Approach cautiously and handle with care
South Africa occupies an unusual position in debates about foreign aid. It is beginning to make greater use of multilateral institutions like the World Bank and the African Development Bank to finance new energy and infrastructure projects.
On the other hand, it is providing financial assistance to countries like Zimbabwe.
Its position as both an aid donor and recipient should make the heated international debate about foreign aid that has been stimulated by Zambian economist Dambisa Moyo’s new book, Dead Aid, of particular interest to South Africans.
The book’s basic thesis is that foreign aid (or at least that portion of it provided by donor governments and multilateral organisations, which she calls “systemic aid”) is the “single worst decision of modern developmental politics”. It has been an “unmitigated political, economic and humanitarian disaster” that “perpetuates the cycle of poverty and derails sustainable economic growth”. Moyo, in other words, contends that there is something inherent in the nature of aid that makes it very dangerous.
It would nice if the complex subject of foreign aid could be dismissed so categorically—and it is tempting to do so. Foreign aid horror stories are not hard to find. To give only three examples:
- One of the first loans made by the World Bank was to The Netherlands. The stated purpose of this 1947 loan was to fund the country’s reconstruction after World War II. However, its effect was to enable the Dutch government to shift resources from its own reconstruction to the bitter war it was fighting at that time to maintain control over its Indonesian colony.
- After convincing US president Ronald Reagan to support debt relief for his country, then-Zaire president Mobutu Sese Seko promptly hired a Concorde to fly his daughter to her wedding in Côte d’Ivoire.
- The United Nations, working with some donor governments, provided aid to Bangladesh for inadequately prepared water projects that have resulted in many Bangladeshis using water containing toxic doses of arsenic.
On the other hand, aid donors, like private creditors, have funded successful development. Korea, Taiwan and Botswana all at one time received aid flows that were essential to their later development successes. The eradication of smallpox and near eradication of polio and river blindness would not have been possible without foreign aid. Finally, successful micro-finance institutions, of which Moyo is so fond, would not function today if they had not received years of concessional finance (i.e. aid).
These examples show that it is foolhardy to make categorical judgements about aid. Instead, it is necessary to evaluate each specific aid transaction on its merits. Whether it is good or bad depends on the purpose for which the funds are intended, the terms on which they are obtained, what the alternative financing sources available to the recipient are, and what the other possible uses of the funds could have been.
Thus, despite Ms Moyo’s strong warnings about the unique evil of aid, African countries should treat it as merely one source of funds and should evaluate it pragmatically. All financing, including aid, involves costs, which include the conditions attached to the use of the funds, and benefits. Thus a potential recipient, in determining the acceptability of a particular offer of aid, should carefully assess its costs and benefits and compare them with the costs and benefits of alternative funding proposals, including self-financing, and of the option of not undertaking the planned activity.
If the recipient concludes that the terms of the aid are acceptable, it should negotiate the best possible deal with the donor, just as it would with a private lender. If it determines that the costs or conditions are too onerous, it should reject the offer. There is nothing inherent in aid (or any other form of financing) that precludes such an approach.
Unfortunately, many governments, either because of governance problems or a lack of resources, do not engage in this careful analysis of aid and so end up accepting bad deals from their donors who, like all other funders, are only offering what their cost-benefit analysis suggests is a good deal for them.
Ironically, Moyo’s misleading book and the debate that it has spawned could have the salutary effect of encouraging potential aid donors to help countries obtain the resources they need to use aid effectively. In any event, it should remind us that aid and advice about aid should be handled with care.
Daniel Bradlow is SARCHI Professor of International Development Law and African Economic Governance, University of Pretoria, and Professor of Law, American University Washington College of Law.