the need for a massive aid program for Africa

LONDON – Surely a massive infusion of aid into Africa would be to pour money down a rat hole? Isn’t this the mistake that was made in the past – enormous generosity by the rich countries only to see it wasted on misconceived projects, bad economic management and, at its worst, siphoned away into war and corruption, as is so evident in say Zimbabwe right now? But a call for more aid is the essence of a remarkable interview given to the Financial Times on Tuesday by South Africa’s president, Thabo Mbeki.

The rat hole is one way to look at it. But another, equally plausible, is to say enough African countries have turned off the low, downward, road and are walking a more straight and narrow path of fiscal responsibility. They have good macro economic management and low inflation rates and have set up management systems that would use the money much better than in the past. Besides, after years of struggle, President Bill Clinton has finally persuaded the Republican-dominated Congress to do what it swore it would never do: sign on to the great international debt relief program for Africa. This is perhaps the moment to give Africa a new start.

But, wait a minute, say more sober voices. Surely that is enough for now. The debt relief, having been mired down in the rut of hesitant western governments and, more latterly, an even more slow moving US Congress, may be gaining speed too fast. Are the African recipients really going to be well enough organised to use this relief to build up education and health programs for the poorest sectors of society as they promised when negotiating this deal?

A group of economists, working under the aegis of the much underrated United Nations Conference on Trade and Development, recently stuck their necks out, arguing that “doubling the current amount of aid to give a big push to African economies today could end their aid dependence within a decade”. This, they say, “would sustain rapid growth for a sufficiently long period and allow domestic savings and external private flows to gradually replace foreign aid”.

At the moment, African countries face stagnating or falling aid from abroad. At the same time private capital flows have also dried up, despite all the many reforms to liberalize their economies and make them more attractive to foreign investors. African countries, like their Asian counterparts, have experienced great volatility in investment flows, though without attracting the same attention of the international community since Africa’s capacity to upset the world financial system is zero.

Yet it is only 20 to 30 years ago that these self same Asian countries that now have the power to unsettle markets in London or New York had as little clout as Africa does today. Their experience of high powered growth over a generation suggests that if in Africa national income could be raised by around 6% a year and sustained for a decade or so then private capital would be attracted in sufficient amounts to make aid much less necessary. Often overlooked is that in the early 1970s some African countries experienced increases in investment and growth at rates faster than in some of the East Asian countries. The African effort came to grief because industrialization was pursued without adequate attention to the agricultural sector and to industrial competitiveness. Only two countries, Botswana and Mauritius, have showed what the rest of Africa might have achieved with more sensible policies and better government.

Two important things are known about private investment. First, it follows behind growth rather than leads it. And, second, an increase in lending by the World Bank and the International Monetary Fund is a catalyst for private capital inflows. This, in a nutshell, is the argument for more aid.

Of course, it does not necessarily follow that a greater injection of aid will be translated into rapid growth capable of both raising living standards and generating domestic resources for investment. This will only happen if the aid is used for the kind of imports necessary to add to productive capacity, and is not used for financing capital outflows or building up excess reserves, as happened in the past. Reserves have been seen necessary as a precautionary buffer against continuous falls in commodity prices. Indeed it is this problem of falling prices for Africa’s traditional exports- coffee, cocoa etc.- that has contributed to the so called “aid fatigue” of the rich countries. Much aid has simply gone in trying to compensate for the resulting losses and there has been not much left over for developing sustained growth. However, the effort over the last decade to “squeeze Africa into shape” by pushing it to follow International Monetary Fund-prescribed “structural adjustment” has not markedly improved Africa’s predicament. By encouraging countries to rely on market forces the IMF has ignored shortcomings in markets, institutions and infrastructure. While the state has withdrawn from economic activity, often enough private enterprise has not moved in to take its place. Incentives may have been generated but then there was little response from would-be entrepreneurs for want of physical and human infrastructure. It is too often overlooked, when evaluating the success of the Asian “Tigers”, that the Asian governments pushed hard with direct intervention to encourage savings and to accelerate capital accumulation.

This is why what is needed now in Africa is a judicious combination of a big push in external aid and a reorientation of domestic policies away from the mistakes of the past. Both market institutions and state institutions have to be encouraged. Then Africa will have a chance of triggering a virtuous circle of rising national savings, investment and faster growth. This is what President Mbeki is calling for. It is the right time to give it a go. Present policies will merely perpetuate aid dependency, which is the road to nowhere. Note for editor 1) Copyright JONATHAN POWER 2) dateline London 3) I can be reached by phone on:+44 7785 351172 or by e-mail: JonatPower@aol.com

I can be reached by phone +44 7785 351172 and e-mail: JonatPower@aol.com