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From Africa Recovery, Vol.13#2-3 (September 1999), page 28 (part of special feature on ECA conference)
Making aid more effective
Good policies and ownership are key, say ECA studies
By Ernest Harsch
Aid can be an effective tool for Africa's development only if governments are pursuing good economic policies, concludes an issues paper produced by the UN Economic Commission for Africa (ECA) and presented for discussion to the conference of African finance ministers. But those policies will be sound only if donor institutions make it possible for Africans to formulate and decide the policies themselves, that is, to "own" them, stresses the paper, "Official Development Assistance to Africa: Challenges, Opportunities and Outlook." Noting that donors have taken "an ever increasing and intrusive role in decisions regarding public expenditure" through tying aid to policy conditionalities, the ECA argues forcefully that "spending authority, control and accountability" be returned to African countries.
The debate over aid effectiveness has been spurred to some extent by declining donor assistance. Figures released by the major donor countries' Development Assistance Committee indicate that Africa's overall receipts of official development assistance (ODA) fell from $23.5 bn in 1994 to $18.7 bn in 1997.
While critical of the way aid has been disbursed and utilized, the ECA issues paper -- and several accompanying studies by outside experts -- views this overall downturn as basically harmful. They make a strong case for aid's continued necessity, provided it is well targeted and managed. "Indeed," argues Mr. Paul Collier, of Oxford University, "current African experience suggests that far from having become less important, aid is now more valuable than ever."
Over recent decades, notes the ECA paper, aid has established a poor record in Africa. The causes vary, including, "the lack of recipient ownership," ineffective aid management, "the prevalence of donor-driven programmes," poor aid coordination, poor policies, and "a shortage of resources for recurrent operations and maintenance."
On the latter point, observes the ECA, "the reluctance of donors to support recurrent costs led to a dramatic decrease in civil-service salaries in real terms, thereby resulting in increased corruption and a paring down of the functions of the state as demanded by donors." This in turn contributed to weakening African state capacities to collect revenue, thereby making them even more dependent on external aid.
Often, says the ECA, donors have tended to confuse "bad aid" with "aid dependence," leading to a view among some circles in donor countries that Africa might be better off receiving less aid.
In some respects, argues Mr. Ibrahim A. Elbadawi, an analyst with the Nairobi-based African Economic Research Consortium, excessively large and poorly managed aid flows may indeed be economically harmful. He argues in his paper, "External Aid: Help or Hindrance to Export Orientation in Africa," that high aid dependence in low-income sub-Saharan countries contributes to over-valued currencies, thereby undercutting the international competitiveness of their exports.
However, Mr. Elbadawi adds, aid dependence cannot be ended overnight, nor can ODA simply be replaced by private inflows. For an interim period, "substantial aid flows" would help African countries "manage an orderly transition to less aid dependence" in a way that does not undermine their export competitiveness.
One factor in the perceived ineffectiveness of aid to Africa is that donors often expect results that aid alone cannot deliver, note two analysts from the Development Research Group at the World Bank, Mr. David Dollar and Mr. William Easterly.
In their discussion paper, "The Search for the Key: Aid, Investment, and Policies in Africa," they examine the long-established "dogma" among donors that aid can help bridge poor countries' financing "gap," thereby increasing public investment levels and stimulating growth. In an analysis of 34 African countries over 1965-95, they find little link between aid and investment, however. In a separate comparison, they also find no clear evidence that higher investment levels actually bring higher economic growth.
The missing variable, they argue, is the presence of policies that promote both physical and human capital formation over the long-term, a key factor underlying East Asia's rapid economic growth. Realizing this, donor institutions have shifted toward a greater reliance on aid conditionality, to induce African governments to adopt good policies. So, Mr. Dollar and Mr. Easterly ask, "did aid-induced policy reform turn out to be the key to unlock Africa's growth potential?"
Their answer is mixed. In some cases, aid helped "reformers" in Africa get policy reforms launched, in part by softening the reforms' unpopular or socially painful effects. But often governments agreed to start reforms simply to obtain conditional resources, and then later abandoned them. Yet the donor institutions frequently continued to disburse funds anyway.
Mr. Dollar and Mr. Easterly conclude, "Foreign finance -- even conditional finance -- is not likely to generate a reform programme in a country in which there is no domestic constituency for reform. [However], once a serious reform programme has started in a country, then financial assistance can be useful to help consolidate it."
The authors concede that good policies by themselves may not be sufficient to stimulate greater domestic and foreign investment in low-income countries, perhaps because infrastructure is poor or investors are uncertain the reforms will be maintained. In such circumstances, they continue, "foreign aid to a reforming government may improve the environment for private investment -- both by creating confidence in the reform programme and by helping ease infrastructure bottlenecks."
In light of the shortcomings of the current aid process, the ECA paper presents a series of recommendations. Anticipating that aid levels will continue to decline, the ECA urges African governments to reduce their dependence on development assistance, in part by enhancing their own revenue collection and reducing unnecessary expenditures. To guard against volatility in aid flows, the ECA recommends that governments develop "contingency funds, which are built up in good times to be disbursed in bad." Donor governments can help by granting "deep debt relief" and maintaining aid flows for an interim period, to help African governments "plan a reduction in net flows over time."
Stressing the need to return authority, control and accountability to African countries, the ECA also suggests the broad outlines of an "ideal aid system":
-- Governments should elaborate overall development strategies, with rolling expenditure and revenue plans.
-- Donors should scrutinize these plans for broad coherence, feasibility and policy consistency, but not for project details. Once agreement is reached, donors should contribute to a "pool of aid" to be used with the government's own resources to finance the entire package.
To move in such a direction, the ECA recommends national conferences on development strategies, greater coordination and formal divisions of labour among donors, more investment in recipient countries' accounting and auditing capacities, and reform of current donor consultation mechanisms (Consultative Groups and Roundtables), in part by moving them to the recipient countries and allowing national governments to co-chair them.
Only by demonstrating greater aid effectiveness on the ground can African countries hope to influence donors, although it may be unrealistic to expect any significant increase in development assistance, concludes the ECA. It adds that "the best African governments can do to attract ODA flows in the future is to invest in improving their policies."
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BOX 1:
Is Africa too 'dependent' on aid?
While many in Africa and the donor community criticize prevailing development assistance policies, some, particularly from the "new right," believe that Africa's reliance on aid financing is itself a major cause of the continent's poverty and poor economic performance, notes Mr. Paul Collier, Professor at Oxford University and Director of its Centre for the Study of African Economics. In his discussion paper for the ECA, "Aid 'Dependency': A Critique," he takes strong issue with such a view.
The proponents of the "aid dependency school," he says, often hold several interrelated beliefs: that Africa has grown more slowly than other continents in part because it has received much more aid relative to gross domestic product (GDP); that dependency on aid "traps" recipient countries into remaining perpetually reliant on aid; that private capital flows have made aid unnecessary; that aid flows are volatile and therefore bring more economic instability; and finally, that aid is in any case "doomed," destined to rapidly decline.
Like the other discussion paper authors, Mr. Collier argues that good policies are the key to growth. "Aid is highly effective in raising growth in good macroeconomic policy environments," he says, "and is ineffective or even harmful in poor policy environments."
Overall, Mr. Collier continues, comparisons of "aid dependency" with "welfare dependency" are invalid, in part because national economies do not respond to incentives and disincentives the same way households do. And, he adds, private capital flows to Africa are still far too small to replace other forms of external financing. In fact, he says, aid can help attract more foreign investment.
Mr. Collier carries out a statistical analysis of 36 African countries between 1970 and 1995 showing that tax revenues have been a far more unstable source of financing than aid. This finding, he says, implies a further benefit of aid, in that "it acts as a buffer to revenue shocks, tending to increase when revenue is low." Finally, he believes, overall aid flows will not necessarily continue to decline; the dip in the 1990s was mainly the result of two "one-off events," the end of the Cold War and fiscal retrenchments in Europe and the US, which will gradually be superceded by more rapid economic growth.
Mr. Collier concludes: "far from Africa needing to emerge from aid dependence, the continent is entering on a phase during which 'big aid' will make its most vital contribution. The next decade in Africa will be an opportunity for aid to be vindicated," and, he argues, aid should contribute to core budgets in good policy environments "for an extended period, rather than as an exceptional financing item."
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