The Developmental Effectiveness of Aid to Af rica Tony Killick

68 Pages·2000·3.26 MB·English

by  World Bank Group

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s Aid to Sub-SaharaAn- fricaht azsb een less effective in promiotinig
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cl economiicd ev,elopmi-etnhta inhaisa id to other regionis. Policies in
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c Di the recipient countries of Africa - thouighc ertainilyn ot the only
bli factor play the most nimponanrto le in determiniiinga id's
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P effectiveness. At thie heart of the problemiis politics. and thec
Nolti oni tests in thie handso f the people of Africa.
jPlc,Research, and External Affairs|
Debt and International Finance
WPS 646
This palper. -- a prodiucot l ihc Debta nd IntcrnationaFl inance Division, International EconiomicsD cpirtimlen-t - is
part of a larger effort in PRE to assess the availability and potential growth impazcto f altcrnalive lormso l cxternall
finance lor Sub-SaharanA l'rica. Copics are awvilablef rec from the World Bank, 118 H Strcet NW, Was-hington,l )C
2()433. Plcase contact Sheilah King-Watson, roonmS g-040,e xtcnsion 33730 '(63p ages, with figuiresz an(tadb les).
Killick uses an informal analytical framework to and project aid. Policy mistakes in particular halve
assess the developmcentael ffectivencss of aid to Sub- contributed to declines in export markct shares andli n
Saharan Africa. The lrameworkp rovides a produc- saving and investment.
lion function-tYpcc quationl or determininigi hconic Absorptivc capacity - thc cuonoinic systeml's
growth and conveys that: ability to put additional aid to productive use -- is
* There are many influences besides aid on country weakened by skill shortages, weak policies, institu-
economic performance. tional weaklnesses,a nd budget constraints and
* Domestic policies have a pervasive inlluencc on recurrent costs. But ol more fundaeintenal inportance
the whole system, are basic structural wcaknesses of Sub-Saharan
* Aid also has an important iniluence, in raising African economics and the adverse characteristics olf
import and investment capacity and in other ways. somc political systems and pr(ocsses. A crisis ol
Agency evaluations ol the overall effectiveness govcrnance in somc Sub-Saharan Alrican countries is
of ai(dr ecord fairly high levels of project succes: "ut a fundamental obstacle tloi ncreasing the devclopmcn-
it is unclear how much weighl should bc placed on tal effectiveness of the aid the) receivc.
thcsc rcsults, particularly with respect to projects' Thee ffects of the hostile global economfic
ability to reach the vcry poor. A review of ihc environmcnt are ol'ten aggravated by donor-counLry
literature on the effectiveness of adjustimienltc niding policies, particularly the trcids and policies that
programs shows that they hielpr aise economic worsen Africa's terms of trade, debt-servicinig
performance to some degree but less than dramati- burdens, and access to world savings. Some donor-
cally. It is evcn less clezr that they are socially cost- country policiesa nd practices. such as using aid ItO
cffective. The evidence on aid clffclivcness lavorsa promotc foreiginp olicy or commercial objectives,
moderately posilive but still rather tentative verdict, reducc the quality of aid and lthusi ts potential
The author presents evidence on aid in Africa developmental value. Donor -gcncy weaknesses
that suggests that the hiighp ast levels of aid have becn further dimiiinishthi c value of aid.
unable to prevent serious economic deterioration an(d Killick suiggesLsh at Ihe problemoiif aid efl'lcctiv-c
that its effectiveness is considerably Icssih ;anin other ness is not technocratic nor due to a shortage of
regions. Nor have (lonors becn able to offer much advicc. Politics lie at thc heart of the problem. It is
assistancc in Africaii governments' design of devel- for the pcople of Al'rica to resolve their g .vcrnancc
opment strategies. Case sludies OfC ofc td voire an d problems -- antdt hcre arc potentiallyi nmpornont
Ghana support the conclusion that there is much room stirrings ol' political change. And although donors
for increasing the effectivcncss of aid to Sub-Saharan havc to work with existing go,e rnments, thyc should
Africa. he more selective in those they aid.
DeterminanLso f the ellectiveness of zaidc an he Political changes arei neded(l to break the logjan
broken down into faclors located primarily in on these issues of effectivencss, and thc lrcscntl state
recipient countries (the policy environment and of world affairs may lacilitate the ncccssary reorder-
institutional or ahborplive capacity) an(dth ose relating ing of policy l)rioritiebsy (donoarisn (dre cilpiltts.
primarily to conditions amidp olicies in donor countries Enginecring a f'reh sazrt in assisting thc de\elopmentil
(the world econoinic environmienatn di the policies of Sub-Saharan Alrica countrics should hbesoniIcli c
and practices of aid agencieN). priority Ir ihcn cwl)yc realed (l.oh;il Coalitiont or
R. Aiptent-1r 1filr% p'olitn -%a re the (decisi\e Alrica.
iniluence on the eIlcciiven,'ss ol progra.n. scetoral,
Tl). KR1WE orkingI 1'3CipS eYii s d slincjmC' fCiti.n dingo,f oik Undct%r. i) in ilhc1 3unk' 1 o1o.- R cw.irh... andl \X tnm.d
Af f T(Cs on-ple. AnOh jcclive o.fi lihes cTic, i%iot gct (hl)csc findings oui quicklt, L'5-r. if ptr scoid ions ar;et1c .tsi .uia hilyIX )i'tle. d
Thef indingsi,n terpyemdmiinodn cs.o, nclu%ioinn% th escp aTs dton ot neceh-art rTcCps TCcnmo fIicj HBank p0tn)
l'ro,,itcI b\ tic P~RED isscminjo,'n C\-n',,
The Developmental Effectiveness of Aid to Africa
by
Tony Killick*
Table of Contents
Summary 1
A. Evaluating Aid Effectiveness 4
An analytical framework 4
How effective has past aid been? 10
* Aid in general 10
e Aid to Africa 16
i C6te d'lvoire and Ghana 21
B. Recipient-Country Influences on Effectiveness 25
The policy environment 25
Absorptive capacitv 33
* Proximate sources of difficulty 34
* Fundamental problems 37
C. Donor-Country Influences on Effectiveness 42
The global economic environment 42
D. Conclusion: Towards a Fresh Start 46
Appendix A. Consultative Groups and Roundtables 52
Appendix B. Issues in Food Aid Effectiveness 55
Appendix C. Aid to C6te d lvoire and Ghana, 1971-88 58
References 59
* Senior Research Fellow, Overseas Development Institute, London, and Visiting
Professor, University of Surrey. I would like to thank Matthew MarLin for assistance in
preparing materials on donor coordination and food aid, and for drafting the appendices
on these topics. I am grateful to Adrian Hewitt, Robert Liebenthal, and anonymous
referees for helpful suggestions on an earlier draft.
This paper was prepared for the World Bank symposium on African External
Finance in the 1990s.
THE DEVELOPMENTALE FEECTIVENESS OF AID TO AFRICA
sqmmary
The principalr emit of this papt- is to examine the developmentale ffectiveness
of aid to sub-SaharanA f .ca (SSA),a lthough the paucityo f informationc onfined
to that region means we shall sometimes look further afield. We concentrate
on capitala id In Its variousf orms,a lthough AppendixB providesa brief review
of issues In the effectivenesso f food aid.
The paper commencesb y settingo ut an informala nalyticalf rameworkw ithin which
aid effectivenessm ay be assessed. This provides a production function-type
equation for the determinationo f income growth and conveys (a) that there are
many influencesb esidesa id on countrye conomicp erformance; (b) that domestic
policies have a pervasive influenceo n the whole system; but (c) that aid also
has an important influence,i n raising import and investmentc apacity,a nd in
other ways. Discussiono f this frameworkf oreshadowss ome of the issuesw hich
arise later, including the analyticald ifficultiesc reated by various forms of
fungibility, the complications which are created when multiple donor and
recipientp olicy goals are introduced,a nd the absence of any simple connection
between aid and economic growth or development.
We turn next to review the evidence on the effectivenesso f aid, lookingf irst
at the overall picture and then at the evidence as it relates to SSA. As
regards the former, agency evaluationsr ecord fairly high levels of project
success but It is unclearh ow much weight should be placed on these results,w ith
particularlyl arge doubts about projects'a bility to reach the very poor. It
is suggested that the resultso f cross-countryr egressionsa re Inconclusivea nd
that the alternative methodology of in-depth country studies produces more
reassuringr esults. The literatureo n the effectivenesso f adjustmentl ending
is reviewed, concluding that the programmes being supported do help to raise
economicp erformancei n some degree but that the resultsa re less than dramatic
and that it is even less clear that they are socially cost-effective. The
overall conclusiono n aid effectivenessg enerally Is that the evidence favours
A moderatelyp ositive but still rather tentativev erdict.
Turning to the African aspect, although we should be cautious about over-
generalislnga substantiala mount of evidence is presentedw hlch suggests that
the exceptionallyh igh past levels of aid have been unable to prevent serious
economic deteriorationa nd that the effectivenessr ecord is considerablyw orse
than that of other regions. Doubts are also expressedw hether in the past
donors have been able to offer much assistance in SSA governments'd esign of
developments trategies. Case studies of Cote d'tvoire and Ghana support the
overall conclusion that there is much room for increasingt he effectivenesso f
aid to SSA.
The paper then examines the determinantso f aid effectiveness,o rganising the
discussion around a distinctionb etween factors which are primarily located
within recipientc ountries,b reaking these down Into (a) the policy environment
and (b) institutional,o r absoiptivec apacity,q uestions; and those relating
primarily to conditionsa nd policies in donor countries,c lassifyingt hese Into
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(a) questlonsc oncerr.n g the world economice nvironmenta nd (b) the policles and
practices of aid agtncles.
Concerningr ecigient-countrpyo lAcies,t he evidences hows thls to be the declsive
influenceo n the developmentale ffectlvenesso f programme,s ectorala nd project
aid allke. Particular emr' ;Is Is given to policy mistakes which have
contributedt o the loss of eY it market shares and the declines In saving and
investment, Including the ,or state of the public finances In many SSA
countries. The influenceo f policy on ald effectivenessp rovides a rationale
for donor pollcy conditionalityb ut there are large Intrinsicd ifficultiesi n
the way of using aid as an effectivel ever for improvingt he policy environment.
As concerns absorptivec apacitY, defined as the afillty of the economic system
to put additional aid to productive use, we note varlous proximate sources of
difficulty- skill shortages; Institutlonalw eaknesses; budget constraintsa nd
'the recurrentc osts problem'; and weak policies. These, however, do not go
to the heart of the matter. Of more fundamentali mporte_ e are basic structural
weaknesses of SSA economiesa nd the adverse characteristicso f some political
systems and processes. The first is non-controversial,t he second more so.
While we should not over-generalisea bout a dlverses ituationn or be too gloomy,
there remainsa crislso f governanceI n some SSA countriesw hich Is a fundamental
obstacle to increasingt he developmentale ffectivenesso f the aid they receive.
Turning to donor-countryi nfluences,i ndicatorso f the hostile global economic
environmenta re presented, often aggravated by donor-countryp olicies. We
particularlys tress the adverse effect on Afrlca of trends and policies which
worsen Its terms of trade, debt servicingb urdens and access to world savings.
We note, however, that the donor communlty has responded to SSA's special
problems by devocing much increased proportions of total aid to it, and by
special (althoughs till inadequate)d ebt-reliefi nitiatives.
TherP is also a varietyo f donor-countryp oliciesa nd practicesw hich reduce the
qualityo f aid offered and thus its potentiald evelopmentalv alue. Me.nyo f the
difficultiess tem from the use of aid to promote foreign-policyo r commercial
objectives. This leads to confusion and to practices, such as procurement-
tying, which substantiallyr educe the real value of the aid offered. Donor
agency weaknesses further diminish the value of aid: inadequate staffing;
pressurest o spend; short time horizons; over-extension;b iases towardsl arge,
capital-intensivper ojects; and practicesw hich undermineb udgetaryd iscipline
in recipientg overnments. There are also various proliferationp roblems: of
donors;o f projects; of policy condltions. Donor co-ordinationi s also a weak-
spot, partly because both donors and recipientsa re ambiguousa bout it. The
donors who so frequentlyu rge policy reforms in developingc ountriesn eed also
to reform their own policies.
The paper concludesb y pointing out the tensionb etween the macroeconomicc ase
for yet more aid for SSA and the apparent Ineffectivenesso f much past
assistance. A fresh start is needed before additionala id could be justified.
The paper summarises the many policy recommendationsr elating to all aspects
of aid effectivenessm ade by other writers but suggests that the problem is not
rechnocraticn or is there any shortage of advice. The politics of it lie at
heart of the problem. Within SSA, it is for the peoples of Africa to resolve
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their g. ernance problems and there are potentially important stirrings of
Doliticalc hange. Doncrs have to work with existLngg overnmentsb ut they should
be more selectivei n those they aid. There are, however, difficultiesw ith a
policy of greater selectivity,n ot the least of which being the mixed motives
of donor governments. A switch to a higher proportiono f aid channelledt hrough
selectedm ultilaterala genciesw ould be useful but that too has run afoul of non-
developmentald oncr mocives In the past.
Political-levelc hangesw ould be necessaryf or the log-jam to be broken on these
issueso f effectivenessa nd the presentj uncture of world affairsm ay facilitate
the necessaryr eorderingo f policy prioritiesb y donors and recipients. It is
suggestedt hat the engineeringo f a fresh start in assisting the developmento f
SSA countriess hould become the prioritya genda Item for the newly-createdG lobal
Coalitionf or Africa.
4
A. EVALUATINGA ID EFFECTIVENESS
An analv ical fzamew rk
As a starting-pointw e can write the followinge quaticnf or the determinantso f
the growth of an economy:
AY - f(aAK, bAL, cAR, dF, AU)
where K - the stock of capital, L - the labour force, R - the natural resource
base, F - foreigne xchangea vailablef or imports2, and U - the utilisationr ate
of existing resources, with an increase in U being thought of a movement of
actual productionn earer to the productionp ossibilitiesf rontier; and where
the coefficientv alues, a.. .d, reflects tructural,t echnological,i nstitutional
and policy influences.
In this context 'policy'c an be understooda s referringt o the policy instruments
implementedb y domestic governments. Policy influences all fcir of the
coefficients. For example, policies towards the taxation of capital will
influencet echnologyc hoices and hence the productivityo f capital; policies
on educationa nd trainingw ill influencet he skill composition,a nd hence the
productivity, of L; state provision of infrastructurew ill influence the
productivityo f land and mineral resources; policies towarelst he rationingo f
scarce import capacity will influence the productivityo f imported irputs.
Policy will also affect the magnitudeso f the factorso f productiont hemselves.
Thus, the fiscal stance of the governmentw ill affect the amount of saving or
dissavingt hrough the budget and hence the rate of addition to K; its policies
towardsf ertilityc ontrolw ill influencet he rate of increaseo f L; it can even
influence R, e.g. through conservationm easures; it can influence AF, e.g.
through its use of the exchange rate and its debt managementp olicies; and it
2 In includingF as a separate 'factoro f production'w e are implicitly
acknowledgingt he validity of two-gapm odels. Such models have, of course,b een
extremely important in the theory of aid, with the 1966 Chenery and Strout
articleh aving a seminal influence. The justificationf or incorporatinga two-
gap view here is that this approach is most relevant to structurallyr igid
economies which find it difficult to shift resources and demand between
tradeablesa nd non-tradeablesa nd that many SSA economies fall within such a
description.
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can inf-uenceA U through the effectivenesso f its macro-managementp olicies.
It would be easy to multiply such examples.
The outside world also enters in at numerous roints. Terms of trade shocks
obviously impact on AF. They might also be thought of as affecting R, by
influencingt he extent to which it is economic to exploit known res urces (we
particularlyh ave in mind the influenceo f world mineral prices on 'payable'
deposits). AF is also influencedb y capitalm arket shocks throught heir effects
on the capitala ccounto f the balanceo f payments; those shocksw ill also affect
AK by altering the amountb y which it will be possiblet o augment domestics aving
by access to world savings. Finally, the influenceo f external trends on the
terms of trade and the availabilityo f foreigne xchange to pay for importsw ill
also stroi.glya ffect AU in the open economieso f Africa.
Aid enters into the picture most directly through its influenceo n AK and AF.
Aid in the form of technicalc o-operationa lso affectsb AL throughi ts provision
of traininga nd imported skills. However,a id also has a more pervasive impact
on AY to the extent that it influencesp olicy variablesv ia conditionalitya nd
'policyd ialogue'. Moving outside the frameworko f the equat'on,a id can also
play an importr.nrto le in relievinga fiscal constraint,a ugmenting local tax
and other revenuesa nd increasingg overnments'a bilitiest o maintaine xpenditures
on economics ervicesa nd capitalf ormationw ithoutg eneratingi nflationarya nd/or
balance of payments pressures3. Such expenditures,i n turn, promote growth,
particularlyi f they are in forms - and in a context - in which they *'ulate
greater private sector activity.
Dcmestic shocks also come in, of course, chiefly in the forms of rainfall
variationsa nd ci.vilo r military disturbancesl eading to political instability
and populationm ovements. Such shocks are likely to have particularlya dverse
effects on AU, often on dF and more generally on the values of coefficients
3 The concept of the fiscal gap as a developmentc onstraint,a nd of
externalr esourcesa s relievingt his, is being developedf ormallyi n 'three-gap'
models. See Bacha, 1990, for a published example, although this is mainly
employedt o analyse the impacto f debt reliefm easures in heavily-indebtedL atin
American economies.
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a...d. We should also note that there are interactionsb etween variables,m ost
notably between AK and AF, as explored in the two-gap literatu,e. AF is also
likely to have a potent influenceo n AU, because of the way it affectsc apacity
utilisation,p articularlyi n the inAustrials ector. The bAL term also affects
other coefficient values through via the quantity and quality of skills.
Similarly AK affects the other coefficients through the embodiment of
technologicalp rogress.
Clearly, then, we are dealingw ith a complex system with many interactionsa nd
feedbacks - a complexityc ompoundedw hen time-lagsa re also incorporated,e .g.
in the ways in which differentp arts of the economy respond to some policy or
external stimulus,o r in the speed with which differents ectorsr eact to chenges
elsewherei n the economy.
This framework can also be used to identify some controversies about aid
effectiveness. We have stated that (capital)a id is expected to raise Y partly
by augmentingt he investibler esourcesm ade availableb y domestic savings. It
is possible,h owever, that aid inflowsa re associatedw ith reduceds aving ratios
(most plausibly through reduced tax effort or increasedg overnmentu tilisation
of tax revenuest o financet he recurrentb udget rather than capital formation).
This type of 'displacementt heory',i n fact, has a venerableh istory in the aid
literaturea nd we will be returningt o it. It is also not uncommonf or aid to
be overtly used to raise consumptionr ather than investment,m ost obviouslyi n
the case of food aid and disasterr elief but also when it is used to financet he
governments'sr ecurrentb udget.
The fungibilityo f aid to which displacementt heory is addressedc an also occur
in connectionw ith F -import capacity. The chief type of displacementt hat
might occur here is that aid inflowsm ight be utilised( indeed,m ight be intende
to be utilised) to permit a higher level of externald ebt servicingt han would
otherwiseo ccur. This has been an active concern since the deot cris'.sb roke
in 1982 and the Brady initiative for indebted countries comes :lose to
institutionalisinsgo me such displacement,w ith public resourcesb eing used to
reduce debt or debt service rather than directly augmenting import capacity.
Even when aid is not, in effect,u tilised for servicingd ebt, it may well only
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compensate for reduced access to other forms of world savings - a reduction
experiencedb y many developingc ountriesa fter 1982. A further way in which
aid might not bring the intended effect on F is if it has a 'Dutch Disease'
effect: allowing the exchange rate to have a higher value v1s-d-vls foreign
currencies than would otherwise obtain and hence discouragingt he growth of
exports and import-substitutes.
Another type of fungibilityw ith a modern ring to it is between aid and policy
reforms. During the last decade the trend has been strongly towardsa id which
is conditional upon policy change. There is, however, much continuing
controversya bout the suitabilityo f aid as a vehiclef or inducingp olicy change,
as well as about the content of donor conditionality,a nd this is anothert opic
to which we will be returning. In the meantimet he possibilitys hould be noted
of using aid as a substitutef or adjustmentp olicies, deferring the necessity
for action in the way that much of the debt accumulationo f the 1970s was used.
A furtherf actor influencinga id effectiveness- but one which is rathero bscured
by the above framework- is the qualityo f the aid itself. By this we mean the
extent to which the policies and practices of aid donors influence the true
economic value of their assistance, through tying, through the technologies
embodied in aided projects,b y the administratived emandst hey make on recipient
administrations,a nd through the extent of co-ordinationw ithin and among
themselves.
Some additionalc omplicationsm ay be noted. One is that we no longer use AY
as an adequatep roxy for the rate of economicd evelopment. Poverty-alleviation
is now seen as a crucial dimensiona nd distributionalo bjectivesa re prominent
among stated donor g.als. Environmentalp rotectiora nd the sustainabilityo f
developmenta re more recent entries into the objeccivef unction. Additional
issues concerninga id effectiveness,t herefore, are whether it is a suitable
vehicle for helping tne poor, or at least the poorest; and whether it is likely
to be an effectivew ay of furtheringe nvironmentalo bjectives.
4 This is discussedi n some detail by Cassen and Nissanke,1 990; see
also van Wijnbergen,1 986.