What's wrong with aid anyway?

In a previous post, I mentioned that there's a growing number of critics of aid, chief among them Dambisa Moyo. Aid is often synonymous with appeals for helping poorer countries, and many well-intentioned people donate money to various charities and causes. Many of these do have positive effects, and the people who work for these causes should be rightly applauded for their selfless sacrifices and attempts to make the world a better place.

But what I found when I worked in the non-profit sector in Uganda was that a lot of aid was being wasted, whittled away, or outright stolen. It was often difficult to see the benefits of what little of it remained, and many people would say you're not likely to see positive changes in so short a timeframe. The majority of aid is handled by state-to-state transfers, known as Official Development Assistance.

The question for me was, why don't we see positive changes, especially when there's billions of dollars being spent on aid? There's several reasons:

1) A lot of aid never reaches the poor. Some of it is 'aid' in the form of contracts awarded to companies, usually of the donor nation, to construct some project or other for the benefit of the people there. In this form of 'aid' a company's main responsibility is only to demonstrate that the work was done. Usually there's no quality control, there's little justification for the project, there's little local involvement, and the end results are things like roads that don't last through the first rainy season.

Another misnomer is "technical assistance", which is another term for sending overpaid consultants to a foreign country to tell people what to do, usually without understanding local conditions, and their Western market-rate fees are considered to be foreign 'aid'.

2) Accountability systems are inadequate or inefficient. Most accountability procedures are checked through a paper trail, not by actually examining the long-term sustainability or local ownership of the project (because locals just don't know how to manage these things, they say!), and this encourages rampant cheating, cutting corners for 'least cost' imperatives, and outright theft.

The bureaucrats who dispense aid, instead of restructuring the entire broken process, usually come back with even more bureaucratic paper checks, and these are even harming the honest organisations with huge accountability documents to fill in sometimes monthly. So aid organisations now have specialised fundraising and donor relations staff and departments that even when well-intentioned, reduce even more of the money that reaches those for whom it's intended.

3) Needs aren't properly identified and aid isn't effectively distributed. I'm going to be very controversial here, but I believe that aid distribution works the same way as that of a command economy. Yes, the kind of economy you may last have heard about in the former Soviet Union.

In the aid industry, local 'needs' are identified through studies, usually by career NGO people and young students, and these get passed on as recommendations to donors and then the donors respond with money (but often in open-bidding which means the money may not go back to the same people who identified the problems). The awarded NGO takes its cut then dispense the rest of the aid. A lot of these studies (from the so-called briefcase NGOs especially) can be self-serving and designed to keep NGOs in business; recommending actions that are specifically within the NGO's area of expertise.

And where they don't have the expertise, they very quickly reinvent themselves as if they do. There's quite a remarkable (and while it is a lament, I found it oddly humorous) account by Senegalese entrepreneur Magatte Wade, on the time Jeffrey Sachs' Millenium Villages people came knocking trying to promote their entrepreneurial villages. I encountered a slightly different version of this experience in Uganda, when the European Union announced it was going to disburse $2 million for northern Ugandan reconstruction. The meeting with NGOs was absolutely packed - the small meeting room in the EU office overflowing, and you could practically see the gears grinding away as people worked out ways in which their NGO could apply for such a large cake. Sadly, people in the non-profit sector usually have no experience in the private sector, and thus do not know how to create sustainable, self-perpetuating businesses, because it's quite another skill to look at income-generation, productivity and assessing markets outside the aid model.

Communist bureaucracies worked in similar fashion, appealing to the central government for money based on needs of their region or industry. They constantly had to work for their budgets, reinventing their needs if appeals in one direction failed. In particularly large states, extremely large and inefficient bureaucracies were formed to manage the allocation of resources, halt corruption and monitor operations. When they opened their markets, most of the state industries collapsed instantly, while the ones to survive were primarily in oil and mineral extraction or ex-state monopolies like telecommunications. State bureaucrats didn't know how to segue into the the free markets, yet this is the most crucial factor in getting countries to grow. Can someone who's never been an entrepreneur teach people entrepreneurial skills? Or will they perpetuate themselves through recommendations that keep their niche interventions alive?

The aid industry does not have a state bureaucracy, though it has a hefty amount of paperwork to keep up with. At worst, you get reports of theft and corruption, at best you get a system heavily weighed under by the responsibilities to prevent misuse. The aid industry - which is certainly led mostly by well-intentioned people, is and will be learning the same lessons as the communist bureaucracies did, and it's going to be incredibly tough.

4) Aid removes accountability to the people. Large chunks of any poor country's budget comes from aid, and this distances governments from their people in two ways. Firstly, they don't really have to listen to their people when the majority of their budgets come from elsewhere. Secondly even well-meaning governments are now saddled with a burden of accountability to their donors. While this may seem effective in practice, what happens is really that governments become more and more proficient in creating excuses or fogging the trail of accountability.

And when that fails, and donors try to come knocking, the politics of aid are turned into a weapon for generating nationalistic sentiment against the donors, usually relying on well-worn diatribes about colonialist or racist meddling. And ultimately the non-negotiable boundaries of state sovereignty will never be broached over something as piddling as aid (which often amounts to less than 0.2 or 0.3 percent of a developed nation's budget). In effect, bad governments are simply accountable to no one, and good governments (what few there are) are torn between their people and their donors.

5) Aid upsets national priorities. A recent and timely publication by the Lancet medical journal examined the track record of global health initiatives (GHIs). These GHIs have often been held up as sterling examples of aid practiced correctly, with quantifiable benefits and effective interventions in some of the worst and easily preventable diseases. But the verdict by the Lancet has been less than glowing. In an accompanying editorial:

Some of the most troubling harms include steepening inequalities in health services, reduced quality of services because of pressures to meet targets, decreases in domestic spending on health, misalignment between GHIs and country health needs, distraction of government officials from their overall responsibilities for health...

With several sectors taken care of by these massive initiatives such as HIV/AIDS, tuberculosis and malaria, governments are effectively freed of their responsibility to deal with them. And in nascent democracies largely controlled by coup leaders-turned-democrats, they tend to re-focus their budget, not on other national priorities, but on military and security to maintain their grip on power.

But look at what else the Lancet observes, in the very same sentence:

...the creation of expensive parallel bureaucracies to manage GHIs in countries, the weak accountability of a rapidly expanding GHI-funded non-governmental sector, and increased burdens on already fragile health workforces.

These are the very issues we're talking about here. To effectively control aid distribution and align it with national needs, you need bureaucracy that will continue to grow. The main limiting factor of the aid industry is the very limited resources it is given in which to function. But as you increase the funding, diminishing returns created by the ensuing evaluation, oversight and needs identification grow far in excess of the growth in actual aid.

The question finally, is with all these problems affecting aid, can it be fixed, or should we start thinking about alternatives? In the 1990s, the prevailing sentiment was that aid had been improperly managed and that this could be solved by strengthening accountability. But now with huge unwieldy bureaucratic accountability checks in place, aid has managed to create a new set of costs that may prove to be just as costly as the corruption it replaced.

We know the command economy didn't work. It is time to start thinking of alternatives.

Mediation as a Solution for Disputes

I had the opportunity to attend parts of the Asian Mediation Association Conference that just finished today. Mediation and its close cousin arbitration, while long established in most countries' statutes, are processes of resolving disputes through an independent third party (or parties). In some jurisdictions such as Florida, all lawsuits are required to go through a mediation process before going to trial. Arbitration is binding, whereas mediation may not necessarily be binding, but in order for both parties to agree to a resolution, it must take both sides' interests into account.

This has potentially large benefits for the parties involved - avoiding lengthy, costly civil suits, a commitment to finding a resolution and most importantly, addressing the issues in a non-confrontational manner. Unlike litigation that may be acrimonious and result in irreparable damage in the relations of both parties, mediation "increases access to justice by mitigating the costs and risks involved in litigation and arbitration." The important point is that the parties commit to finding a resolution.

In Singapore, a recent survey showed 81 percent of parties found they had saved costs and 85 percent reported saving time. Most importantly, 93 percent of parties and 98 percent of lawyers said they would recommend the use of mediation for similar situations (data and quote excerpted from the speech by Singapore Minister for Law, Mr K Shanmugam, at the opening of the Conference). Mediation is clearly a growth area even in mature jurisdictions.

In Africa, many courts have notorious backlogs and heavy caseloads - just getting a date in court can take months, and the uncertainty can put heavy burdens on the parties in a zero-sum game. For small businesses, this can be deadly.

My fiancee, a lawyer, related how her clients were amazed at how quickly their cases could be processed under mediation processes. A more tragic incident involved an ethnic dispute in refugee camps that resulted in fatal violence over a marriage between different tribes over a cultural misunderstanding. A lot of these problems could be avoided, and lawyers should not be threatened that mediation will take away from their business - they should work to improving the legal environment that will allow them to demonstrate their value to their clients through a variety of instruments.

It's not just businesses that can make use of mediation. The kind of small-scale conflicts that create instability and leave long memories that may later be used to fuel organised violence may often be well-suited to mediation processes. By choosing acceptable independent third parties who may be better in tune with the cultural nuances of a dispute than the courts, the parties have a chance to own the resolution and work amicably to resolve the disputes before they escalate. Moreover, there is a unique opportunity to strengthen traditional institutions that have been marginalised by formal legal mechanisms.

Strengthening the rule of law isn't just about putting up new legislation, some of which may never be enforced or which becomes notoriously convoluted as it attempts to take into account all possible nuances and cultural difference. Part of strengthening the rule of law also includes providing effective, proven alternatives to accessing justice. When traditional institutions have been marginalised and formal institutions are notoriously inefficient, then parties should look towards processes that are effective and consistent with their cultural backgrounds.

Hopefully, we'll see more of the use of mediation to resolve disputes in Africa.

The Aid Debate

Dambisa Moyo's critique of the aid model in her recent book Dead Aid has generated a timely, if sometimes ill-mannered, debate on the subject of aid, particularly to Africa. Firstly, a disclaimer: I haven't yet read her book in full. But I have read the extensive exchanges that have since emerged by people better qualified than I to speak on the subject. I also happen to disagree with plenty of them, and strongly sympathise with Moyo's position.

You can find an exchange opened by Jeffrey Sachs made at the Huffington Post. Moyo responded as did William Easterly, who was also attacked in Sachs' post. It's blown up across the blogosphere and even mainstream media, and this has generated a healthy debate. A decent overview of a range of opinions on this matter can be found at the Financial Times blog, while one of the best exchanges I've seen was on BBC Hard Talk with the Overseas Development Institute's Alison Evans.

So let's look at Moyo's main argument. She writes:

"What the most vociferous aid proponents never seem to ask themselves is what sort of society is their aid-approach producing?

In their blinkered view of the African continent they are happy to ignore the fact that in the worst case scenario aid continues to feed corruption (never mind fuelling inflation, increasing the debt burden unsustainably, and disenfranchising Africans). Even in the best case scenario, many African governments have nearly abdicated wholesale their responsibility to provide public goods to their citizens; instead, unlike anywhere else in the world, education, healthcare, infrastructure, and even security are handed over to aid-agencies around the world." (source)

It's important to note that she is not aiming her guns at all aid, but certain types. Among those she rules out are emergency humanitarian aid, charity-type work (which she herself is involved in) or small-scale gifts like scholarships. She has been quoted selectively several times with ringing denunciations of aid making Africa poorer, and while superficially she has said those things, I think a charitable explanation demands we examine what she means by that.

She does acknowledge that aid can have positive effects. But the at a systemic, macroeconomic level, it creates distorted priorities that removes accountability from governments away from their people and towards their donors. While donors vehemently insist that there are adequate checks and rigorous oversight to the aid they give, this kind of state-to-state aid has had enormous negative externalities (economics-speak for "bad side effects") that have prevented Africa from growing. Worst still, it crowds out entrepreneurial activity, and this is the most damning insight and least acknowledged problem by her critics, who have rattled off impressive figures as evidence for the efficacy of aid.

I would opt for a more balanced view, and avoid some of Moyo's more radical language, though appreciative of the effect it has had to stir the debate - a timely one that is long overdue. In short, the problem isn't that aid has no beneficial effects, the problem is that its negative externalities outweigh those benefits.

The UNDP's Human Development Report 2003 noted:

"During the 1990s the share of people suffering from extreme income poverty fell from 30% to 23%. But with a growing world population, the number fell by just 123 million--a small fraction of the progress needed to eliminate poverty. And excluding China, the number of extremely poor people actually increased by 28 million. (my emphasis, p.5)"

Further down:

"The number of hungry people fell by nearly 20 million in the 1990s. But excluding China, the number of hungry people increased. (my emphasis, p.6)

The World Bank's World Development Indicators 2003 zoom us in further:

"Progress was far from uniform. The fastest economic growth and the greatest poverty reduction were in East Asia and Pacific, where GDP per capita rose by 75 percent while the share of people in extreme poverty fell from 31 percent to 16 percent. But in Sub-Saharan Africa, where GDP per capita fell by 5 percent, the poverty rate rose from 47 percent in 1990 to 49 percent in 1999, and the number of people living in extreme poverty increased by 74 million." (p.4)

According to the World Bank, total expenditure by governments in East Asia and Pacific went from 13.8 percent of GDP in 1990 to 15 percent in 2000. In Sub-Saharan Africa, total expenditure went from 23.5 percent to 27.6 percent of GDP. Both regions' debt service ratio were similar - 4.7 percent in East Asia and 4.5 percent in Sub-Saharan Africa. In 2001, East Asia and Pacific's Official Development Assistance was $3.90 per person. Sub-Saharan Africa's was $20.6 per person. In gross terms, East Asia received $7.3 billion in 2001, compared to $13 billion for Sub-Saharan Africa. By the end of 2000, China was primed for massive growth which promptly dispensed with any talk about aid for good.

It is this context in which we have to examine the efficacy of aid, and Moyo is rightly fed up with the platitudes regarding aid. The very least question we have to be asking ourselves is: Why is aid delivery in Sub-Saharan Africa not working? (interestingly, on the criticisms regarding aid efficacy, most of Moyo's critics actually agree with her, but they think it can be salvaged) How is it that East Asia was able to spend so much less out of its budgets and with so much less aid, yet get so much better results? And what did China do to lift such enormous numbers out of poverty and hunger? It's not because Asians are harder working, Economics Nobel Laureate Paul Krugman demolished that myth decades ago. And it certainly wasn't from aid.

I'll look at some of the structural inefficiencies of aid in the next post.

Explaining the Financial Crisis and How It Could Work for Africa

I was in Uganda when the global financial crisis hit, and a lot of people asked me to explain what had happened, because they didn't have a clear idea about it, nor how it might affect them. The lessons from the financial crises of the 1990s in Asia, Latin America and Russia are instructive, and since I know the Asian crisis best, I'll use that as a case (and the lessons are directly relevant to the current one).

To explain, we have to look at how the financial system works. I'll offer a very crude analogy but it'll help to explain the picture. Money is sort of like a tray filled with water and ice. But imagine ice, once frozen sinks to the bottom and stays there. Every country has some barriers to money flows (tariffs, physical barriers in moving fixed capital) which you could imagine are partitions in the tray. This protects them in some ways from events elsewhere in the tray, but also, if too high a barrier, from getting more water into its share of the tray.

Now inflation is a bit like pouring more water into the tray and nothing actually productive comes of it, but some people feel richer (and can make money out of it, that is, get more water) because it's unevenly distributed. The tray's water level isn't even either - it's very choppy.

Market liberalisation is a bit like melting that ice, and at the same time, lowering the partitions of the tray. There's very good reasons why companies and banks want those barriers lowered and the ice melted - they want to be able to move their capital more efficiently to where growth areas are. In the 1990s, one of these growth areas were the emerging markets in Asia.

But unfortunately, there's a couple problems - once melted, the ice is very difficult to freeze up again. And secondly, what if everyone thinks there's a growth area where there really isn't? Or what happens when a supposed growth area suddenly collapses under its own weight, possibly because of inflated bubbles in the financial markets? What if there's a terrible leak in one of the partitions?

Immediately, the rational choice for the individual is to get out of that area, and move their money (water) to somewhere safe. So water starts draining out of the bad areas, and hopefully somewhere "safe". The problem is, when there's not enough ice left in that area, the economy can take a much harder hit that drags otherwise viable companies down, even if its fundamentals are doing quite well. That's because all companies need cash flow (liquidity) to operate their business.

This was what happened with the Thai property market in 1997 and the first to pull out were those with the most liquidity. Worse still, it began to spread around the region. When the IMF decided that Indonesia should let its banks fail to learn the hard way according to free market principles, it caused even more panic and even more outflows. This pattern of bank runs was well analysed by Jeffrey Sachs, and he demonstrated how rational choices on an individual level led to what appeared to be all out panic at the macroeconomic level.

Asia learned that lesson the hard way. It needed more ice in its trays. So it increased reserve ratios, some like Malaysia flat out banned currency outflows (a panic-move but fortunately was an emergency measure that they soon relaxed), publicly backed their main banks, instituted deposit insurance schemes, and so on.

The danger with the globalised economy and money moving so freely, is that it can lead to large destabilisation at regional levels - all of the crises of the 1990s repeated this pattern. The US, after a year of toxic assets in the subprime markets, managed only to delay the panic that was to come. When banks as large as Lehman Brothers or Merrill Lynch couldn't hold up from the slow drain (people moving their money out of the US part of the tray, into more promising ones like Asia, and in some opinions, oil futures), all hell broke loose. Regardless of the fundamentals, people were shocked that something as large as the US could be brought to its knees with a liquidity crunch. For all the flak McCain received for stating the fundamentals of the economy were strong, he would have been right if he'd said it a month earlier. The US economy was merely facing a liquidity crunch but it desperately needed to be halted before it brought down other industries (unfortunately, panic does travel astoundingly fast, thanks to the rational decisions of individuals on a global scale).

The question now is: what level of ice and water should there be? And what about the partitions in the tray? It would be foolish to erect them back to 1960s or even 1980s eras. After all, despite the financial crises of the 1990s, most of the emerging markets (East Asia, Brazil, Argentina) were all back on track as early as 2001-2 because it was fundamentally a cash flow crisis, even if it did destroy some companies, industries and banks later on. It was not a problem with their fundamentals.

Now the US has to deal with this question, and there's been a lot of solutions proposed. The bailout has been criticised rightly for throwing money away too eagerly and carelessly, but the idea of the bailout is sound - massive inflows were needed. The question now is how to regulate money flows effectively on the world markets such that it isn't susceptible to these sorts of tidal waves, the likes of which we will not see the end of in the 21st century.

So inflation played a part but really isn't the whole picture. More importantly, a global financial regulatory system needs to be set up that ensures money can still flow, but with a view of preventing uncertainty, making sure people have better ideas of what are real growth areas and what are bubbles (i.e. much more transparent financial systems). Lots of important suggestions have been made.

One is the total reform of mark-to-market accounting that judges assets and prospects based on fickle market values. Another is the increase in reserve ratios. A third is to have some banks that will be able to maintain consumer confidence regardless of the magnitude of the crisis - if the markets can't achieve that, can governments? A fourth is to control hedge funds (the kind of ultra-liquid money that deregulation in the 1980s and 1990s allowed to boom into such profitable yet potentially destructive forces).

But this has to be balanced because some liquidity is needed, and you don't want to introduce too many "sunk costs" for prospective investors and companies that might want to set up shop in your neighbourhood.

Tariffs on money flows? Bad idea. Protectionist moves? Bad idea. Nationalisation of every industry that fails (unfortunately massive job-losses are bad for politicians so these get far more importance than they deserve)? Not a great idea, but if you have to do it, do it right - set timelines of how soon you're going to get it running profitably again. Transparent accounting with very tough standards? Good idea. Dollar stability? Good idea. Increased deposit insurance protection? Good idea. Global currency? I just don't think we're ready for it.

African economies were largely insulated from the crisis, because they haven't been so closely integrated in the global economy. How can this be turned into an opportunity for Africa? Many African economies are growing at rates, despite the crisis, well in line with emerging markets. There's a hunt at the moment for relatively safe places to invest, and if African governments can make their business environments more conducive for risk-taking by demonstrating the stability of their economies and prospects for growth, then there are plenty of opportunities to be found in Africa. In the wake of the Asian financial crisis, China and India seized the moment to rouse from their slumber. Could it be Africa's turn?

Asian commentary on Africa

I've started this blog because there's surprisingly little commentary on Asian interaction with Africa, especially from an Asian perspective.

I believe Africa is poised to become the next emerging market, and Asians, particularly China and India, are beginning to see the opportunities for growth in the continent. But there is a lot of uncertainty and ignorance on either side of the divide. Much of the analysis comes from Western perspectives, or are buried in arcane academic discourse - this blog aims to be a small part in bridging this gap.

In the near future, I will take a stab at the recent debate generated by Dambisa Moyo's book, Dead Aid, particularly from an Asian point of view. I also hope to discuss some of the growing debate about growth opportunities, the thinking behind Asian investment and growth models, and how these might work in Africa.

I was born and raised in West Africa, though spent later years in Singapore, tertiary education in the UK, and have now worked professionally in East Africa and Singapore, where I reside. I've worked in both profit and non-profit sectors, and believe both sides have much to learn from each other, which I hope will become apparent in later posts and discussions.

Thanks for reading. Questions are very welcome!