AFRICA - Plea for Reducing Foreign Aid Dependency

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By Jerome Mwanda
IDN-InDepth NewsReport

NAIROBI (IDN) - Whether and how African countries could reduce their dependency on foreign aid - if not do without it altogether - was a major subject of debate at the African Economic Conference in Rwanda's capital Kigali. It was the first time since the 2011 Fourth High Level Forum on Aid Effectiveness in Busan, South Korea, that the issue was discussed.

Convened by the Economic Commission for Africa, (ECA), the African Development Bank, (AfDB) and the United Nations Development Programme (UNDP), the four-day conference from October 30 to November 2, 2012 focussed on the theme 'Inclusive and Sustainable Development in an Age of Economic Uncertainty'.

"In an era when economic volatility seems to have become the norm, achieving inclusive growth is a big challenge," UNDP Administrator Helen Clark said, and called for greater and sustained transformational leadership, targeted actions to generate policy solutions that can drive growth economic growth in Africa.

AfDB President Dr. Donald Kaberuka argued that inclusive growth is both possible and indeed a good investment for Africa but insisted on the need for its leaders to believe in the future of the Continent. Contending that for real development to occur, Africa must chart its course, Kaberuka pointed out that Africa as a continent actually has more money than India, but neverheless continues to seek assistance from the Asian country.

The debate on foreign aid was triggered by a paper presented to the conference by UNDP's Degol Hailu and Admasu Shiferaw of the College of William and Mary (USA). Discussions shed new light on how much work remains to be done in terms of defining a viable aid-exit strategy for the Continent. Far from toeing the fatalistic line, the authors of the paper refer to empirical evidence that shows that a complete and sudden break from foreign aid is neither possible in the foreseeable future nor likely to be accepted by some countries at any time.

Yet, a consensus seemed to emerge suggesting that "Africa could follow the example of some developing countries that significantly reduced their initial high degree of reliance on international aid".

The paper investigates the attributes of a group of countries (/such as South Korea and Mexico) which initially were heavily aid-dependent but managed to exit from it as compared to countries with persistent aid-dependence. These are countries that initially had similar and very high degrees of dependence on international aid but followed dramatically different trajectories of aid-dependence afterwards.

The paper cites proponents of aid who argue that "while aid may not significantly promote economic growth in a typical recipient country, it has a positive effect under 'good policy' conditions". According to authors of the paper, "analysis shows that the likelihood of exiting from heavy reliance on aid increases with the rate of investment".

It suggests that strengthening policies and institutions that promote public and private investment seems to be a reliable path towards exiting from aid-dependence. It notes that "a declining share of aid is being allocated to infrastructure development", a practice that the authors regret.

It contends that "increasing the flow of aid alone does not in itself lead countries out of aid-dependence if it is not accompanied by aggressive capital accumulation".

Participants agreed with the authors that a functional and well-developed financial system that could support high levels of investment is one of the best ways of reducing aid-dependency.

"…a widening saving–investment gap is more than likely to delay graduation from aid-dependence", hence, "donors and recipient countries should watch out for aid flows not to inadvertently stifle domestic savings even when levels of investment are high", the paper stipulates.

Local manufacturing is also another path that can lead African countries out of aid-dependency, the paper explains, adding that "even a small increase in the share of manufacturing in GDP has a potential to facilitate an exit from aid-dependence".

Participants agreed that the exact nature of policies would differ across countries but were certain that a clear industrial policy is a key prerequisite for an aid exit strategy from aid-dependency.

If donors and recipients were to coordinate their aid efforts to support the above-mentioned policy objectives, aid could still be a development tool with diminishing importance.

The United Nations Economic Commission for Africa has spearheaded several studies and initiatives that prepared African countries for the two first Conference on Aid Effectiveness (Paris 2005) and Accra, Ghana (2008).

These laid the groundwork for the formulation of the African Common Position that was tabled at the Busan Conference in 2011.

Economic Reforms

Participants urged African leaders to put in place bold economic reforms, aimed at sustaining growth and boosting human development. They highlighted the need for policy-makers to create diversified economies capable of generating employment, implementing better social policies and inclusive growth.

They agreed that good governance and fair competition will help Africa meet its sustainable development agenda. Carefully calibrated government support can help fulfill Africa's economic potential, reducing political risks and bolstering financial accountability to open new markets.

Africa has become the world's second-fastest growing region. Hosting the seventh Afrcian Economic Conference, Rwandan President Paul Kagame said that in this era of economic uncertainty, the world has high expectations for the Continent.

According to the African Economic Outlook 2012, economic growth across the African continent is expected to rebound from 3.4% in 2011 and accelerate to 4.5% in 2012 and 4.8% in 2013.

"Some countries have even done better than these statistics depict. And because some countries from other continents show signs of economic stagnation, commentators have been inclined to think that this is Africa’s time," said Kagame.

However the Continent’s poverty rates have remained stubbornly high, and progress on health, education and job creation have been too slow to accommodate its fast-growing population. These challenges are likely to become more difficult to tackle in the current global economic environment.

"Rich countries are very much concentrated on their own immediate problems to fix" said AfDb President Kaberuka said. "As we can see from the trade and climate negotiations, there is limited appetite for the multilateral solutions, so we need to trade our way out of poverty and deal with the impact of climate change."

During the closing press conference, Mthuli Ncube, Chief Economist and Vice President of the African Development Bank, said that "Africa can have a brighter future, and has the potential to become the next emerging market by the end of this decade if political, social protection, quality education, private sector and regional integration are implemented."

Ncube urged each and every one "to see inclusive growth in action in Africa". He also affirmed that the Continent's long-term growth prospects are strong, propelled by both external trends in the global economy and internal changes in the continent’s societies and economies.

He said investment in infrastructure will promote regional integration and trade, creating an environment that is more conducive to economic growth, the development of markets and paving the way for acceleration in human development.

"Deliberate policy measures and targeted investments are needed to make growth not just fast, but also inclusive and sustainable," said UNDP Administrator Clark. She added that "the rising tide is capable of lifting every boat."

One of the running threads of the conference was how to use natural resources to create economic benefits for ordinary citizens. The discussants said African countries can raise money by negotiating international contracts from a position of strength, using proceeds from land and mineral deals to invest in rural infrastructure, diversify the economy and boost human capital.

"If politically the leadership is right, there is no doubt that leadership will focus on inclusion in almost everything it does," said the former President of Nigeria, Olusegun Obasanjo. [IDN-InDepthNews – November 3, 2012]

2012 IDN-InDepthNews | Analysis That Matters

Image credit: African Economic Conference

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