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
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
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…’

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%
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

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.
Aid Effectiveness Debate 
Aid has been effective


Durbarry et al (1998) – aid is effective

Hansen and Tarp (2000) – aid is generally effective


Hadjimichael et al, (1995) – aid is effective if you account for nonlinear relationship
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
Africa’s Aid Dependency
Proportion of Total World Aid to SSA
40
35
30
25
20
15
10
5
0
40%
US$9.2b
35%
US$77.5
b
30%
%
25%
20%
15%
10%
5%
World
00
20
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
60
19
00
20
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
19
64
0%
60
19
US $
Aid Per Capita
SSA

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$2.6 to
about 34.3 over the same period

The result is that by 2003, almost one-third of all aid comes to SSA,
compared to about 15% in 1960
2 GAP Theory - Some evidence
SSA
03
20
00
20
97
19
94
19
91
19
88
19
85
73
19
99
96
19
93
19
90
19
87
World
19
84
19
81
SSA
19
78
19
19
19
19
19
19
19
75
0
72
0
69
5
66
5
63
10
60
10
19
15
82
15
19
20
79
20
19
25
19
25
%
30
76
Investment to GDP ratio
30
19
%
Savings to GDP ratio
World

Whilst SSA savings and investments ratios have declined, that of the
rest of the world has increased

The trends for SSA does not seem to support the Gaps theory


Unless aid is filling a foreign exchange gap which is induced by increasing
importation of final consumption goods
However, this DOES NOT promote growth and sustained development in the
recipient country.
GDP Per Capita in SSA Versus the World
Real Per Capita GDP
US$ (2000 Prices)
6000
5000
4000
3000
2000
1000
World

00
20
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
19
60
0
SSA
The average wealth of SSA has remained unchanged
whilst that of the World has more than doubled.
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
The Tale of two SSA countries - Aid
Ghana

20
00
19
96
19
92
19
88
19
84
19
80
19
76
19
72
19
64
19
68
Highest aid to Botswana in
1989 was about $160m
compared to $717 for Ghana
1000
900
800
700
600
500
400
300
200
100
0
19
60
US$ Million
Foreign Aid Flows
Botswana
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
The Tale of two SSA countries – Per Capita GDP
Ghana

Botswana
00
20
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
60
Ghana’s GDP of
$280 is marginally
higher than that of
Botswana of $253
4000
3500
3000
2500
2000
1500
1000
500
0
19
US$
GDP Per Capita (Constant 2000 prices)
Botswana’s GDPP
of over $3500 is
about 13 times tha
of Ghana which i
about $276
It is not too difficult to see which country has performed
better in terms of growth
The Tale of two SSA countries – Pupil Teacher ratio
Number of Pupils per teacher
Pupil to Teacher Ratio
40
35
30
25
20
15
10
5
0
34
28
30
1998
27
1999
33
27
2000
Botswana
32
27
2001
Ghana
31
27
2002
The Tale of two SSA countries – Persistence to Grade 5
% of Cohort
Persistence to Grade 5
100
90
80
70
60
50
40
30
20
10
0
88
87
66
63
1999
2001
Botswana
Ghana
The Tale of two SSA countries – Births by Skilled Staff
Births by Skilled Staff - Botswana
Births by Skill Staff - Ghana
120
98.5
100
80
77.5
87
45
43.8
44
44.3
43
42
60
41
40
40
20
39
0
38
1988
1996
2000
40.2
1988
1993
1998
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
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.


Also there are other effects of over-dependence






The other motives of aid (political and also strategic/commercial) can counteract
the developmental objective
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
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
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
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!
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
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
End of Presentation