The Anti-Bono: microfinance is not aid

February 22, 2009

Zambian-born economist Dambisa Moyo has a new book coming out called Dead Aid. In the lead-up to the launch, she is doing interviews with outlets such as the New York Times and Financial Times. She appears to make an old and serious argument, going back at least to P.T. Bauer‘s 1971 Dissent on Development, that foreign aid does harm by reducing the accountability of government to the governed. The potential harm is especially great in Africa, where many states get large percentages of their budgets from aid. (For a couple of CGD works on this theme see Moss, Pettersson, and van de Walle’s Aid-Institutions Paradox and Birdsall’s Do No Harm.)

In case you hadn’t noticed, one thing that distinguishes Moyo from Bono, Geldof, Sachs, and Easterly is that she is not a white guy. She is African. So she is powerfully positioned to shoulder her way into that constellation of figures, each of whom has to some extent gained fame by becoming a caricature of an extreme position in the grand debate over whether aid “works.” (OK, some of those guys also wrote some good songs.)

Unclear to me is whether it is her goal to join them or forge a more nuanced image. Her NYT interview did raise my eyebrows. I would hate to have my comments to reporters taken too literally, so I will try not to do that to her, and await the book before judging statements like these:

What do you think has held back Africans?
I believe it’s largely aid. You get the corruption—historically, leaders have stolen the money without penalty—and you get the dependency, which kills entrepreneurship. You also disenfranchise African citizens, because the government is beholden to foreign donors and not accountable to its people.

If people want to help out, what do you think they should do with their money if not make donations?
Microfinance. Give people jobs.

But what if you just want to donate, say, $25?
Go to the Internet and type in Kiva.org, where you can make a loan to an African entrepreneur.

If you’ll forgive a little math geekiness, this yields a system of two equations :

(1) Aid ≠ Microfinance
(2) Microfinance = Jobs

As for equation (1): In fact, a lot of foreign aid, as grants and loans, has supported microfinance in Africa and elsewhere. That includes (in my mind) a lot of official-agency investment, which occurs on below-commercial terms, accepting low returns for the perceived risk, and so contains a subsidy element. So is this good aid? If so, what distinguishes it from bad aid? Is aid for microfinance, just by virtue of being for microfinance, better than aid for education or health or roads? Or is the key that the microfinance support she likes goes around the government? Or that microfinance charges for what it provides? …in which case would education and health and road-building aid be equally meritorious if they did the same?

As for equation (2), I am aware of no credible evidence that microfinance creates jobs, on average. Of course it has in some cases, but we don’t know how representative they are, nor how many jobs are destroyed at enterprises out-competed by micro-financed ones. To the extent that borrowers use microfinance for microenterprise, as opposed to, say, paying school fees, they tend to invest it in small, self-employing ventures—corner stores, vegetable trade—that do not hire. That’s not to knock Kiva or suggest that financial services are useless to the poor.

I look forward to reading her book, where perhaps she recognizes these complexities.

Also perhaps of interest is a reply to her book from Jamie Drummond, a close associate of Bono and co-founder with him of the One campaign.

You can skip to the end and leave a response. Pinging is currently not allowed.

Tweet  

1. Ronan Reodica Says:
   February 25th, 2009 at 5:12 am

   I look forward to the US release of Ms. Moyo’s book so that I can get a more accurate picture of her views on foreign aid, rather than snippets from the NY Times.

   Due to the current global economic crisis, foreign aid is under more scrutiny than ever. Donor countries have a right to know that their money is going toward projects that positively impact the people of the receiving countries, and not lining the pockets of corrupt government officials and their cronies. Ending foreign aid altogether sounds too simplistic. Governments play a necessary role in providing infrastructure, building schools and hospitals, and encouraging economic activity. Additional conditions should be placed on foreign aid, whether it be requiring submission of written action plans detailing how aid will be spent (similar to grant proposals) or allowing donor country representatives the opportunity to observe how the money is being used and analyze the social impact. Coming from a family with roots in the developing world, the most effective foreign aid I have seen is through remittances and direct shipment of goods to friends and relatives. Through letters, phone calls, or e-mails, individuals with family living in developing countries have direct knowledge as to how their “foreign aid” is being used.

   I am also a Kiva lender and a relative novice in the subject of microfinance. I agree with your assessment that microfinance does not equate to jobs. The majority of my loans through Kiva have been to solo enterprises that will need successive loans in order sustain them throughout their lifetime. I have come across few entrepreneurs that want to expand their businesses to the point of creating employment opportunities and becoming eligible to participate in traditional commercial credit markets.

2. John Says:
   February 26th, 2009 at 8:04 am

   I’m not certain that microfinance in and of itself creates jobs, but broader financial sector development certainly does. When firms have access to credit for expansion, they can create more jobs. Most microentrepreneurs are in business b/c they have to be, not out of any great desire, and would probably prefer a more stable income from a salaried position – a luxury that many of us in the developed world enjoy.

   What has been missing for household-level finance in many countries is better access to safe savings. Accessible, affordable savings accounts allow families to build assets, self-insure against risks and manage the highly variable incomes that are the hallmark of many poor households

3. Arvind Nair Says:
   February 26th, 2009 at 6:21 pm

   I went to Dambisa Moyo’s talk and book signing today at Oxford, and I thought I would pass along some of my impressions/thoughts as it might be of interest.

   She mentioned microfinance as part of four “alternatives” to aid that an African country can pursue, so it was a pretty central part of her thesis. She also mentioned kiva.org in particular, and said that that was pretty much the only way, apart from pressuring their own governments to cut the aid budget, that citizens in developed countries could help. Her prescription for alternative courses of action for African countries include increasing borrowing in international capital markets by getting a bond rating (!) and to stop borrowing from the World Bank, specializing in their comparative advantage by exporting primary products to China (she had a whole part about how African countries should stop wasting time in WTO negotiations to pressure western governments to cut tariffs and instead focus on selling goods and even land to China, which seemed a bit simplistic), and finally, to increase their tax base.

   My own two cents in reading the book is that it is a bit simplistic in its approach, with not much reference to evidence, but it can get a lot of traction during the current economic climate because it basically says that cutting aid will help Africa.

4. Colored Opinions Says:
   February 27th, 2009 at 2:45 am

   Three years ago Shanda Tonme wrote an article which was published in the New York Times titled “All Rock, No Action”. In that article he pointed to Africa’s main problem, lack of democratic development. I am not sure microfinance addresses that problem in a satisfactory way, allthough I am aware that many in the west are jumping on that bandwagon.