‘Aid curtailing Africa’s competence’

Windhoek – African countries’ over dependence on external aid communicates negative signals about creditworthiness and affects countries’ abilities to raise capital from the international markets, economic analysts say.

These are some of the key findings presented in a paper titled “Macro-economic determinants of exit from aid-dependence” by United Nations Development Programme (UNDP) economic policy advisor, Degol Hailu, and assistant professor at the College of William and Mary in the United States, Admasy Shiferaw.

The two analysts argue that exiting from aid dependence increases macro-economic stability, attracts investment, boosts domestic resource mobilisation and spurs growth of the manufacturing sector.

They say that if donors are to conduct their aid efforts to support domestic economic growth, aid could still be a development tool but with diminishing importance.

The analysts have ranked aid recipient countries based on an “aid to GDP ratio”. Countries whose average aid to GDP ratio has in recent years been below the fifth decile have had a very low and stable, even declining aid dependency.

Countries ranked at and above the fifth decile have experienced a steady increase in aid-to-GDP ratio from the 1960s up until the end of the 1990s before experiencing a modest decline during 2000-2007.

Countries below the 4.5 decile line have experienced a reduction in their aid-dependence by moving down the rank of aid-to-GDP ratio since the 1960s.

Botswana, which was almost in the 10th decile in the 1960s, has significantly reduced its aid-to-GDP ratio to the third decile since the turn of the millennium.

Among countries that over the past four decades have become more dependent on aid are Benin, Burundi, Cameroon, Chad, the DRC, Ghana, Malawi, Mauritius, Rwanda, Uganda and Zambia, among others. Others are Ethiopia, Liberia and Mozambique.

To meet their growing demand for imported capital goods and technologies, developing countries need to boost their competitiveness and break into export markets.

With a competitive export sector, countries are expected to become increasingly less dependent on aid.

Further to export earnings, the ability to attract international finance, including FDI, could accelerate the pace of reduction in aid-dependency, as it signals the viability of the domestic economy to the rest of the world.

The analysts say that some countries which, during the 1960s, were above the fifth decile, have become increasingly aid dependent, raising the question of whether aid indeed has been used to facilitate reduced aid dependence.

Research has shown that countries that exited from aid increased their average saving rate to more than 20 percent of GDP, while aid dependent countries had a saving rate which slipped below 10 percent of GDP.

This bolsters previously held arguments that more aid undermines incentives for domestic savings.

“In terms of investment efforts, countries with a significant reduction in aid-dependence experienced a sharp increase in the investment-to-GDP ratio during the 1970s and 1980s,” the analysts said.

In contrast, a steady rise in international aid has not translated into a higher rate of capital accumulation for some African countries.

Countries that slashed their reliance on aid have a slightly higher share of manufacturing in their GDP than aid dependent countries.

This tallies with other research which has failed to find a statistically significant long-term relationship between aid and economic growth in developing countries.

“Countries with a low initial degree of aid dependence are more likely to remain less aid-dependent and further reduce their aid-to-GDP ratio. Countries with a high initial aid-dependence are more likely to remain highly aid-dependent or even become increasingly so,” the analysts said.

“The likelihood of exiting from heavy reliance on aid increases with the rate of investment. Strengthening policies and institutions that promote public and private investment seems a reliable path to exiting from aid-dependence.

“Unfortunately, evidence shows that a declining share of aid is being allocated to infrastructure development. Increasing the flow of aid alone, therefore, does not in itself lead countries out of aid-dependence if it is not accompanied by aggressive capital accumulation”.

A functional and well-developed financial system that could support high levels of investment is also equally important, as a widening saving-investment gap is more than likely to delay graduation from aid dependence.

A small increase in the share of manufacturing in GDP has a potential to facilitate an exit from aid dependence.

Other experts have long stated that aid is not the panacea to Africa’s problems.

Dambisa Moyo, in her groundbreaking book “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa”, argues that that aid is the fundamental cause of poverty and eliminating it is critical for growth.

Moyo argues that aid makes governments less accountable to their citizens and leads to civil wars, rampant corruption and has been central to an undercurrent of irresponsibility culminating in increased and self-reinforcing poverty since independence.

Gambian author, Prince Bubacarr Aminata Sankanu, is even more damning of aid in his book, “The Africans: A Triple Uselessness”.

“We Africans are currently lagging behind in the fields of appropriate innovation, self-sufficiency, regional unity and global clout.

“The unique fields we have to beat the world with are our rich tangible and intangible cultural wealth, the entrepreneurial zeal of our artisans, fauna and flora and our social warmth.

Sylvia Mwichuli, the UN Millennium Campaign communications co-ordinator, adds that Africa has to act now to end aid/donor dependence.

“I get disgusted with countries that entirely depend on donor budgets. What then do we pride in as African countries if we have no control over our own national budgets and affairs?

“African governments must find ways of financing development. We are calling for a paradigm shift in financing of development, not depending on donors.”

November 2012
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