1. 2007 Imani West Africa University Seminar ------------------------------------------------- WHY AFRICA SHOULD FORGET FOREIGN AID By Robert Darko Osei Institute of Statistical Social and Economic Research University of Ghana

2. Overview of Presentation  What is Foreign Aid?  What are the arguments for foreign aid  What are the trends in Foreign aid to Africa?  Has Aid Impacted on Africa Growth?  What is the evidence from the literature?  What is the extent of Aid dependency?  Is high dependency a problem?  Should and Can Africa wean itself from aid  Summary and Conclusion

3. What is Foreign Aid ? “Aid is an international operation channelling tens of billions of dollars to developing countries each year and employing hundreds of thousands of people in a multitude of organisations” Hjertholm and White (2000) ‘ …the World Bank is estimated to employ thousands of people and also there are an estimated 40,000 expatriates financed by aid and working in Africa…’

4.  The OECD-DAC defines Official Development Assistance (ODA) as capital flows to developing countries with these characteristics  From official sources – either a state or the local government or their executing agencies  It has as it main objective the promotion of economic development and welfare of the developing country  It is concessional in character – it should have a grant element of at least 25%

5. Why do Countries need Aid?  Idea that aid promotes growth (and development) can be traced back to the work of J. M. Keynes (1883-1946) who argued in the 1930s that governments can stimulate growth by increasing investments (Erixon, F., 2005)  These ideas informed the work of Hollis Chenery and Alan Strout in 1966 who developed the Gap theory  The premise of the gap-theory was a simple one  LDCs can attain higher growth rates through increased investments which is determined by savings (which is in turn determined by per capita income)  LDCs were in a ‘low-level equilibrium trap’ which can be broken by the use of aid

6.  The two gaps were  Foreign exchange gap – deficit between import requirements for targeted production levels and foreign exchange earning  Savings gap – deficit between domestic savings and targeted investment level  These gaps constrain growth  Foreign aid fills both gaps and therefore promotes growth.

7. Aid Effectiveness Debate - Aid has been effective  Hadjimichael et al, (1995) – aid is effective if you account for non- linear relationship  Durbarry et al (1998) – aid is effective  Hansen and Tarp (2000) – aid is generally effective  Lloyd et al (2001) – aid impacts on long term private consumption but not by as much as exports Aid has been ineffective  Boone (1996) – aid is ‘down the rat hole’  Dollar and Easterly (1999) – aid did not increase investments in Africa  Burnside and Dollar (1997, 2000) – aid only works in a good policy environment  Alesina and Dollar (2000) – political and strategic motive dominates

8. Africa’s Aid Dependency World Aid has increased over the years – from about US$1.4 to in 1960 to about US$12.3 in 2003 The level of aid to SSA has increased even more – from about US$2.6 to about 34.3 over the same period The result is that by 2003, almost one-third of all aid comes to SSA, compared to about 15% in 1960 US$9.2b US$77.5 b

9. 2 GAP Theory - Some evidence  Whilst SSA savings and investments ratios have declined, that of the rest of the world has increased  The trends for SSA does not seem to support the Gaps theory  Unless aid is filling a foreign exchange gap which is induced by increasing importation of final consumption goods  However, this DOES NOT promote growth and sustained development in the recipient country.

10. GDP Per Capita in SSA Versus the World  The average wealth of SSA has remained unchanged whilst that of the World has more than doubled.

11. What Pattern is emerging?  For SSA Aid increased by about 41 fold Per capita output remained the same – the 2003 level was only 1.2 times the 1960 level  For the World The increase in aid was significantly less - about 19 times the 1960 level Per capita output more than doubled  Netting out SSA will make this finding even Starker

12. The Tale of two SSA countries - Aid  Aid to Ghana has been consistently and significantly higher than that to Botswana  Aid to Botswana averaged about US$ 66 million annually compared to US$ 303 million for Ghana Highest aid to Botswana in 1989 was about $160m compared to $717 for Ghana

13. The Tale of two SSA countries – Per Capita GDP  It is not too difficult to see which country has performed better in terms of growth Ghana’s GDP of $280 is marginally higher than that of Botswana of $253 Botswana’s GDPPC of over $3500 is about 13 times that of Ghana which is about $276

14. The Tale of two SSA countries – Pupil Teacher ratio

15. The Tale of two SSA countries – Persistence to Grade 5

16. The Tale of two SSA countries – Births by Skilled Staff

17. The Evidence is…  SSA countries have received almost a third of total World Aid  SSA’s growth and development have been anything but impressive  Ghana has been significantly more reliant on aid compared to Botswana  Botswana has performed significantly better than Ghana

18. Why is high dependency a problem for Development?  The fundamental reason is that aid is not always given with the ‘financing gaps thesis’ as the main motivation.  The other motives of aid (political and also strategic/commercial) can counteract the developmental objective  Also there are other effects of over-dependence  It has a high toll on executive time  Disincentive effect on government to be fiscally ‘responsible’  It breeds policy conflicts – these conflicts are usually between the true owners of the development process and the ‘development partners’  High dependence results in volatility having a greater negative impact on an economy  It can create and entrench ‘vampire’ elements in the economy – “Rather than seeing opportunities to produce goods and services more efficiently, entrepreneurs see hand-outs from donors as the easiest route to wealth” (Erixon, 2005, p-15)  An Important part of the solution is to reduce aid dependency

19. Can Africa Wean itself from Aid?  How can Africa achieve the twin objective of Reducing aid dependency + Sustaining Higher growth rates ?  There are two approaches that have been implicitly suggested by the Debate  Gradualist/Optimist policy option  Shock/Pessimist policy option

20. Gradualist/Optimist Option   aid in the medium term to transform the economy  Reduce aid as economy is transformed and growth is increased and government revenue increases  Key proponents are Jeffrey Sachs, Bono, Henrik and Hansen, Morrissey, UNDP, G-8  But outcome depends on whether transformation will actually take place plus the evidence does not support this option This prescription presupposes that the disincentive effect of aid is more than outweighed by the aid effectiveness

21. Highlights of Gleneagles Summit  A doubling of aid by 2010 - an extra $50 billion worldwide and $25 billion for Africa;  Writing-off immediately the debts of 18 of the world's poorest countries, most of which are in Africa. This is worth $40 billion now, and as much as $55 billion as more countries qualify;  A commitment to end all export subsidies. A date for this, probably 2010, should be agreed at the World Trade Organisation's Ministerial in December. The G8 have also committed to reducing domestic subsidies, which distort trade;  Developing countries will "decide, plan and sequence their economic policies to fit with their own development strategies, for which they should be accountable to their people"  However, the last two objectives are more difficult to achieve with the proposed increase in the dependency on aid!

22. Shock or Pessimistic Policy Option  Make the reduction of aid an explicit policy – Some have suggested we give ourselves 5 years maximum Forces us to generate more resources from within Forces the policy maker to be more prudent We can pursue a national development strategy with minimal interference We devote more time into thinking about our policy options and the strategies that will help us achieve our objectives  Some of the proponents include :Erixon F., Mensah S. This prescription presupposes that the disincentive effect of aid more than outweighs the aid effectiveness

23. Conclusions  The correlation between aid and development outcomes is weak  The debate should begin to shift away from ‘aid effectiveness’ to ‘optimal options for development’  The World Bank (2004) estimates that a reducing tariffs and subsidies would allow developing countries to gain nearly $350 billion in additional income by 2015 compared to the $75 billion level of aid that we mentioned earlier.  Africa stands to gain more than it will lose if it reduced considerably its dependence on foreign aid

24. End of Presentation