Kitaru Ueda, ARUN Partner
This book is strong medicine.
The author is a Zambia-born female economist who holds a PhD from Oxford University and a Master’s degree from Harvard University. She has worked at the World Bank for 2 years and at Goldman Sachs for 8 years. She clearly asserts that foreign aid has encouraged corruption, brought people to poverty, and hindered the economic growth of Africa.
(…) Whether you agree or disagree with the author’s argument, this book can be recommended for those who want to learn quickly what the debate about foreign aid in The United States and Europe is.
Dead Aid: Why Aid is Not Working and How There is a Better Way for Africa by Dambisa Moyo（Toyo Keizai, Inc.）
Having started by quoting from the book description by Amazon, I didn’t necessarily think that the book was “strong medicine” as described here. I rather felt the author’s argument on the importance of investment about foreign aid was quite legitimate in view of the example of China, where investment fueled the country’s economy after its economic deregulation, and helped hundreds of millions of people out of absolute poverty.
I find that the author’s claim in this book is in accord with the concept of social investment that ARUN represents. ARUN supports entrepreneurs who want to start businesses having a significant social impact in developing countries by helping these businesses grow through “investment,” not through “charity.” Furthermore, ARUN works hard to help solve the social problems of those countries. I think the reasons such social investments have a great impact is that it will stimulate a sense of responsibility and motivation in local entrepreneurs due to their obligation to repay, helping them grow, in addition to the beneficial cycle in which invested money is returned and becomes available for reinvestment.
According to the author, on the other hand, grant aid that doesn’t have to be repaid or super long- and low-interest finance (for example, loans from the World Bank or the ODA of JICA) have a harmful effect on the economic growth of developing countries. She strongly criticizes foreign aid by saying:
“With aid’s help, corruption fosters corruption, nations quickly descend into a vicious cycle of aid. Foreign aid props up corrupt government –providing them with freely usable cash. These corrupt governments interfere with the rule of law, the establishment of transparent civil institutions and the protection of civil liberties, making both domestic and foreign investment in poor countries unattractive. Greater opacity and fewer investments reduce economic growth, which leads to fewer job opportunities and increasing poverty levels. In response to growing poverty, donors give more aid, which continues the downward spiral of poverty.”
If countries are eligible to be financed for free by developed countries only because they are developing countries, it is quite understandable that leaders don’t only lose their motivation to increase domestic tax revenue and attract direct investment from foreign investors, but also become more tempted to benefit only themselves from such aid.
The author offers the following four alternative sources of funding for African economies:
1. To access the international bond markets
2. To accept large-scale direct investment in infrastructure by China
3. To press for free trade in the world’s agricultural products so as to enable African countries to increase their earnings from primary product exports
4. To encourage financial intermediation so as to enable the poor to borrow and emigrants to send remittances back home
The author discusses microfinance as an example of #4. With low credit losses and higher loan rates compared to financing large companies, microfinance is a business which provides sufficient profit and thus has expanded in the world. While it is effective, personal businesses that microfinance works for are less likely to generate innovation and large-scale employment.
On the other hand, in developing countries where there aren’t many large companies like those in Japan, it seems that small and medium enterprises (SME) are the driving force of economic growth and provide most of the country’s employment. However, local banks in developing countries finance only some credit-worthy borrowers (large companies) and are often reluctant to lend money to SMEs without collateral, in spite of their being well-managed, for reasons of such as capital shortages. In short, SMEs in developing countries are in very harsh financial circumstances. They are in the space between personal businesses with whom microfinance works and large companies with whom banking institutions work.
I believe that ARUN should play a role to meet the needs of these SMEs.
This book doesn’t devote many pages to discussing social investment and SME finance. However, I found the book is still worth reading for us to become aware that social investment and the SME finance that ARUN is pursuing, along with micro-financing, are having a remarkable impact on economic development in developing countries.