Population: 30 million. Average life expectancy: forty years (down from sixty-five in the past twenty years, mainly because of the HIV–AIDS epidemic; in its cities, one in three adults have the disease). Annual per capita income: US$300, with 70 per cent of its population living on below US$1 a day. Average growth rate in the past twenty years was 1 per cent and 5 per cent in the last five years: has benefited from a recent copper price surge. Chief exports: copper, gold, cotton and sugar. Political system: adopted a nominal democracy ten years ago, having spent twenty years as a one-party state led by the same political party, and the same president.
This is the Republic of Dongo. While fictitious, the Republic of Dongo is not far off the reality of many African countries. Freed from European colonial rule in the 1960s, the country’s background and evolution are pretty characteristic of the average African country. A socialist economy in the 1970s, it underwent privatization in the mid-1980s, moved to a democratic regime after Glasnost and Perestroika,1 and is ranked 3 out of a possible 10 on the Transparency International Corruption Perceptions Index (where 0 is the least transparent). In the 1980s the country had accrued as much as US$3 billion of debt – twice as much as the country’s annual GDP, and more than three times its combined education and health budgets. Dongo benefited from debt relief in the early part of the 2000s, which left minimal debt. Yet the country remains the beneficiary of millions of dollars of aid each year. Aid share of GDP: 10 per cent. Aid as a percentage of government revenues: 75 per cent.
Like Nigeria and Malawi, Dongo was granted its independence in the 1960s. Like Uganda and Botswana, it is struggling under the weight of HIV–AIDS. Like Zambia, Mali, Benin and the Democratic Republic of Congo, Dongo relies on commodities (mineral and agricultural) as a primary source of export revenue (by comparison, 60 per cent of Zambia’s export revenues come from copper, and over 95 per cent of Nigeria’s export earnings are from oil and gas). Although not as extreme as the Gambia or Ethiopia, where 97 per cent of the government budget is attributed to foreign aid, Dongo’s fiscal revenue is mainly aid-dependent. Like Kenya, it has in place a fragile democracy, which under the confluence of exogenous factors is susceptible to political destabilization. And like the majority of African (and indeed most developing) countries, its population is skewed towards the young: 50 per cent of its citizens are below the age of fifteen. Faced with few obvious prospects, Dongo, like so many of its neighbours, is intensely vulnerable: a breeding ground for disaffection, unrest and civil war.
Where will its young men and women be in twenty years’ time? If a country can’t produce the next generation of well-educated civil servants, politicians, economists and intellectuals, then how can it not regress? Will Dongo have changed, or will it still be locked in a cycle of disappointment and despair?
This book is not about specific development policy. It is not a book about whether one way of tackling the HIV–AIDS problem is better than another, or if one education strategy yields better results than another. It is about how to finance the development agenda so that, whatever the development policy, economic prosperity might be realized. Dongo will only change if its fundamental model of aid-dependency is abandoned and the Dead Aid proposal of this book adopted wholesale, in its entirety.
The choice of development finance is at least as important as the policies a government adopts. You can have the best development policy in the world, but without the right financial tools to implement it, the agenda is rendered impotent. Put differently, it matters little whether Dongo is capitalist or socialist in development orientation – of paramount importance is how Dongo finances its economic development. Indeed, neither a capitalist nor a socialist economic agenda can be truly achieved in the longer term without a financing strategy based on free-market tools.
Implicit in the proposals that follow are financing solutions that have their roots in the free-market system. This invites the question: is it possible for a government to raise money in a free-market way and spend it on a socialist agenda (for example, provide free education and healthcare)? The answer is yes: Sweden, Denmark and Norway are just three examples. Whatever the social, political and economic ideology a country chooses, there is a menu of financial alternatives (all better than aid) that can finance its agenda.
Can a government use free-market tools and still maintain its core socialist values? The answer is not only yes, it can, but, perhaps more importantly, it has to. And even when a government finances itself using socialist-like tools (for example, high taxes), it must still rely on some market-based financing tools in order to successfully achieve its economic goals.