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The need for a massive aid program for Africa

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, Congo and Somalia right now?

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 straighter and narrower path of fiscal responsibility than they did a decade ago. 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.

In the years immediately before Covid most of Africa was doing reasonably well. But now it is being hit by the fallout from the virus and the subsequent downturn in the economies of the rich world as supply chains struggle with the aftermath, and the West walks towards a dangerous combination of inflation and slow growth. On top of that is the fallout from the war in Ukraine.

Last month the International Monetary Fund held a gloomy press conference on Africa’s immediate prospects. “We expect growth to slow sharply this year from 4.7 percent in 2021 to 3.6 percent this year as the worldwide slowdowns, tighter global financial conditions, and volatile commodity prices spill into a region already wary from a prolonged pandemic.”

This is the moment not to tell Africa to tighten its belt but rather to give Africa a new big push. If the money can be found to purchase expensive weapons for Ukraine then certainly it could be found for Africa. It is question not so much of the Western countries not having money to give, it is a question of political willingness. The IMF has made it clear the matter is urgent and involves far, far, more people than are being hurt in Ukraine:

“Many countries find themselves being pushed close to the edge. The most recent turmoil is just the latest in a series of shocks over the past few years, all of which have taken a toll on the region's policy space. Rising food and energy prices are striking at the region's most vulnerable. Public debt has reached almost 60 percent of GDP, leaving the region with debt levels last seen in the early 2000's. In fact, 19 of the region's 35 low-income countries are now at high risk of debt distress or in debt distress, and inflation rates have accelerated to levels not seen in about 15 years

But wait a minute, say other voices. Are African recipients really going to be well enough organised to use a new round of relief to build up education and health programs for the poorest sectors of society? Look at the Islamic militants tearing part good governance in Somalia, Mali and the Central African Republic. Look at the corruption in Zimbabwe, Congo and South Africa. Look at the messy politics, local uprisings, the misuse of oil wealth and corruption in Africa’s largest country, Nigeria. Look at the Ethiopians- oh so typical- having got their economy going- faster than anywhere else in the world- they decided to slip back into their old bad ways of civil war. Africans can’t hack it.

I wager than 90% of Europeans and Americans don’t realise quite how big Africa is. In fact, China, India, Europe and the US could all be fitted inside its boundaries. Africa is mind-bogglingly huge and contains an enormous variety of different set-ups. It is a question of finding the many parts that are well run and doing well and helping them. Take Nigeria. Last month the Financial Times made a special 3-page report on Nigeria’s mushrooming IT sector. It made for an astonishing read. Parts of the private sector in Nigeria are literally humming along.

A group of economists, working under the aegis of the much-underrated United Nations Conference on Trade and Development, have 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 30 to 40 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 two generations 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. They are now middle-income countries.

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, minerals 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 in the late 1990s to "squeeze Africa into shape" by pushing it to follow International Monetary Fund-prescribed "structural adjustment" did not markedly improved Africa's predicament. In fact it caused a lot more suffering. By encouraging countries to rely on market forces the IMF ignored shortcomings in markets, institutions and infrastructure. When the state was withdrawn from economic activity often enough private enterprise did 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. There’s no good reason why Africa shouldn’t emulate Asia.

At the weekend the protagonists in Ethiopia’s civil war made a peace deal. There’s no reason why the country can’t quickly return to its annual growth rates of 10% a year. And if Ethiopia can do it then most of the rest of Africa should be able to too. But the continent does need that aid.


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