Aid dependence and the challenge of self-reliance in Sub

Lia Quartapelle
N. 183 - APRIL 2010
Aid dependence and the challenge
of self-reliance in Sub-Saharan Africa
The past few years have seen
many claims suggesting that
Sub-Saharan Africa may finally be on the way to selfreliance. As President Barack
Obama graphically suggested
on his first state visit to an African nation, Ghana, on 11th July
2009, «Africa’s future is up to
Africans». In 2008 the authoritative weekly The Eco-nomist suggested that «despite its manifold
and persistent problems of lousy
governments and erratic climates, Africa has a chance of
rising» 1 . The interest shown in
the continent by emerging economic giants such as China and
India is certainly connected with
the new market opportunities
opening up in Africa. This is
another sign of the fact that
Africa is being perceived as an
interesting land of promises.
The quest for self-reliance,
however, clashes with the
ever-increasing commitments
for more and better aid that
donor countries make at every
international summit. Does Africa need more aid? And if so,
why, given the promising economic trends that the continent
is registering? Not only are donors ready to give more, they
are attempting to give better aid.
The adoption of innovative aid
instruments however, while
intended to increase country
ownership of development poli1
«The Economist», There is Hope,
October 8, 2008.
cies, also brings the risk of donors interfering with recipient
country’s decisions.
This Policy Brief will take a
closer look at the issue of aid
dependence by considering two
issues. The analysis will attempt
to assess quantitatively whether,
given its recent economic advances, Sub-Saharan Africa is
less reliant on official development assistance as a source of
capital. We shall then consider
whether the new aid architecture, namely aid struc-tured in
order to increase ownership
and policy space for the beneficiary country, increases or
rather decreases the SubSaharan countries’ dependence
on aid. The Brief concludes
with some policy options that
take into account the issue of
self-reliance when considering
the dilemma of choosing better
ways to deliver aid. The issue is
particularly significant given the
fact that the commitments
taken by donors in the Paris
Declaration on Aid Effectiveness are due to be implemented by 2010.
Abstract
High growth rates and
a renewed importance of
African resources suggest that
Sub-Saharan Africa might be
finally on the way towards
self-reliance.
The Policy Brief analyzes
whether the new economic
trends support the claim that
aid dependency is decreasing
in Sub-Saharan Africa and
whether new aid modalities,
such as budget support, are
reducing de facto dependency.
Economic progress, aid
commitments and the
financial crisis
To most observers it seems that
in the last ten years Africa has
managed to emerge from the
dire economic conditions
caused by ill-management, ideological policies, the consequences
Lia Quartapelle is research assistant of
the Africa Programme at ISPI
2
of decolonization and structural
adjustment programmes. This
means that Sub-Saharan Africa
has registered high growth
rates since the mid 2000s
(around 5% per year in the continent overall, with hikes of
above 8% GDP growth per
annum in 2008 in countries such
as Angola, Ethiopia, Mozambique
and Sudan 2 ).
The other good news is that the
global economic crisis has hit
Africa relatively less than other
areas of the world. In fact, according to the OECD African
Economic Outlook 3 , real growth
rates in Sub-Saharan Africa
have halved between 2008 and
2009, going from a forecast of
6% GDP growth per year to 3%
in 2009. At the same time, comparing the decrease in growth
experienced by African countries with that in OECD countries
(the latter moved from a 1%
growth rate in 2008 to the expected -4% in 2009), it is clear
that Africa’s economic situation
is rosier than that of other regions. This is all the more remarkable if one considers that
the economic conditions of SubSaharan Africa are worse, on
average.
The two variables affecting Africa’s ability to address the effects of the crisis are vulnerability, that «depends on how exposed countries are to adverse
changes in global finance and
trade» and resilience, that «refers to the capacity to cope with
4
shocks» . African countries
appear to be less vulnerable
and more resilient than ten
years ago: they have developed
2
World Bank, The Little Data Book
on Africa, Washington 2009.
3
OECD, African Economic Outlook, Paris 2009.
4
A. KWASI - W. NAUDÉ, Policy
Response to the Global Economic
Crisis in Africa, Policy Brief, 3,
Helsinki 2009.
ISPI - Policy Brief
sounder public financial management, and increased their capacity to attract external flows of
funds (not only aid) and diversify
their exports and domestic production as far as possible.
The global financial crisis has
increased African demands to
deliver on aid commitments 5
and to further increase available funding. There is a risk of
Africa becoming the long-term
victim of the crisis, as although it
did not benefit at all from the
financial products that generated
the crisis, Africa now risks bearing the heaviest burden in terms
of a sharp reduction in external
(private and public) resources.
These concerns have therefore
motivated Africa’s increasingly
vocal requests for the upholding
of aid commitments. Once more,
and despite progress, Africa’s
fate – be it in terms of economic
progress or in some cases mere
survival – apparently still depends more on the benevolence and solidarity of outsiders than on endogenous
policies.
A new aid architecture:
for better or for worse
The debate on aid effectiveness
in the 90s produced new aid
modalities, such as common
funds and general budget support, intended as a way to increase selectivity for aid giving.
These forms of aid ensured that
only evaluation of the “good per5
The African Union Commission
has asked for the creation of a
stimulus package for African demand, the recapitalisation of the
African Development Bank and
delivery of the commitments taken
by international donors in Monterrey
and Gleneagles, African Union
Commission, The Impact of the
Current Global Financial and Economic Crisis on African Economies
and Africa’s Common Position on
Reforms of the International Financial System, Addis Ababa 2009.
formance” of the recipient country
would trigger the decision to grant
aid. Donors, in fact, would select
as beneficiaries only those
countries with a proven record
of reforms and virtuous behaviour in the economic management and poverty reduction.
Since those countries with a
proven record of sound fiscal
management, such as Ghana,
Tanzania and Rwanda, have
been rewarded with substantial
amounts of aid via common funds
and general budget support in the
past ten years, it can be stated
that these forms of aid may have
contributed indirectly to the positive economic performance of the
continent as a whole.
Nominally, the ultimate goal of
these forms of aid should be
their abolition: since international funds are granted upon the
adoption of policies that should
help growth, at a certain stage
aid flows should become superfluous as growth will assure that
the country has acquired internal
sources of capital to finance
productive investments. These
forms of aid do, however, raise
some doubts regarding their
contribution to augmenting Africa’s self-reliance.
First of all, it seems that the
introduction of new aid modalities has increased the
flows available to a limited
number of countries, especially
in Sub-Saharan Africa. Those
countries that happen to be
“donors’ darlings” have registered
a substantial increase in avail6
able resources after the intro6
The Joint Evaluation of General
Budget Support, London 2006,
which is to date the most comprehensive study on general budget
support, carried out by a study
team coordinated by Stephen
Lister, has calculated that between
1998 and 2004 almost 4 billion
dollars went to the sample of seven
countries considered in the study.
3
ISPI - Policy Brief
duction of new aid modalities.
This is connected with a combination of two facts: on the one
hand external donors are being
pressured to give more aid, and
on the other hand these forms
of aid allow steep increases in
disbursements. In fact, disbursements via budget support
and common funds keep personnel and imple-mentation
costs unvaried with respect to
the amount of money disbursed.
Secondly, as these new aid
modalities are directed at the
recipient’s coffers, there is a
risk of their having negative
macro-economic effects es7
pecially on revenue collection
and monetary policy.
Finally, budget support and
sector support strengthen the
relationship between donors
and recipients, weakening in
contrast the accountability of a
government and its constituencies. Many observers
have opposed the extensive
employment of these forms of
aid on the grounds that they
affect a country’s independence,
its sovereignty pact with its citi8
zens and its policy space .
The map below shows that
general budget support, the
most innovative of the new aid
modalities, is used extensively in
Sub-Saharan Africa as a devel-
90% of this amount was concentrated
in the last four years covered by
the study, and seems to complement rather than substitute the
resources devoted to projects.
7
M. MCGILLIVRAY, Aid, Economic
Reform, and Public Sector Fiscal
Behavior in Developing Countries,
in «Review of Development Economics», 13, 3, 2009, pp. 526-542.
8
On the distorted link between aid
and politics, see the dialogue between Richard Dowden and Dambisa Moyo, in D. JOHNSON, A
Trillion Dollar Wasted?, in «Standpoint», March 2009, pp. 27-31.
opment cooperation tool. In
2006 the majority of African
countries employed funds disbursed via this aid modality; this
was fast adoption of an aid modality that was inexistent only
eight years earlier. It should be
noted that in countries like Mozambique 9 , donors directly support almost half of total government expenditure.
The relevance of aid for national income creation has
increased since the beginning
of the decade, even though
these countries can increasingly
rely on their own resources,
thanks to the economic growth
spurt experienced by a number
of African countries as well as
other factors. The effects of the
economic crisis, that have affected the realm of wealth genFigure 1: Countries receiving general
eration more than aid flows so
budget support from DAC donors in 2006
far, will possibly imply an increase in the ODA/GNI ratio.
Moreover, the latest analyses of
the last decade of economic
development in Sub-Saharan
Africa suggest that aid may
have played an important part in
the surge in economic growth
rates.
Source: World Bank, African Development Indicators, 2009.
African self-reliance
reconsidered:
how relevant is aid?
The discourse on self-reliance
has understandably downplayed
the role that aid still performs
in most African economies.
As it can be seen from Figure 2,
aid (Overseas Development Assistance or ODA) still represents
on average over 10% of GNI
(Gross National Income) in those
African countries where data are
available. The period chosen
(2000-2007) considers the years
when the new aid architecture
had become fully operational. It
should be added that 2003 was
an exception, in that unprecedented levels of debt relief
were registered that year.
In Sub-Saharan Africa aid is
an important source of foreign exchange to be used to
“close the gap” between
investments and savings, revenues and government expenditure, as Table 1 shows. This
suggests that African countries
are still very dependent on aid
not only for their investment but
also for their government
spending.
Remittances are often contrasted with aid as they are a
source of capital that is deemed
to be more self-reliant. However, Table 2 shows that aid
per capita is higher than remittances per capita in the 36
African countries where data
are available. Overall, one cannot under-estimate the persisting im-portance of aid as a
source of capital for African
countries, despite the fact that
Africa has grown considerably
in the last ten years.
Aid flows and new aid
architecture: who gains?
9
Mozambique is the only country
in Sub-Saharan Africa where Italy
experiments with budget support.
This persistent aid dependence
must be weighed against the
efforts of the international aid
4
ISPI - Policy Brief
Figure 2: Average ODA as a percentage of GNI in 37 Sub-Saharan African countries between 2000 and 2007
18
16
14
ODAas %of GNI
12
10
8
6
4
2
0
YR2000
YR2001
YR2002
YR2003
YR2004
YR2005
YR2006
YR2007
Source: World Bank, World Development Indicators, 2009. Author’s elaboration.
Table 1: Economic variables as a percentage of GDP in 37 Sub-Saharan African countries between 1997 and 2008
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Investments as % of GDP
17.8
19.4
18.8
17.6
18.6
19.8
19.3
19.9
19.9
21.1
22.0
22.2
Domestic saving as %
of GDP
17.3
15.7
16.5
21.6
19.8
19.0
19.3
21.3
22.8
25.5
24.5
25.0
Revenue as % of GDP
19.9
19.5
20.8
22.9
22.3
21.2
20.9
22.3
24.1
24.8
24.1
25.1
Government expenditure
as % of GDP
24.5
24.7
25.5
24.9
25.9
23.8
24.6
23.5
23.4
23.1
24.2
24.8
Source: International Monetary Fund, IMF Data Mapper, 2010. Author’s elaboration.
Table 2: ODA per capita and remittances per capita in 36 Sub-Saharan African countries between 2000 and 2006
ODA per capita
Remittances
per capita
2000
2001
2002
2003
2004
2005
2006
18.27
21.17
24.52
25.08
30.38
40.67
50.79
8.40
8.97
8.69
10.00
13.02
14.92
19.56
Source: World Bank, World Development Indicators, 2009. Author’s elaboration.
community to innovate aid
modalities in order to increase
ownership and effectiveness.
As stated above, since the Paris
Declaration 10 international donors and recipient governments
have started experimenting with
aid modalities that would on the
one hand ensure ownership
over national policies and on the
other a closer scrutiny of the
overall performance of recipients in terms of poverty reduction. Budget support and com10
OECD, Paris Declaration on Aid
Effectiveness, Paris 2005.
mon funds for sectoral policies are increasingly employed
by most donors, while projects
are being reduced.
The EU is leading efforts
amongst its members to implement a code of conduct for the
division of labour. Donors are
relying increasingly on peer
review initiatives. The latest G8
summit produced a first set of
recommendations for policy
coherence for development.
Comprehensive judgement of
the mixed record of these initiatives is beyond the scope of this
paper. However, there are wor-
rying signs in terms of the intrusiveness of these new aid
modalities. In fact, new initiatives for aid effectiveness are
strengthening
cohesion
amongst donors. Generally
speaking, donors tend to relate
to the recipient government as a
united front, strengthening their
negotiating power as a lobby.
Common funds and budget
support, moreover, leave recipient governments more exposed
to the risk of an “atomic option”. In fact, in the event of
underperformance or non compliance with donors’ requests,
5
ISPI - Policy Brief
the recipient govern-ment runs
the risk that its funding will be
suspended. When a project is
suspended the implementation of
its actions is stopped. When
disbursements from budget support or a common fund are withheld, the overall funding of government policies is suspended.
In these cases donors are in
control of more powerful leverage. In the words of Raquel C.
Alvarez, «to date, budget support
has been fashioned to be influen11
tial rather than effective» .
The fact that donors provide
money in common baskets on the
implementation of certain policies
reduces the policy space of the
recipients. A brief analysis of the
Policy Reductions Strategy Papers – the main document that
grants access to debt relief initiatives and other forms of direct
support – of most Sub-Saharan
African countries, suggests that
policy measures adopted by
beneficiary govern-ments closely
mirror the prescrip-tions of the
Washington
and
postWashington consensus. These
facts add to concerns that SubSaharan Africa is still heavily
reliant on aid and that new aid
granting mechanisms are increasing Africa’s de-pendence on aid.
Policy options
The Paris Declaration, signed in
2005 and the subsequent Accra
Agenda for Action oblige their
signatories to disburse half their
aid via new aid modalities by
2010. This year, therefore,
should mark an important turning
point in the ways aid is disbursed. Most donors, excluding
Italy, have made a great effort in
order to implement new modalities that would ensure an amelioration of the quality of aid. More11
R. ALVAREZ, The rise of budget
support in European development
cooperation: a false panacea,
Policy Brief, 31, Fride.
over, international donors have
signed many commit-ments 12 in
order to increase aid to Africa by
2015. Thus, it is important to
sketch out some criteria that will
ensure that more and better aid
does not hinder Africa’s efforts towards self-reliance:
9 a consistent part of aid should
be destined to growth-enhancing initiatives and initiatives aimed at strengthening the private sector,
in order to ensure that aid
sustains national growth. This
should reduce aid dependency
in the long run;
9 consider moving from performance-based to cash-ondelivery aid in order to increase the ownership of policies and the seeking of alternative solutions;
9 decisions on the amount to be
disbursed via budget support
and common funds should be
made taking into account government capacity to mobilize
internal resources and collect revenues, as well as
other factors;
9 decisions on aid disbursement
and on the way aid should be
employed should not be taken
only by donors and the recipient Government; the discussion should involve associations, trade unions, local authorities and other national
stakeholders.
9 The European Union and
other leading donors should
consider implementing these
measures in order to deepen
their efforts at making aid
more effective and in order to
go beyond the principles contained in the Paris Declaration
on Aid Effectiveness.
12
The Commission for Africa in
2005 recommended the doubling of
aid to Africa by 2010, and a further
doubling by 2015. Each G8 meeting
since the 2001 meeting in Genoa
has vowed to increase debt relief
and aid to the African continent.
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