Dead Aid in Undeveloped State Apparatuses: Retrograding African Growth

Dead Aid in Undeveloped State Apparatuses:

Retrograding African Growth

Alvin Lim

547298

Tutor: Chiyedza Chitepo

Submited in partial fulfillment of the requirements of GEOG30001 Africa:

Environment, Development, People at The University of Melbourne

© Alvin Lim 2013

Introduction

Africa’s continued backwardness despite conducive integers for economic

growth - a relatively young labour force, vast amounts of arable land, multitudes

of natural resources and supply of foreign aid - is a troubling discourse for the

21st century.

Amidst discourses advocating for and against development aid in Africa,

none have struck an ontological chord so deep in public and intellectual circles as

Zambian-born economist Dambisa Moyo’s controversial critique of aid: as a

problem. Moyo insists that aid has retrograded African growth by removing

incentive and innovation, along with perpetuating cronyism and corruption.

This paper will be a critical analysis of the inefficacy and inability of African

states - particularly in Sub-Saharan Africa - to build and sustain effective public

institutions, and how it has hurt economic development. I will discuss possible

explanations for Africa’s inability to build accountable and transparent states with

strong public institutions. Further, I will argue that switching aid with investment is

not the solution. What is more crucial is a push to build strong public institutions

with credible central planning capabilities.

Aid, investment and economic growth in Africa

Africa is the world’s second-most populous continent with 1.033 billion

people. As the second-largest continent, it covers 20.4 percent of the global land

area with large mineral resources. Its workforce is young: more than half its

population is aged below 20.

However, much of Africa remains impoverished and undeveloped. A difficult

colonial past, tumultuous history of slave trade, violence, inhospitable climate,

widespread disease and unstable political environment are frequently cited

factors for Africa’s long-term reliance on aid.

Using the latest available data from the World Bank and International

Monetary Fund (IMF), I graphed a number of indicators in Excel to illustrate the

aid, growth, investment and development situation over time in selected countries

in Sub-Saharan Africa. Each chart will be accompanied by critical analysis of

successes, failures and opportunities in the given time period.

The time period from 1980 to 2012 was selected due to the availability of

data points and the multitude of significant developments of the period including

(but not limited to) domestic sociopolitical changes, ethnic violence, the end of

the Cold War and the development that characterised Eastern Europe,

South/Southeast Asia and South America, the amping of aid arising from the

United Nations’ (UN) Millenium Development Goals (MDGs) in 2000, as well as

the Global Financial Crisis in 2008 and 2011’s Eurozone debt crisis.

Figure 1. ODA and official aid (comparative regional)

Figure 1 shows that the official development aid (ODA) to sub-Saharan

Africa over the last two decades is much higher, and has been increasing at a

larger rate compared to other developing regions. This figure has risen

dramatically since 2000 due to large increases from donor nations as part of the

MDG, especially in food aid and agricultural assistance (Abdulai, Barrett & Hazell

2004).

Figure 2. ODA and official aid to Sub-Saharan Africa

Figure 2 represents the share of aid amongst six Sub-Saharan African

nations. It can be observed that ODA is increasing to the Democratic Republic of

Congo (DRC) and Kenya each year. The large spikes in ODA flows to Nigeria in

2005 and 2006 are attributable to an US$18 billion debt relief (Easterly 2002)

granted by donor nations in the interest of freeing up capital for the Nigerian

economy. While ODA to war-torn Sierra Leone seems miniscule, it is important to

note that it is a country with a population of just 5 million with an ODA receipt of

US$424.21 million in 2011 (World Bank 2013).

Figure 3. GDP per capita in selected Sub-Saharan African nations

GDP per capita figures are a measure of a country’s economic growth

divided by its population, and are a suitable measure for estimating a country’s

economic performance and standard of living.

Despite large amounts of ODA inflows, Figure 3 shows that growth has

clearly stagnated in the resource-rich economies of the DRC, Nigeria, Kenya and

Sierra Leone. Over this time period, these countries had suffered considerable

political strife, failures in central planning, violent leadership changes and

prolonged civil unrest.

South Africa and Botswana, considerably ahead in self-government, political

and civil stability as well as economic management, have growth rates much

higher than the Sub-Saharan average.

To lend a counter-factual observation to the data analysis, I selected

Thailand, Poland and Chile as developing nations similar in size, population and

resources, which have gone through political and economic restructuring as well

as received development aid. Each is a representative sample of its respective

(developing) region. As these governments matured in central planning and

opening up trade, so did foreign investment in their economies, which had a

greater positive correlation to growth than aid does.

Figure 4. GDP in selected Sub-Saharan African & developing nations

Figure 4 shows that the growth rates experienced by these countries are

similar to those of Botswana and South Africa. This is further reinforced by similar

movement in the global business cycle, as indicated by the global GDP per

capita represented as a simple moving average. Some growth can be observed

in Nigeria and Kenya from 2002 onwards attributable to rising commodity prices

(Reserve Bank of Australia 2013), yet growth rates lag significantly behind the

two leading African economies.

Figure 5. FDI net inflows to selected Sub-Saharan African countries & other

developing regions

In Figure 5, we can see that flows of foreign direct investment (FDI) to Sub-

Saharan Africa have grown at a far slower pace and volume than in other

developing regions in Latin America as well as East-Asia Pacific region. An FDI is

an investment made by a company or entity into a company or entity based in

another country, and is useful as a determinant to how business-friendly a

country is in attracting global investors.

Basu and Srinivasan (2002) suggest that macroeconomic stability and the

creation of a business-friendly environment are far more efficacious in

encouraging growth in these regions than aid. Their observations are supported

by Figure 2, which indicates a negative correlation between the growth of official

aid transfers and FDI – as FDI increases, aid falls.

Another inference that can be made is that FDI has a direct effect on

increasing GDP per capita. Basu and Srinivasan (2002) postulate that this is

because FDI is a conditional investment made in expectance of real returns.

Therefore, there is no guarantee that FDI inflows will continue in unstable or

uncertain fiscal or socio-political environments. This bears stark contrast to aid

inflows, which actually increase as a result of instability – such as in Sierra

Leone. In South Africa and Botswana, the proportion of ODA transfers to FDI has

actually fallen with increasing GDP per capita (World Bank 2013), indicating a

weaning of aid in favour of investment.

Public institutions and economic growth

We have established that a) ODA to Sub-Saharan Africa remains at much

higher levels than in other developing regions; b) GDP per capita stagnated in

countries with unstable socio-political and fiscal conditions despite growing

amounts of aid; c) growth rates in countries with better public institutions are

much higher, and the countries less aid-dependent; d) FDI to Africa has only

picked up when aid is tapered.

Strong public institutions have long been argued to have a positive effect on

aid’s effectiveness. Public institutions are concerned with providing basic

government services ranging from street lighting or healthcare to a police force

and the judiciary. Governments usually directly administrate the public sector

through bureaucratic, tax-funded means. Public institutions have an obligation to

responsibly serve its citizenry as the bulk of taxes falls on the electorate,

(Brennan & Buchanan 1980; Horn 1995). That has not been the case in Africa,

with competing warlords looking after their own interests, and hampering

advancement of bureaucracy. The absence of effective law enforcement such as

the military or police force meant that the local governments could do little to stop

their activities.

Much of the blame too lies on the prevalance of corrupt and violent leaders.

Post-colonial Africa produced some of the worst dictatorships of the 20th century.

Toure of Guinea, Abacha of Nigeria, Mobutu and Kabila of the DRC and

Uganda’s Idi Amin were some of the most notorious leaders who were as

charismatic as they were ruthless, or corrupt (Chege 1988; Egwaikhide &

Isumonah 2001; Jackson & Rosberg 1982). Their reigns were often characterised

by the fielding of death squads, siphoning state money and repressive regimes

built around their personalities.

Weber (2009) argues that the modern bureaucracy resolves some of the

shortcomings of the traditional system in a system of power where leaders

exercise control over others. Subordinates are afforded independence and

discretion, therefore the charisma of the leader becomes less important

(Friedland 1964). Stable public institutions with proper checks and balances on

its leadership have a good chance of limiting power to any one leader or group.

A stable taxation system to ensure profits do not just come privately from

ownership is important. Weber (2009) concludes that in developed

bureaucracies, the power of plutocrats - an elite group who wield political power

from the wealth they hold can be confined to moderate limits. Plutocrats in

administration also tend to put paid professional labour in place of historically

inherited ‘avocational’ administration by notables.

The prevalence of corrupt dictators and plutocrats may be linked to Africa’s

troubled colonial past. Cooper (2002) argues that African states control access to

external markets to incentivise cooperation by clients who rely on the state to

gain access to trading profits and imported goods. These ‘gatekeeper’ states

depend on external resources to stay in power, not unlike their colonial masters

before. Further, they collect most of their revenues from taxes on imports and

exports, and through controlling entry and exit visas along with the money

market. They distribute foreign aid and issue licenses that determine who could

engage in business activities (Cooper 2002).

Doing business in such an environment may be disconcerting, but it has not

been inconceivable. Gatekeeping is successful when market demand is strong

for heterogeneous products such as rare earths. In the DRC, where large gold

deposits and some of the world’s purest concentrations of uranium and coltan

can be found, the problem is further exacerbated (Asiedu 2006). In the absence

of credible public institutions, various groups compete with each other for control

over these resources, often violently, given there are few or no sanctions against

them.

Former Goldman Sachs and World Bank analyst Dambisa Moyo has taken

on a provocative role. Through the use of insistent and abrasive language, she

has called for a paradigm shift from unconditional aid or debt forgiveness to

holding African governments accountable for credit inflows to the region. The

solution she postulates is to wean governments off aid transfers and ease them

into financial bond markets (like other developed nations) as a form of raising

capital (Moseley 2011).

My view is that Moyo is appealing to investors for business interest in Africa

by concertedly diminishing the paradigm of development aid. Moyo’s frequent

media appearances, coupled with public attacks on celebrity aid proponents such

as artiste Bono, philanthropist Bill Gates and aid economist Jeffrey Sachs have

focused the public eye on her arguments. I would argue that Moyo first labels aid

‘the problem’, then stresses her caveats after to limit her attacks to systemic cash

transfers and not humanitarian or food aid. When pressed for a solution, Moyo

almost always urges the replacement of aid with investment – therefore her aim, I

would argue, is to replicate what Bono, Gates or Sachs is doing with aid, but in

attracting investment instead.

While economic indicators show that investment is a much more efficacious

way of growing the economy and improving standards of living, Africa may be

some way from being able to attract stable investment in the bond markets.

African bond markets are literally non-existent as capital markets view the risk of

default as unacceptable. The inefficacy of public bureaucracies to manage

complex tax systems, establish control mechanisms or perpetuate good public

service values have pushed investors away to other developing regions. Middle-

income countries such as Thailand, Chile and Indonesia have large, rapidly

affluent populations with much higher spending power than in Africa and friendlier

business climates conducive for private ownership. Unfortunately, in a risk-

averse global economic climate, it is unlikely that Africa will be able to attract the

bond sales that Moyo claims will lift African economies.

Conclusion

Economist John Maynard Keynes once famously remarked, ‘When the facts

change, I change my mind. What do you do, sir?’

It is perhaps easy to change our minds about aid. There is little question

about how humanitarian aid is essential when faced with hunger, lack of

sanitation, but ODA transfers make little sense when faced with the charts. Other

regions have thrived outside aid. So have a few African nations.

While robust growth has not been realised, pulling aid from Africa may not be

the solution. Aid still counts as the cheapest way for an impoverished nation to

acquire capital for development. Perhaps, the solution is not simply to wean

governments off aid as Moyo may argue, but to assist in the development of

credible, sustainable public institutions which will manage capital inflows –

whether aid or investment – responsibly and with accountability.

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