Killing Sub-Saharan Africa with Aid. 9781560728795, 1560728795, 9781614701811, 1614701814

Table of contents :
KILLING SUB-SAHARANAFRICA WITH AID
CONTENTS
LIST OF TABLES
INTRODUCTION
WHO GIVES FOREIGN AID TOSUB-SAHARAN AFRICA AND WHY?
THE TYPES OF AID SUB-SAHARAN AFRICA RECEIVES
THE WORLD BANK AND IMF AID TO SUB-SAHARAN AFRICA
IMF FUNDING
THE EUROPEAN UNION'S AID TO SSA
THE INSTRUMENTS OF EU AID TO SSA (TABLE 7)
THE EU'S STRUCTURAL ADJUSTMENT SUPPORT
THE EU'S NON-PROGRAMMED AID26
European Investment Bank (EIB) --
Managed Resources
THE STABEX SYSTEM OF COMPENSATORY AID
SYSMIN
ASSESSING FOREIGN AID
ASSESSMENT OF PERFORMANCE OF FOREIGN AID TO SSA. POVERTY ALLEVIATION PRESUMESECONOMIC GROWTH AND DEVELOPMENTASSESSING FOREIGN AID
INAPPROPRIATE STRATEGY FOR ADVANCINGECONOMIC GROWTH AND DEVELOPMENT
MACRO-ECONOMIC OBJECTIVES
ASSESSING FOREIGN AID
INTEGRATION OF SSA ECONOMIESINTO THE WORLD ECONOMY
THE EXPORT INCOME STABILIZATION SYSTEM (STABEX)
ASSESSING FOREIGN AID
THE EU'S SPECIAL TRADEPREFERENCES FOR ACP COUNTRIES
FOREIGN PRIVATE INVESTMENT AND GLOBAL INTEGRATIONOF SSA ECONOMIES
ASSESSING FOREIGN AID
MISCELLANEOUS ASPECTS OF AID ANDGROWTH/DEVELOPMENT IN SSA
DEMOCRACY AND HUMAN RIGHTS
ASSESSING FOREIGN AID. THE PSYCHOLOGICAL DIMENSION OF AID TO SSASO WHAT IF AID IS WITHDRAWN?
CAN AID WORK IN SSA?
SPRINGING THE DEBT TRAP AS AID.
REDRESSING CAPITAL FLIGHT ANDRETURNING AFRICA'S LOOTED WEALTH AS AID
PRIVATE INVESTMENT AND TRADE AS AID
MAKING AID WORK IN SSA
DEVELOPING DOMESTIC AND REGIONAL MARKETS
CONCLUSION
REFERENCES
INDEX.

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KILLING SUB-SAHARAN AFRICA WITH AID No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

KILLING SUB-SAHARAN AFRICA WITH AID

HUMPHREY ORJIAKO

Nova Science Publishers, Inc. New York

Senior Editors: Office Manager: Graphics: Information Editor: Book Production: Circulation:

Susan Boriotti and Donna Dennis Annette Hellinger Wanda Serrano Tatiana Shohov Cathy DeGregory, Lynette Van Helden and Jennifer Vogt Ave Maria Gonzalez, Ron Hedges, and Andre Tillman

Library of Congress Cataloging-in-Publication Data Orjiako, Humphrey. Killing sub-Saharan Africa with aid / Humphrey Orjiako. p. cm. Includes bibliographical references and index. ISBN 978-1-61470-181-1 (eBook) 1. Economic assistance--Africa, Sub-Saharan--Evaluation. I. Title. HC800.077 2000 338.91’0967--dc21

CIP 00-048982

Copyright 2001 by Nova Science Publishers, Inc. 227 Main Street, Suite 100 Huntington, New York 11743 Tele. 631-424-6682 Fax 631-424-4666 e-mail: [email protected] Web Site: http://www.nexusworld.com/nova

All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without permission from the publishers. The authors and publisher have taken care in preparation of this book, but make no expressed or implied warranty of any kind and assume no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS.

Printed in the United States of America

CONTENTS List of Tables Introduction WHO GIVES FOREIGN AID TO SUB-SAHARAN AFRICA AND WHY? The Types of Aid Sub-Saharan Africa Receives The World Bank and IMF Aid to Sub-Saharan Africa IMF Funding

vii xi

CHAPTER I:

1 5 6 7

THE EUROPEAN UNION’S AID TO SSA CHAPTER 2 The Instruments of EU Aid to SSA (Table 7) The EU’s Structural Adjustment Support The EU’s Non-Programmed Aid The STABEX System of Compensatory Aid SYSMIN

13 16 18 19 20 21

CHAPTER 3 ASSESSING FOREIGN AID Assessment of Performance of Foreign Aid to SSA Poverty Alleviation Presumes Economic Growth and Development

23 23

ASSESSING FOREIGN AID CHAPTER 4 Inappropriate Strategy for Advancing Economic Growth and Development Macro-economic Objectives

33

24

33 37

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Humphrey Orjiako

CHAPTER 5 ASSESSING FOREIGN AID Integration of SSA Economies into the World Economy The Export Income Stabilization System (STABEX)

43 43 45

ASSESSING FOREIGN AID CHAPTER 6 The EU’s Special Trade: Preferences for ACP Countries Foreign Private Investment and Global Integration of SSA Economies

53 53

ASSESSING FOREIGN AID CHAPTER 7 Miscellaneous Aspects of Aid and Growth/Development in SSA Democracy and Human Rights

61 61 65

ASSESSING FOREIGN AID CHAPTER 8 The Psychological Dimension of Aid to SSA So What if Aid is Withdrawn?

69 69 76

CAN AID WORK IN SSA? CHAPTER 9 Springing the Debt Trap as Aid. Redressing Capital Flight and Returning Africa’s Looted Wealth as Aid Private Investment and Trade as Aid

79 82

CHAPTER 10 MAKING AID WORK IN SSA Developing Domestic and Regional Markets Conclusion

87 90 91

References Index

95 99

57

84 85

LIST OF TABLES Table 1:

When countries in SSA first reached their current GDP/N Levels. Table 2: Developing countries; Social Indicators by region. Table 3: ODA Flows, (Concessional and non-concessional) to SSA Countries Between 1980 and 1995. Table 4: SSA’s Net Credit from the IMF, 1982 – 1993. Table 5: Evolution of ACP-EU Partnership. Table 6: Annual Payments by EDF in million Euros Table 7: Average Annual Shares of EU Aid by Instruments. Table 8: ODA – Gross Domestic Investment – FDI – GNP Ratio for 10 SSA Countries (1995) Balance of Payments, Average Growth Rates Pre & Post Structural Adjustment. Table 9: Percentage Total STABEX Transfers Received by Diversifying SSA Countries, Level of Diversification & Share of Manufactured Products. Table 10: Regional Participation in International Trade & Capital Flows, 1995 (Percent)

xiii xiv 8 10 14 15 15

28

49 93

INTRODUCTION Given the diversity of sub-Saharan Africa (SSA)1 in terms of resource base, economic structure and political economy, a generalized explanation of the failure of African economies may amount to oversimplification. However, a few economic aggregates reveal a common pattern of the effects of deterioration of economic performance in sub-Saharan Africa. The failures and consequences could generally be attributed to a combination of negative exogenous factors and inappropriate internal policies. A negative trend of external shocks on African economies commenced in the 1970s in the form of declining terms of trade and international responses to the continent’s need for sustained growth and development. Reinforced by ill-advised national government interventions, sub-Saharan Africa started to record miserable budget deficits and balance of payment problems. The situation escalated as African economies began to rely more and more heavily on foreign savings in the form of loans and official development assistance transfers. These temporarily boosted incomes and domestic consumption but did little to grow the productive capital. In the 1980's, SSA showed the worst aggregate growth performance, worsening external and internal account balances as rising government budget deficits as a share of GDP, reached unsustainable levels...2 Since then, the region’s economies have been characterized by fleeting spurts of growth and extended periods of economic decline. In a recent study, ‘Why Not Africa’, Professors Richard B. Freeman and David L. Lindauer found that 1

For the purpose of this study, SSA excludes the 6 countries of North Africa. The Republic of South Africa is excluded in the analysis because of its dual economy, but it includes the island States in the Indian Ocean (See Map) 2 David E. Sahn, Economic Crisis and Policy Reform in Africa: An Introduction, p.3

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Humphrey Orjiako

94% of sub-Saharan Africa’s 1997 population lived “in countries where income per capita retrogressed progressively since 1970. Thirty six percent of the region’s population lived in economies that in 1995 had not regained the per capita income levels first achieved before 1960. Another 6% are below levels achieved by 1970, 41% below 1980 levels, and 11% below 1990 levels. Only 35 million of Sub-Saharan Africa’s population of nearly 600 million reside in countries that had higher per capita incomes in 1995 than they had ever achieved before”3. [Table I] Similarly, other macro-economic indices reveal the magnitude of the economic retrogression of sub-Saharan Africa. Since 1989, there has been a massive decline in modern sector employment as a share of the aggregate labor force. The result is a quadrupling of unemployment to well over 100 million.4 Real wages have fallen by more than a third, to subsistence levels particularly in the urban sector. The region’s share of World trade has fallen from 4% to 2% during this decade even though export volumes increased. While deteriorating terms of trade cost African economies around $ 12 billion per annum in the 1980s, the increasing glut of the world commodity market has driven prices further down in the 1990s. And SSA’s share of foreign investments has fallen in real terms than it was in the 1980s. Absolute poverty rate is rising above 50% while food production per capita continues to decline. “On current trends, some 300 million people, around half of the region’s population, will be living in poverty by the end of the decade. Sub-Saharan Africa is now the only part of the developing world in which poverty is increasing and health and education are worsening... the region’s children, who represent 10% of the world’s total, account for a third of all-under-five child deaths and the number keeps rising”.5 [Table 2]

3

Richard B. Freeman and David L. Lindauer, Why Not Africa? National Bureau of Economic Research Working Paper 6942, Cambridge, Feb. Rep. 1991 P.1-2. 4 Kevin Watkins, We’re not doing anyone any favours A IMF-World Bank activities in Africa, New Statesman and Society, April 8, 1984 V7, N.297 P. 24 (2) 5 Ibid., Kevin Watkins, P.24

Introduction

xiii

Table 1. When did Countries in SSA First Reach there Current GDP/N Level? Economic Decline: 94% of Population Before 1960’s: 205,342,000 people (36%) Angola Benin Burkina faso Burundi Central Africa Republic Chad Comoros Côte d’Ivoire Madagascar Mali Mozambique Niger Rwanda Sierra Leone Somalia Sudan Zaire Zambia Between 1960-1969: 36,601,000 people (6%) Gabon Guinea- Bissau Liberia Senegal Togo Uganda

Between 1970-1979 YEAR 236,381,000 people(41%) Cameroon 79 Gambia 71 Ghana 70 Kenya 79 Malawi 78 Mauritania 74 Namibia 71 Nigeria 71 South Africa 70 Swaziland 70 Zimbabwe 71

YEAR 68 69 63 64 67 66

Between 1980-1989 65,628,000 people (11%) Congo Ethopia Guinea

YEAR

In the 90’s: 73’500 people (0.01) Seychellelles

YEAR

80 82 80

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xiv

Table 1. (continued) Economic Growth: 6% Of Population Countries Experiencing Growth: 34,584,000 people Botswana Cape Verde Lesotho Mauritus Tanzania The international donor community comprising the World Bank and the International Monetary Fund, regional organizations such as the European Union, other multilateral international agencies and individual OECD countries, has used foreign aid in one form or another to ameliorate the grim situation in sub-Saharan Africa, home to 33 of the 48 least developed countries, LDCs, in the world. The role of donors has therefore become an increasingly important and constant factor in the economies of sub-Saharan Africa. Over all, since the 1980s, there has been a dramatic growth in external intervention in the form of IMF-World Bank guided stabilization/structural adjustment funding and Official Development Assistance, (ODA) in various forms. The World Bank’s policy – based and IMF lending program to SSA rose from $135 million in 1980 to $ 1.544.7 million in 19896. The World Bank-IMF program response was aimed at reducing deficits in the government budget and the balance of payments, containing inflation and stimulating savings for investment and debt service. For reasons of geography and history, the European Union claims credit for providing the most ODA, 53% of all project aid and compensatory funding to sub-Saharan Africa. These take the form of grants from the European Development Fund and soft loans from the European Investment Bank. The EDF/EIB financed instruments include rolling national and regional indicative programs, (NIPs and RIPs), provision of stabilization income from exports to the Community of some 50 odd tropical agricultural commodities (STABEX) and a special financing facility for mining products (SYSMIN).

6

Ibid., David E. Sahn P.3

Table 2. Developing Countries: Social Indicators by Region Population

GNP per capita capita

Infant mortality rate

Illiteracy rate

Export growth

1994 ODA

1994 direct investment

(% chance (p. thousand) per annum)

(age 15 +)

% chance per annum)

(as % of GNP)

(as % of GNP)

1.9

(millions)

(% chance per annum)

(USD)

Sub Saharan Africa

572

2.7

460

-1.2

92

43

0.9

12.4

East Asia South Asia Middle East/ North Africa Latin/ Caribbean

267 1735 1220

2.8 1.4 1.9

1580 860 320

-0.4 6.9 2.7

49 35 73

39 17 50

1.1 14.4 8.5

1.6 0.8 1.4

471

1.8

3340

0.6

41

13

0.3

1.6

Sources: World Bank, “Social Indicators of Development”, World Development report 1996, UNCTAD World Investment Report 1996.

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Humphrey Orjiako

At the bilateral level, almost all the OECD countries have provided subSaharan Africa with aid of high grant content, some 61.4% compared to a global average of about 25%. Since the end of the cold war, foreign aid advocates decry what they describe as ‘unsettling trends’ – the progressive fall of net ODA flows from the Development Assistance Committee (DAC) countries to developing countries and multilateral organizations. The sharp drop from US$60.8 billion in 1992 to US$48.3 billion in 1997, a fall of 20% in real terms drove down ODA as a percentage of the combined GNP of the OECD’s DAC from 0.33% in 1992 to an historic low of 0.22% in 1997, less than a third of their agreed target of 0.7 percent. The Society for International Development projects that ODA will fall below 0.2% of the GNP of DAC member countries by the end of 1999. In short, while ODA represented 39% of the total net resource flows from DAC member countries and multilateral agencies to developing countries in 1990, this share dwindled to 15.3% in 1997 (OECD, 1999: Table 1.A2). Aid advocates mourn that this indicates a slow withering away of the era of aid and perhaps the beginning of a new, much broader concept of development cooperation based on two-way compacts rather one-way transfers. This view may be mistaken because, among the DAC countries, the biggest drop in aggregate ODA is from the USA whose aggregate aid to developing countries fell from 0.24% of GNP in the 1980s to just about 0.10% in 1995. This comes as no surprise. Having achieved its main purposes of aid – to help fight the Cold War and to shift the prevailing economic model from Keynesianism to laissez-faire, one would expect US aid to diminish. The fact that most other countries dropped much less, and in a few other countries such as Denmark, Switzerland, Portugal, aid rose as a percentage of GNP, aid is quite likely to stay with us for a while. In fact, France and Japan (for different reasons) maintain a growing level of aid. Japan's ODA to sub-Saharan Africa has actually grown from 2.3% of total ODA in 1986 to 11.8% in 1994, (about 180 billion yen between 1986 and 1994) 7. Even at the height of its growth, aid inflows did not begin to offset half the losses in external earnings that SSA has suffered as a result of declining commodity prices. In the four years between 1986 and 1990, the region 7

(a) Figures are taken from Sadig Rasheed et al., Development, Sage Publications for the Society for International development, 1999, p.25. (b) Howard Stein, Japanese Aid to Africa: Patterns, Motivations and the Role of Structural adjustment; Journal of Development Studies, v.35i 2 Dec. 1998, p.27 (2). (c) Anver Versi, Japan bears brunt of aid burden: International aid and Africa, African Business, n217, Jan. 1997, p. 39(4)

Introduction

xvii

received an average of $16 billion per annum while loosing more than $50 billion each year in foreign income due to deteriorating terms of trade. Furthermore, the net receipt of aid is depleted by the cost of servicing the excessive foreign borrowing that commercial lenders foisted on African governments in the late 1970s. At a time the world financial system was awash with cheap credits and excessive petrodollars, commercial lenders were far too anxious to restore balance to the system. They lent huge sums instinctively to African governments with little consideration of their investment details and/or absorptive capacity. Naturally, instead of generating growth, the excessive borrowings generated unsustainable debt burdens that set the stage for sub-Saharan Africa’s economic decline. Consequently, and in spite of the IMF-World Bank-led aid programs, SSA’s debt burden has more than tripled since 1980 dwarfing net ODA receipts. Repayments, including $2 billion per year to the IMF for new loans, amounts to over $10 billion per annum, a mere third of what is due to its creditors, yet four times as much as the region spends on the education and health of its citizens8. The net inflow of aid is nowhere near the huge drain of investable capital that goes to service external debt. The African condition raises legitimate questions about the nature of aid and the processes of poverty alleviation, national economic growth and regional development. Why for instance, after 40 years of substantial aid flows and much advice, is sub-Saharan Africa no better now than at Independence? Members of DAC set the year 2015 as the target for reducing by 50% the proportion of people living in extreme poverty; achieving universal primary education in all countries; reducing infant and under-five mortality rates by two-thirds; reducing maternal mortality by three-fourths; ensuring universal access to reproductive health services; and reversing the loss in environmental resources. Realistically speaking, none of these is happening, yet foreign aid transfers remain the preferred instrument for reaching the goals. Is it possible that too much aid, too much advice and intervention in African economic policies are yielding results other than the declared or desired objectives? This study will therefore examine the hypothesis that rather than promote growth and development in SSA, foreign aid interventions may have contributed in no small measure to the poor performance of the region’s economies. This seems to run against the grain of volumes of literature on the 8

Ibid., Watkins P.24

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Humphrey Orjiako

subject of aid to developing countries, and particularly to sub-Saharan Africa9. Among many writers who advocate more aid as a way out of the African economic crisis, the focus of objection is the aid delivery methods and strategies of the leading international donors. Since development success has been rare in sub-Saharan Africa where foreign aid constitutes the largest percentage of GNP, analysts tend to concentrate attention on the region’s World Bank/IMF stabilization and structural adjustment interventions, prescribing ways and means to make them more effective. They presume that poor conception and misallocation of aid resources as well as the complexity and misapplication of structural reform programs, are to blame for much of SSA’s growing economic problems. Generally, what seems to be missing in the advocacy for more aid is appreciation of the close association between slow economic growth and low levels of development in sub-Saharan Africa with relative heavy reliance on aid resources. For instance, the World Bank and IMF aid policies, the current standard for most multilateral donors, are advised by pro-market or neoclassical theorists. Their models favor restoration of stable balance of payments and debt-service capability to the detriment of productivity growth, provision of human priority services and long-term economic development. In turn, this strengthens dependency of the poorest African countries on aid from all sources. Thus, while economically - growing regions in Asia and Latin America wean themselves away from aid and the Bretton Woods institutions, SSA is tied to stricter IMF and EU-supported programs. The persistence of economic decline suggests that these programs do not address the underlying constraints to growth in the region, and/or that the economic costs of external involvement outweigh the benefits of additional finance therefrom. The inference grows stronger when we consider that the poorest countries in the world are carrying a disproportionate share of the global adjustment burden with damaging consequences for poverty alleviation. The vast majority of policy makers and advisers within the donor and recipient communities accept the neo-classical economic view that foreign savings can help economic development under appropriate circumstances and conditions, that is, under a good policy and good institutional environment. That may well be so. But the departure from the majority view rests on the premise that an economy operating under appropriate circumstances and conditions may not require foreign aid to succeed. The records of history, commonsense and cognate experience do not uphold the essentiality of aid in 9

See References

Introduction

xix

the development process as modern donors and recipients seem to presume. Neo-classical economic models may have simplified the measurement of the contribution of aid and other foreign saving to growth and development, but their prediction of a positive impact of aid on economic growth is open to debate. In countries such as Ethiopia, Mali, Tanzania, Kenya, Senegal and Ghana, where foreign savings account for over 10% of the GNP, the recorded aggregate growth rates are not so impressive, and where growth has occurred, the contribution of aid is questionable. Except for Tanzania, which has recorded about 1% real economic growth per annum over the last decade, after decades of rock-bottom economic stagnation, the rest are countries that have failed to re-gain the peak positive growth or GDP per capita they had reached in the 1960s and 1970s.10 This strengthens the view that “in fact, there is no strong correlation across countries between aid receipts and economic growth 11. Even if all aid went to additional investment, in the sub-Saharan Africa condition, it is unlikely to add up to a significant or sustainable increase in the growth of the capital stock, or cause an increase in the growth of GNP. This is because high domestic or foreign savings rates cannot substitute for the lack of important complementary inputs to growth and development. Aid cannot stimulate growth in the absence of human skills, administrative capacity, economic infrastructure and institutions, friendly investment environment and political stability - all characteristics of sub-Saharan African economies. Potentially, aid could help create some of these inputs, but until quite recently when the World Bank is beginning to ‘rethink the money and ideas of aid’, ownership of reform policies, social and political stability building have rarely featured in the calculations of donors and aid managers. In particular, much of the aid to SSA is fungible and does not contribute much to additional savings or investment. For reasons of the political economy of African countries, foreign aid often goes to finance higher consumption, reduce exports and fuel official corruption. A dimension of this thinking which has not received much scholarly attention, is the view that certain forms of aid are not only neutral to growth and development, but in the long-term, actually stymie the growth process of recipient States. The best examples of this type of aid include the special 10

Figures are extrapolated from the UN Handbook of International Trade and Development Statistics. 1996/97 11 Gillis Perkins, Roemer, Snodgrass, Economics of Development 4th ed. W.W. Norton and Company, N.Y. 1996, P.399

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Humphrey Orjiako

compensatory aid categories of the European Union under the African, Caribbean and Pacific, ACP-EU Lomé Conventions. Like many issues affecting Africa, the normatives of the European Union’s substantial aid to SSA are under- theorized and the huge impact on SSA is mostly unexamined by objective third parties. In fact, the development story of sub-Saharan Africa today is mostly written by donors - the European Union, the Bretton Woods institutions and UN agencies, with diminishing objective input by academia. The French cartoonist, Plantu, seems to have captured the post-Cold War tendency to ignore Africa with the attitude of Western scholarship which informs popular wisdom on Africa. He conveyed a common place with a drawing: an unfortunate African facing the lottery of death after a natural disaster in Cameroon. His wheel of fate turned between famine, civil war, drought, apartheid, the invasion of locusts, corruption and the AIDS epidemic12. Whenever Western scholarship pays any heed to Africa, it turns the study of its societies into a pseudo science of pathological dependency, immaturity and/or morbidity, an attitude of hopeless fatalism that many Africans seize as an alibi for failure. Arising from this perception and attitude is the presumption on the part of donors and many recipients that without aid the SSA region would atrophy and die, or at best remain, not a mere geographical region but a topical theme of perpetual economic stagnation. My primary objective therefore, is to raise some doubts on the intellectual premise of current aid policies at bilateral and multilateral levels. My assumption is that the African economic condition is not one of forlorn hopelessness – ‘a basket case image’ that only increased foreign aid can ameliorate. On the contrary, it is a remediable condition given sustained research and application of new policy review arising therefrom. I am the first to admit that the eclectic method that I have used in this work is not too scholarly. Yet, I will feel fully justified if this study helps in any way to revive waning intellectual interest on Africa, and perhaps cast some doubt on, or reduce the dogmatic certainty of certain donors and aid officials about what Africa needs. It would also be quite gratifying if in addition, it helps to stimulate deeper thought among the Africans themselves, concerning reliance on aid as a means to overcome the region’s economic backwardness. It need be stated from the outset that this inquiry is not about emergency food aid and/or humanitarian aid as a response to natural and man-made disasters. It does not even cover the activities of Non-Governmental 12

Professor of French History Bayart, Politics of the Belly: Historicity of African Societies, Introduction, P.I

Introduction

xxi

organizations engaged with the development process (NGDOs). In this connection, the study concentrates on examining the government-centered, development-oriented and compensatory types of aid such as provided mostly by the EU under the Lomé system, and the IMF/World Bank under the stabilization and structural adjustment programs.

Chapter I

WHO GIVES FOREIGN AID TO SUB-SAHARAN AFRICA AND WHY? Foreign aid has its roots in the post world-war II Marshall Plan, in which the United States transferred $17 billion (1.5% of its GDP) over 4 years, to rebuild Europe’s war-wasted physical capital stock. In the 1960s, sub-Saharan Africa countries emerged from colonial rule and became recipients of aid from the USA, and now prosperous Western European countries, particularly France and Britain whose aid targeted their erstwhile colonies. Foreign aid at that stage was mostly a bilateral relationship driven by a complex set of considerations among which were: The security of the United States and Europe suggested a shift of attention and resource to the emerging African nations as part of containing communism. Clearly, such aid that is rational from a security or foreign policy perspective need not bear even a marginal relationship to that which might appear desirable from a distributive and poverty-reducing one. The drastic reduction of US aid to developing countries since the end of the Cold War removes this view from the realm of speculative probability. As the leader of the Western countries and strongest adherent of laissez faire, the USA bore the most burden of aid imposed by the East-West contest. It should be expected that after emerging victorious in that contest, it would seek to shed as much of the burden of aid as its foreign security needs demand. Thus, the radical shift in US aid policy is neither the result of national insensitivity to human poverty elsewhere, nor a sudden realization that aid does not work. It is simple rationalization of the national interest.

2

Humphrey Orjiako (i) There was need for industrial Europe and the USA to ensure uninterrupted access to important strategic raw materials, which subSaharan Africa had in abundance. Aid in this sense was determined primarily by issues of donor production and consumption needs, and less by the local social contexts of the receiving communities and countries. (ii) Foreign aid was expected to promote export trade expansion and investment and therefore the prosperity of the traders and investors in the donor countries. In addition to their security needs, the West realized that ‘aid leads to good trade’ and maintained a generous aid policy designed to achieve a market-based world order.

It was also believed that aid would promote development and stability, actually a stake in the capitalist world order in the recipient new States. Both the security and economic interests of the donors would be served simultaneously if the new States were aided to adopt or maintain democratic political institutions and private-enterprise-based economies in the capitalist mould; (iii) The early aid programs also drew strength and momentum from a popular humanitarian concern for the World’s poor. For the most part however, the motives for aid were not likely to lead to povertyreducing allocation or to economic growth and development. By the 1970s, the multilateral agencies particularly the IMF, the World Bank and its affiliates - the International Development Association (IDA) and International Finance Corporation (IFC), became important sources of capital, and by 1992, the multilateral share of all official loans had risen to 61%, or 22% of all ODA13. Although the IMF was not conceptually aid-ordevelopment oriented it has since the 1980s had a most profound effect on developing countries, particularly in sub-Saharan Africa. When the Nixon Administration abolished the fixed exchange rate in 1972, it robbed the IMF of its raison d’etre. But by using its resources for a variety of balance-ofpayment support programs, it took advantage of the financial instability that followed the oil shock of the 1970s to morph itself into the world’s advise13

World Bank Debt Tables, 1994. Much of the World Bank disbursements are offset by loan repayments, for example, in 1992 the bank and affiliates disbursed $ 15.6 billion, actually $ 4.9 billion or 9% of all ODA, when loan repayments were factored in.

Who Gives Foreign Aid to Sub-Saharan Africa and Why?

3

and-salvage operator. For sub-Saharan Africa, it turned out to be, as evidence of its debt policies show, a search-and-recover squad for international creditors. Each of the regional development banks in Africa, Asia and Latin America, funded by regional members, the major aid donors and borrowings on private capital markets, has a separate window that dispenses hard and soft loans to member countries. The UN also has a technical assistance concessional program coordinated by the UNDP. In terms of high grant-content-aid transfers to sub-Saharan Africa, the European Union features prominently because, for reasons of history, trade and geography, it remains the most important multilateral aid giver to the countries of the sub-region, all of which belong to the ACP-EU Lomé Convention. The Africans regard the three-decade long set of conventions that relate them and the EU in a legally binding system of institutions and cooperation as “the most complete instrument of North-South cooperation ever. 14 Going by the high-minded objectives and principles set out in Articles 1 and 2 of the Preamble of its four conventions, the Lomé arrangement is actually unique in many ways. It states inter alia: “The contracting parties hereby conclude this cooperation Convention in order to promote and expedite the economic, cultural and social development of the ACP States... express their resolve to intensify their effort to create, with a view to a more just and balanced international economic order, a model for relations between developed and developing States.15 As EU officials will readily admit, the dismal state of Africa’s economic condition makes a mockery of this ambitious declaration of intent made a quarter century ago. Any wonder that political realists are wary of declared intentions – the gap between theory and practice can be quite wide indeed! The fact for the European Union as for other multilateral and bilateral aid givers is that economic development is not quite the rationale or driving force of aid. In any case, the objectives of aid have shifted significantly since the Marshall Plan. In the 1950s or the Marshall Plan era, the main economic goal of aid, provision of foreign savings for reconstruction and investment, was rapid recovery of Europe, the growth of its economic output and incomes. The Marshall plan would succeed because what the war had consumed or destroyed was Europe’s physical capital and economic infrastructure, its basic 14

The Courier, ACP-EU bi-monthly publication, Lomé IV Convention. N?. 155, Jan-Feb.. 1996, P.1 15 Ibid., p.11

4

Humphrey Orjiako

technology and human capital was intact, even improved as a result of war time research, experimentation and improvisation. This fact was probably lost on some Western politicians and officials who were genuinely driven by idealism to expect that foreign aid would do for the new independent states that emerged in Africa in the 1960s, what the Marshall Plan had done for Europe. But the miracle of Europe’s rapid recovery could not be replicated as the decades rolled by with sub-Saharan African countries sliding further into poverty and underdevelopment. As for the realists whose consideration of international economic advantages made the directional flow of aid and trade a part and parcel of the Cold War contest for ideological, material and military supremacy, the goals of aid have been mostly realized. All the same, aid did help to make foreign exchange an integral part of capital. Technical assistance and aid programs spread into all sectors of national planning such as education, health, social infrastructure and other human services. Since the 1970s, the theoretical emphasis of program aid shifted from the goal of promoting economic growth and development towards income redistribution, poverty alleviation, and satisfaction of basic needs in the rural areas. Operating under mostly unstable governments, growth-restraining import substitution policies, and beset by public corruption and mismanagement, African economies were predisposed to crumble under any adverse external shocks. Hence they were seriously weakened by the sharp rise in the price of crude oil following the reaction of Arab states to the Western support of Israel in the Yom Kippur war of 1973. Closely followed by the drastic fall of commodity prices in the world market, the way was paved for the collapse of African economies and the entry of international donors as the dominant force in the region’s growth and development planning. As the market and market-reform needs experienced a resurgence in the 1980s and 1990s, the focus of donor emphasis shifted to macro-economic stabilization and structural adjustment as the principal goals of aid. In particular, the World bank-IMF group, concerned by the escalating risks posed by the rising external debt profile of developing countries to the stability of international finance, assumed the role of monitor and enforcer of reforms in those countries. Thus, they imposed Structural Adjustment Programs that constrained most countries of sub-Saharan Africa to adopt austerity measures, cut health care, education funding and other social infrastructure budget in order to qualify for further World Bank / IMF funding.

Who Gives Foreign Aid to Sub-Saharan Africa and Why?

5

The demise of Soviet Communism and end of the Cold War diminished the strategic importance of sub-Saharan Africa, and once more, the aims of aid are expanding to accommodate issues of environmental sustainability, prevention of mass migration and political democratization. As these issues become the premier interests of donors, concern for economic growth and development, and therefore poverty reduction in recipient countries, diminishes to insignificance. The poor are usually victims rather than agents of the factors that make aid interventions necessary. Similarly, the threat of migration does not emanate from among the poorest people in poor countries. The African experience will justify the conclusion that aid transfers to poor countries that seek to prevent financial collapse, maintain debt service payments or prevent mass migrations, are unlikely to focus on the poor within those countries. Aid to promote public environmental goals such as forestation, prevention of desert encroachment and erosion control, can only be coincidentally poverty-reducing, while aid to facilitate democracy may have indirect impact on the poor if successful. Beyond the coincidental and indirect possibilities, the new motives for aid, if they are really new, are not likely to lead to growth and developmentaugmenting policies. The European Commission seems to have acknowledged this in its ‘Green Paper’ on future relations with the ACP countries. In the green paper, the EC claimed an intention to try to persuade its ACP partners that “development aid has lost legitimacy, that in comparison to trade and investment, aid has played a marginal role in the economic success of certain Asian and Latin American countries ... and subSaharan Africa recipients of substantial aid and cooperation resources had fallen behind and remained on the margins of global economic and technological development”.16 Assuming that EU policy were to be consistent with this perception of aid, the African partners seem to be in no position to cooperate with any of it. They insist on more not less of the same.

THE TYPES OF AID SUB-SAHARAN AFRICA RECEIVES Bilateral donors dispense loans and grants through national aid agencies such as USAID, Japan’s OECF, ODA, CIDA, SIDA etc. 17 Numerous studies 16

‘Green Paper’ on Relations between the European Union and the ACP countries on the eve of the 21st century’ challenges and options for a new partnership, European Commission, P.3 17 ODA - Overseas Development Administration of the UK

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Humphrey Orjiako

contain ample evidence in the direction of flows of bilateral aid from the USA, France, the UK and other OECD countries to support the view that most bilateral aid is dictated by political, economic and strategic self-interest rather than reasons of development.18 We have also noted that bilateral aid is losing ground as donor fatigue spreads among the OECD countries including such exemplary givers as the Scandinavians, the Dutch and Canadians. All the same, aid giving as an instrument of foreign policy is not about to die on the vine so long as global objectives exist and donors have interests beyond their own borders – the environment, population, disease, and drug control. UN figures show that bilateral aid is quite alive. Of the total amount of $112,513.9 million ODA flows to sub-Saharan Africa from 1980-1995, bilateral sources accounted for $65,349 million, well over 58% and usually with a higher grant content. The total non-concessional loans for the period was $8,347.7 million of which only $1,436.9 or 17.2% came from multilateral sources.19 The important multilateral aid agencies for sub-Saharan Africa are the World Bank, the International Monetary Fund the EU, the African Development Bank (ADB), and to a lesser extent, the UNDP.

THE WORLD BANK AND IMF AID TO SUB-SAHARAN AFRICA The World Bank, or International Bank for Reconstruction and Development (IBRD), sources funds from the world capital markets at prevailing prime interest rates and re-lends to developing countries for project development and support at slightly higher rates. Its affiliate, the International Finance Corporation (IFC) lends on commercial terms and may take minority equity positions to support private foreign investments. In this strict sense, only the International Development Association (IDA), which distributes contributions from richer to poorer countries on soft terms, actually dispenses aid. Since the debt crisis hit sub-Saharan Africa in the early 1980s, the World Bank and IMF have dominated economic policy in the region. The World Bank expanded its functional role of project lending with loans for export growth and expansion. It simply provides medium and long-term quick dispersing loans in exchange for the borrower governments’ agreement to CIDA - International Development Agency of Canada SIDA - Swedish International Development Agency 18 Don. P. Clark, Economic Development and Cultural Change, Trade US Aid, Distribution of Third World Development Assistance; University of Chicago Press, 1991 P, 828. 19 Ibid., the UN Handbook of International Trade and Development Statistics,

Who Gives Foreign Aid to Sub-Saharan Africa and Why?

7

execute new incentive structures for increased production and marketing. Net ODA in the form of IDA loans to SSA increased by an average annual rate of 15% between 1980 and 1985, accelerated to 49% in 1986 before moderating at 10% in 1987. Examined as a share of GDP in sub-Saharan African countries, the increase is a dramatic 13.4% to 26.7% between 1980 and 1987.20 Table 3 indicates the dramatic increase of all ODA flows to SSA from both bilateral and multilateral sources between 1980 and 1995, more than 50% rise for the region from $8044.3 million in 1980 to $ 18,793 million in 1990, and $15,336.5 million in 1995. [Table 3].

IMF FUNDING On its part, the IMF remade itself as the principal interlocutor between the rich donor countries of the North and the poor aid recipients in the South. Its seal of approval for the budgetary policies of reforming SSA countries has become a prime condition for aid from even traditional bilateral sources. SubSaharan Africa qualified for IMF funding in the form of credits to low-income countries under the Structural Adjustment Facility (SAF) created in 1987, and the Enhanced Structural Adjustment Facility (ESAF) created in 1989. Before then, the Funds compensatory financing facility, CFF, amended in 1982 as the Compensatory Contingency Financing Facility, CCFF- a high conditionality facility, was an important source of finance to developing countries. That has changed as the Fund’s long-term involvement in many developing countries particularly sub-Saharan Africa with over 15 years of outstanding IMF credits, calls into question, the temporary and revolving character of IMF lending envisaged in its Articles of Agreement. The Fund’s failure to rationalize its short-term funding perspective in dealing with both long-term structurally adjusting and short-term stabilizing countries, has become a major drag on the investable resources of many sub-Saharan African countries.

20

Ibid., David E. Sahn, p.13

Table 3. ODA Flows (Concessional and Non-Concessional) to 15 SSA Countries between 1980-1995

SSA Benin Botswana Burkina Faso Cameroon CAR Congo Ghana Kenya Liberia Mali Nigeria Senegal Uganda Tanzania Zambia

1980

1990

1991

1992

1993

1994

1995

$m 8044.3 93.8 110.3 225.7 370.4 11.2 78.3 213.4 464.4 101.0 268.0 135.7 366.5 115.3 706.4 310.2

16882.8 298.8 170.7 337.1 614.0 246.6 227.8 658.5 1012.9 64.8 468.9 1303.0 807.2 595.0 1147.1 449.2

18841.3 254.5 153.0 414.3 713.7 175.9 328.2 759.9 825.8 168.7 460.8 724.7 554.3 577.2 1043.2 539.6

16805.7 278.7 132.6 441.6 1015.5 170.1 109.6 652.1 864.5 118.8 421.7 915.9 726.6 658.4 1226.2 915.4

1781.3 286.1 139.8 451.5 674.5 174.1 127.1 709.0 807.7 125.3 370.8 749.9 567.0 598.8 961.7 640.0

17810.3 230.9 63.9 406.6 865.8 165.5 451.5 571.0 575.2 66.1 407.8 409.8 670.6 712.5 945.5 470.9

15336.5 271.9 70.4 457.4 572.7 177.2 394.6 533.5 669.1 119.7 567.3 -84.7 599.1 785.2 869.3 385.6

Source: UN handbook of International Trade and Development statistics: 1996: 1997.

Who Gives Foreign Aid to Sub-Saharan Africa and Why?

9

In the context of Structural Adjustment Facility, the IMF exerts a decisive influence over the design of economic policy in SSA countries undergoing stipulated reform programs. This involves a powerful IMF prescription and approval of SSA policies, covering the exchange rates, domestic credit creation (money supply), interest rates, and fiscal balances. Reformers appear constrained to seek its seal of approval to qualify for new credit, debt relief or rescheduling, and to attract foreign direct investment. For this reason, many African governments have had to give up some of the sovereign power of States to set the pace of policies covering prices, trade liberalization, privatization, financial reform and the pattern of taxes and public expenditure. In spite of this immense power, table 4 shows that from 1985, SSA’s net receipts from the IMF were negative. In fact, the region paid more to the Fund in debt service than it received in Structural Adjustment Facility loans from 1985 through 1993. [Table 4]. Sub-Saharan Africa’s heavy dependence on IMF approval and credit reflects the region's deteriorating balance of payments performance and declining credit worthiness due to excessive credit creation in the late 1970s and early 1980s. The high level of dependence indicates high levels of external debt, zero international reserves and internal policies that cause rapid inflation and deteriorating terms of trade. The dismal economic condition of SSA countries in spite of nearly two decades of intensive external intervention indicates that the Fund’s engagement in the region is a long-term fact of life. Disengagement will depend on higher levels of economic investment, growth and development, as well as reduced vulnerability to adverse external shocks, none of which is happening yet. Initially, many SSA countries resisted IMF conditionalities only to accept as a last resort, as the leveraging of reform programs with foreign financing became the hallmark of policy - making throughout the region. It need be stated that the IMF prescriptions are not necessarily wrong despite the wide gaps that have been recorded between model and outcomes. Early resistance to the Fund in countries like Nigeria was based on the perception that the reform package was a foreign imposition, an intrusion on national sovereignty. The prescriptions were also ridiculed as undifferentiated cure-all formula for every conceivable economic disease in developing countries, in spite of the known diversity of the target economies.

Table 4. Africa Net Credit from the IMF 1982-1993 1982 Africa 6.9 Sub-Saharan 0.7 Africa

1983 11.0 1.3

1984 4.7 0.5

1985 0.3 -

1986 -2.0 -0.4

1987 -4.7 0.5

1988 -4.1 -0.2

1989 -1.5 -0.4

1990 -1.9 -0.3

1991 1.1 -0.3

1992 -0.2 -

1993 1.0 -0.1

Source: IMF World Economic Outlook, Washington D.C. may 1992, May 1993 and October 1994. Shows that from 1985 Sub-Saharan Africa’s Net receipts from IMF was negative- Sub Saharan Africa paid more to the IMF than it received in Structural Adjustments Facility.

Who Gives Foreign Aid to Sub-Saharan Africa and Why?

11

At the intellectual level, the raging controversy between supporters and critics of Structural Adjustment Programs revolves around their appropriateness, effectiveness and equitability. A library of literature exits on the response of economists to the World Bank-IMF claims that ‘SAP is working in Africa’. From chapter three of this inquiry, we will commence an attempt to go beyond popular conclusions and views on both the left and right to explore if in fact, structural adjustment policies have had detrimental effects on the macro-economic bases of long-term growth and development in subSaharan Africa. We shall examine particularly, the impact of foreign aid on gross domestic investment, diversification of export structure, growth and poverty reduction. In the meantime, the next chapter will focus solely on the scope and nature of aid that the European Union gives to sub-Saharan African countries under the provisions of a special cooperation arrangement dubbed the Lomé Conventions.

Chapter 2

THE EUROPEAN UNION’S AID TO SSA The European Union boasts four decades of partnership with SSA countries, (since 1957), predating their independence and the agglomeration of cooperation under the aegis of the ACP group created during the first Lomé Convention in 1975. [Table 5] All 48 SSA countries (including South Africa) are ACP Members and therefore beneficiaries of ‘the finest and most complete instrument of North South Cooperation' and ‘the largest single source of ODA’21. All aid to the ACP is financed by the European Development Fund (EDF) administered by the Directorate General for Development (DGVIII) of the European Commission. One of the unique aspects of ACP- EU partnership is the institutionalization of aid evident in the EDF, as the premier instrument of cooperation. As a financial instrument, the EDF is exclusively devoted to the ACP countries under the Lomé Convention. It is funded from ad-hoc contributions by (EU) member States to revolving 5-year programs called National Indicative Programs (NIPs) and Regional Indicative Programs (RIPs). The Programs are varied in range and structure: humanitarian and emergency assistance, automatic programmable grants, compensatory grant facilities for stabilization of earnings from agricultural and solid mineral exports (STABEX and SYSMIN), structural adjustment support, and risk capital financing of projects by the European Investment Bank, EIB. [Tables 6 and 7].

21

More than 53% of Development Assistance Committee, DAC, members ‘ODA’ disbursements are EU funds or originate in the EU. Green Paper. P.52

14

Humphrey Orjiako Table 5: Evolution of ACP-EU Partnership.

Year 1957

1963 1969 1975 1980 1985 1990 1995

Event European Economic Community (EEC) Treaty. Provision made under Article 131-136 of the Treaty for association of non- European countries and territories with which EEC Member States have special relations. Yaoundé I Convention AASM- EEC Yaoundé II Convention AASM-EEC Lomé I Convention ACP (African, Caribbean and Pacific) –EEC Lomé II Convention ACP-EEC Lomé III Convention ACP-EEC Lomé IV Convention ACP-EEC Lomé IV mid-term review Revised text signed in Mauritius ACP- EC

No. of countries ‘ACP’ Europe

18 18

6 6

46

9

58

9

65

10

68

12

70

15

Four decades of Partnership Although the ACP group only came into being at the time of the first Lomé Convention in 1975, co-operation between the European Community (now the Union), and countries with which they had special relations in the sub-Saharan Africa, the Caribbean and the Pacific, dates back to 1957. This was when the Treaty establishing the European Economic Community was concluded. The evolution of the relationship is charted below. Source: The Courier, ACP-EU Publication no. 155, Jan.-Feb. 1996, P-2.

The European Union’s Aid to SSA

15

Table 6. Annual Payments by EDF in Million Euro ($1 = E1.02)

1961-1970 1971-1975 176-1980 1987-1985 1986-1990 1991-1996 Total Payment Total allocation

EDF 1&2 909 336 53 1 1299

EDF 3 489 334 60 6 889

EDF 4 1487 1328 261 3077

EDF 5 2041 1790 337 4168

EDF 6 3323 3205 6528 7400

EDF 7 5423 5423 10800

Total 5 yr. 209 825 1874 3430 5380 8965 21383

8th EDF (unallocated)’ MECU 12,967. Source: EU-ACP Co-operation in 1996; The Fight against Poverty, EC publication, P.208 / 209. *Approximately 90% of all EDF is allocated to SSA.

Table 7. Average Annual Shares of EU Aid by Instruments: 1991-1996.

Programme Aid (NIPS and RIPs) SAF OTHER STABEX

Source: EU-ACP Co-operation: The Fight Against poverty, EC publications, 1996 p.210.

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The EDF programs commenced in 1961 but became more distinctly structured in line with the various instruments of EU aid delivery with the commencement of the 3rd and 4th Lomé Conventions in 1985 and 1990 respectively. Each one of the four Lomé Conventions has its own distinct EDF with operations programmed over 5 years to address priority requirements in fields such as education, health, rural development, infrastructure development and private investment. Table 6 shows the schedule of annual EDF payments to ACP countries from 1961 to 1996. Sub-Saharan Africa accounts for 85% -95% of all EDF payments to ACP countries. Table 7 shows the average annual share of EU aid to the ACP countries by instruments. While the Conventions cover 5-year periods, a complex implementation procedure prolongs exhaustion of relevant EDF, hence several EDFs at different levels of depletion run concurrently.

THE INSTRUMENTS OF EU AID TO SSA (TABLE 7) Program Aid: National and Regional Indicative Programs (NIPs / RIPs) EU development cooperation projects and programs with individual ACP countries are called National Indicative Programs (NIPs) while similar programs with the seven sub-regions of the ACP group (5 are in SSA),22 are called Regional Indicative Programs (RIPs). Both NIPs and RIPs are financed from EDF funds earmarked in advance for the purpose under provisions of Art. 282 of Lomé IV Convention. The NIPs form the bedrock of EDF financed transfers averaging about 70% of all programmable aid decisions and payments. The amount of national allocations from the approved fund is agreed in bilateral negotiations between the European Commission and the individual ACP country concerned. At the bilateral level, the EC informs the recipient country of the programmable financial allocation available to it during the 5-year period. Subsequently, both sides agree on the timetable of implementation comprising, programmed aid objectives, sectoral project commitments, and disbursement forecasts. The level of disbursement attained by each country is supposedly determined by its compliance with covering policies or conditionalities.

22

See map for ACP sub-regions in Africa - West, East, Central, Southern and Horn of Africa.

The European Union’s Aid to SSA

17

Under the Lomé IV Convention, emphasis is placed on the development and consolidation of democracy and the rule of law, as well as respect for human rights and promotion of fundamental freedoms. The Convention mentions, but unlike the IMF/World Bank, does not detail, the requirement of stable macro-economic policies on the part of the recipient governments. The records show that no ACP country has been denied EC aid on grounds of policy - induced macro-economic instability. On the other hand, the NIPs of several SSA countries have in recent times been suspended as a result serious internal political crisis, civil wars and/or human right abuses23. The SSA region receives the lion’s share of all EDF allocations. The region received 94% and 90% respectively of all NIP allocations under the 6th and 7th EDF amounting to million Euro 8,30.96. (US$1 = approx. Euro 1.02) The NIPs which are essentially budget-augmenting are generally said to target a two-fold objective: poverty alleviation and integration into the regional and world economy. By making a systematic effort to finance programs rather than projects, the EC claims uniqueness among other multilateral aid givers. In terms of implementation, EU aid unlike the quick dispensing loans of the IMF / World Bank group, passes through a complex maze of processes involving: protracted project identification, appraisals, financing proposals, extensive bilateral negotiations and agreements, contract tenders and awards, projects monitoring, evaluations, technical and financial execution.24 A rationale of program aid in terms of sectoral development is to facilitate medium and long-term planning, and to reduce if not eliminate the incidence of fungibility. In practice however, recipient governments quite easily render earmarked program aid fungible by simply reducing expenditure or taking resources away from the sector that receives aid and transferring same to other sectors of the budget.

23

Burundi, Eritrea, E. Guinea, Liberia, Somalia, Sudan, Togo, Rep. of Congo and Nigeria, had aid blocked at one time or another for reason of war, political crisis, or abuse of democratic values. 24 Ibid., Courier N.? 106, November-Dec. 1987, P.48

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Humphrey Orjiako

THE EU’S STRUCTURAL ADJUSTMENT SUPPORT A feature of the latest Lomé Convention (Lomé IVb) is the growing importance of structural adjustment support as an aid instrument accounting for 25% of all aid appropriations. The EU’s structured adjustment support for the ACP countries follows a path of policy coverage similar to the ESAF of the World Bank and IMF. The financial transfers and conditionalities attached to them are supposed to be a means of leveraging macro-economic reforms in the recipient countries. The Commission therefore relies to a large extent, on IMF assessment of recipient States' compliance with reform policies in reaching financing decisions in support of structural adjustment reforms. Funds for structural adjustment support are drawn from provisions set aside in the 7th EDF (Million Euro 1150) with additional resources drawn from the national indicative programs of the countries concerned at the end of 1996, financing decisions from both sources (EDF provisions and NIPs), in support of SAP in sub-Saharan Africa stood at Million Euro 1,514.200 of which 70% derived from the Structural Adjustment Facility funds. Some 85% of the decisions on structural adjustment facility funding gave rise to payments to 37 SSA countries indicating relative rapidity in disbursing commitments under the facility.25 In the 8TH EDF, structural adjustment support programs seem to gain in strength from provisions in the Second Financial Protocol concerning the use of EU funds of for direct budgetary aid to reforming ACP countries. Sub-Saharan Africa is at the core the direct budgetary aid program under a Special Program for Africa (SPA). This involves implementation of new provisions on public expenditure reviews, and coordination of structural adjustment aid conditionality with the Bretton Woods Institutions. Consequently, any assessment of structural adjustment performance in SSA under the World Bank / IMF program (chapter 3), applies generally to the structural adjustment support of the European Union.

25

ACP-EU aid situation at the end of 1996: Poverty Alleviation, Publication of the European Commission, 1996, P. 218

The European Union’s Aid to SSA

19

THE EU’S NON-PROGRAMMED AID26 European Investment Bank (EIB) - Managed Resources Under the Lomé Conventions, EIB financing of ACP countries is funded from the bank’s own resources in the form of loans accompanied by interest rate subsidies, and/or from EDF resources in the form of risk capital operations. In 1996, 18 SSA countries received EIB financing of Million Euro 189.7 (Million Euro 84.5 in risk capital and Million Euro 105.2 from own resources). This is a mere pittance when compared with receipts under grantonly instruments. The EIB claims to favor 3 main sectors in deciding the extension of loans: - small and medium - size industrial enterprises (SMEs), communications infrastructure (transport and telecommunications) and energy. The funds are usually offered in the form of global loans to banks or local financial institutions that in turn finance either share holdings in SMEs or lend directly to the SMEs. There is need to point out the preference of sub-Saharan African states for free-spending hand outs to investment loans that pass through the market process. It is significant for instance, that only 18 of Africa’s 48 ACP member countries with over 600 million people, sought to take advantage of the EIB’s low cost investment loan facilities, altogether receiving only Million Euro 159.7 in 1996. In contrast, 8 of the Caribbean’s 13 member ACP countries with less than 21 million people, sought and received EIB loans of Million Euro 200 27. On the other hand, SSA countries scramble to be, and are generally favored by the European Commission, in the allocation of free grants. The preference for grants over investment funds could be a clear indication of an African mindset conditioned over decades of dependency on foreign aid as source of development capital and economic growth.

26 27

The sums transferred cannot be predicted unlike the NIPS. Financial Cooperation under Lomé Convention: Aid situation at the end of 1996, EC publication, p. 40-41.

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THE STABEX SYSTEM OF COMPENSATORY AID STABEX is an EDF funded stabilization system offering the ACP States substantial aid in the form of grants, to offset losses they encounter due to falling world commodity prices and/or natural disasters. The European Commission says that the root of the STABEX system, “is the recognition that the benefits of growth in export earnings for commodities do not suffice to offset the damage done by contraction, even if the rises and falls appear to be similar in scale”28. STABEX is therefore aimed at preventing disruption of investment, planning, restoring internal and external balance in the macro-economy of the recipient countries. It also aims at reducing the erosion of producers’ income in order to sustain productivity and stabilize income. In addition, STABEX is supposed to contribute significantly to the beneficiary countries’ establishment of a sound economic base by safeguarding the production and export sectors of the compensated product concerned, or through diversification of production. Beyond supporting profitability and growth, STABEX is expected to promote the economic and social progress of the populations of the recipient countries whose purchasing power would otherwise collapse. To qualify for STABEX, exports must, with two derogations,29 go to the EC market, and must be tropical agricultural commodities, “excluding those in competition with products from temperate regions, wood and fishery products, and products which have undergone first-stage processing such as squared wood, cocoa paste, cocoa butter, cocoa powder and groundnut oil.30 At present, some 50 agricultural products qualify for compensation under the STABEX rules of eligibility, carefully designed to protect Europe’s Common Agricultural Policy. Under the first three Lomé Conventions, STABEX transfers were supposed to be, at least in theory, repayable loans. But in acknowledgment of the impracticality of beneficiary countries reconstituting STABEX resources, Lomé IV eliminated the principle of repayment altogether. All the same, the Commission retains 4.5% of all STABEX transfers as “franchise”, a “system 28

Development: The STABEX systems and Export Revenues in ACP countries, EC Publications N?. 199, detailed objectives of STABEX, P. 5-8 29 Stabex may apply to exports from one ACP State to another - and an ‘All destinations’ exception is made when the exporter is constrained by unavoidable circumstances to sell 6070% of the STABEX covered product to non-Community countries. 30 Ibid., Development STABEX, P.7

The European Union’s Aid to SSA

21

whereby the ACP States show their support for one another and the Community’.31 In addition, ACP countries which have reached a certain threshold level of development, are exempt from STABEX transfers. To qualify therefore, a STABEX recipient State must show proven dependence on the product concerned. Between Lomé I and IV (1975-2000), funds allocated to STABEX amount to Million Euro 5,768.6. As of the end of 1995, 29 sub-Saharan African countries had benefited to the tune of Million Euro 1339.

SYSMIN SYSMIN is also a special EDF-funded arrangement established by the second Lomé Convention in 1980. It is supposed to be the equivalent of STABEX for designated solid minerals. As a financial instrument, SYSMIN is ostensibly designed to help recipients cope with the challenges facing the mining industry in ACP countries. Furthermore, by providing financial aid in the form of grants SYSMIN is meant to induce ACP countries to maintain output and supply of some ten minerals strategic to European industry. These are copper, cobalt, phosphates, manganese, bauxite, alumina, tin, iron ore, uranium and gold – the only precious metal covered by the scheme. SYSMIN resources are usually allocated on a case-by-case basis, and prior to Lomé IV, the funds were usable for any stage of mining leading up to ore-processing, i.e., exploration, technical and economic assessment and investment in mines. 32 This apparently, excludes actual processing or value-adding to raw minerals. Under Lomé IV, SYSMIN grants are usable in principle, for diversification projects outside the mining industry. There is no evidence to date however, that transfers from the Fund have been used in any African country for diversification away from mining-related enterprises. Like STABEX, the objectives of SYSMIN are clearly specified. It is expected to establish “a more secure and broadly based economic base for the development of the recipient ACP countries, either by safeguarding their mining industries’ ability to produce and export or by diversifying and

31 32

Ibid., Development, STABEX P. 11 (see details for 5% product dependency threshold, P.11) Development No. DE 83, SYSMIN & Mining Development, EC pub. Jan. 1996, p.7.

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expanding the foundations of economic growth using national income produced by SYSMIN operation.”33 To qualify for SYMIN, the ACP country concerned must be an exporter of minerals to the European Union. Secondly, mining must occupy a prominent position in the country’s economy, “drawing at least 15% of its export revenue in at least two of the four years preceding its request (for SYSMIN intervention) from one of the listed minerals, or at least 20% from all the minerals covered by the system”.34 SYSMIN operations are triggered only when an important component of the mining industry is under threat, or a drop in export earnings is jeopardizing the implementation of on-going development projects. Only when these circumstances have become manifestly apparent can a country consider making an application for SYSMIN intervention. Because SYSMIN transfers affected only 13 African countries in the sum of Million Euro 528.64 in 15 years (1980 – 1995), it has not had as much impact on SSA economies as STABEX funds that disbursed Million Euro 1,339 among 29 SSA countries around the same period. Moreover, SYSMIN application passes through a labyrinth of bureaucratic processing that includes proposal on eligibility and financing, opinion of EDF Committees; decision on eligibility and financing; financing agreement, and contract for funds. The total EDF allocation for SYSMIN operations from 1980-2000 is Million Euro 1,752 of which Million Euro 641.4 had been disbursed to ACP states at the end of 1995. Sub-Saharan African countries received Million Euro 528.64 or 82.5% of the total SYSMIN disbursement.35

33

Ibid., Development No. DE 83 P.8 The revenue threshold has been lowered to 10% and 12% respectively for ACP countries classified as LDCs and LLIs (Land-locked and Island States.) 35 Ibid. Development No. DE8, P.11 34

Chapter 3

ASSESSING FOREIGN AID ASSESSMENT OF PERFORMANCE OF FOREIGN AID TO SSA It must be acknowledged that a ‘with-or-without-aid’ model of analysis would be more rewarding in assessing the performance or impact of foreign intervention in any developing country economy. However, in the subSaharan Africa context, a ‘with-or without’ model could only apply in a speculative rather than a practical sense simply because the region has never known any aid-free period in its post independence history. All the same, SSA countries in general have had two periods of distinctly different levels of intensity in foreign aid intervention. In the period immediately after independence (1960s and 1970s), foreign aid was mostly a bilateral arrangement that featured in the annual budgets and development plans of the African countries. In contrast, concern for the growing debt profile and declining economic fortunes of many developing countries in the late 1970s ushered the current era of intensive, all-pervasive multilateral aid administration. Since then, aid has become more than an important and constant feature of development planning. It has become a sine qua non of budget and development thinking in sub-Saharan Africa. Consequently, and in spite of formidable circumstantial difficulties inherent in a comparative analysis of different historical periods, it makes practical sense to base assessment of aid performance in SSA on the two periods of distinct aid intensity. This and subsequent chapters will therefore rely on a ‘before-or-after-intensification’ paradigm to assess aid performance in sub-Saharan Africa, within the context of the declared objectives of various

24

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donors and specific aid instruments. Currently, the commonly stated objectives of development aid include alleviating poverty, stimulating economic growth and advancing development through structural reform, promoting good environmental policies, democracy and good governance, and integrating recipient economies into the world economy. The impact of specific aid instruments on these goals is the focus of analysis in the following chapters.

POVERTY ALLEVIATION PRESUMES ECONOMIC GROWTH AND DEVELOPMENT The longevity of foreign aid as an instrument of international relations is sustained by the objectives it purports to espouse, principal among which is poverty alleviation. It is simple commonsense to assume that economic growth is a necessary though not sufficient condition for the success of any poverty alleviation policy. Poverty alleviation is therefore likely to occur in high-growth economies with mechanisms for equitable income redistribution in terms of employment opportunities, rising real wages, food security, access to education, health, social infrastructure and other life-enhancing facilities. While several studies in the 1990s suggest no positive relationship between financial aid and economic growth, some assessments in fact, find that aid has on average, either negative or no effect at all on economic performance. The failure of various studies to find any strong correlation across countries between aid receipts as a share of GNP, and economic growth is a limitation of the economic models that extol the virtues of strictly marketoriented, outward looking development strategies. The neo-classical models that seem to have propelled the World Bank - IMF reform programs since the 1980s fall into this category. An obvious problem with the market-only approach to economic development is the tendency of its promoters to insist on equal, uniform and wholesale application of the model to reforming economies. In developed and the more advanced developing economies, consumers ‘vote’ with their money for the goods and services that the economy should produce. In contrast, in developing countries where remoteness, poverty, illiteracy and inadequate information prevent many subsistence farmers, rural laborers and their households from ‘voting’ in goods, services and the financial markets, the consumer generally has little influence on the types of

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goods or services supplied. This is particularly evident in sub-Saharan Africa home to 33 of the world’s 48 lowest-income countries. The great expectation of the IMF/World Bank interventions in subSaharan Africa was that market-driven reform–and- aid programs would force the pace of response to market forces. That has failed in part because the program planning would not accommodate the fact that special efforts are required to bring Africa’s disadvantaged consumer groups into the monetary economy. The authors of structural adjustment presumed for instance, that fiscal policy and exchange rate reforms would be sufficient to increase incomes and productivity in the farm sector with beneficial impact on poverty reduction in the rural areas where the great bulk of the poor live. In many places, reform did achieve sound pricing and handsome prices for farm goods that managed to reach the urban markets. But farm gate prices remained low because reform made no provisions for equally important marketing arrangements or new technologies to improve labor and soil productivity. Contraction of government expenditure removed the resources for irrigation to reduce risk, diversify production and extend the production period. There wasn’t much consideration for suitable credit and extension services, and worse still, government austerity led to the neglect and deterioration of supportive infrastructure in roads, water supply and electricity. Various studies and critics of aid proffer multiple explanations for the lack of correlation between aid and economic growth. A common explanation is that “aid flows remove a hard budget constraint, thus postponing the need for domestic consensus on economic adjustment.” Such consensus is deemed a necessary condition for achieving ownership of the adjustment process; i.e., developing public support for reform, and commitment to prudent economic policies among policy makers. The application of capital can only promote growth in the good policy environment that reform is expected to create. Secondly, there is the obvious lack of necessary complementary in-puts to development in SSA some of which (human capital, institutional and infrastructure assets), aid could target and help to create. But then, donors and aid managers rarely prioritize public institutions-capacity building, reducing the knowledge gap, human capital creation or integration of civil society in the development process. Available statistics point to the contradictions within the development aid system - whereas less than 7% of all bilateral ODA is directed towards human-development priorities such as health, education and

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safe drinking water, the bulk is allocated for diplomatic and commercial purposes36. Thirdly and perhaps more importantly, aid givers seldom concern themselves with issues of social and political stability within the recipient countries, and without stability real growth cannot occur or be sustained. The governments in industrial countries and the international banking and financial institutions show general insensitivity to the political and social consequences of the draconian policy measures they force upon African countries. The price in terms of unemployment, poverty and sharp reduction in living standards is largely paid by the most vulnerable sections in the population, the poor who have made no contribution in generating the prevalent economic crisis. When the prices of basic consumer goods are raised, social expenditure is cut and the tax rate rises, the burdens of the poor increase. On the other hand, the foreign creditors and the affluent sections of the local population who share responsibility for the economic crisis, for the most part escape with limited if any losses. This can generate a combination of extreme inequality, social exclusion, alienation, humiliation and daily assaults on human dignity which in turn aggravates dormant structural violence. All components of structural violence promote despair, prejudice, scapegoating and cynicism, undermining the social fabric of societies and lowering the barriers against resort to physical violence. There are rather few if any countries in sub–Saharan Africa today whose component communities are not driven by ethnic jealousies, mutual suspicion and conflict. Fortunately, many of them manifest anomie in the more diffuse form of individualistic criminality. But the potential is always there to explode into organized communal / national violence as has happened with catastrophic consequences in Rwanda, Burundi and elsewhere in Africa. Of course foreign aid is not to blame for Africa’s structural violence, but it does its share to lower the threshold of conversion into physical conflict and instability. Peter Uvin of the Society for International Development provides detailed evidence of how social exclusion processes are tied to development projects in his writing on development aid and structural violence, (Aiding Violence: The Development Enterprise in Rwanda, 1998). He observed that the “game of development played out in an almost ritualistic manner between 36

Carol Graham, Michael O’Hanlon, A half on the Federal Dollar: The future of Dev. Aid, (Brookings Study) Foreign Affairs, Vol. 76 N? 4, July – August. 1997 P. 98. See also, Carol Lancaster, Aid to Africa. Univ. Of Chicago Press, and Raghuram, The Politics of Aid, Development Vol.43 no.3 Sage Pubs. for SID, p.44

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governments, bilateral agencies, and international organizations, with increasing NGO participation, often contributes to exclusion, inequality, frustration, cynicism and a potential for conflict.” Fourthly, the actual contribution of aid to additional savings and investments is minimal, often insignificant in sub-Saharan Africa. This is simply because, SSA governments have hitherto relied on aid, not so much for investments as for maximizing welfare, financing higher consumption and supporting anti-trade policies. A random sampling of any number of SSA countries illustrates the point clearly, that a high aid-to-GNP ratio rarely reflects a rising investment to-GNP ratio. [Table 8] In a sample of 14 countries with strong flypaper effect, (aid went dollar-for-dollar to government spending) Feyzioglu et al. found that $1 in aid results in 29 cents of public investment, the same as any dollar from other sources of government revenue. The rest 71 cents per dollar goes into government consumption – administration, subsidies, defense expenditure etc.37. However, sub-Saharan African countries do not indicate strong flypaper effects. On the contrary, given the fact that the ‘high grant’ aid they receive is largely fungible, about 90% of all aid provided for investment goes to finance consumption spending. This seems to validate the strong association of more aid with higher government consumption in Africa where, according to World Bank records, $1 worth of aid targeted on agriculture for example, results in approximately 10 cents of spending on agriculture. It makes logical sense therefore to conclude that wherever aid is largely fungible between investment and consumption, targeting aid administratively on one sector or another does not make much difference.

37

Assessing Aid, What works What Doesn’t and Why (Feyzioglu et al) World Bank Policy Report 1998, Oxford Univ. Press, p.66.

Table 8. ODA, GDI/ GNP (1995), BOP and Average Growth Rate pre & post SAP Country

GNP $m 1995

ODAAS % of GNP 1995

GDI as % of GNP

Foreign Direct Investment % GNP.

Botswana Cape Verde Rep. Of Congo Ethiopia Ghana Mauritius Sierra Leone Sudan Tanzania Uganda SSA

4320 324 9642 5502 6310 3920 824 26148 3600 6170 17584

1.62 34.69 4.09 16.54 8.45 0.06 22.48 096 24.15 12.73 8.75

25 45 12 17 19 25 6 31 16 20

8.8 3.0 0.08 0.14 1.7 0.48 -0.24 3.33 1.96 2%

Average growth rate

Pre SAP 12.3 10.2 4.4 2.1 2 8.3 2.1 2.9 2.5 -4.1 2.7

10 Countries. (1990-1996) Source: UN handbook of International trade and Development statistics. 1996/1997.

Post SAP 4.5 4.7 0.8 3.7 4.0 4.4 -95 4.5 3.8 9.6 1.1

Balance of payments

Pre SAP -34.5 -2.5 -16 -60 30 -73.5 -81 -81 -448 -39

Post SAP 285.17 -17.16 -621.67 -69.33 -35.6 -77.5 -34.5 660.67 -757.5 -22683

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In another study of 97 countries, Professor Peter Boone, the economist found that “nearly all foreign aid goes to government consumption and has little impact on investment or growth”38 This general conclusion applies mostly in SSA countries where aid has not improved the production possibilities due, inter alia, to the choice that governments make. The choice to spend more on consumption than investment is made easier by reason, often an excuse, of social pressure to relieve desperate poverty through subsidies on staples, fuel, imports and general consumer utilities. The fact though is that as a result of a low level of good governance and a high level of structural instability, physical safety and state security are maintained at a very high level of police and military expenditure relative to GNP. Thus, in spite of targeting, governments can and do easily render aid transfers fungible by simply reducing outlay in the aided sector in order to raise expenditure in preferred areas such as defense and police. Furthermore, lots of aid projects have shown a lack of coherent purpose partly because of the intrusion of many commercial interests leading to an over-emphasis on large capital-intensive projects rather than small social sector programs targeted at poverty reduction. This has been abetted by donors’ preference for foreign consultants rather than national or local expertise; priority given to physical capital rather than human capital development, and greater aid allocations through bilateral sources, often tied to procurement of goods and services in the country of origin. Fifthly, to the extent that foreign aid bridges the foreign exchange gap by lowering its price (appreciates the exchange rates), it promotes a greater demand for imports (a general objective of donors) and reduces the incentive to produce for export. In sum therefore, it bears credence that the contribution of aid and other foreign savings to development is not that they provide specific amounts of additional investment. “Rather foreign aid provides additional purchasing power and thus gives recipient governments and citizens more room to choose between consumption and investment, more imports and less exports, more food consumption or less food production, and so forth.”39 In other words, economic growth performance is rarely a factor in aid allocation. The donors’ strategic and trade interests are more important in deciding the direction of flow of aid. The pattern of aid flows to SSA particularly in the cold war years confirms that governments attracted aid irrespective of their economic performance and/or the policies they pursued. 38 39

Ibid., Carol Graham and Michael O’Hanlon, P.99 Ibid., Gillis, Perkins et al, P. 400

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The statistical indices of growth and economic performance for SSA confirm that in terms of real GDP and GDP per capita, SSA is the only region of the World where economic decline has been cataclysmic. For instance, the annual average GNP growth rate for the region, which was 2.3% between 1975 and 1980, declined progressively to the nadir of -0.2% in 1992/93 before picking up and peaking at 4.4% from 1994 to 1996. The World Bank and other donors, desperate for success stories in Africa, cited this brief period of moderate growth, as the long-awaited turnaround in the region’s economic fortunes. But the celebration was short-lived as 1997 brought back a downward pattern of growth that ended in 2.1% in 1998 suggesting no sustained or sustainable improvement in performance. Data on GDP and GDP/N in SSA from 1976-1990 reflects the characteristic oscillation of SSA incomes up till the closing part of this decade. Even in the so-called middleincome SSA countries which have maintained, or lately regained a moderate growth rate ranging from 3.6% - 9.6% in 1990-1995, (Botswana, Ghana, Tanzania and Uganda) the average income per capita (except Botswana) is still far below $400. And their average growth rates per capita become even less impressive when a rapid rate of high population growth of between 3% 3.5% is considered. Among the five countries with decade-long growth records, there is no compelling evidence that aid was a factor. Only Cape Verde and Tanzania with annual average growth rates of approximately 4.3% and 4%, had high average aid-to-GNP ratios of 34.69% and 24.14%, while their average gross domestic investments as a share of GNP (1990-1995) remained at 21.26% and 16.3% respectively. On the other hand, Botswana and Mauritius had the most spectacular annual growth rates of 19.9 % and 8.3% respectively throughout the 1970s, long before the sharp rise in aid flows to SSA. Their average growth rates approximated 4.5% thereafter. Even though they had relatively much lower average aid – to-GNP ratios in 1995, their gross domestic investment ratios were quite high at 32.25% and 27.75% respectively. While this may be insufficient evidence to conclude that aid does not drive economic growth, it does lend support to the findings of other studies that only a fraction of aid resources go into investment capital, and have little impact if any, on productivity growth. The sustained performance of Botswana and Mauritius also indicate that SSA countries can grow economically without a high aid dependency if macro-economic and other environmental factors are growth friendly. A common denominator among the 5 economically growing

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countries is relative social stability and a modicum of political consensus, none of which foreign aid addresses. If, for purposes of argument we assume that the growth recorded in some SSA countries were associated with foreign aid, the number of success stories (countries with positive average per capita real GDP growth rates in the aidintensive period 1980-1995), are too few to be of any significance. It is therefore misleading to suggest as some donors do, that aid is succeeding anywhere in SSA. Tanzania for instance, is counted a success story, yet it remains one of the poorest countries in the world with $120 income per capita. Tanzania also accounts for 30.03 million of the 34.5 million people living in ‘economic growth’ SSA countries [Table I]. This implies that SSA’s steady growth population with per capita income above $500, the UN declared poverty line, is roughly 4.5 million out of 600 million persons. For the whole region the annual growth rate of income fluctuated between negative and low positive figures during 1980 -1993. Its annual growth rate of per capita real GDP was constantly negative from 1975 and got progressively worse as structural adjustment and other forms of aid dominated the region's economic policies. [Table 8] That cannot be called success, it is failure. The World Bank admitted this failure in its 1994 evaluation of adjustment programs in Africa. After boldly asserting that ‘adjustment is working’ in the first sentence, the report concluded that “after a decade of SAP and net aid flows of $170 billion, current growth rates among the best African performers are still too low to reduce poverty much in the next 2 or 3 decades”40 The Bank is at present becoming more progressively forthright than the IMF in admitting the failure of its aid policy in Africa. The 7th publication in a serial policy research reports, ‘Assessing Aid’ (1998) is a revealing new stage in the Bank’s thinking about development strategy and development assistance. In a commentary on the back cover of the same publication, professor emeritus, Shigeru Ishikawa of Hitotsubashu university observes that the Bank’s new thinking ‘takes another step away from a narrow neo-classical world of perfect markets’. If economic growth is a necessary condition for poverty alleviation, it is only logical to admit that foreign aid has failed woefully as an instrument of policy. Beyond GDP/N growth, other poverty indices place sub-Saharan Africa at the top of the World poverty ladder. Whether poverty is measured in terms of rising unemployment and falling real wages, or in access to food, 40

Ibid., Kevin Watkins, P.24(2)

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portable water and nutrition, SSA in general, is first among the world’s poor. In spite or because of abject poverty, the region’s population is growing at an annual average rate of 2.9% in countries like the Democratic Republic of Congo and 4% in others like Côte d’Ivoire. Incidentally, the average annual growth rates of real GDP in both countries (as in most others) is negative at minus13.5% and minus 2% respectively. The population per physician in all of SSA is roughly 15,500 persons. But there is large variance among individual States: anywhere between 1,987 persons in Gabon (a small oilexporting country) and approximately 35,000 persons in Burkina Faso. SSA’s adult illiteracy rate is a high 43%, lower than only South Asia with 51% in 1995. However, South Asia maintains a higher rate of investment in education than SSA as indicated by their respective primary and secondary school enrollment ratios: 101% and 39% in south Asia, to SSA’s 72% and 24% respectively, in 1992. At the post-secondary level of education, no SSA country (except Namibia at 18%) has achieved up to 5% enrollment41.

41

World Bank Indicators, 1997.

Chapter 4

ASSESSING FOREIGN AID INAPPROPRIATE STRATEGY FOR ADVANCING ECONOMIC GROWTH AND DEVELOPMENT When donors emphasize structural reform as a precondition for aid, they generally refer to 3 categories of adjustments: expenditure reducing, expenditure - switching and institutional reforms. Expenditure reducing policies are calculated to improve a country’s balance of trade position by decelerating aggregate domestic demand for local and imported goods and services, and by increasing export volumes while simultaneously decreasing import volumes. Instruments under the rubric include credit and wage restrictions, contractions in money supply, and reductions in public outlays. Expenditure switching policies on the other hand, are directed at mobilizing factor inputs away from the non-tradable to the tradable goods sectors and from consumption to savings and investment. The strategy embraces producer price increases to stimulate agricultural production, currency devaluation and income taxes. Institutional reforms center around market liberalization policies such as, privatization, marketization, removal of non-tariff barriers, and tariff relaxation. The assumption is that the market is more efficient than the state in allocating resources to different segments of society. There is no arguing the fact that SSA economies require some structural reforms for growth and development to occur. In the long run, they must wean themselves away from external assistance and bear the main responsibility to achieve sustained growth and sustainable human development. They must

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therefore design for themselves and agree to undergo necessary economic, social and political changes that prioritize the creation of productive, remunerative and secure livelihoods for their populations. However, the current imposed reform programs have different objectives - to achieve macro-economic stability. They are not working. Even if they were to work, sustained economic growth and development require more than stable macroeconomic conditions. Sustained growth requires in addition, an appropriate structure of incentives, an adequate physical and human capital base, a high enough level of domestic savings, and efficient institutions to turn savings into productive investment. The sub-Saharan Africa economic condition justifies queries about the extent foreign interventions in the form of adjustment programs and other aid facilities have actually 'adjusted' SSA economies to resist external shocks and meet necessary growth criteria. Again, the IMF-World Bank recovery programs for Africa have many critics who argue persuasively that the economic costs associated with SAPs such as shrinking domestic credit and money supply, deep cuts on public expenditure, higher interest rates and devalued currency required of adjusting governments, do in fact outweigh the actual and potential benefits of adjustment. In a rebuttal of the World Bank’s claim of SAP successes in Africa, Temple University emeritus Professor of economics, Sayre P. Schatz, used 26 SSA countries to compare economic growth rates with macroeconomic policy reform performance. His conclusion is that “the restrictive, anti-inflationary monetary and fiscal policies urged by the World Bank and IMF have, by constraining demand, been inimical to economic expansion.42 The study also finds no relationship between fiscal reform and economic growth. In yet another study, professors Ikubolajeh B. Logan et al, state that between 1985 and 1987, GDP grew at an average rate of 2.8% for strong reform countries compared to 2.7% for weak reform countries. Export earnings for both groups fell to minus 2% and minus 2.5% respectively. The study reached the conclusion that allocations to social services such as education and health, dropped 0.6% in strong reform countries but rose by 1.5% in weak reform countries.43

42

Sayre P. Schatz, Structural Adjustment in Africa. A failing Grade So Far; The Journal of Modern African Studies, V. 32, P. 4, 1994, P. 684. (Full argument P. 679-692) 43 Ikubolajeh B. Logan, Kidane Mengisteab (Clark University) African Development: IMF World Bank adjustment and structural transformation in SSA, Economic Geography V 69 NI Jan. 1993.P 1 (24)

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The Bretton Wood Institutions and other reform-based donors insist on deficit reduction based on the assumption that deficit reduction promotes economic growth. To the contrary, most economists agree that enhanced economic growth, ceteris paribus, promotes deficit reduction, increases government revenues, and depending on particular circumstance, may reduce government expenditure. Moreover, if economists are right in associating moderate inflation with enhanced economic growth, then the donor policy of eliminating deficits (usually driven by inflation) can impede rather than promote SSA’s economic growth. In another sense, it hardly receives enough emphasis that massive privatization of state owned enterprises along with devaluation of currency and serious cuts in public expenditure, simply mean drastic cuts in health, education, social and economic infrastructure financing. It also implies, as many reforming SSA countries have experienced, drastic reductions and retrenchments in the public sector and privatizing firms, thus creating huge unemployment levels, and alienating powerful urban constituencies with attendant problems for social and political stability. The previous chapter examined the close linkage between reform and structural violence as a critical factor in achieving sustainable economic growth and poverty alleviation anywhere. Defenders of some aspects of the current donor-imposed reforms present a different view such as expressed by Professors David Sahn, Paul Dorosh and Stephen Younger of Cornell University. They argue that the vast majority of the poor in sub-Saharan Africa are in the rural areas, and agriculture remains the most important income source for the rural poor. They also argue that the rural and urban poor generally lack access to rationed products and services such as public health and education services, rents from foreign exchange rationing, subsidized credit and other distortions that adjustment policies seek to, and often eliminate. In the light of these facts, they conclude that structural reform measures have little direct impact on the poor. “.... Evidence from Africa generally does not support the widely accepted proposition that the poor have suffered from substantial cuts on government expenditure.44 The conclusion reached by these highly regarded scholars is open to debate. First of all, the rates of urban population growth in African countries are among the highest in the world. According to the UNCHS estimates in 44

David Sahn et al; Exchange Rate. Fiscal and Agricultural Policies in Africa: Does Adjustment hurt the Poor? World Development Vol. 24 N?4, 1996 PP. 721-747

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1996, by the year 2000 over 40% of the population of sub-Saharan Africa will be living in the urban areas and the proportion will reach 50% early in the next century. The urban low- income working class, in the formal and informal sectors – the vast majority in African cities, devote anything between 60% to 80% of their total incomes to the procurement of food meaning that urban poverty manifests as serious food insecurity. Adequate food production and the availability of food in the market are only two components of food security. Sufficient income and access to the food that is available is a more important component for urban populations. If so, it is no longer valid in the wake of changes wrought by structural reform in SSA to maintain, as urbanbias development theorists tend to do, that food insecurity and poverty in general are rural problems. While the rural areas are likely to remain the major locus of poverty in sub-Saharan Africa well into the 21st century, the rate at which this is shifting to the urban areas suggests that structural reform has hurt the poor even if they live in cities. Static rural-urban comparisons for a variety of indicators may indicate that urban populations are better-off than their rural counterparts, but intra-urban inequality is growing, and the rural-urban gap in various indicators of well-being appear to be closing fast. (Daniel Maxwell, World Development Vol.27, No. 11, 1999, p.1940). The 1995 World Bank report noted the rapid increase in urban poverty in Africa, declining living standards in Accra for instance, while in general, poverty was decreasing elsewhere in Ghana. Secondly, that structural adjustment has not hurt the poor, even though not factual, is logically defensible only to the extent it stresses ‘direct impact on the poor.’ Beyond that, it is indefensible and not too helpful in understanding the Africa’s desperate situation. It simply ignores the socio-structural formations, the intricate kinship networks and extended family support systems that characterize social relationships in most African societies. In most cases, it is quite safe to state that for every retrenched public servant, or employee that suffers a loss of income as a result of adjustment policies, the livelihood source of as many as ten or more ‘poor’ dependents are neutralized. Strong extended family interdependence is not always a matter of choice but an obligation imposed by custom and tradition. In almost all sub-Saharan African countries, it remains the only social safety net covering the simplest needs of life from access to basic nutrition, healthcare, children’s education and miscellaneous expenditures. It is usually irrelevant whether the impoverished kinsmen or relatives dwell in the urban or rural areas, the income-earning relative is obliged to subsidize their needs.

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Rural farmers and their households in particular, feel the pinch when the purchasing power of income earners and city dwellers are emasculated or eliminated. In terms of access to food, a common response to escalating urban poverty across Africa has been a resurgence of household-based agricultural production within cities. From the West coast and the Horn to Southern Africa, urban farming has grown in importance as a subsistence strategy for low-income groups. Not only were they formerly dependent on food produced in the hinterland, their occasional surplus now competes with rural produce in the urban markets. It does hurt the poor therefore, when the conception and implementation of economic reforms ignore local conditions in the target countries just as the common adjustment formula for sub-Saharan Africa has done. Furthermore, by curtailing the powers of the State, demoralizing the civil service and alienating key political constituencies, the policies urged by the World Bank, IMF and donors, translate into government failures. Austerity measures that force governments to embark on drastic budget cuts to remove deficits and inflation may also lead to economic recession, rising interest rates and dwindling public revenue. The consequent inability of governments to provide basic public goods and services can lead to loss of credibility, even legitimacy with the population resulting in the paralysis of government authority. Government failure, now a common feature in Africa, has provided excuses for military takeover of power and other acts of anomie in many reforming African countries. It is equally evident in the unrestrained resort to the use of excessive force and coercion by incumbent governments to collect taxes and compel loyalty. Perhaps the most enduring legacy of government paralysis in some African countries is the contribution it has made towards fostering an unprecedented level of corruption, pervasive bribery, rent-seeking behavior, smuggling, tax evasion and other forms of anti-growth economic activities. In this sense, austerity sounds like another word for killing a country and its economy.

MACRO-ECONOMIC OBJECTIVES Additional to adverse social and political outcomes, structural adjustment and infusion of external savings have failed to achieve the more elementary macro-economic objectives: closing the balance of payments deficits and containing inflation. Any number of SSA countries illustrates this point

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[Table 8]. Among the reforming countries, only Botswana had reversed a negative balance of payments of $151 million in 1980 to a surplus $342 million in 1995. Except for small oil-exporting countries like Gabon, the rest structurally adjusting countries with high ODA infusions had their balance of payments problems exacerbated. Some reformers like Ghana and Nigeria have reversed pre-adjustment surpluses to high negatives, while pre-reform deficit countries such as Mali, Burkina Faso and Uganda increased their deficits by more or less 60%.45 Lately, the World Bank has realized ‘from experience’ that “providing significant financing is unlikely to work in countries with weak management, that conditional lending or buying reform cannot generate reform in countries with no domestic movement in this direction for reform; and that focusing on individual projects does not have much impact unless it spurs systemic change.”46 If only the Bank, the IMF, donors and aid administrators had paid heed to early independent studies on structural adjustment policies, African countries and their impoverished citizens might have been spared some of the agonies they have endured under imposed structural adjustment regimes. In general, these studies found a contrariety between overall macro-economic policy reforms and desirable economic performance. Similarly, no independent study found credible data to support any claims of positive effects of adjustment policy and cumulative financial facilities on reform objectives such as, gross domestic investment, agricultural and / or industrial growth. Professor Schatz’s rebuttal of the World Banks ‘Adjustment in Africa’ indicates that “countries with small improvement in macro-economic policy performed 45% better in increasing gross domestic investment than those with large improvement”47 By focusing exclusively on the efficiency of market mechanisms in countries with very weak or non-existent information, insurance, credit and financial inter-mediation instruments, structural reforms emasculated any growth possibilities in SSA. The reform programs made no provisions for any form or scheme of incentives to increase and sustain domestic investment in the agricultural or industrial sectors. And as the World Bank seemingly admits now, because aid transfers to Africa tend to be essentially fungible, structural adjustment facilities and other ODA have not necessarily gone into investment savings. Even the Bank’s own report on SSA, (African Recovery, 1995), 45

Sayre P. Schatz; Ikubolajeh, et al, Kevin Watkins, Howard Stein, David Sahn etc. Ibid, Assessing Aid, p.103. 47 Ibid. Sayre P. Schatz, P. 688. 46

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found “no clear pattern of a relationship between reform and agriculture or industrial growth”. This is a clear admission that the expected agriculture stimulating effect of exchange rate reform is easily offset by the opposite impact of rigid fiscal and monetary policies. As for industrial growth, comparative data between 1987 and 1991, show that countries with small improvements in macro-economic policies had better rates of industrial expansion (5.0% p.a.) than those with large improvements (4.4%), and at 3.6% p.a., the industrial advance of countries whose macroeconomic policies had deteriorated, was not far behind.48 The logical inference seems to be that higher rates of output, where they have occurred in reforming countries, may simply reflect the effects of lower initial base figures rather than superior levels of productivity. This is basically true of Tanzania, Ugandan and Ghana, among SSA’s growth countries whose economies prior to reform, had been wrecked by decades of misrule and mismanagement. The case can therefore be made that, even if exogenous funds can potentially improve the capital generating capacity of reformers, the combination of such credit access and reform measures are insufficient to raise, and sustain average growth rates in positive figures or to world standards. Sustainable growth cannot occur in the absence of other equally necessary conditions which external interventions either do not address, or influence in other than desired directions. It is therefore understandable that across sub-Saharan Africa, the application of strict monetarism reinforced by rapid deregulation of labor markets has resulted in the destruction of small-scale, labor intensive industries. The presumption was that deregulation would pave the way for foreign private direct investment and export - led recovery. However, by inducing unemployment and the collapse of real wages, and thus undermining the domestic market, strict IMF/World Bank measures tend to imply that effective domestic demand and supply do not count for economic growth. The fact is that domestic markets do matter, just as much as sound internal policies. In order to be effective, reform policy must find the appropriate balance between the two. Unbalanced reforms are bound to fail as they have failed in SSA, to achieve the lower inflation that the World Bank glorifies. If development is to be homocentric rather than an end in itself, then provision of social safety nets for the innocent and vulnerable people in reforming countries should be part and parcel of reform. It is both inhuman and bad economics to sacrifice the 48

Ibid. David Sahn, Economic. Crisis and Policy Reform in Africa.

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welfare of the poor in order to balance budgets and control inflation. As the Bank rethinks the current growth strategies for Africa, its reform planners may do well to realize that the prime cause of inflation in SSA has shifted from budget deficits and excessive money supply to inadequate investment and resulting shortage of goods and basic services. Alan S. Blinder, professor of Economics at Princeton University noted recently that ‘inflation, the bane of the 1970s and 1980s - the rationale for austerity, is not really the problem today ... the shortage of aggregate demand is the premier macro-economic malady of sub-Saharan Africa....and programs that force austerity all over the region (SSA) simply aggravates this problem’. (Foreign Affairs Vol. 78 No. 5 Sept./Oct. 1999, p. 50-63.). Finally, the burden of stymied expenditure on social services induced by reform is denial of the established synergies between investment in education and health on the one hand, and economic growth, development and poverty reduction on the other. In the health sector for example, the situation grows increasingly hopeless for sheer lack of investment. HIV / AIDS-related death is decimating sub-Saharan Africa while the region spends more than $10 billion per annum servicing external debts. Of the 33.4 million HIV positive people in the world at the end of 1998, more than two-thirds live in Africa and 83% of the world’s AIDS deaths have occurred there. The plight of children is even worse: 90% of all children newly infected with the HIV virus in 1998 live in Africa. (Sadig Rasheed, Development, Vol. 43 No.3, Sage Pubs. 1999, p. 29). The negative impact of this devastating affliction on human resources, productivity, growth and development is only comparable to the social, medical and emotional costs. Sub-Saharan Africa’s health and education systems are fragile and postponing investment in them is the same as postponing African economic recovery and development. The logic is a simple one: healthy educated people are invariably more productive than sick and ignorant ones. There is no doubt that, sub-Saharan Africa needs carefully sequenced, home grown structural reforms that go beyond the world of perfect markets. To a large extent, markets could be relied upon to dictate supply and demand in developed economies, not so in developing countries. The strictly marketled reforms that donors advocate, is therefore at variance with SSA’s development challenges: accelerating human development and poverty reduction; achieving and sustaining high rates of economic growth; and accelerating the integration of their economies into the global economy. Development aid has failed in its promise to provide vital resources in support

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of these priorities. Instead it has beggared the capacity of African countries to initiate change by imposing a complex set of inappropriate reform programs.

Chapter 5

ASSESSING FOREIGN AID INTEGRATION OF SSA ECONOMIES INTO THE WORLD ECONOMY Integration with the World Economy is a key element in the donors' rationalization of the forms of aid that sub-Saharan Africa receives. In fact, the IMF, the World Bank, the European Union and orthodox economists have argued for full integration of developing countries into the global economy. In other words, they advocate a correction for the highly unequal international asset and income distribution, prevention of growing insecurity and social exclusion and guarantee of basic needs everywhere in the world. It sounds like utopia to conceive bringing the world’s 1.3 billion people now below the poverty line up to minimum level. Some donors and aid managers suggest that a four-fold increase in current aid levels will suffice. If that were to happen, a fat chance, it would still fail dismally to integrate African countries into the global economy. The achievement of global integration has to presuppose the preparedness of the rich industrial countries to harmonize their interests with the need for global complimentary reforms that guarantee the participation and competitiveness of developing countries in the global economy. That should include using their vastly greater resources and by far much higher levels of income to carry out structural adjustment on a scale that is far-reaching enough to facilitate changes in the international division of labor favorable to developing countries. Imagine the beneficial consequences that genuine reform of Europe’s Common Agricultural Policy, CAP, could have on employment and

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incomes in sub-Saharan Africa. Consider what trade liberalization in the United States and Europe, especially removal of barriers on imports of processed and labor- intensive goods of African origin could do for foreign exchange earnings in SSA! The merits of foreign aid intervention in Africa could therefore be judged by the efficacy with which it corrects the external and internal factors underpinning SSA’s inability to achieve competitiveness in international trade. Closely related to this is how far aid improves the local capacities of the aided countries to cope with external shocks such as fluctuating terms of trade and financial instability inherent in the modern economy. Is it even possible to expect monetary stability in developing economies without a major reform of the international financial order? To date, no SSA economy has achieved any meaningful global integration, and no evidence exists to suggest that foreign intervention in the form of adjustment and/or aid transfers can reconcile SSA economies to global realities. A serious shortcoming of all development aid strategies is the exclusive focus on internal reforms and comprehensive omission of international structural reform. According to Professor Ikubolajeh et al, “internal reform is certainly necessary for economic development, but, by itself, it is not a sufficient condition. For adjustment to be successful, it should be capable of orchestrating a comprehensive and balanced program of internal and international reform ...”49 Sub-Saharan Africa’s performance in the global market system is conditioned by the international political economy. The later is central to the success or failure of any developing economy’s structural development changes and policy responses. Consequently, the relevance of foreign aid interventions ought to rest on how effectively they address the sources of linkage to the global economy – terms of trade, external debt structure and foreign private investment flows. SSA’s position in the global economy is defined generally by the production and export of low value-added primary commodities, a market of food and staples that justifies Engel’s Law. And because the market is dominated by international monopolies, SSA producers have remained price takers. Professors Ikubolaje et al. Have observed that Africa’s heavy reliance on primary commodities “is strongly influenced by the existing international political-legal, bureaucratic - administrative, economic and other free trade restrictions, especially in the secondary and tertiary sectors” 50. This 49 50

Ibid., Ikubolajeh et al, P.12/23 Ibid., Ikubolajeh et al p.13/23

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observation may be reminiscent of the idealism and radical rhetoric that propelled the moribund movement for a new international economic order, but the facts remain incontrovertible. Interestingly, donors justify foreign aid to enhance SSA’s global competitiveness on the basis of the region’s ‘comparative advantage’ in primary products, an advantage contrived partially by artificial trade barriers rather than factor endowments - to sustain the existing economic order. The consumer countries and monopsonies control supply using various price manipulating strategies, such as stockpiling, and subsidizing production of direct substitutes for traditional commodity exports. The large number of primary goods producers fuels competition among the SSA countries, and between SSA and other developing economies and regions. This reduces the effectiveness of quota arrangements and limits the potential feasibility of cartels through which producers could exercise some control over supply and prices. Price dampening is further reinforced when favorable conditions result in bumper harvests. The inelasticities of supply and demand surrounding sub-Saharan Africa’s comparative advantage in primary commodities have resulted in sustained tumbling of the region’s export earnings. Since the 1980s, the reality of the international commodities market for African countries has been - ‘the more efficient the production, the less income for the producers and exporters’, a classic case of head or tail you loose. It is in the light of these facts, that certain types of development aid and their delivery instruments, merit much closer scrutiny than they have received hitherto. Prominent in this category is compensatory aid, especially the STABEX / SYSMIN systems of the European Commission. Recall that STABEX and SYSMIN are specifically targeted at boosting primary commodities production and export in SSA countries. (Chapter 2).

THE EXPORT INCOME STABILIZATION SYSTEM (STABEX) According to EC and ACP officials, “it is right that ACP producers should benefit from a kind of insurance guaranteeing steady earnings and encouraging them to supply products which will earn their country the foreign

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exchange it needs for its development” 51. This stretches the meaning and objective of the STABEX system. It is not an insurance scheme, the benefactor (EC) is not an insurance company, and the beneficiaries in subSaharan Africa have taken neither policy nor paid any premiums. What STABEX is, is ‘direct, undifferentiated, untargeted and unnegotiated’ cash transfers to favored African governments to use as they see fit’. Assuming that this ‘free gift’ is motivated purely by altruism and goodwill as it probably is not, the consequences for the recipient countries have not been as benign. In the first place, by compensating the low-export earnings of tropical commodities, STABEX entrenches the erroneous presumption of an iron cast comparative advantage in the production and export of primary commodities for African countries. Amendments under the fourth Lomé Convention recommend use of STABEX funds for rehabilitating, maintaining or strengthening a struggling agricultural export commodity sector. The problem is that most if not all-tropical export commodity sectors are under stress due to collapsing world market prices. Thus, the play on comparative advantage is akin to a psychological assault to depreciate the producers’ capacity to maneuver, to shift, change or influence the use of their endowed advantages. Internalizing this contrived sense of immutability has had a debilitating effect on recipient countries’ economic planners, paralyzing their incentives to confront reality, to actually seek to diversify their production base rather than primary products. Sustained unfavorable terms of trade since the 1970s have made it increasingly clear that no primary commodity-dependent economy could expect to achieve rapid real growth and sustained development, let alone competitiveness, in the modern global economy. It is therefore an irony, if not outright mockery of the development objective, that the rules of eligibility in fact prohibit use of STABEX funds for the purpose of diversifying production ‘except where it can be demonstrated that a sector is no longer viable’. The impediment for impoverished recipient governments in Africa is that the incentive to demonstrate unviability is less compelling than the reward of invoking a “struggling sector”. In any case, the STABEX definition of diversification simply means diversion of input resources from one unviable commodity to the production of some other export commodity. It precludes any programs of forward linkages that may add value to the unviable commodity, or any sectoral shift from primary to secondary production. 51

Development, The STABEX System and Export Revenues in ACP countries (EC publication) N? DE 93, Dec. 1997, P.15

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It is easy to appreciate that Europe’s regional agricultural interests should dictate the STABEX rules of eligibility. To harmonize those terms with the aggressive objectives of the Common Agricultural Policy cannot be an easy task. That however, does not justify presenting STABEX as a free insurance for its recipients. In order to qualify for compensation of trade losses under the STABEX scheme, exports must be tropical agricultural commodities “excluding those in competition with products from temperate regions.... and products which have undergone first stage processing, such as squared wood, cocoa paste, cocoa powder, cocoa butter and groundnut oil.”52 The only logically consistent inference seems to be that STABEX discourages real diversification of the economic base of SSA countries. It saps the incentives and confidence of the region’s economic planners to explore their relative advantage in other tradable sectors. It removes the necessity to raise the value of their exports. It stymies their opportunity to acquire or improve know-how by experimenting with new products and processes. Ultimately, it halts entrepreneurial initiative towards industrial farming, and reduces the level of self-reliance to grow domestic incomes out of poverty and dependency. The irony of STABEX is that while it penalizes diversification, it remains the major EU aid instrument that provides for diversifying of export structures in the ACP countries. It is only natural that its record in this area is abysmal. In a negotiating brief prepared for the ACP Group, (a pro-STABEX document), the Commonwealth Secretariat in London made reference to a 12country evaluation report based on general cross country information on STABEX. The report cited evidence of increased specialization (concentration) of agricultural exports in a number of ACP countries since the mid 1970s. It pointed out that the specializing countries were by far more numerous than those where diversification of exports had occurred in the 1980s. It concluded with the suggestion that no significant diversification is taking place in the recipient countries. 53 The same brief proceeded to identify 6 out of 12 top STABEX recipient countries as having ‘demonstrated evidence of export diversification’ with the disclaimer - “it is not clear what specific role STABEX transfers played in this process”. As shown in table 9, the original information – ‘demonstrated 52

Ibid. Development, DE 93, P.8 Lomé IV claims to have relaxed the primary processing rule but in practice, processed and semi-processed commodity products face a litany of non-tariff barriers in the European market. 53 Commonwealth Secretariat, Negotiating Brief N? ACP/00/245/99, 02 July 1999, Annex 9

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evidence of diversification’, is misleading. Among the six diversifying countries identified in the table, two, Côte d’Ivoire and Cameroon had in fact suffered a loss in number of exported commodities between 1980 and 1995, (from 154 to 121 products, and 90 to 84 products respectively). The rising diversification indexes of both countries during the period confirm their losses – (0.850 to 0.905 Côte d’Ivoire, and 0.720 to 0.848 Cameroon). Among the remaining four, only Kenya recorded any significant diversification from 143 to 174 commodities, reducing its diversification index from 0.812 to 0.735. In fact, the diversification index for Tanzania and Uganda rose 0.838 to 0.844 and 0.953 to 0.960 respectively during the period, indicating actual loss of diversification. In general, since the commencement of STABEX and Structural Adjustment Programs in the 1970s and 1980s, not a single SSA country except Kenya and Zimbabwe at 0.735 and 0.728 respectively, has achieved a diversification index below 0.800. And where there has been a slight reduction in the diversification index, there is no evidence of correlation with STABEX, SAP or any other instrument of foreign aid intervention. Export figures in Table 9 (export structure column) also confirm that wherever diversification has occurred, it is mostly horizontal and not vertical. The manufactured product share of total exports between 1970 and 1996, is either stagnating (Uganda, Ghana, Côte d’Ivoire), actually depreciating (Cameroon 8.5% - 8%), or increased only marginally (Kenya and Tanzania). These figures contrast sharply with those for Indonesia, Malaysia and Thailand whose diversification indices have shown marked reduction. Thailand reduced its diversification index from 0.766 to 0.412 between 1980-1995 and the share of manufactured goods of total exports have shown remarkable increase. Indonesia is even more impressive, raising the share of manufactured products from 1.2% of total exports in 1970 to 51.4% in 1996. These countries are no longer aid recipients in the form of grants-in-aid, compensatory cash transfers, extra GSP preferences, and until the recent financial difficulties in Asia, were not constrained by imposed reform policies.

Table 9. Percentage Total STABEX transfers received by diversifying countries- Level of Diversification and share of manufacturing products. (Figures for Indonesia, Malaysia and Thailand have been included for comparative purposes). Position as recipient of STABEX funds

Lomé II

Lomé III

Lomé IV

1975-95

Côte d’Ivoire Cameroon

1st 2nd

14.76 2.18

28.96 14.92

15.2 14.0

16.4 12.9

154 90

121 84

Kenya

7th

7.09

5.33

4.8

4.1

143

174

Ghana

9th

13.52

0.00

2.7

3.2

55

72

Tanzania

11th

3.30

0.67

3.5

2.8

83

87

Uganda

Country

Product diversification No. of exported commodities 1980-1995

0.905 0.848

Export Structures % share of manufacture of total export 1970-1996 6 _ 8.5 8.0

0.812

0.735

12.5

26.4

0.916

0.889

0.4

_

0.838

0.844

1.2

17.6

Index of Diversification 1980-1995

0.850 0.720

12th

0.00

0.00

8.6

2.7

22

27

0.953

0.960

6.5

0.7

Indonesia

_

_

_

_

_

144

210

0.664

0.607

4.7

51.4

Malaysia

_

_

_

_

_

214

227

0.640

0.520

75.9

Thailand

_

_

_

_

_

176

222

0.766

0.412

73.1

Source: Annex.9, Doc. ACP/00/245/99, Brussels, and 02 July 1999. ‘Negotiating brief on STABEX, and handbook of int. Trade and development Statistics.

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In general, both European Commission and ACP officials in Brussels are eager to address the technical and procedural objections to STABEX such as ‘not targeting the most needy countries or the balance of payments problems of recipients’. On the other hand, they prefer to ignore the conceptual and more damning criticism of such compensatory schemes. STABEX and SYSMIN no doubt, encourage poor recipient countries to pursue a policy of high concentration in the production and export of compensation-eligible commodities while discouraging local food production, and extra-sectoral and/or vertical product diversification and linkages. On their part, African governments and officials, unmindful of the effect on their development prospects, expect such aid as their entitlement – a matter of right. Thus, they incessantly seek to persuade their European partners to increase their share of STABEX and SYSMIN transfers. The burden of such a mindset for SSA countries, most of which are among the world’s least developed countries, is the tendency to remain suppliers of raw commodities to European factories. Doubling STABEX resources as their agents in Brussels advocate, will improve nothing. They will still remain LDCs and poor because, when STABEX transfers enter the national accounts, a rare occurrence indeed, the extremely fungible funds are used mostly for government consumption. The funds neither convert to investment capital nor are farmers aware of the existence of such transfers let alone compensation. At another dimension, STABEX and SYSMIN funds, to a larger extent and more directly than other instruments of foreign aid, present a classic example of aid tied to issues of donor consumption and production needs. They are self-serving in that they cover only exports to the European Community market, to ensure the regularity and certainty of supplies to the EC at the importers’ price. EC officials claim that no provision of STABEX prevents ACP States from selling their products to non-EC destinations. This claim is technically correct, given that STABEX rules provide two derogations: (i) STABEX transfers may apply to exports from one ACP State to another – a very convenient provision since intra-ACP trade is, for obvious reasons, either negligible or non-existent. (ii) An all destinations guarantee is made to ACP countries “which despite all their efforts find themselves in a situation, which obliges them to sell nearly all (60-70%), of their export to non-Community countries”. For reasons of history, geography and economic common

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sense, this option is not available to SSA countries. The situation that will “oblige” them to sell their raw materials to non-compensating consumers is easier conjured by the imagination that reality. The pattern of flow of SSA's international trade is quite revealing and makes the point. Between 1990-1997 Western Europe’s share of all merchandise exports of Africa was an average of 54.55% of which the EC accounted for 50.2%. In the same period, an average 58% of SSA's agricultural and 54% of mining products went to the EC compared with 24.4% minerals and 0% agricultural to North America. The pattern is predictably more telling for exporter countries that qualify for STABEX/SYSMIN. More than 97% of the agricultural exports of eligible countries like Côte d’Ivoire, Senegal, Cameroon, Ghana, Uganda, Tanzania etc. go to the EC market. A similar trend obtains for SYSMIN-eligible countries like Zambia, Senegal, Botswana, Gabon, Burkina Faso, Republic of Congo, Namibia, Mauritania, Niger and Togo. STABEX appears to entrench the reigning international economic order as ordained by the ‘immutable’ laws of comparative advantage, policed by the all powerful Bretton Woods Institutions and the WTO, and religiously observed by all DAC countries. A glutted international market and low prices leave the Africans few choices, and of course automatic loss of compensation compels them to sell to Europe. Consequently, the EU claim of not compelling Africans to sell to its market loses credibility in the face of reality. The self-interest of European countries, not love or kindness, and definitely not a sense of historical obligation, dictates EU policy towards Africa. The foregoing may sound like familiar rhetoric, but the facts have not changed: sub-Saharan Africa still remains supplier of raw materials to Europe mostly, and consumer of products finished from the commodities it supplies, the same as it was during colonial rule. And there is no indication that any developed country or multilateral donor feels uncomfortable with this arrangement. The STABEX and SYSMIN regimes confirm the comfort and convenience that European countries find in the reigning international economic order. At a moral dimension, STABEX funds have fuelled the pace and volume of official corruption in recipient SSA countries. Because the funds are transferred as physical cash, they are more fungible and easily appropriated by corrupt officials. It is commonly acknowledged among ACP diplomats in Brussels that STABEX, and to a lesser extent SYSMIN transfers, are usually

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appropriated by SSA government officials who perceive the receipts as incentive or bribe to sustain the status quo and refrain from any major production and / or trade policy switches.54 As a matter of fact, STABEX funds have been cited for helping to sustain in power for too long many corrupt, profligate dictators in SSA. This criticism may have led to the introduction in Lomé III of a generally ignored ‘Framework of Mutual Obligations’, FMO, by which STABEX funds were to be negotiated between the recipient State and the Commission requiring the recipient to give detailed information on the use of the funds. According to Commission reports, the FMO is widely resisted and ignored by recipient States which “still do not see why they should have to negotiate and justify the use of the funds” 55. STABEX has also failed, even the ACP Secretariat admits, to achieve its most primary aim: to stabilize export earnings in the recipient countries. The Secretariat cites a study by Hermann for 48 countries that received STABEX payments from 1975-1987, showing that “the overall impact of the STABEX system on export earnings instability was weak. Not a single stabilization effect was larger than 10%. On the contrary, STABEX payments destabilized export earnings in all four countries who received the highest transfers: Côte d’Ivoire, Senegal, Sudan and Papua New Guinea”56 Much of the shortcomings of STABEX also apply to SYSMIN, but in addition, the later supports enclave economies in the mining sector, with dubious aggregate benefits to the population.

54

One question this writer put to ACP officials in Brussels was why STABEX funds were paid to governments and not the actual farmers who sustain the export losses. The answer was that Lomé Convention is an arrangement between governments and EU. The later could not by pass its government partners to deal with producers, it however trusts the recipient governments to transfer the funds to the producers or use same in ways that benefits them. 55 Ibid., STABEX, Development N? DE93 p.15 56 Document ACP/28/008/98 Rev.1, ACP Secretariat Internal Draft Memorandum: Brussels, PNG-Papua New Guinea is a non SSA, but ACP country, 22/4/98 P.13

Chapter 6

ASSESSING FOREIGN AID THE EU’S SPECIAL TRADE PREFERENCES FOR ACP COUNTRIES Under the modified Generalized System of Preferences, GSP, recognized by the WTO, most industrial nations extend tariff preferences to certain manufactured and semi-manufactured goods exported from designated beneficiary developing countries, while retaining Most-Favored Nation, MFN, duties on imports from non-preferred sources. Clearly, tariff preferences ought to help developing countries become more competitive in donor country markets, thus promoting economic growth and development through trade rather than aid. That was the goal and expectation of those who canvassed and won international support for the GSP. In practice however, a concatenation of factors limits the preferential import shares of the poorer GSP beneficiaries. This is in spite of a priori preferential import ceilings, graduation and reserved benefits, which donors establish by limiting the trade shares of the more advanced beneficiary developing suppliers, apparently for the benefit of the poorer countries. In reality though, because the poorer, industrially backward countries, mostly in sub-Saharan Africa have only raw commodities to export, a priori limits on preferential imports only serve to protect import-sensitive industries in donor countries from surges of imports from the more advanced developing

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country suppliers. 57 Professor Don P. Clarke demonstrated this on the Suit’s Index, based on the trade regimes of Japan and the USA. He showed that the GSP trade of donor countries is extremely concentrated among the higher income beneficiaries because they are better suited to export GSP - eligible products than are poorer beneficiaries. In other words, SSA countries which are generally lacking in export capabilities, have not benefited from the Genera System of Preferences, definitely not from the American or Japanese GSP regime.58 Since the GSP was intended to encourage a shift of factors of production from primary product activities toward manufacturing, most agricultural, mineral, forestry and fishing products of export interest to SSA countries were excluded from GSP eligibility. But the EU had a ready answer for Africa’s problem since much of the latter’s flow of trade was toward Western Europe in the first place. It was therefore quite convenient that the EU-ACP partnership should establish a modified form of the GSP by which “products originating in the ACP States shall be imported into the Community free of customs duties and charges having equivalent effect”. Thus, Europe and the ACP countries started to implement a set of tariff preferences offered outside the GSP and under MFN conditions. The European Commission has often touted this arrangement as the most generous aid instrument in North-South relations, a centerpiece of its development cooperation with countries of the Lomé Conventions. But the taste of the pudding, as the English say, is in the eating. The aggregate consequences of Europe’s special trade concessions to its southern partners have been anything but desirable. Firstly, rather than improve its share of the EU market, the ACP has lost more than 71% of the share it had in 1970 – a steady decline from 16.24% in1970 to a mere 4.6% in 1996 and still falling. Relative to other non- ACP developing States, the ACP trade record with Europe is abysmal. Similarly, Europe’s imports from the ACP also dropped from 8.9% of total to 2.3% during the same period. The main reason for the drastic trade decline in value terms is not far fetched – there is only so much demand for commodities in a radically changing world economy, and the low prices mean low incomes.

57

Tracy Murray, How Helpful is the General System of Preferences to Developing countries? Economic Journal 83, June 1973: pp. 449 - 455. 58 Prof. Don. P. Clark, University of Tennessee, Trade versus Aid: Distribution of Third World Development Assistance, Economic, Development and Cultural Change. P.833

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Secondly, duty-free entry of unprocessed goods has further dampened the incentives and prospects of its beneficiaries to change the structure of their exports. Detailed as the European Development Fund is in its provisions, it is baffling that it suffers a peculiar oversight - failing to provide or target any program specifically at downstream processing of indigenous raw materials. Therefore, in combination with other aid inducements such as STABEX and SYSMIN, non-reciprocal, duty-free commodity preferences appear tailormade to boost the production and export of tropical agricultural products and industrial raw materials for the European market. It would be illogical to resist this inference since there is no comparable inducement in the EU- ACP tradeand-aid partnership to assist the latter countries reduce their dependence on primary commodities for foreign exchange earning. There is a Center for the Development of Industry, supposedly in ACP states. But probably because it was established as an after thought, it suffers from a fixation to justify its existence, a perennial budget war, under-funding, and an excessively politicized decision–making process. The outcome is inept management, ajob-for-the-boys culture, and a staff structure that is top-heavy with ‘experts’. Going by its records, it seems to specialize in the development of corrupt practices, incessant strategy seminars and volumes of mostly unread literature.∗ Incidentally, the ACP Secretariat which articulates and represents the interests of ACP member countries in Brussels seems to share the view that the European Commission is not interested in assisting ACP countries wean themselves off dependence on primary commodities. It laments that “even though it is a well-known fact that one of the necessary conditions for ensuring the increased participation of ACP in the PMDT (Processing, Marketing, Distribution and Transport) of their products destined mainly for the international markets is to get the European enterprises to set up in the sectors in the ACP States, it is observed that the measures provided under Lomé IV for that purpose were limited.”59 In plain English, the measures provided in the Convention for processing of products are nonexistent. The EU negotiators simply ignored ACP proposals to improve their participation in the PMDT. At best, they agreed to empty provisions such as

∗

This writer spent a 3-month internship at the Brussels headquarters of the CDI in 1999, and came away with these impressions. 59 ACP Secretariat Draft Internal Memorandum No. ACP/67/017/98: ACP-EU Relations in the Area of Commodities, Brussels, 9 April 1998, P.7

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Article 70 of the Convention that thoughtfully recognized the PMDT as a priority of the convention and then proceeded to ignore it. As a matter of practice therefore, if not principle, the European Commission has promoted non-diversification of SSA products by constraining their participation in the processing of their natural resources or in enhancing their value before exportation. The dwindling share of manufactured and semi-manufactured goods in sub-Saharan Africa's export portfolio makes the case. In 1996 for instance, SSA countries earned the sum of US $ 58,435 million from all exports. Of this amount, processed and semiprocessed goods accounted for only $ 108.5 million a drop from $269.8 million in 1980 – approximately 60% drop. The trend is worsening as only 7% all the ACP countries’ commodities are processed and less than 5% are for marketing and distribution.60 Overall, in four decades of independence from Western Europe, most of which was dominated by a special preferential trade and aid partnership with the EU, the composition of SSA exports has remained the same or worse. Its share of World exports tumbled from 2.9% in 1965 to 0.9% in 1975 and only picked up to 1.4% in 1995. Worse still, its share of manufactured goods has fallen from 0.54% of gross export value in 1980 to 0.18% in 1996. A few SSA countries that have demonstrated a modest capacity to export products with significant value-added such as Zimbabwe and Kenya are confronted with stiff competition from more advanced East Asian economies which enjoy preferences under the GSP in Europe and other consumer markets. The competition from Asia and Latin America exacerbates the effect of non-tariff barriers, NTBs that developed countries impose on processed exports originating in developing countries. Clearly, removal of artificial barriers on imports of processed and labor-intensive goods originating in subSaharan Africa can change economic fortunes in the region in many important ways that orthodox foreign aid cannot match. It would be a powerful boost for manufacturing, diversification of export base, foreign exchange earnings and employment expansion in multiple sectors. The experience of African exporters however, is that the higher the degree of processing, the more complex the non-tariff barriers in the form of rules of origin, technical specifications, sanitary, phytosanitary and environmental measures, as well as tariff escalation of transport and other costs. In contrast with SSA countries, many non-ACP developing countries such as Bangladesh and India that do not ‘benefit’ from the EU’s special preferences have grown their export incomes 60

Ibid., Doc.ACP/67/017/98, P./1

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and trade with Europe ten fold. Malaysia for instance, has grown the manufactured complement of its exports more than 1000% between 1970 and 1996.

FOREIGN PRIVATE INVESTMENT AND GLOBAL INTEGRATION OF SSA ECONOMIES Another factor integrating developing economies into the global system is the flow of ‘efficiency-seeking’ private foreign direct investment, FDI. The search for higher returns on investment and the opportunity for risk diversification motivate investors. In the new age of global capital, the responsiveness of private funds to cross-border opportunities has gained unprecedented momentum. The trend is driven by structural changes in the enabling environment, such as financial deregulation in both industrial and developing countries, as well of course, as major advances in technology and financial instruments. In the industrial North, there is ever growing pressure on firms to increase efficiency and reduce costs. This receives a boost from greater internationalization of investor portfolios and greater linkages of national financial markets. In the developing South, improving credit worthiness, better growth prospects and higher long-term expected rates of return are reinforced by the opportunities for portfolio risk diversification due to capital market deepening and a low correlation of returns between developing and industrial countries. The overall outcome - increased foreign direct investment flows and increased market access, are supposed to be the reward of structural adjustment measures in the developing economies - trade liberalization, privatization, investment deregulation and opening of capital markets. Without going into the details of their technical composition, statistical facts show that private capital flows to developing countries now dwarf ODA five times, receiving 40% of foreign direct investment and 30% of global portfolio equity flows in 1996 compared to 15% and 2% respectively in 1990. In real figures, net private capital flows to developing countries exceeded $ 265 billion in 1996, six times higher than in 1990 and four times more than the peak reached during the commercial bank lending boom of 1978-1982. The importance of FDI flows in developing country economies has also grown from 4.1% of gross domestic investment to 20% between 1990 and 1996. Significantly, traditional financial bank and trade related lending is giving

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way to the surging dominance of portfolio flows in bonds and equities. These radical reversals also mean a shift away from government public borrowing to private sector end users through market channels. The advantages of FDI over government borrowing are obvious in terms of investment, consumption and dealing with the problem of fungible aid. The resulting impact on the growth and competitiveness of the economy is equally obvious. Impressive as North – South FDI figures are, only about 20 countries account for 95% of the net private flows to developing nations, and subSaharan Africa countries are not part of them. Among the six regional developing country groups that attract FDI flows, SSA receives the least. East Asia, North Africa and the Middle East, Latin America and the Caribbean attract anything between 5% to 8% of GNP. 62 On the other hand, SSA received only 3.5 billion or 5.9% of all foreign direct investment in 1995, less than 2% of GNP, of which Nigeria alone received an appreciable 2.2 billion, or 63% mostly in the oil sector. This raises an interesting distinction between the flow of foreign aid and foreign direct investment. Nigeria, one of two countries (Burma or Myammar is the other) the World Bank study – Assessing Aid, cites as states where “almost nothing positive has happened in the past three decades”, received more FDI than all other SSA countries together. And this was at a time all foreign aid to the country had dried up because it was under international sanctions for human rights violations. Private investment funds are more likely to respond to profit potentials and market-risk calculations rather than policy-guided aid. The implications are clear. Aid does not, perhaps need not favor countries with good management. Similarly, aid does not necessarily ‘act as a magnet that “crowds in” foreign private investment as the World Bank suggests in Assessing Aid. On the contrary, while it is not clear that sub-Saharan Africa would attract more FDI in the absence of aid, private investors tend to perceive perpetual foreign aid interventions as confirmation of highly distorted economic environments. Thus, in SSA where aid has become a permanent feature of economic life, aid is more likely to have been ‘crowding out’ rather than ‘crowding in’ foreign private investment. The plausible conclusion is that nearly 20 years of structural adjustment interventions -trade liberalization, privatization and financial market deregulation, have failed to create the expected enabling environment to attract private investment funds to SSA. The failure of reforms to attract FDI to the SSA region, and the Nigerian exception tend to validate the view that 62

Ibid. World Bank Data.

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the African condition needs more than market-led reforms to make an improvement. It also re-emphasizes existing evidence correlating domestic investment with domestic savings. Relying on a combination of data on capital flight and domestic capital stocks, Collier and Gunning compared the portfolio choices of wealth holders across regions to show that SSA displays much less home country bias in investment than other regions. Their findings show that 37% of sub-Saharan Africa’s wealth is relocated outside the region compared with 17% and 3% for Latin America and East Asia respectively. They suggest that if SSA reduced its level of capital flight to that of Asia, its capital stock would increase by 50%63. That to my mind, is more likely to generate foreign private investor confidence and “crowd in” more investment to sub-Saharan Africa than aid transfers. What Africa needs most to achieve competitiveness and integration into the global economy is intensive capital investment under growth-friendly conditions. But by placing all the emphasis on wholesale free market reforms at the expense of stability and risk reduction to property rights, foreign donors inadvertently exacerbate social tensions and alienate wealth holders in SSA thereby promoting capital flight and scaring away private foreign investors. The combination of capital flight, debt service payments and corrupt foreign exchange transfers has simply undermined domestic savings in the region, leaving behind an investment gap too wide for inflow of foreign savings to close. Thus, it seems safe to conclude that the only integration that is happening between sub-Saharan Africa and the global economy is the connection between the rest of the World and the combination of the region's bearing the global structural adjustment burden and the exodus of its human and financial capital.

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Ibid. Freeman and Lindauer, Why not Africa? P.11

Chapter 7

ASSESSING FOREIGN AID MISCELLANEOUS ASPECTS OF AID AND GROWTH/DEVELOPMENT IN SSA The attempt so far has been to challenge the evidence used by donors to suggest a positive correlation between development aid as a share of GNP on the one hand, and economic growth, poverty reduction and competitiveness across countries on the other. Because the evidence of a correlation is weak, the apologists of aid have tended to blame failure, when it is admitted, as is the case in SSA, on the constraints imposed by too little human capital, imprudent fiscal and macro-economic policies, corrupt practices, a social and geographical environment hostile to economic performance. These constraints are real, but their very persistence despite a protracted period of aid, is indication enough that aid per se, is the wrong instrument for tackling the African economic crisis. In view of the dismal performance of protracted, intensive and wideranging application of foreign aid in sub-Saharan Africa, we cannot completely avoid legitimate speculation as to whether the region would be better or worse-off if there was no aid, or if aid was withdrawn. In addition to seeking alternate and complimentary explanations for Africa’s economic crisis, this chapter conjures such a hypothetical scenario in considering some of the more recent objectives and diffuse implications of aid – promoting democracy and human rights, miscellaneous forms of social dysfunction, and psychological dependency on aid.

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In their detailed study of the African economic condition, Professors Freeman and Lindauer argued quite persuasively that the standard reasons many donors proffer constitute “neither iron-clad barriers to development nor compelling explanations for SSA’s failure to achieve rapid economic growth”64. This study argues further, that rather than assist with reducing or eliminating these constraining factors, foreign aid to SSA has mostly accelerated them, thus in itself, constituting a constraint on the pace of economic growth in the region. The initial burden of aid arises in matching its real objectives with what sub-Saharan Africa requires to reduce its constraints to economic growth. According to Carol Graham and Michael O’Hanlon in ‘Making Foreign Aid Work’, “economic growth is not the sole objective of aid, and it may be the least important goal for policy makers concerned with security, short-term solvency, human rights or democracy.”65 Before the collapse of communism and triumph of global capitalism, cold war calculations conditioned donors on both sides of the iron curtain to funnel aid to sustain in power, corrupt, lifeterm dictators, depending on whose side they were, and the perceived strategic importance of the countries they misruled. In 1980 for instance, the volume of Western aid to ‘strategically important’ countries like Zaire ($814.3 million), Somalia ($481.1 million) and Ethiopia ($211.8 million) to name a few, indicates a sharp contrast with aid flows to equally corrupt and oppressive, but ‘non-strategic’ ones such as Guinea ($88.1 million) Gabon ($14.5 million) and Equatorial Guinea ($9.9 million). These foreign transfers were invariably dubbed foreign development aid despite the well known facts that most of it went into arms purchases, and maintenance of unwieldy armies, or directly into the pockets of the ruling despots. Even when such aid entered the production sector, the dominance of commercial interests and an illusion of grandeur on the part of incumbent dictators ensured an over-emphasis on large capital-intensive, mostly white elephant projects, or a jumble of activities without coherent purpose. While in general dictatorships are not necessarily inimical to economic growth, African dictators are not famous for choosing growth - augmenting policies and have records that reveal them as the World’s best examples of corrupt, rent-seeking political actors. Despotic rulers rely on bribery, violence, and a high level of police and military expenditure relative to GNP, to stay in 64 65

Ibid. Freeman, Lindauer, Why Not Africa? P.2 Carol Graham, Michael O’Hanlon, Making Foreign Aid Work: No Pain no Aid, Foreign Affairs Vol. 76 No. 4, July/August 1997, p. 98.

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power. These in turn have helped to spawn a rash of corrupt practices among bureaucrats and private business operators that ranks African countries among the most corrupt in the World.66 The debilitating effects of corruption on productive accumulation and investor confidence in sub-Saharan Africa go far beyond normal imagination. The high incidence of corruption in Africa has until quite recently, not featured as a concern of donors and aid officials. This was convenient and sometimes a deliberate policy of donor countries that deserves further study. The fact though is that foreign aid, particularly of the cold war period, did more than subsidize and perpetuate unsound economic policies, rent - seeking behavior and weak economic performance. It often amounted to plain bribery to retain the allegiance of self-seeking dictators in Africa. Foreign intervention cannot be responsible for the depth and spread of high level corruption in Africa, but its contribution is undeniable. As part legacy of cold war assistance to Africa it spawned a habit that dies hard in any circumstance. Furthermore, we have argued that if foreign aid removes the budget constraint of profligate governments, it also removes the incentive for domestic consensus on the need to reform. Thus, it postpones the pressure for leadership commitment to prudent economic policies and transparent public accounting. In addition, the growth effects of aid may be obvious and measurable, but its impact on the political landscape is not. The hypothesis is generally acknowledged today that, the first and foremost determinant of economic growth is political stability and attendant security of property. Without this base, the best macro-economic policies and abundance of human and material capital will fail to sustain growth. By sustaining unstable dictatorial regimes in Africa, foreign aid up until the 1990s, helped in no small measure to fund a legacy of political turmoil and war. It may be true that the Cold War battle lines encompassed most of the world, but the side of the coin that is fast receding into universal amnesia is that a number of African countries suffered more acutely than others by having the Cold War fought physically on their territory. Some of sub-Saharan Africa’s current wars are fought with aid-financed ordinance and equipment left behind by retreating donors when the Berlin Wall collapsed. In a recent conflict management seminar in Africa, an Ethiopian banker underscored the point with this appeal to the West - “We need more of the implements of agriculture and we need no more implements of war”. Since independence in 66

International Corruption Ranking, A Joint Initiative of Transparency International and Gottingen University.

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the 1960s, the burden of war continues to plague SSA. A third of its 48 countries are embroiled in international or local wars at any time. In 1996 alone, 14 African countries were embroiled in armed conflicts, resulting in more than 50% of the war-related deaths world-wide, generating more than 8 million refugees (UN figures, 1998). The fact that SSA’s 600 million people, only 10% of the World’s population, still contributes 46% of the World’s refugees and war-displacees, not to mention a huge and incessant brain drain, is a grim reminder of the endemic nature of instability on the continent. If aid was driven by security concerns in the cold war era, the rationale started to shift in the 1980s towards limiting the increasing strains that developing country debts placed on the international financial system. The politics of foreign debt need not be a part of this study, but the linkage between certain aid instruments and debt repayments are too strong to permit a separation. Even technically, separation is not quite possible since many gainful monetary transactions such as high-cost World Bank/IMF structural adjustment loans, debt rescheduling schemes and prudent write down or write off of bad debts are being labeled as aid.67 In particular, a developing country’s ability to service its external debt determines whether or not it receives the IMF-World Bank seal of approval for its national budget. Today, the poorest countries are facing the most serious debt crisis in history, and an enduring solution to the problem is not in sight in spite of a near universal consensus about the need for decisive action. The failure of foreign aid must therefore be linked with the burden of debt. Far from reducing sub-Saharan Africa’s debt to manageable levels, foreign aid in the form of new loans, rescheduled or rolled over arrears, has rapidly built up its debt stock from barely $ 60 billion in 1980 to $180 billion in 1994. Since the beginning of liberal reforms in SSA economies in the mid 1980s, the region transfers to Western creditors on average, $10 billion per annum in debt service, $2 billion going to the IMF each year as interest on new structural adjustment loans. This means that yearly, the region generally repays in debt service more than 20% of its gross export earnings. And for highly indebted countries such as Guinea Bissau, Malawi, Mozambique, etc., whose annual repayments fall anywhere between 27% and 63% of gross export incomes, debt has proved to be a crippling burden on new investment.

67

Because the World Bank provides credit at below market rates, the credits are considered grants or concessional to high-risk countries (SSA) whereas similar loans at even lower interest rates to “low risk countries” like South Korea are not so considered.

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The Zambia is a classic example of how the burden of debt is destroying sub-Saharan Africa’s fragile industrial base and export of manufactures. Zambia repaid $2,626 million or 245% of all export earnings in 1995 in order to qualify for receipt of $385.6 million in foreign aid the same year. Thus Zambia’s potentially competitive textile industry collapsed under the weight of zero investment in economic infrastructure, punitive interest rates and credit shortages, leaving some 40,000 people unemployed.68 According to the Economic Commission for Africa, manufacturing production across Africa is operating at less than 50% of installed capacity, due in part to the burden of debt and under investment, as well as ineffective domestic demand resulting from reform-induced massive unemployment and collapse of real wages. It is not an exaggeration to conclude that foreign aid – the new name for loans borrowed in foreign currency, often at high interest rates and harsh conditionalities, have matured into a toxic brew of debt and unemployment leading to sub-Saharan Africa’s present epileptic economic performance. The most pernicious consequence of the World Bank-IMF exposure in Africa is the rising volume of capital outflows from the region vis-à-vis domestic investment on the essential ingredients of economic growth and long term development. The Bank now admits that the continuous flow of aid, actually new loans, even to poor reformers, is so as to avoid defaults on debt payments, - losses that for the most part would be borne by the multilateral institutions. That expensive new loans to service external debts, so ruinous of fragile economies, are referred to as foreign aid does seem to stretch the imagination quite some.

DEMOCRACY AND HUMAN RIGHTS Since the collapse of the threat of communism in the1990s, Western concern about reducing poverty has been linked with some refreshing policy objectives - the promotion of democracy and human rights in aid recipient countries. This convenient bolt face from the support given to tyrants as an integral part of anti-Soviet policies in the past should be the one silver lining in the arid firmament of donor – recipient relations. The presumption, which may operate in reverse, is that democratic societies are more likely to adopt open market-oriented economic policies and create more growth -friendly 68

Ibid., Kevin Watkins P.24(2)

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environments. Whichever drives the other, economic growth and democratic values are both desirable goals for the overwhelming majority of sub-Saharan Africa – the poor and powerless. After failing to make an impression on donor countries and institutions with the argument that democracy is unsustainable in the midst of poverty and economic decline, the African political class seems to have reached a pragmatic compromise. The apparent decision is that democracy and human rights constitute the newest forms of Western imposition, something they must contrive a means to circumvent in order to retain foreign aid. In a recent interview, Mr. Carl Greenidge, Deputy Secretary General of the ACP, summarized the collective resignation of the group to “the nebulous concept of good governance being enshrined as a fundamental principle of aid and trade in the Lomé Convention.” (Cable Network News International, 28 July 1999) Thus lacking in persuasion and consensus, democracy is often fudged in Africa through acceptance of mere periodic elections usually manipulated to reconfirm the mandate of incumbent governors. The incidence of corrupt practices and low growth in many ‘democratic’ African countries – (Côte d’Ivoire -2%, Togo -14%, Senegal 2%, Zambia 3.1%, and Kenya 1.7%, 1995 growth figures) confirm that periodic elections neither guarantee prudent fiscal management nor higher economic growth. They may in fact guarantee the opposite. It is logically possible though, that fudged democracy is preferable to the unmitigated authoritarianism that hitherto held sway in Africa, a fact that makes promotion of democracy a desirable good in itself. However, the view that economic growth is impossible under despotic governments does not present a persuasive argument. Similarly, democracy as the recent growth history of China and East Asia illustrates, is neither a necessary nor sufficient condition for economic performance. In other words, foreign aid as several studies have shown, will have no positive effect on economic growth, even in a genuinely democratized SSA that is lacking the will and the skill to grow itself out of poverty. Democracy can certainly contribute to creating an environment of peace and stability - a necessary condition for economic activities to thrive. But in the absence, or misuse of complementary growth assets such as investments in human capital, infrastructure, sound internal policies and effective domestic demand, democracy per se can be an expensive drag on the economy. Democracy does not guarantee for instance, that governments will expend foreign income on investments. In fact, the contrary may be the case as the

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World Bank confirms relying on a study based on a model of political indicators developed by Isham, Kaufman and Pritchett (1997). “While electoral democracy and civil liberties are closely linked, civil liberties rather than the electoral process is the main channel of influence or impact on the economic rates of return to the Bank-financed government projects.” 69 The Freedom House Civil Liberties Index (1997) and the more graduated Humana Index (1996) show Africa’s democratic governments lagging far behind other democracies in giving a voice to their subjects. Donors who pat each other on the back for the success of democracy in Africa need to restrain their celebration. It is certainly not yet Uhuru in Africa because periodic elections are not a guarantee of freedom or civil liberties. As a matter of experience, the prospect of the next round of elections actually reinforces the impulse of governments to expend unearned foreign transfers on consumption. Rather than investment and promises of future economic growth and prosperity, meeting the immediate needs of voting constituents must command greater appeal to a politician seeking to stay in power. Apparently, aid has not succeeded and is unlikely to succeed in imposing good policies or good governance on reluctant governments. In summary, foreign aid even in the promotion of democracy, is not a growth-augmenting strategy because democracy in its own right ensures neither growth and development nor poverty alleviation. It could well be that the African political elite does stand on solid ground in claiming that democracy cannot thrive among the poor and hungry. On this view, they seem to share common grounds with Amartya Sen, master of Trinity College, Cambridge, and winner of the 1998 Nobel prize in economics. Mr. Sen contends in his new book – Development as Freedom, that the true ends of development are human choices, that is, freedoms or capabilities “to lead the kind of lives we have reason to value.” So poverty must mean a lot more than low consumption. In short, democracy is unlikely to command much meaning to a person living under the constant threat of early death due to chronic undernourishment, pandemic HIV/AIDS-related illnesses, illiteracy, unemployment and other forms of deprivation that contribute to social exclusion, loss of self reliance, self confidence, physical and psychological health. And if it does not mean that much to him, he is not likely either to be keen on paying the normally costly price of freedom – part reason Africa remains a haven for dictators. 69

Ibid., Assessing Aid: What Works, What Doesn’t and Why, p.135-7.

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Evidently therefore, foreign aid has failed in Africa because it was never conceived as a growth performance policy or freedom-creating strategy. Such a strategy would focus primarily at promoting self-confidence and selfreliance and not dependency of its recipients. It would be investment driven, basically knowledge-creating, and values–changing, and automatically responsive to sound economic policies developed where possible, through domestic consensus. A freedom and development-augmenting policy for subSaharan Africa would place high emphasis on developing the internal markets of its component countries and integrating them in a common regional market. On the contrary, donors of foreign aid are not very interested in promoting the elements of a growth performance strategy. If aid were motivated less by the donor’s strategic interests and more by economic growth and pursuit of freedoms in recipient countries, growth performance rather than rigid values would dictate the pattern and direction of aid flows. It is illusory to assume that foreign intervention in the guise of aid can trigger political stability and democratic values in the absence of internal and external economic environments that sustain productivity growth and reduce the blight of poverty in poor countries. In so far as foreign aid does not encourage self confidence or promote self-reliance among the Africans, in fact undermines both, the most telling of the effects of aid on sub- Saharan Africa, is the psychological dimension.

Chapter 8

ASSESSING FOREIGN AID THE PSYCHOLOGICAL DIMENSION OF AID TO SSA A common African aphorism informs that ‘no one grows rich on a gift’. Its universal equivalent would be ‘give me a fish to eat and I will eat for a day, teach me how to fish and I will eat fish all my life.’ In this regard, and despite the best intentions, foreign aid-giving has proved to be a poisoned chalice for SSA. It has had the same effect as sweet wine or a drug addiction that induces slumber that perpetuates dependency. The syndrome of dependency is nowhere better illustrated than in the reaction of African officials on the foreign aid detail in Brussels, headquarters of the European Union, whose aidgiving policy to Africa commenced with the Treaty of Rome in 1957, and has remained a permanent, central feature of its foreign relations with the continent. In an African strategy meeting in 1994, during negotiations leading to the Revised Lomé IV Convention, all the participants argued for substantial increment of the ‘Envelope’.70 One and all expressed concern that “the amount of development assistance on offer under the Lomé Conventions has always been less than hoped for”. As if that was not bad enough, a mischiefmaking counselor raised a question - ‘What if Aid is withdrawn’? That was all too possible given the air of uncertainty surrounding the survival of the EU 70

Envelope is the acronym used by ACP diplomats to refer to the contractual EDF provision, funded by ad hoc contributions of EU member States, exclusively for the ACP countries. Each of the 4 Lomé Conventions has its own distinct EDF with operations programmed over 5 years.

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ACP arrangement at the end of the 4th Convention in the year 2000. The stunning reaction was utter incredulity marked by silence and open mouths, and then the Chairperson’s reassurance: “Perish the though. With-holding aid” in his words, was “thinking the unthinkable”. Yet, the counselor had put into words, the unspoken fear that gnaws at the collective psyche of African officials in Washington and Brussels. The fear of losing the detail to keep watch over, and return their governments’ share of the next ‘tranche’ or ‘envelope may explain the enthusiasm and scramble among aid officials to secure a larger share of what is on offer. But by far, the more harmful to Africa’s economic performance, is the paralyzing anxiety of economic planners, a pathological fear of being left alone, abandoned to own means and devices. The anxiety of losing aid contrasts sharply with the skepticism that Africa’s ancient traditions seem to reserve for unwarranted altruism. For instance, to an emissary sent to convince him of the British Crown’s altruistic desire to bring his Kingdom the benefits of civilization, the Asantehene replied in so many words; “That cannot be your motive. As regards industry and the arts, you are superior to us. But we have relations with another people, the Kong, who are as little civilized in relation to us as we are to you. Yet there is not a single one if my subjects, even among the poorest, who would be willing to leave his home to civilize the Kong. So how do you people hope to convince me that you have left the prosperity of England for such an absurd motive.”71 That skepticism beautifully expressed by the Asantehene is today replaced by a level of credulity and dependency that beggars the African soul. As James Morton noted in his book, ‘The poverty of Nations, 72 aid drives a serious wedge between governments and the people, the former no longer depends on the later for taxes to carry out its activities - and so is not accountable for its actions. Mr. Morton was referring to sub-Saharan Africa, some of whose governments depend so much on aid flows that they no longer bother to improve on collection of tax revenue, or even attempt to put a check on capital flight. If donors are concerned about creating aid dependency in some African countries, the harm is already done. The shock and panic that gripped French71

French Professor of History, Bayart, The Historicity of African Societies Politics of the Belly, p.29 The Asantehene is the King of the ancient Kingdom of the Ashanti people of modern Ghana 72 James Morton, The Poverty of Nations: The Aid Dilemma at the Heart of Africa, London, British Academy Press, 1994.

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speaking West Africa when France toyed with the idea of de-coupling the CFA franc from the French franc in 1995 is illustrative of the mental paralysis aid has wrecked on the African elite. A handsome number of officials from Dakar and Abidjan to Cotonou and Yaoundé did not believe it could happen until it actually happened. Similar anxiety appears to be the lot of many SSA governments whose development plans and annual budgetary policies are hinged on the approval or disapproval of the Bretton Woods Institutions, and particularly, on the size of their share of the inevitable national indicative envelopes from Brussels. In this way, aid has, in the words of Marguerite Michaels, become “kindness that cripples”.73 It has crippled initiative, seduced creativeness to slumber, and replaced inventiveness and self-reliance with dependency in SSA. Permanent or contractual foreign aid such as the European Development Fund, (EDF) amounts to institutionalized dependency. And when administered on a long-term basis as the European Commission and the World Bank- IMF group have done in sub-Saharan Africa, all aid instruments serve as a vehicle to convey and stabilize a syndrome of dependency. Hence, the ACP Secretariat could whine that ‘African countries could not participate in the processing of its commodities because the EU rejected all the proposals the ACP countries had made for inclusion in the Lomé IV Convention.’ In other words, once the EU rejected proposals suggesting incentives for potential investors in the upstream sector of their commodity products the inevitable consequence was; “no significant progress was made between 1990-94 in this area”.74 The strange impression this conveys is one of helplessness and surrender, based on the self-doubt of African leaders to accomplish anything on their own volition and initiative. Not even to improve the value of their export products! Dependency is solidifying in sub-Saharan Africa as structural adjustment programs that should last some 3 to 5 years, have become permanent features of modern Africa’s economic history, an unending experiment in macroeconomic models and conditionalities dictated by international lenders. The promises of aid are lengthy, so are its excuses for failure to deliver on those promises. Yesterday, it promised economic growth and the excuse was macroeconomic imbalances. Today’s promise is poverty alleviation, not elimination – an impossible prospect apparently, and the excuse is lack of democracy and human rights. Tomorrow will certainly bring new promises and new ready73

Marguerite Michaels, Nairobi Bureau Chief of Time Magazine and Edward R. Murrow Fellow at the Council on Foreign Affairs writing in Foreign Affairs: Retreat from Africa. 74 ACP General Secretariat internal memo N?.ACP/67/017/98, Brussels, 9 April, 1998, P. 7

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made excuses. But the Africans, trapped by debt and mired in poverty, feel helpless and obliged to remain laboratories for economic experiments, for fear of losing the World Bank - IMF imprimatur, the anxiety of losing ‘aid’. In combination with the Europe’s extra-GSP special trade preferences for ACP countries, a system that relies on non-tariff barriers to encourage commodity exports and discriminate against manufactures, aid programs have promoted Africa’s loss of self-confidence, self-reliance and psychological health. The total reliance of African countries’ on export of raw commodities for foreign exchange earnings illustrates a collective dependency mind-set - a fear of entrepreneurship, an aversion to risk-taking. Because the European Commission is yet to approve or facilitate their participation in the processing of their natural products, regional initiatives are suspended. Reliance on useless compensation for huge export losses rationalizes a slanted definition of diversification - inclusive only of horizontal expansion. The fear of loss of compensation and the ‘envelope’ justifies lethargy to explore regional opportunities or foray into markets beyond Europe. Probably, the strings attached to the national indicative programs, the special trade preferences, the “dependency threshold” and other rules of eligibility for STABEX and SYSMIN, were not meant to entrap African economies into dependency. But they certainly ensure continuous flow of African raw materials for Europe’s factories. They also ensure that the African economies stay on life suspension - neither dead nor alive. These facts are precise and not easy to dismiss. They lend credence to the hypothesis that foreign aid has been a disincentive to the prospects of growth, development and freedom in sub-Saharan Africa. To suggest differently in my view, would amount to naivete if not outright self-deceit. By nature, a mind-set of dependency survives on a steady ration of naivete and /or self-deceit, and a generous dose of both goes with the territory of aid giving. They are inherent in the concept and practice of development aid on the side of both givers and takers. Consider the presumption of some truly compassionate donors, that agrarian transformation can be achieved in Africa through ad hoc introduction of modern agricultural technology into the hands of rural peasants. Such presumption may be founded on noble intentions, but it misses the point and places the cart before the horse. The African peasant is mostly an illiterate farmer in a community based on a culture of subsistence accumulation. He is barely exposed to the culture of science and capitalist planning. Instead, he is mired in superstition and fetishism. If the horse must come before the cart, the peasant’s objective of farming for subsistence

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consumption must give way to the culture of planning for future consumption, and superstition must succumb to the culture of science and reason. It is only then that he is able, empowered with the knowledge, values and desires that drive modern economies, to use modern agricultural technology to grow sustainable wealth. Providing him with fertilizers, tractors and combine harvesters before he is well on his way to this transformation is no different than providing Liberia or Equatorial Guinea with space technology. The failure of most aid projects in Africa ought to have resolved this illusion, unfortunately it has not. It is equally deceitful to continue to couch the language of aid in the cast of pure altruism - ‘donors sacrificing themselves and their resources for the benefit of the needy, and getting nothing in return’. Let us agree that the motives for aid are mixed, so there is not one type of aid that is altruistic as against all other types. But then, we must also agree that the altruistic motive pushes aid in different directions from the other motives, one of which is definitely not economic growth or development. This study deliberately excludes altruistic aid, such as is given by the public in developed countries to NGOs for distribution in developing countries, or official humanitarian response to natural and man-made disasters. Development aid is motivated by calculations of power, that is, politics and economics. But altruism or the compassionate ethic is not a by-product of politics or economics. Rather, it is a by-product of religion, the loss of which is not overly mourned in post-Christian Europe. As for the United States, wallowing in the exuberance of unchallenged power, no one has better summarized an enduring spirit of America than Mr. George W. Bush, Republican front runner for President. Recently, he accused his Party, the majority Party of the United States, of “obsession with wealth and indifference to the human problems that persist in the shadow of affluence.” If according to him, the Congress is working hard ‘to balance the national budget on the backs of its own poor citizens’, it is ‘a no-brainer’ to reckon that the United States neither, is an icon of compassion. As a matter of fact, not many aid recipients are naive about this, at least not the Africans who tend to lean to the opposite extreme - regarding aid as a matter of right rather than compassion. Asked about the European Union programs in his country, an Ambassador representing Senegal in Brussels replied in these polite words: “At the moment as you know, we are very appreciative of the money the EC and the Member States are giving us for our development. But their firms are not losing out. Far from it. They, are

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benefiting.”75 Many aid officials readily confirm that the lion’s share of development aid allocations, sometimes as high as 80%, recycle and is spent in the donor countries. Most aid returns to the country of origin in the form of payment for know-how, consultancies, hardware, contracts etc.76 A breakdown of the country of origin of contractors and volume of contracts awarded under the 6th and 7th EDFs of the ACP-EU arrangement reveals a pattern that seems to validate the high percentage of aid recycling. Of the total sum of EURO 3,053,863,257 awarded as contracts in works, supplies and services under the National Indicative Programs of the 6th EDF, 78% or EURO 2,382,013,340 was awarded to, and performed by - EU contractors. Only 20.5%, less than 20.75% for France alone, went to the 70 ACP countries. And of EURO 1,606,153,541 worth of contracts under the 7th EDF, European Contractors won 76.42% and the ACP States 20.88%.77 It also takes some experience of the excessive procedures, bureaucracy, meetings and transactions involved in the life cycle of an aid project to know who spends the funds, how it is spent and where the jobs, if any, are created. At the end of 1996 for instance, 12.2% and 22.36% respectively, of the 6th and 7th EDFs were spent on ‘OTHER’ a subhead comprising studies, seminars, fairs, import programs etc.78 – programs in which the recipients have only marginal interests or benefits. If the impression is that this trend is peculiar to European aid, or if further proof is needed to show who benefits from development aid, a recent policy document on the USAID homepage provides succinct and telling remarks. Under the rubric: ‘Development is Good Business’, USAID showcased the returns for foreign assistance between 1990 and 1995. Exports to developing and transitional countries increased by US$ 98.7 billion and this growth supported 1.9 million jobs in the United States. And since by law all US assistance must be spent on American produced items, in 1993 alone, US foreign aid programs accounted for more than US$10 billion in purchased US goods and services. An independent study conducted by an international Food Research Institute found that each dollar invested in agricultural research in 75

The Courier, ACP-EU bi-monthly publication, N? 106, November/December 1987, P.57 Raghuram, ‘Politics of Aid’, Development Vol.42 No.3, 1999 p.44. And 80% is estimated by Daniel G. Clarke, ([email protected]) participant in several US-funded projects in Africa; plus the author’s informal discussions with ACP, CDI, EU and Embassy officials in Brussels. 77 Development, (Publication of the EC) N? DE 92 'Financial Co-operation under the Lomé Conventions: Aid situation at the end of 1996, Nov. 1997, P. 36-37. 78 Ibid., Development N? 92, P. 36/37 76

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developing countries increases that country’s imports of American goods and services by US$ 4. Annual imports by developing countries represent a total value of nearly US$ 200 billion and account for about 4 million jobs. In Indonesia, just one example, a US$ 3 million investment by USAID in support of privatization of the energy sector, led to a US$ 2 billion award to a US firm for Indonesia’s first private power contract. (Raghuram, Politics of Aid, Development 42/3, 1999 p.44) Seen in these contexts, the Africans must, at some point, choose whether or not to continue to rely on aid for their development. They must at that point confront their fear and decide that query: So what if aid is withdrawn? The answer, in my view lies between two frames of mind: the skepticism of the Asantehene who perceived absurdity in self-serving altruism, or the dependency mindset of officials who believe that no matter how hard they try, African countries are doomed to failure without foreign aid. In the view of the dependents, withdrawing aid from Africa will exacerbate social tensions beyond the crisis point, undermine the authority of many governments, and result in a rising incidence of failed States in the continent. This is expected to necessitate the heavier burden of massive humanitarian intervention by the West. A Time Magazine article offers the Western perspective of a failed State – ‘a country that, inter alia, cannot pay its internal and external debts, cannot collect taxes, is overwhelmed by corruption, cannot police crime, cannot credibly project any form of influence - military or political abroad, ultimately cannot protect the basic well-being of its citizens, cannot provide a conducive environment for life standards not to deteriorate all too rapidly’. Going by this definition, the sub-Saharan African country that has not failed is rare indeed, a fact that justifies the World Bank official who is said to have quipped on questioning by nosey journalists that “Aid is a game for losers”. It is indeed, including those structurally- adjusting countries that the World Bank parades as Africa’s new success stories - Uganda, Tanzania and Ghana. Assuming that it were possible to ignore all other elements in the menu of failed States, the escalating external debt portfolios of the exemplary States should qualify each of them as a failed state. Uganda’s external debt grew from $609 million, 3% of its GNP in 1980 to $3311 million, or 61% of GNP in 1995. Tanzania’s was $1, 734 million, 34% of GNP in 1980, and $ 5116 million or 148% of GNP in 1995. For Ghana it was $1231 million, 28%

See Fig. 1, the Life Cycle of a Project. The Courier, N?106, Nov-Dec. 1987.

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of GNP in 1980, and $5271 million, 85% of GNP in 1995. For all of SSA, debt escalated from 19% of GNP in 1980 to more than 100% of GNP in 1995.79 None of these countries’ productivity growth rate is nearly high enough to sustain its debt, and when their high rates of population growth are factored in, it becomes clear that the debts are for the very long term, probably not repayable. Yet ‘aid’ continues to flow into badly run SSA countries in order to prevent default on their debt service, in order to avoid the burden of shoringup failed States. So sub-Saharan Africa continues to survive on life support, that piteous state of ‘the poor spirit’ whom President Theodore Roosevelt described as ‘living in the gray twilight knowing not victory nor defeat’.

SO WHAT IF AID IS WITHDRAWN? The alternate view reflects life reality. African states that have not failed so far, may or may not fail. But what will surely fail is continuous sustenance by western aid and arms, of inept and corrupt governments, whose agents live fat and happy, generation after generation, while the populations lead stunted lives in blighted villages and urban ghettos. The realistic view is that despite the potential short or long term social costs, withdrawal of financial aid flows will compel Africans, leaders and followers, to depend less on naive expectations and begin to think. They will finally figure it out, that aid is not a good choice, not even a second-best or temporary option. The smart choice is to enhance income through better terms of trade, by boosting the value, quantity and quality of exportable goods through domestic savings and investment. Withdrawing aid may fast-forward the need for domestic consensus and regional consultations and cooperation on issues, political and economic, leading hopefully, to genuine reforms under circumstances of peace, stability and the rule of law. Consider that there were those who feared that doomsday was near when the French government withdrew support for the CFA franc. The CFA took a beating, but it did not die. The era of aid dependency must end to make room for fresh ideas. In Schumpeterian analysis, the discontinuity of events and opportunities is the critical ingredient in promoting a new growth environment, it is change that is

79

Ibid. UN Handbook of International Trade and Development Statistics.

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the source of increased productivity”80. In African folklore, ‘if one road closes, another one opens’ just as in universal terms, necessity is the mother of invention. If aid is withdrawn after more than 40 years of dominance in African development thinking, the governments will be compelled to discard excuses and complacency and begin to seek empirical solutions to Africa’s problems. When confronted with a new reality or new challenges, people anywhere do not simply throw up their arms in despair and wait for the relief that death brings. Africans may not watch helplessly while their off springs and societies atrophy and die. They will attempt to find solutions, constrain their leaders to think, to realize that poverty and dependency wherever they occur, are much more a process than a fixed structure of life. And that wealth and the good life wherever they thrive, are a result of sweat and continuous sacrifice, never hand-outs. In this task, African leaders have history on their side. It confirms that Africa’s social and cultural fabric has never been inert. It has constantly been producing black societies and cultures with internal dynamics as well as those resulting from their relations with the environment. 81 Until this last decade of the 20th century, the declared central challenge of the African leadership was political: de-colonization, elimination of apartheid and all forms of racial oppression in the continent. Since these issues can no longer serve as excuse for economic failure, the challenges posed by poverty, lack of development and loss of freedoms must be the agenda. Finding a lasting solution to the region’s economic lag is the new challenge and should be the focus of policy for African leadership through the better half of the 21st century. Sub-Saharan Africa is not a hopeless case. To assume that it is, as Western scholarship tends to do, is to ignore the fact that all African societies have stood up to and survived the tests of history. It is also the lesson of history that, left to define their meaning and means of reaching development as freedom, modern African societies will discard the usual excuses of a harsh geographical and hostile economic environment. They must confront the real causes of Africa’s retrogression: a harsh environment made harsher by

80

Prof. Rudiger Dornbusch, (MIT, Economist) The case for Trade Liberalisation in Developing countries, Journal of Economic Perspectives Vol. 6 No. I, 1992, P. 76 81 Ibid. Bayart - the Historicity of African States - p.17.

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induced terror and mutual slaughter, a man-made environment of lawlessness and misrule, in which neither wealth nor health can thrive.

Chapter 9

CAN AID WORK IN SSA? In view of the history and nature of foreign interventions in Africa, to state that aid will fail to promote economic growth and development in subSaharan Africa, as it has failed in the past and now, is not a prophecy or mere prediction. It is certain for as long as the interest of nations, often in competition with each other, decide the course of international relations. The opposite is counter-intuitive. All the same, it need be stated that the failure of aid and economic growth and development in SSA is not a machination of the West or aid- givers to keep the region down. It is rather that aid serves the purpose of its own dynamic – the political and economic interests of those who generate it. If, as happens occasionally in the aid-delivery process, the recipient country records some growth, the donor readily takes credit for the welcome coincidence. In SSA unfortunately, there aren’t that many credits to go round. But that could change if donors and recipients rethink their beliefs about the African condition. The rich countries must realize that there are mutual benefits and advantages to be gained from harmonizing their national interests with the development goals of the poor countries. On their part, the Africans must acknowledge that failure is the outcome of decades of political instability, social dislocation and war rooted in their history, but fanned and exploited by successive, authoritarian regimes pursuing anti-growth, mostly self-serving policies. And the donors can own up that in this, they have provided considerable help through all sorts of foreign intervention in the guise of aid.

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Sub-Saharan Africa is classic proof that an environment of predictable political turmoil and instability is not capable of sustaining economic growth or development. The high rates of GDP growth recorded in the past by many SSA economies - in Côte d’Ivoire, Cameroon, Congo, Nigeria, Togo etc. coincide with periods of peace and predictable stability. Similarly, the impressive GDP growth rates of Botswana and Mauritius sustained over the years, and the more recent good performance of Uganda, Ghana, Lesotho and Tanzania have been sustained under stable environments. In contrast, a condition of failed States have prevailed in those SSA countries that have known protracted instability or war - Somalia, Liberia, Angola, Ethiopia, Eritrea, the Sudan, Congo and Sierra Leone. The sterling performance of Botswana and Mauritius have endured for decades suggesting that there is no inherent constraint on African countries' ability to achieve and sustain long-term economic growth if human effort is focused on creating wealth and prosperity rather than on how to survive mutual slaughter and devastation. If the history of modern Africa is one of ethnic tensions, political turmoil, territorial squabbles and civil wars, it is without doubt, much thanks to foreign interventions - slave trading, colonialism, imperialism, cold war maneuvers, staging theatre of proxy wars, development aid, and lately, experiments in structural economic reform. Consider the current wars, 7 in all at the last count and raging at different levels of intensity. They are not fought with bows and arrows. They are fought with sophisticated military hardware, mostly Western or ‘smuggled’ through Western countries. Can foreign aid work in sub-Saharan Africa? Yes, say the World Bank and the International Monetary Fund, as well as the academic and professional experts who claim that ‘ aid works in a good policy and good institutional environment’. This assessment is incontrovertible. Its only draw back, albeit an important one, is that a good policy and good institutional environment may have little if any need for the form of foreign aid that sub-Saharan Africa has received. What is controvertible is the derivative that ‘aid can be the midwife of good policies and institutions’. (“Assessing Aid”, 1998) This claim lacks consistency with the Bank’s subsequent concession that “buying reform cannot generate real change in countries with no domestic movements urging reform”. If aid were a harbinger of change towards sound economic policies and institutions, 40 years of unbroken aid should have turned the subSaharan Africa region into the world’s bastion of economic prudence.

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In spite of the foregoing, the answer to the question ‘can aid work ‘ is still yes, if in the first place, aid seeks to cooperate with African governments and regional institutions to restore a culture of political discussion and compromise rather than instability and war. This is the basic, indispensable foundation for successful application of capital and technology anywhere in the world. In order to lay this fundamental basis, SSA could use some cooperation from Western governments and institutions. The commitment of the Western Alliance to stabilize central Europe and the Balkans spares neither resource nor resolve. At least from a moral point of view, Africa deserves no less given the connection between its checkered history and Western interventions. As late as the 1980s, military spending was for obvious reasons, seen as off-limits to advocacy and monitoring by the United Nations and the Bretton Woods Institutions. Except for the laudable, though limited efforts of NGOs, documenting levels of military spending and collating information about the arms trade, there wasn’t much activity in this area. The post-Cold War era offers unprecedented opportunity to take bold steps at regional and global levels, to reduce military spending, document and control flows of international trade in weapons including small arms. The permanent members of the United Nations Security Council, by far the largest manufacturers and exporters of armaments and weapons, are not, and perhaps should not be expected to be leading advocates of transparency. But they are the ones with the capability and sources of data to cover most of the world’s armament production and trade. Can they be persuaded to become more transparent, to provide leadership to reach international agreements necessary for effective arms control and military spending? That probably, is a lot to ask going by the fate of the anti-personnel mine treaty and lately, the Nuclear Test Ban Treaty, in the US Senate. Assuming that the answer is yes, the efforts of the United Nations, the Organization of African Unity and other sub-regional organizations to help restore peace and political stability to Africa will be much easier. In the meantime, development cooperation founded on a harmony of interests, could commence simply by a resolve of Western governments to restrain foreign aid in the form of providing military ordinance and war material to Africa’s surviving authoritarian regimes and rebel armies that reject peace and choose war. Angola is a case in point. The UNITA movement led by Mr. Jonas Savimbi, has sustained an effective war machine for decades relying on illegal

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sale of diamonds and other precious minerals in the West. The movement sources machine guns, small arms, landmines and other sophisticated war equipment from, or through Western countries. If Western governments decide to confront UNITA’s patrons within their territories, to suppress the illegal flow of arms and ammunition into that country, that will amount to the best, foreign aid that Angola and Angolans have ever received since independence from Portugal in 1975. The same applies to Sierra Leone, Ethiopia, Eritrea, the Republic of Congo etc. Beyond such initiatives and cooperation for control of arms flows, the momentum for stability and peace building in Africa, installing democracy, human rights and the rule of law, should remain with the Africans, their governments and their institutions. If the West co-operates with African countries to establish stable, secure political environments in which people, local and foreign, can gain the rewards of their investments in physical and human capital, the other known constraints to economic growth and development will prove much simpler to confront and easier to overcome.

SPRINGING THE DEBT TRAP AS AID. Among the known barriers to growth in sub-Saharan Africa, exacerbated rather than ameliorated as aid intervention intended, external debt stands out. Not even the most stable democracy in the world can sustain economic growth if it bears external debt in access of 100% of GNP and devotes more than 30% of its income to debt service. It will cease to grow economically as the gap widens between investment and domestic savings. This is the plight, the burden of more than half of SSA countries. The World Bank confirms that ‘in order to enable them service their debts, highly indebted poor countries have been receiving “extraordinary amounts of aid, twice as much as they should have, based on GNP per capita”. (Assessing Aid, 1998) It is a refreshing departure from past practice for the Bank to admit the failure of this strategy, to acknowledge that despite the huge assistance, “the large debt overhang creates an uncertainty for the whole economy”. So far, global initiatives at debt relief and rescheduling seem to be the realistic objectives of international life. But nothing short of substantial ODA debt reduction and cancellation of commercial debts will ameliorate the economic crisis of the poorest sub-Saharan African countries. If debt relief is foreign aid as many analysts say it is, then debt cancellation, write-downs and

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write-offs ought to replace cash transfers as preferred means of aid. Giving aid to impoverished countries for the purpose of servicing debt has the same effect as giving arms to a beggar on the street with one hand and scooping away the contents of his cash pan with the other hand. That amounts to robbery not charity. The collapse of the Zambia’s fledgling textile industry in 1995 (chapter 7) as a result of excessive debt service payment in that year, is illustrative of a common occurrence in heavily indebted sub-Saharan African countries. The prospect of an enduring solution to Africa’s debt crisis remains dim despite a growing consensus about the need for decisive action. There are those in the creditor countries who still argue against debt forgiveness. Their objection is rationalized on the basis of a facetious theory of ‘moral hazard’, seemingly concocted by hired consultants to justify the real moral iniquity of debt against the world’s poorest people. The generic view is that shielding governments from the consequences of their actions encourages them to take more impudent risks, hoping for a bailout if things go wrong. If it constitutes a moral hazard to write off bad debts, where, one may ask, is the hazard for the ‘protected creditors’ who made the ill-considered loans in the first place? Donor governments and institutions that take solace under the cover of a moral hazard must realize that foreign aid meant to relieve imprudent, usually unpopular governments of well deserved budgetary constraints, constitutes a moral hazard. The donor community has so far stuck to conditionalities meant to bail out foreign creditors while the local populations are left to drown. That is what should raise moral outrage - the idea of inflicting acute poverty on hundreds of millions of innocent people, mostly women and children in Africa, while relieving culpable rich lenders in the West of responsibility for their action. Debt rescheduling which many creditors prefer, cannot be the answer if it simply rolls-over debt, often at a punitive rate given fluctuating interest rates in foreign exchange. Fortunately, the moral hazard hypothesis seems to be losing converts among members of the Group of Seven most industrialized countries in the world, G–7). Recognizing that the debts owed by the world’s poorest countries may never be repaid, the G-7 proposed recently to cancel some billions of dollars in debt of the most vulnerable countries. This is a welcome, though insufficient development as the time is long overdue for cancellation of these iniquitous debts. If implemented, it should serve as the beginning of a new approach to resolving a formidable impediment to investment in wealthgenerating projects and provision of important public services in sub–Saharan

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Africa. With regard to other heavily indebted countries in sub-Saharan Africa, a more constructive initiative than debt rescheduling is urgently required to pare down their debt obligations to manageable levels. As a matter of fact, until the debt crisis is resolved, it will remain hard to decide between external debt and the HIV/AIDS epidemic, which one has the upper hand in killing Africans. Furthermore, lenders, including ODA-givers, ought to restrict new loans to only well managed economies which have a proven ability to use resources productively to sustain growth over long periods. Foreign resources or aid transfers that are not meant to argument the region’s investment menu, or that are unlikely to generate sufficient resources to service their debt, will only plunge SSA countries into deeper investment crisis. That has been the case so far.

REDRESSING CAPITAL FLIGHT AND RETURNING AFRICA’S LOOTED WEALTH AS AID Sub Saharan Africa’s domestic capital stock will, according to crossregional studies done by Collier and Gunning in 1997, appreciate by 50% if it reduced its capital flight from the current level of 37% to the Asian level of 3%. No amount of foreign intervention can remove the root causes of capital flight from the SSA region. Therefore, it is up to the African governments to provide the enabling economic environment - protection of property rights and security of risk venture capital, in order to encourage conversion of domestic savings into investment at home. However, as more and more responsible governments emerge in SSA and move toward greater openness and rule of law, the cooperation of Western governments and financial institutions is required to trace and return to Africa, some of the huge sums of money looted by its leaders and stashed away in foreign banks. Some SSA countries have their treasures run like the personal accounts of their leaders who find more security in Western banks than at home. In countries like Nigeria, ruled for decades by successive, corrupt military juntas, unofficial estimates place the share of such flight capital at figures that are high enough to liquidate foreign debts or quadruple their investment stock. Donor countries can effectively assist reduce the high incidence of corruption and capital flight in African countries if their governments and financial institutions adopt policies that treat all stolen wealth as the property of the originating state. The proceeds of corruption and looted treasuries like those of narcotics, should be

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subject to seizure and return to the rightful owners. Preventive action against capital flight and return of looted wealth will go much further than foreign aid to close the gap between investment and domestic savings.

PRIVATE INVESTMENT AND TRADE AS AID Sub- Saharan African economies could convert foreign savings into growth - inducing investments if capital inflows take the form of foreign direct investments. FDI in this sense is not mere speculative finance, ready to run at the first sign of market volatility. What Africa needs is long-term foreign investment that seeks to take advantage local resources and provide new ideas, fresh information, new skills and appropriate technologies. Rapid expansion of exports is imperative to ensure foreign exchange to import necessary technology and equipment to for the modernization of the economy. Production for export can lead to economies of scale, employment opportunities in skilled and semi-skilled jobs, promote improved production methods and training, management and organizational skills. With the availability of relatively cheap labor, export prices should be competitive. It is acknowledged that only African governments can create the conducive environment that crowds in the foreign direct investment to facilitate expansion of exports. It is equally true that the donor community can smoothen the way by reducing the burdens it has imposed on the subcontinent. And there is a precedence to follow. In the 1970s, a significant change occurred in the logic of the global economic system. For the first time since the industrial revolution, developing countries could be involved through the General System of Preferences, in the World’s manufactured - product-export regime. For the most part, this was a crucial element in the emergence of the newly industrialized countries, NICs. These were poor countries that responded with massive investments in mainly labor-intensive exports such as clothing, textiles, machine tools, transport equipment and mass-produced electronic equipment. They could trade their manufactured goods on preferential terms that made the products competitive in developed market economies. The collaboration of Japanese and American firms and corporate investors taking advantage of the GSP-contrived comparative advantage in their natural regions of preference, facilitated the economic success of some South East Asian and Latin American countries. On the other hand, the African region,

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usually dependent on Western Europe, could not and did not participate in the GSP because, according to the Secretariat of the African Caribbean and Pacific group in Brussels, Africa had a special partnership with Western Europe. European firms had “specialization in the area” (of smoke-stack industries and labor-intensive manufactures), in view of which, European companies were unable to invest in ACP countries.82 The ACP further complains that the European Commission had ignored all the proposals it had made for mechanisms for ensuring and guaranteeing ACP-EEC investments, as part incentives to encourage private European direct investment in processing their commodities. The apparent compromise was and still remains for SSA to supply the raw inputs under a “favorable duty-free non-reciprocal regime” and compensation paid for losses due to price falls, while European factories processed and recycled the manufactured products to Africa and the World market. That is the form of aid that has stymied product diversification and growth in sub-Saharan Africa. It may well sound as if colonialism never really ended, but facts are stubborn, they never disappear and they always speak for themselves.

82

ACP General Secretariat [Draft Internal Memorandum N?ACP/28/008/98] Brussels, 22 April 1998, P.7

Chapter 10

MAKING AID WORK IN SSA Clearly, foreign development aid as we know it does not, and cannot work in sub-Saharan Africa. What can work is an international level effort to facilitate the emergence of peace and political stability in the region, deal with the burdens of external debt and capital flight, replace fungible aid transfers with steady trade access and FDI flows targeted mostly at enhancing the value of the regions’ export resources. In general, such a remedial can succeed in changing the fortunes of sub-Saharan Africa if the international community comprising the multilateral financial institutions, the G7, WTO and the OECD states, decided to confront rather than continue to ignore the macroweaknesses in the global structure. It means sharing the burdens of structural adjustment, and reducing the tendency to marginalize the poorer countries by further weakening their bargaining power in international institutions. In particular, the negative impact of globalization on non-competitive countries crystallizes the urgency to rethink the donor-recipient philosophy presumed in North-South relations. Africans can benefit if globalization and liberalization lead to the replacement of foreign development aid with a balanced, mutually beneficial cooperation arrangement that recognizes the need to create a special economic recovery opportunity for sub-Saharan Africa. A special recovery program focusing on trade and direct investment flows to SSA should be essentially private sector based, with governments playing supportive roles in terms of treaty guarantees and creation of enabling environments. It would replace Structural Adjustment Program (SAP), as a more effective means of reviving growth and promoting development in the region. It would seek to reinforce domestic laws and provisions made for the

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protection of private property rights while encouraging governments to adopt investment-friendly policies. To start with, a special economic recovery program is likely to succeed where structural adjustment has failed if it takes the form of an international investment guarantee mechanism. The prime objective of this mechanism is to enable foreign private enterprises to invest confidently in those sub-Saharan African countries that have attained relative peace and political stability, where the rule of law has replaced the unpredictable arbitrariness of autocratic rule. In order to ensure the credibility of the investment guarantee scheme, it should comprise a World Bank-IMF low-cost resource pool for international firms desirous of investing in targeted or specified economic sectors in SSA. The fund should also be available to credible or bank certified indigenous firms with the capacity to operate competitively in the preferred sectors. Important donors such as the European Union, Japan, Canada and the United States could make direct contributions to the fund. In disbursing funds to prospective private economic operators under the scheme, priority consideration should be given to the processing, marketing, distribution and transportation, (PMDT) sectors of the target economies. Secondly, the special economic recovery scheme should provide for substantial remission of taxes for SSA-bound private investment loans and capital in the target sectors, including investments in regional infrastructure building, particularly transport, communications, power generation and distribution. To prevent international financial speculators from taking undue advantage of the guaranteed incentives, investment agreements must as much as possible exclude short-term financial flows. Thirdly, trade-surplus and donor countries wishing to make bilateral contributions to the program could concentrate on the enhancement of the region’s human capital through bursary and scholarship awards to their educational institutions for training skilled workers, processing engineers, industrial technicians, commercial agents and international dealers in processed and manufactured products. All trainees under the scheme must be bonded to return to their countries on completion of training. On the basis of bilateral agreements, donors could also embark on direct technical and capital assistance to health centers schools, universities and training institutions and other social service providers in the target countries, preferably through nongovernmental agencies. Fourthly, if adopted and efficiently implemented, a special economic recovery program could lead to a rapid and radical change in the volume and

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structure of sub-Saharan Africa’s export products. However, valueenhancement and good quality of export products alone cannot guarantee their access or competitiveness in the international market. The recovery program should therefore be able to improve their prospects for competitiveness through a contractual arrangement to increase the region’s access to, and size of the world market. A logical component of the special economic recovery program would therefore be WTO extension of the duration of GSP derogations for designated non-commodity products originating in subSaharan Africa. This is justifiable on the grounds that SSA is not only the poorest and most disadvantaged region of the world, but also the one region that is yet to benefit from the GSP since its inception in the 1970s. One of the advantages of a special economic recovery program over current foreign aid programs for SSA, would be its capacity to match trade liberalization and other deregulation policies with enhanced inflow of private foreign capital and direct investment to change the export product structure of reforming States. Short of that, liberalization is not of much use to a country or a region that has only unprocessed natural resources to sell in the international market. That is the principal weakness of Structural Adjustment Programs in SSA - opening up the vulnerable economies of poor countries for the influx of imports but providing them minimal opportunity for downstream processing of indigenous raw materials for export in a highly competitive international market. Secondly, by centering the recovery program on profit-conscious private economic operators and reducing the role of governments, the incidence of fungible aid, inefficiencies, corruption and rent-seeking behavior associated with foreign aid is likely to reduce to acceptable levels. Moreover, provision of trade access under GSP rules ensures that manufactured goods originating in sub-Saharan Africa can attract markets beyond the European Union. In particular, the involvement of all the major international economic institutions – the World Bank, IMF, the WTO etc. in the special recovery program ties international and domestic reforms together into a single unpartitioned process. By closing this gap that structural adjustment ignored, even helped to create, the recovery program makes reform in Africa consistent with the objective of integration into the global economy. Related to the foregoing is the fact that structural adjustment and other foreign aid instruments left sub-Saharan African countries to bear the brunt of reform alone, on the assumption that devalued local currencies would automatically raise demand for the region’s exports. To the contrary, a special

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recovery program recognizes the obvious fact that commodities have very limited demand elasticities and that no amount of capital inflow, irrespective of high grant content, could offset the international constraints undermining SSA’s terms of trade. Finally, where foreign aid rather than domestic taxes relieve governments of tight budget constraints, it also relieves them of public accountability and replaces responsibility for strategic economic planning with supervision of aid projects. In addition, the policies attached to structural reform loans, invariably seek to contract investment possibilities in the public goods sector. But a special economic recovery program would free governments from the kind of excessive expenditure reduction obligations that starve education, healthcare and human resources development of necessary funding.

DEVELOPING DOMESTIC AND REGIONAL MARKETS Whatever the efforts of the international community, it cannot provide sub-Saharan Africans with the reasons, the motives and the drive to grow out of poverty and join their economies with the rest of the world. The success of any exogenous effort will depend on regional cooperation among African countries to articulate goals, figure out strategies and pursue a common development objective. For one thing therefore, sub-Saharan African governments must take responsibility beyond political rhetoric, to expand their markets through regional and sub-regional economic integration, establishing credible custom unions or free trade areas, and ultimately economic and monetary union. The problem here is not lack of effort at regional integration building, it could well be too much effort lacking in political conviction and credibility. The situation in West Africa aptly illustrates this gap. Credible regional integration would preclude the current existence of multiple sub-regional bodies such as the Economic Community of West African States, ECOWAS, and the Economic and Monetary Union of West Africa, UEMOA. Not only are they a wasteful duplication of efforts and resources, they are also not viable because of inefficient dispersal of meager resources. Incidentally, they survive mostly on the availability of financial and diplomatic support of the European Union. As the most advanced economic and monetary union in the world, the EU is aware that viable regional integration must preclude concurrent existence of multiple economic bodies ostensibly pursuing the

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same objectives. Thus, the role of the European Commission in this regard, providing substantial funding to each one of the competing organizations in West Africa, is reminiscent of the colonial policy of divide-and-rule. The policy of divide-and-rule entrenched ethnic fission and the take-no-prisoners form of politics characteristic of modern sub-Saharan Africa. The same old trick delivered as foreign aid, has, to a large extent, seriously stagnated subregional effort to build a credible economic community in West Africa.83 Irrespective of good intentions or motivations, it has to be acknowledged that any foreign intervention that tends to dilute the political will of African leaders to construct viable, unified regional economic integration is simply a drag on the continent’s growth and development prospects.

CONCLUSION In conclusion, to the question – can foreign aid induce economic growth and development in sub- Saharan Africa, a categorical NO can do. In the perspective of this study, SSA does not need foreign aid to survive, but it does need the cooperation of the international community, particularly the West, to stabilize its political environment, and to reduce if not eliminate those known constraints to sustainable economic growth in the region. Like every other region in the world, it needs equitable resolution of its debt, it needs investment, mostly private, to upgrade the structure of its exports, and trade access to achieve competitiveness in the world market. What it no longer needs is self-serving foreign aid: handouts, armaments, trade compensations, and experimental economic models, wrapped up in altruism and delivered with condescending love. This study has tried to demonstrate that rather than ameliorate Africa’s impediments to economic growth and development, foreign aid intervention as we have known it so far, has simply exacerbated the problems. There is absolutely nothing to be said for cash aid to Africa’s tyrants, past and present. If ‘cash transfers’ is aid, it has nothing desirable to do with investment or for that matter, the welfare of the 600 million peoples of sub-Saharan Africa. Even the ‘best’ instruments of aid have had a lasting impact on the African psyche – a dependency syndrome with crippling effects on the capacity of 83

The EU supports ECOWAS comprising all 16 countries of West Africa. At the same time, it supports and provides much larger financial resources to UEMOA, comprising only Francophone West Africa.

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governments, national and regional planners. Sapped of initiatives, creativeness, self-reliance and self-confidence, they have lagged woefully behind other races in leading their peoples away from the blight of war, deprivation, disease, ignorance, insecurity, poverty and economic retrogression. Finally, in concluding an inspiring draft on the Macro-economics of Food and Agriculture, Professor Peter Timmer of Harvard University in Cambridge, stresses the underlying sources of rapid economic growth: high rates of investment and improved efficiency in using resources. He observes that both require short-run sacrifices for long-run gain.84 There may be few political systems in the world that would reward that choice, but then there is no economic region in the world as desperate as sub-Saharan Africa is today. In 1970, the income gap between the per capita income of the world’s richest and the poorest (SSA) 20% was some 30 to 1. By 1990 the gap widened to 60 to 1, and by 1994 it was 78 to 1 and growing.85 Economic history confirms that once a country or region has been devastated by economic crisis as subSaharan Africa has, there are no good options or short cut to recovery. It does appear as if SSA has only one choice: perspiration and sacrifice, because desperate situations seek desperate solutions. Are there any governments in sub-Saharan Africa willing to choose savings, investment and efficiency over consumption and transfer of rents? That is the real modern challenge of African economic growth and development. That is the key to poverty reduction and integrating with the global economy. The answer does not lie in “improved aid or enlarged envelopes”, after all, “aid”, according to the World Bank official, “is a game for losers.” Trust him. He should know.

84

C. Peter Timmer, The Macroeconomics of Food and Agriculture, Unpublished draft, P. 29/30. 85 Jolly, Development (Development Cooperation) Vol. 42 No. 3, 1999, p. 40.

Table 10. Flows of International Trade and Investments Region Sub -Saharan Africa East Asia South Asia Middle East/ North Africa Latin/ Caribbean

Share of World GDP

Share of World Trade

Share of Trade in GDP

Average Annual Growth in Trade (1980-1995)

Share of Net Private Capital Flows

1.1

1.4

50.7

0.3

5.9

4.8 1.6 1.5

7.0 1.0 2.1

54.3 24.4 51.0

12.8 7.3 -0.0

54.6 3.4 0.9

6.1

4.4

27.2

5.9

35.2

a. Trade equals exports plus imports. b. Flows to low and middle income economies excluding those to Europe and central Asia. Source: World Development Indicators (1997)

REFERENCES ACP- EC Council of Ministers. (1995) Agreement Amending the Fourth ACP-EC Convention of Lomé. EC Pub. Brussels. Amsterdam. Stuart, C Carr et al, (1998) Psychology of Aid. Bandow, Dong & Vasquez, Ian. (1994) Perpetuating poverty: the World Bank, the IMF and the Developing World. Behrman, J. R. (1987) “Commodity Price Instability and Economic Goal Attainment in Developing Countries”, World Development Vol. 15 No. 5 1987, p. 559-573. Brewer, T. L. (1991) “Foreign Direct Investment in developing Countries” World Bank Working Paper WPS 712, June 1991 p. 9. Cardoso, E. & Dornbusch R. (1989) “Foreign Private Capital Flows” Handbook of Development Economics, Vol. 2, 1989. P. 1387-1439. Carlsson, Jerker et al, (1998) Foreign Aid in Africa: Learning from Country Experiences. Cassen, Robert. (1986) “Does Aid Work?” Report to the Inter-governmental Task Force, (The Library of Politics and Economy) Oxford Univ. Press, London. Clark, Don P (1991) “Trade versus Aid: Distributions of Third World Development Assistance”, Univ. of Chicago. Cornia, G.A & Jolly, R. & Stewart F. (eds.) Adjustment with A Human Face, 2 Vol. Oxford Univ. Press, London. Daniel, Maxwell -Care Int. Nairobi, (1999) “The Political Economy of Urban Food Security in SSA”, World Development, Vol. 27, No. 11, 1999. Development Assistance Committee, DAC, (1989) Development Cooperation in the 1990s. OECD, Paris.

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INDEX A C absorptive capacity, xv ACP countries, vi, 5, 13, 16, 18, 19, 20, 21, 22, 46, 47, 50, 53,54, 55, 56, 69, 71, 72, 74, 86, 96 ACP-EU Lomé Conventions, xviii administrative capacity, xvii agricultural products, 20, 55 agricultural technology, 72 aid inflows, xiv aid resources, xvi, 30 AIDS epidemic, xviii, 84 Angola, xi, 80, 81 apartheid, xviii, 77 arms flows, 82 austerity, 4, 25, 37, 40

B balance of payment problems, ix balance of payments, xii, xvi, 10, 28, 38, 50 Benin, xi, 9 bilateral aid, 3, 6 Botswana, xii, 9, 28, 30, 38, 51, 80 bribery, 37, 62, 63 budget deficits, ix, 40 Burkina Faso, xi, 9, 32, 38, 51 Burundi, xi, 17, 26

Cameroon, xi, xviii, 9, 48, 49, 51, 80 Cape Verde, xii, 28, 30 capital outflows, 65 capital stock, xvii, 1, 59, 84 Central Africa Republic, xi Chad, xi CIDA, 6 civil war, xviii, 17, 80 cocoa butter, 20, 47 cocoa paste, 20, 47 cocoa powder, 20, 47 cold war, xiv, 1, 4, 5, 30, 62, 63, 64, 80 cold war maneuvers, 80 colonial rule, 1, 51 colonialism, 80, 86 commercial lenders, xv commodity prices, xv, 4, 20 communism, 1, 5, 62, 65 Comoros, xi compensatory financing facility, 7 competitiveness, 43, 44, 45, 46, 58, 59, 61, 89, 91 Congo, xi, 9, 17, 28, 32, 51, 80, 82 consumption, xvii, 2, 27, 29, 33, 50, 58, 67, 73, 92

Index

100 corruption, xvii, xviii, 4, 37, 51, 63, 75, 84, 89 Côte d’Ivoire, xi, 32, 48, 49, 51, 52, 66, 80 credit shortages, 65 credit worthiness, 10, 57 currency devaluation, 33 custom unions, 90

D debt cancellation, 82 debt obligations, 84 debt relief, 10, 82 debt service, xii, 5, 10, 59, 64, 76, 82, 83 deficit reduction, 35 democracy, vi, 5, 17, 24, 61, 62, 65, 66, 67, 72, 82 deprivation, 67, 92 deregulation, 39, 57, 59, 89 devalued currency, 34 Development Assistance Committee, xiv, 13, 96 development capital, 19 diamonds, 82 disease, 6, 10, 92 domestic consumption, ix domestic demand, 33, 39, 65, 67 donors, xii, xvi, xvii, xviii, 2, 3, 4, 5, 6, 24, 25, 29, 30, 31, 33, 35, 37, 38, 41, 43, 45, 53, 59, 61, 62, 63, 67, 68, 71, 72, 73, 79, 88 drought, xviii

E East Asia, xiii, 56, 58, 59, 66, 86, 93 economic decline, ix, xi, xv, xvi, 30, 66 economic growth, v, xii, xv, xvi, xvii, 2, 4, 5, 19, 22, 24, 25, 29, 30, 31, 33, 34, 35, 40, 41, 53, 61, 62, 63, 65, 66, 67, 68, 72, 73, 79, 80, 82, 91, 92 economic infrastructure, xvii, 4, 35, 65 economic retrogression, x, 92 EDF financed transfers, 16 energy sector, 75

Enhanced Structural Adjustment Facility, 7 Ethopia, xi European Investment Bank, xii, 13, 19 European Union, v, xii, xviii, 3, 5, 12, 13, 18, 22, 43, 69, 73, 88, 89, 90, 96 export growth, 7 external intervention, xii, 10, 39

F famine, xviii financial aid, 21, 24, 76 financial collapse, 5 financial reform, 10 flight capital, 84 food security, 24, 36, 95 foreign borrowing, xv foreign investments, x, 6 foreign savings, ix, xvi, xvii, 3, 29, 59, 85 foreign security, 1 France, xiv, 1, 6, 71, 74 free trade areas, 90 friendly investment environment, xvii

G Gabon, xi, 32, 38, 51, 62 Gambia, xi GDP, vii, ix, xi, xvii, 1, 7, 30, 31, 34, 80, 93 Generalized System of Preferences, 53 Ghana, xi, xvii, 9, 28, 30, 36, 38, 39, 48, 49, 51, 70, 75, 80 global economy, 41, 43, 44, 46, 59, 89, 92 government expenditure, 25, 35, 36 government revenues, 35 groundnut oil, 20, 47 Group of Seven, 83 growth performance, ix, 68 growth strategies, 40 Guinea, xi, 17, 52, 62, 65, 73 Guinea- Bissau, xi

101

Index H human right abuses, 17 human skills, xvii

I ignorance, 92 illiteracy rate, xiii, 32 IMF-World Bank, x, xii, xv, 34, 64 imperialism, 80, 97 income per capita, x, 30, 31 income taxes, 33 industrial growth, 38, 39 infant mortality rate, xiii inflation, xii, 10, 35, 37, 38, 40 insecurity, 36, 43, 92 interest rates, 6, 10, 34, 37, 64, 65, 83 International Monetary Fund, xii, 6, 80

K Kenya, xi, xvii, 9, 48, 49, 56, 66

L laissez faire, 1 Lesotho, xii, 80 Liberia, xi, 9, 17, 73, 80 locusts, xviii Lomé Conventions, 12, 16, 19, 20, 54, 69, 74, 96 looted wealth, vi, 84, 85

M Madagascar, xi Malawi, xi, 65 Mali, xi, xvii, 9, 38 marketization, 33 mass migrations, 5 Mauritania, xi, 51 Mauritus, xii

military spending, 81 mining industry, 21, 22 money supply, 10, 33, 34, 40 Mozambique, xi, 65 multilateral organizations, xiv

N Namibia, xi, 32, 51 national allocations, 16 national indicative programs, 13, 16, 18, 72, 74 national interest, 1, 79 NGOs, 73, 81 Niger, xi, 51 Nigeria, xi, 9, 10, 17, 38, 58, 80, 84 non-tariff barriers, 33, 47, 56, 72

O ODA, vii, xii, xiii, xiv, xv, 2, 6, 7, 9, 13, 25, 28, 38, 39, 57, 82 OECD, xii, xiv, 6, 87, 96 OECF, 6 official development assistance transfers, ix Organization of African Unity, 81

P petrodollars, xv political stability, xvii, 26, 35, 63, 68, 81, 87, 88 poverty, v, x, xv, xvi, 1, 4, 5, 12, 15, 17, 18, 24, 25, 26, 29, 31, 35, 36, 37, 40, 41, 43, 47, 61, 65, 66, 67, 68, 70, 72, 77, 83, 90, 92, 95, 96, 97, 98 poverty alleviation, v, xv, xvi, 4, 17, 18, 24, 31, 35, 67, 72 poverty reduction, 5, 12, 25, 29, 40, 41, 61, 92 precious minerals, 82 preferential imports, 53 private foreign direct investment, 57 privatization, 10, 33, 35, 57, 59, 75

Index

102 productive capital, ix productivity, xvi, 20, 25, 30, 39, 40, 68, 76, 77 program planning, 25 proxy wars, 80 psychological dependency on aid, 61 public goods sector, 90 public revenue, 37

T Tanzania, xii, xvii, 9, 28, 30, 31, 39, 48, 49, 51, 75, 80 tariff preferences, 53, 54 tax evasion, 37 Togo, xi, 17, 51, 66, 80 tradable goods, 33 trade liberalization, 10, 44, 57, 89

R real wages, x, 24, 32, 39, 65 regional indicative programs, xii, 13, 16 repayable loans, 20 rule of law, 17, 76, 82, 84, 88 Rwanda, xi, 26

S Senegal, xi, xvii, 9, 51, 52, 66, 74 Seychellelles, xi SIDA, 6 Sierra Leone, xi, 28, 80, 82 slave trading, 80 smuggling, 37 social dysfunction, 61 Somalia, xi, 17, 62, 80 South Africa, ix, xi, 13 South Asia, xiii, 32, 93 special compensatory aid categories, xviii STABEX, v, vi, vii, xii, 13, 20, 21, 22, 45, 46, 47, 48, 49, 50, 51, 52, 55, 72, 96 stabilization income, xii strategic raw materials, 2 structural adjustment, v, vii, xii, xiv, xvi, xix, 4, 7, 10, 11, 12, 13, 18, 25, 31, 34, 36, 38, 39, 43, 48, 57, 59, 64, 71, 87, 88, 89, 97 structural adjustment facility, 7, 10, 18 structural adjustment program, xix, 4, 12, 48, 71, 87, 89 Sudan, xi, 17, 28, 52, 80 Swaziland, xi SYSMIN, v, xii, 13, 21, 22, 45, 50, 51, 52, 55, 72, 96

U Uganda, xi, 9, 28, 30, 38, 48, 49, 51, 75, 80 UK, 6 UN agencies, xviii unemployment, x, 26, 32, 35, 39, 65, 67 urban population growth, 36 USAID, 6, 74

W Woods institutions, xvi, xviii, 18, 51, 71, 81 World Bank, v, xii, xiii, xvi, xvii, xix, 2, 4, 5, 6, 7, 12, 17, 18, 24, 25, 27, 30, 31, 32, 34, 35, 36, 37, 38, 39, 40, 43, 58, 64, 65, 67, 71, 72, 75, 80, 82, 88, 89, 92, 95, 97, 98 World Trade, x, 93 WTO, 51, 53, 87, 89

Z Zaire, xi, 62 Zambia, xi, 9, 51, 65, 66, 83 Zimbabwe, xi, 48, 56