PROMISED AID INCREASES SHOULD BE SPENT DIFFERENTLY TO LIFT AFRICA OUT OF POVERTY

De-politicized and more predictable flows with greater economic focus needed, managed by the UN along Marshall Plan lines, UNCTAD report(1) says

Aid to Africa not only should be doubled, as now agreed to by donors, but most of it should be distributed multilaterally, perhaps by a UN fund independent of political pressures, a new UNCTAD report contends.

The money should be released in predictable tranches over a long-term period, should be more focused than currently on enabling African economies to produce a broader range of goods and to create more jobs, and should be channelled to those countries´ general budgets so that their legislatures can best decide how to spend it, the report recommends.

Such an arrangement would replace the current chaotic system in which too many agencies - some bilateral, some multilateral - are pushing too many development projects that sometimes compete with each other, often don´t match recipients´ development goals, are costly to administer, and frequently leave African governments confused and stymied by their numerous rules and conditions, says Economic Development in Africa 2006: Doubling Aid: Making the "Big Push" Work.

Back to the Future

The report says a new "aid architecture" is needed, drawing in part on the Marshall Plan that helped revitalize European economies after World War II. That plan, paid for by the United States, recognized that shock therapy and piecemeal projects had not helped in getting Western Europe back on its feet and offered instead a generous, multi-year and coordinated funding approach, with each State drawing up long-term recovery plans with no outside interference. The US released aid in predictable tranches predominantly through grants, and while intermediate targets were used to measure progress, rules and conditions on the aid were applied in a flexible manner. Such principles were largely forgotten as international aid programmes expanded in the 1980s, the report says, although the European Union´s own regional funds have functioned well under a similar approach. These funds also have a clear focus on strengthening investment, multi-year funding, strong local ownership, and clearly stated aims to strengthen State capacities.

Given the basic challenges across the region, much of this initial push will be frontloaded on the public sector where the preferred modality of support from the international community should be in the form of grants to the national budget. These should come with limited conditionality and should help strengthen public sector management. Donors should abide by their commitments to significantly raise the share of direct budget support, currently just 20% of bilateral flows to sub-Saharan Africa (SSA).

Going multilateral

In recent years, the international community has begun to turn its attention to the quality of aid. But the Report worries that the right balance is still not being struck. It notes that while aid flows have on average risen sharply since their low point in the late 1990s, much of this rise has been accounted for by debt relief and with a handful of what some critics call "aid darlings" receiving much of the increased flow. Moreover, the change in emphasis has not stopped a repoliticization of aid flows: since the early 1990s, the focus of EU aid has shifted to Eastern Europe and Mediterranean countries; security issues have recently become a principal concern for some donors; and opening markets weighs as heavily as ever on deciding who gets what.

With this in mind, the Report suggests that the time is "perhaps right to revisit the idea, first broached in the 1950s, of a UN funding window" tailored to African development needs. Such an approach "can help to reduce unnecessary and costly competition among donors, and thus greatly reduce administration costs. It can also provide a buttress against the politicization of aid which has been so damaging in the past."

The report states that existing multilateral aid mechanisms, such as the World Bank´s International Development Association (IDA) and the International Monetary Fund´s Poverty Reduction and Growth Facility, have not lived up to expectations and are not suited to administering doubled aid. Net disbursements by IDA to SSA, for example, are under US$3 billion, around 10% of all flows, and depend on difficult replenishment exercises. These funds along with various new mechanisms related to a doubling of aid might best be merged into a new UN fund, the report suggests. Such a Fund could act as a magnet for new proposals such as the International Finance Facility suggested by the United Kingdom´s Chancellor of the Exchequer. The report also sees the need for a multilateral forum within the UN, similar to that already established at the Organization for Economic Cooperation and Development, to give an airing to the concerns of recipients as aid increases.

Other shortcomings of current aid systems for Africa, the report contends, are that they are focused on short-term results, have too high a technical assistance component and are increasingly targeted at social sectors, which, while important, don´t address the needs of African countries to build the productive infrastructure and capacities that will enable them to diversify and upgrade their economies. These changes require long-term attention but have the advantage of offering a way out of the poverty cycle and -- for donor nations -- a potential end to ever-increasing requests for aid.

To meet the Millennium Development Goals, it is estimated that African economies must grow at roughly 8% per year. Without more attention to their productive capacities, the report says, most will fall well short of the mark, yet in sub-Saharan Africa, the share of social sectors in total technical cooperation rose from 50% in the early 1990s to 70% today, with corresponding falls in the share taken by infrastructure, productive sectors and agriculture.

A failed aid-adjustment nexus

Africa has received some $500 billion in aid since 1980, around $30 per capita annually, the report notes. Since real incomes fell over this period in many countries, sceptics have raised questions about whether further increases in aid really offer a route out of poverty. In fact, the major trend between the early 1980s and the late 1990s was declining real per capita aid flows to SSA which were wholly insufficient to offset the resources lost to declining commodity prices leading to mounting indebtedness; let alone recurrent famines and the HIV crisis; and it was often volatile in nature. Moreover, it was conditioned on recipients adopting a standardized package of adjustment measures including price stabilization, rapid liberalization, and privatization that imposed austerity in many countries.

UNCTAD`s examination of successful experiences - for example, East Asia in the 1950s and ´60s and Ireland from the early 1970s, enjoyed much larger aid flows than have most African countries -- indicates that increased aid can give a "big push" to the region, sparking a virtuous circle of higher rates of savings, investment and economic growth as a route to a permanent reduction in poverty. However, the delivery of aid and accompanying policies have to be re-thought, taking into account such factors as Africa´s vulnerability to external shocks, its binding structural constraints on growth prospects, and the inefficiency of the current aid system.

The report also contends that a careful weighing of the evidence shows that many of the concerns raised by sceptics, such as the insufficient absorptive capacity of African economies or the distortion of price incentives - such as the "Dutch disease" -- are exaggerated and can be managed.