world, it is in our interest regardless of where we live to ensure that humanity establishes a level of prosperous equilibrium.
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Kileken ole-MoiYoi is a case writer for the Pediatric Team of the Global Health Delivery Initiative at Harvard University's Bagnoud Center for Health and Human Rights.