Aid as a catalyst for poverty reduction

Table of Contents

1. Introduction

2. Main Proposals of Blair’s Commission for Africa

3. Classifying the Proposals of the Commission for Africa

4. Increased Financial Aid and Poverty Reduction
a. The Relation between Aid and Poverty Reduction
b. Requirements for a Positive Correlation between Aid and Poverty Reduction
c. Does Africa Meet the Institutional Requirements?

5. Conclusions

6. Bibliography

7. Declaration on Plagiarism and Word Lenght

1. Introduction

The underdevelopment of the African continent and the multi-layered causes of this problem have been central to various plans and frameworks aimed at finding a way out of the vicious circle of poverty, poor governance, indebtedness and lack of resources. From efforts in the 1980s to more recent initiatives^[1], the African countries were mostly perceived as the problem children of international development policies. Besides these specifically Africa orientated development frameworks, a number of global programmes were launched in order to approach the problems faced by Least Developed (LDC) and often Heavily Indebted Poor Countries (HIPC). Examples are the HIPC Initiative (1996) supported by the IMF and World Bank, and the formulation of the Millennium Development Goals (MDGs) in September 2000.

By releasing its report^[2] in March 2005, the Commission for Africa, set up by Britain’s Prime Minister Tony Blair, added another plan to the already exiting ones. The appointment of the commission was due to the fact that the Millennium Development Goals that have to be reached until 2015 are likely to be missed. Assuming the presidency of both, the EU and the G8 summit in 2005, the British government saw itself in a good position to advance decisively international development policies towards Africa.

Cornerstones of the report are 100 per cent debt cancellation for sub-Saharan African countries “which need it” ,^[3] additional $25 billion a year in aid provided by donor countries by 2010 and a further increase of $25 billion a year by 2015 .^[4]

These are only some of the objectives outlined by the commission’s report but they constitute the main pillars concerning the immediate economic intents.

One has to point out that the main prerequisites for an effective implementation of the plan’s proposals are adjustment processes related to African institutions. Institutional deficiencies on the recipients’ side are a problem that has to be considered as being crucial. The lack of home-grown institutional competence^[5] and basic institutions of accountability^[6] respectively are some aspects that point to the shortcomings of recipient’s capacity to manage an increase in money inflow wisely.

This essay argues that increased financial aid transferred within a rather short period of time, as proposed by the Commission for Africa, is not able to enhance African economic development considerably enough to have an impact on poverty reduction. Although the Commission’s report is used as the main plan of reference, the essay tries to assess the general chances of success for the effective usage of increased financial aid in African economies.

A short explanation of the measures proposed by the commission will be in the first part of the essay. A classification of the commission’s report concerning underlying development concepts will be conducted shortly in the second part. In the next part, the discussion whether increased financial aid is the adequate remedy for Africa’s problems will be in the centre. Finally, in the last part of the paper, a summary will cover the findings of the analysis

2. Main Proposals of Blair’s Commission for Africa

As outlined above, the Commission for Africa proposes several measures aimed at lifting Africa out of poverty. The underlying goal is to reach a sustainable annual growth rate of seven percent by 2010^[7] – this growth rate is needed to halve poverty by 2015,^[8] thus achieving the MDGs.

The commission’s report contains 89 policy recommendations concerning several policy fields like governance, finance, culture, peace and security, health as well as education and economy. In order to avoid going beyond the scope of this paper, the following part will mainly focus on the core recommendations that are related to trigger economic development: debt cancellation and increased aid.

In the centre of the report are on the one hand recommendations concerning debt cancellation as soon as possible for sub-Saharan countries that need it.^[9] The objective is 100 percent debt cancellation. The Commission proposes to establish a transparent debt compact to include all African countries of the sub-Sahara, including those excluded from current debt relief schemes. By doing so debt stocks and debt services shall be cancelled by up to 100 per cent, and multilateral and bilateral debts shall be covered.^[10] The plans for debt cancellation shall be embedded in an overall financing package aimed at achieving the Millennium Development Goals on the African continent.

Besides debt cancellation, increased aid is another pillar of the financing package the commission wants to set up. Developed countries should provide $25 billion a year in aid by 2010 and, subject to review, a further increase of $25 billion a year by 2015 .^[11] The extra money should be used for financing African infrastructure priorities and should be provided mainly in the form of grants.^[12] For instance, the construction of rural roads, slum upgrading, improvements in the information and communication technology, and setting up the infrastructure needed to support greater integration of Africa into world markets are defined as the target areas of additional foreign help.^[13] The report refers to a “big push”,^[14] which is needed to trigger development. Other options than aid are not considered as constituting a credible alternative for triggering the mentioned “big push.”^[15]

Besides these, specifically economy related proposals, the commission emphasises that the international community should recognise the need for greater efforts to understand the values, norms and allegiances of the cultures of Africa.^[16] Further, the report takes into account the weakness of African institutions and the need for capacity building and increasing accountability and transparency.^[17] It is urged e.g. that African governments should draw up comprehensive capacity-building strategies and donors should put in place a series of measures to deter their own companies from paying bribes in the first place.^[18]

3. Classifying the Proposals of the Commission for Africa

The classification of the commission’s proposals is aimed at pointing out the underlying concepts of development policy inherent to the commission’s report. Concerning the classification of the underlying concept towards enhanced economic development in Africa, the Washington-Consensus^[19] provides an adequate system of reference. According to the Washington-Consensus based approach of development, a set of economic policy measures has to be in place in order to trigger development. The most important measures outlined by the proponents^[20] of this approach are: privatisation of state-owned companies, trade liberalisation, reducing the role of the state to a provider of only basic policies, deregulation, financial discipline, low tax polices, and securing property rights. International development organisations like the World Bank and the International Monetary Fund, mostly adjusted their policies in accordance with the principles of the Washington-Consensus. The consequence was what has become known as structural adjustment. Loans and resources were mainly provided based on the conditionality that they are spent in accordance with the measures proposed by the Washington-Consensus.

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^[1] A list of significant plans with the main objective of growth and development for the African continent is provided by: Kayizzi-Mugerwa, S., “Report of the Commission for Africa: What is New?”, The Journal of Development Studies, Vol. 41, No. 6 (2005), p. 1131.

^[2] The report “Our Common Interest – Report of the Commission for Africa” can be found at: http://213.225.140.43/english/report/introduction.html (last access: 15.12.05)

^[3] Our Common Interest (2005), p. 337.

^[4] Ibid., p. 330 and p. 332.

^[5] Birdsall et al., “How to Help Poor Countries”, Foreign Affairs, Vol. 84, Issue 4 (2005), pp. 136-152.

^[6] Thomas, M.A., “Getting Debt Relief Right”, Foreign Affairs, Volume 80, Issue 5 (2001), p. 41.

^[7] Our Common Interest (2005), p. 251.

^[8] Ilorah, R., „NEPAD: The Need and Obstacles“, African Development Review 16(2), 2004, p. 224.

^[9] Our Common Interest (2005), p. 17.

^[10] Ibid., p. 60

^[11] Ibid., p. 330 and p. 332.

^[12] Ibid., p. 313.

^[13] Ibid., p. 73.

^[14] Ibid., p. 307

^[15] Ibid., The report assesses higher savings, FDI (Foreign Direct Investment) and remittances as further options.

^[16] Ibid., p. 132.

^[17] Ibid., p. 157.

^[18] Ibid., p. 36.

^[19] The Washington-Consensus policies were designed in the late 1980s in order to respond to economic problems in Latin America. The main problems that were identified as obstacles towards sound economic policies were: household deficits, protected domestic economies, high inflation and state owned , inefficient companies.

^[20] See for example Williamson, J., “The Washington Consensus as Policy Prescription for Development”, Institute for International Economics (2004), p. 22. Williamson provides an overview of characteristics of the Washington-Consensus as well as of the post-Washington-Consensus.

This paper can be found at: www.iie.com/publications/papers/williamson0204.pdf (last access: 15.12.05)