Dambisa Moyo: Aid dependency blights Africa. The cure is in the credit crisis

Far from being a catalyst, foreign aid inhibits the continent's growth

Monday 02 February 2009 01:00 GMT
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The credit crisis was – inevitably – the dominant theme of the annual World Economic Forum that concluded in Davos over the weekend. And while other subjects – diversity and culture, the Israel-Gaza conflict, and even Zimbabwe – did get a look-in, there was little said about the opportunity the crisis presents for aid-dependent African countries.

Setting aside the debate on how (or indeed whether) sub-Saharan Africa will be affected in the short term by the ongoing financial turmoil, there is every reason to believe that what is happening could in fact be the best thing for Africa's long-term development prospects.

The crisis presents Africa with a unique opportunity to overhaul its development strategy away from the aid-based model (which despite its over one trillion-dollar injection has achieved little in terms of delivering growth and alleviating poverty over the last 50 years) and move more aggressively towards the kind of market-driven interventions that have fundamentally transformed the fortunes of emerging countries, such as the well-known BRIC economies – Brazil, Russia, India and China – but also, closer to home, South Africa and Botswana.

In the last five years Africa's economic performance has been encouraging. Its economies have grown by an average of five per cent per year, and at the end of 2006, three out of the top 10 fastest-growing economies in the world were African (Angola, Sudan, and Mauritania). In just two decades, Africa's GDP has roughly doubled from $130bn in the 1980s to around $300bn today. The question is how best to make this development trajectory stick.

I have long believed that far from being a catalyst, foreign aid has been the biggest single inhibitor of Africa's growth. Among its shortcomings, aid is correlated with corruption, fosters dependency, and invariably instils bureaucracy that hinders the emergence of an essential entrepreneurial class. For Africa to grow in a sustained way, foreign aid will have to be dramatically reduced over time, forcing countries to adopt more transparent strategies to finance development.

What the credit crunch has effectively done is to instigate this process by default. With Western donors facing mounting fiscal pressures and gaping deficits, foreign aid flows are in inevitable decline (Italy has already cut its foreign aid budget by half), and with this comes a chance for Africa to chart a strategy that delivers long-term economic growth. This is, after all, ostensibly the goal of any individual or institution that wishes to see Africa become an equal partner in the global community.

The development finance policy that has been the hallmark of consistent growth across the world has almost universally comprised a mix of four essential elements: Trade and commerce, Foreign Direct Investment (FDI), microfinance, and access to international capital markets.

As such, despite negative headlines over China's expanding role in Africa's burgeoning economy, African governments should be minded to accelerate alliances with China and the rest of the rapidly emerging world. Rather than continue to spend millions of dollars each year attempting to gain greater access to Western trade markets, they should focus their attention on markets such as China, where, with 1.3bn people to feed and just seven per cent arable land, African produce is welcome.

And with roughly $4 trillion of foreign reserves, China is undoubtedly a better bet for much needed FDI in the foreseeable future than its Western competitors. Furthermore, the reserves profile of not just China but also the Middle East suggests a class of new investors with likely appetite to take on African risk via the bond markets.

In the past 18 months the sovereign bond issues of Ghana and Gabon (as well as a number of corporate and bank issues) have shown that innovative thinking towards more transparent methods of financing Africa's development may be catching on – but there is clearly scope for improvement.

No one can say for sure how long market-based financing would take to yield sturdy growth for Africa, but one thing is for sure, it will be faster than continuing to rely on aid. These dark economic times are just the opening Africa needs to show that it can at last contribute meaningfully to the global economy rather than perennially being viewed as a drag.

Dambisa Moyo is a former economist at Goldman Sachs and the author of 'Dead Aid: Why Aid is Not Working and How There is Another Way for Africa', to be published by Allen Lane on Thursday. www.deadaid.org

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