Foreign aid-dependency comes under scrutiny at Kigali African Economic Conference

Kigali, Rwanda, 31 October 2012 - The issue of foreign aid dependency by African countries came under heavy scrutiny on the second day of the 7th African Economic Conference which opened in Kigali, Rwanda Tuesday, as expert sparred over whether and how it should be scrapped.

Long advocated by many African countries, it was the first time that a major public discussion on the issue has been held since the 2011 Fourth High Level Forum on Aid Effectiveness in Busan, South Korea, according to ECA’s Information and Communication Service.

Dr. Patrick Osakwe, Chief of the Finance Section at the United Nations Economic Commission for Africa (ECA) led the debate, based on a paper presented to the conference by Messrs Degol Hailu and Admasu Shiferaw of UNDP and the College of William and Mary (USA) respectively.

The consensus on development effectiveness of the African Union and its New Partnership for Africa’s Development (NEPAD) Programme has always been that African countries to reduce aid dependency and ultimately exit aid towards development effectiveness”.

However, today’s discussions shed new light on how much work remains to be done in terms of defining a viable aid-exit strategy for the Continent.

Far from toeing the fatalistic line, the authors of the report refer to empirical evidence that shows that a complete and sudden break from foreign aid is neither possible in the foreseeable future nor likely to be accepted by some countries at any time.

Yet, a consensus seemed to emerge suggesting that “Africa could follow the example of some developing countries that significantly reduced their initial high degree of reliance on international aid”, it was observed.

The paper investigates the attributes of this group of countries which initially were heavily aid-dependent but managed to exit from it as compared to countries with persistent aid-dependence.

These are countries that initially had similar and very high degrees of dependence on international aid but followed dramatically different trajectories of aid-dependence afterwards.

The paper cites proponents of aid who argue that “while aid may not significantly promote economic growth in a typical recipient country, it has a positive effect under ‘good policy’ conditions”.

“The analysis shows that the likelihood of exiting from heavy reliance on aid increases with the rate of investment”, according to the report.

It suggests that strengthening policies and institutions that promote public and private investment seems to be a reliable path towards exiting from aid-dependence. It notes that “a declining share of aid is being allocated to infrastructure development”, a practice that the authors regret.

It contends that “increasing the flow of aid alone does not in itself lead countries out of aid-dependence if it is not accompanied by aggressive capital accumulation”.

Participants agreed with the authors that a functional and well-developed financial system that could support high levels of investment is one of the best ways of reducing aid-dependency.

“…a widening saving–investment gap is more than likely to delay graduation from aid-dependence”, hence, “donors and recipient countries should watch out for aid flows not to inadvertently stifle domestic savings even when levels of investment are high”, the paper stipulates.

Local manufacturing is also another path that can lead African countries out of aid-dependency, the paper explains, adding that “even a small increase in the share of manufacturing in GDP has a potential to facilitate an exit from aid-dependence”.

Participants agreed that the exact nature of policies would differ across countries but were certain that a clear industrial policy is a key prerequisite for an aid exit strategy from aid-dependency.

If donors and recipients were to coordinate their aid efforts to support the above-mentioned policy objectives, aid could still be a development tool with diminishing importance.

The United Nations Economic Commission for Africa has spearheaded several studies and initiatives that prepared African countries for the two first Conference on Aid Effectiveness (Paris 2005) and Accra, Ghana (2008).

These laid the groundwork for the formulation of the African Common Position that was tabled at the Busan Conference last year.