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David Roodman's Microfinance Open Book Blog


Dambisa Moyo. Photo: Helen Jones PhotographyZambian-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, 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? 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.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.