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Africa: Making Aid Multilateral

AfricaFocus Bulletin
Sep 30, 2006 (060930)
(Reposted from sources cited below)

Editor's Note

The current international aid system, says a new UN report, is chaotic, and suffers from high transaction costs, politicization, lack of transparency, incoherence, and unpredictability. What is needed, says the report, is a shift to a multilateral model similar to the Marshall Plan and to the European Community's regional funds.

This AfricaFocus Bulletin contains a press release and excerpts from an overview of the new UNCTAD study. The full report is available on the UNCTAD website (http://www.unctad.org).

The chances of such a full-scale reorganization of the international aid system are slim indeed, given U.S. opposition and the weight of vested interests in the IMF/World Bank system. But modest steps in such a direction are visible in efforts such as the Global Fund and in the new aviation tax being adopted by France, Brazil, and other countries. Another AfricaFocus Bulletin sent out today contains several documents from earlier this year on this coalition working on "innovative sources of financing for development."

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

Promised Aid Increases Should Be Spent Differently to Lift Africa out of Poverty

De-politicized and more predictable flows with greater economic focus needed, managed by the UN along Marshall Plan lines, UNCTAD report says

UNCTAD/PRESS/PR/2006/025 - 21/09/06

For more information, please contact:
UNCTAD Press Office, T: +41 22 917 5828, E: unctadpress@unctad.org; Web: http://www.unctad.org/press

Aid to Africa not only should be doubled, as now agreed to by donors, but most of it should be distributed multilaterally, perhaps by a UN fund independent of political pressures, a new UNCTAD report contends.

The money should be released in predictable tranches over a long-term period, should be more focused than currently on enabling African economies to produce a broader range of goods and to create more jobs, and should be channelled to those countries general budgets so that their legislatures can best decide how to spend it, the report recommends.

Such an arrangement would replace the current chaotic system in which too many agencies - some bilateral, some multilateral - are pushing too many development projects that sometimes compete with each other, often don't match recipients development goals, are costly to administer, and frequently leave African governments confused and stymied by their numerous rules and conditions, says Economic Development in Africa 2006: Doubling Aid: Making the "Big Push" Work.

Back to the Future

The report says a new "aid architecture" is needed, drawing in part on the Marshall Plan that helped revitalize European economies after World War II. That plan, paid for by the United States, recognized that shock therapy and piecemeal projects had not helped in getting Western Europe back on its feet and offered instead a generous, multi-year and coordinated funding approach, with each State drawing up long-term recovery plans with no outside interference. The US released aid in predictable tranches predominantly through grants, and while intermediate targets were used to measure progress, rules and conditions on the aid were applied in a flexible manner. Such principles were largely forgotten as international aid programmes expanded in the 1980s, the report says, although the European Union's own regional funds have functioned well under a similar approach. These funds also have a clear focus on strengthening investment, multi-year funding, strong local ownership, and clearly stated aims to strengthen State capacities.

Given the basic challenges across the region, much of this initial push will be frontloaded on the public sector where the preferred modality of support from the international community should be in the form of grants to the national budget. These should come with limited conditionality and should help strengthen public sector management. Donors should abide by their commitments to significantly raise the share of direct budget support, currently just 20% of bilateral flows to sub-Saharan Africa (SSA).

Going multilateral

In recent years, the international community has begun to turn its attention to the quality of aid. But the Report worries that the right balance is still not being struck. It notes that while aid flows have on average risen sharply since their low point in the late 1990s, much of this rise has been accounted for by debt relief and with a handful of what some critics call "aid darlings" receiving much of the increased flow. Moreover, the change in emphasis has not stopped a repoliticization of aid flows: since the early 1990s, the focus of EU aid has shifted to Eastern Europe and Mediterranean countries; security issues have recently become a principal concern for some donors; and opening markets weighs as heavily as ever on deciding who gets what.

With this in mind, the Report suggests that the time is "perhaps right to revisit the idea, first broached in the 1950s, of a UN funding window" tailored to African development needs. Such an approach "can help to reduce unnecessary and costly competition among donors, and thus greatly reduce administration costs. It can also provide a buttress against the politicization of aid which has been so damaging in the past."

The report states that existing multilateral aid mechanisms, such as the World Bank's International Development Association (IDA) and the International Monetary Fund's Poverty Reduction and Growth Facility, have not lived up to expectations and are not suited to administering doubled aid. Net disbursements by IDA to SSA, for example, are under US$3 billion, around 10% of all flows, and depend on difficult replenishment exercises. These funds along with various new mechanisms related to a doubling of aid might best be merged into a new UN fund, the report suggests. Such a Fund could act as a magnet for new proposals such as the International Finance Facility suggested by the United Kingdom's Chancellor of the Exchequer. The report also sees the need for a multilateral forum within the UN, similar to that already established at the Organization for Economic Cooperation and Development, to give an airing to the concerns of recipients as aid increases.

Other shortcomings of current aid systems for Africa, the report contends, are that they are focused on short-term results, have too high a technical assistance component and are increasingly targeted at social sectors, which, while important, don't address the needs of African countries to build the productive infrastructure and capacities that will enable them to diversify and upgrade their economies. These changes require long-term attention but have the advantage of offering a way out of the poverty cycle and -- for donor nations -- a potential end to ever-increasing requests for aid.

To meet the Millennium Development Goals, it is estimated that African economies must grow at roughly 8% per year. Without more attention to their productive capacities, the report says, most will fall well short of the mark, yet in sub-Saharan Africa, the share of social sectors in total technical cooperation rose from 50% in the early 1990s to 70% today, with corresponding falls in the share taken by infrastructure, productive sectors and agriculture.

A failed aid-adjustment nexus

Africa has received some $500 billion in aid since 1980, around $30 per capita annually, the report notes. Since real incomes fell over this period in many countries, sceptics have raised questions about whether further increases in aid really offer a route out of poverty. In fact, the major trend between the early 1980s and the late 1990s was declining real per capita aid flows to SSA which were wholly insufficient to offset the resources lost to declining commodity prices leading to mounting indebtedness; let alone recurrent famines and the HIV crisis; and it was often volatile in nature. Moreover, it was conditioned on recipients adopting a standardized package of adjustment measures including price stabilization, rapid liberalization, and privatization that imposed austerity in many countries.

UNCTAD`s examination of successful experiences - for example, East Asia in the 1950s and 60s and Ireland from the early 1970s, enjoyed much larger aid flows than have most African countries -- indicates that increased aid can give a "big push" to the region, sparking a virtuous circle of higher rates of savings, investment and economic growth as a route to a permanent reduction in poverty. However, the delivery of aid and accompanying policies have to be re-thought, taking into account such factors as Africa s vulnerability to external shocks, its binding structural constraints on growth prospects, and the inefficiency of the current aid system.

The report also contends that a careful weighing of the evidence shows that many of the concerns raised by sceptics, such as the insufficient absorptive capacity of African economies or the distortion of price incentives - such as the "Dutch disease" -- are exaggerated and can be managed.

Overview by the UNCTAD Secretariat

[Excerpts only. Full text of this overview and of the full report available on http://www.unctad.org]

The current commitments to double the amount of aid to Africa by 2010 and the recent economic performance of the continent (in large measure thanks to increased demand for commodities in emerging economies) have raised hopes that Africa can sustain this growth performance as a basis for meeting the Millennium Development Goals. Yet concerns remain with respect to the effectiveness of aid, the absorptive capacities of recipients, and whether aid can raise growth and help reduce poverty. Based on past successful aid experiences, [this report] it argues for a new aid architecture with a much larger multilateral component in order to deal with the present "chaotic" state of aid system, which suffers from high transaction costs, politicization, lack of transparency, incoherence, unpredictability, and too much demand on weak institutions of recipients.

1. After two decades of adjustment without growth, there are, at last, some real signs of improving economic performance in Africa. Not only has growth steadily accelerated since the turn of the century, but new trade and investment opportunities, particularly arising from increasing demand in emerging markets such as China and India, hold out hope that this time around it might be sustained. ... the international community, after retreating in the 1990s, has recovered its faith in official development assistance (ODA), with a promise to double aid to Africa by 2010. With the Cold War a fading memory, hopes are high that this aid will not be distorted by political calculations.

2. However, it would be unwise to lose sight of the magnitude of the challenge. The continent is already behind on meeting the Millennium Development Goals (MDGs) and getting back on track implies, on some estimates, sustained growth of 8 per cent annually for the next decade, well above this year's expected growth of gross domestic product (GDP) of over 5.5 per cent for the continent as a whole. ...

3. It is also the case that fresh starts for the continent are nothing new. In the late 1970s, when the region was already exhibiting clear signs of economic slowdown, the Organization of African Unity produced the Lagos Plan of Action, a far-reaching reassessment of Africa's links to the global economy. It put the responsibility for the continent's problems, and for finding solutions to them, firmly on the shoulders of African policy makers. The proposed reform agenda, however, was sunk by the combined forces of global economic slowdown and declining commodity prices, leading to a severe debt crisis which engulfed the entire region in the early 1980s. Struggling under severe balance of payments constraints and under considerable pressure from the international financial institutions, aid and loans were extended on condition that countries adopt structural adjustment programmes that would supposedly enable their economies to withstand and benefit from the competitive pressures of a global economy. Instead, the steady worsening of poverty and human development indicators across Africa has forced a rethink by the international community. ...

5. Six years ago, UNCTAD called for a doubling of aid to Africa, a call subsequently picked up and amplified by the High-level Panel on Financing for Development, the Monterrey Consensus, the Practical Plan to Achieve the Millennium Development Goals (the "Sachs Report"), the Report of the Commission for Africa, set up by the British Prime Minister Tony Blair, and the World Summit. New life has been breathed into the aid target of 0.7 per cent of developed countries' gross national income (initially recommended by UNCTAD and subsequently adopted by the United Nations) with some major donors agreeing a timetable for its achievement. Of course, even if aid were to reach these levels, there can be little doubt that a secure economic future for Africa will hinge on the effective mobilization and investment of domestic resources. ...

6. While a "big push" designed to instigate a virtuous circle of higher rates of savings, investment and economic growth is necessary for a permanent reduction in poverty, the quality of both the aid supplied by donors and the policies pursued by recipients are critical factors for success and for eventually ending the need for aid. .....

9. In 1947, Senator Dirksen famously dubbed the Marshall Plan as "Operation Rat- Hole", into which the United States taxpayers' money would disappear with little prospect of returns to the donor. He was proved spectacularly wrong and the Marshall Plan still stands as perhaps the most successful aid exercise in history. This report still sees valuable lessons in this experience. But it is not an isolated case. Ireland and Portugal received massive amounts of aid following their membership of the European Economic Community (EEC): transfers reaching as much as 5 percent of their respective GDPs and continuing for a decade or more were comparable in scale to Marshall Aid. Europe, however, is not the only part of the world where there have been success stories with aid. The East Asian miracle economies, notably the Republic of Korea and Taiwan Province of China, received enormous amounts of aid during the initial and early stages of their development, the assistance lasting well into the 1960s. In Africa, both Botswana and Mauritius received very large amounts of aid at key strategic moments in their development as, earlier, did Tunisia. These examples show that large amounts of well-targeted aid have produced some remarkable success stories in terms of growth and overall development. ...

10. Despite all this, however, the sceptics remain prominent, if no longer dominant, in public debates about aid. Africa is often held up as a prime example of wasted aid. This view is usually buttressed by reference to econometric evidence that takes little or no account of structural deficiencies, policy constraints, and the inefficiencies of the aid donors themselves, including the quality of aid, its quantity, unpredictability, political instrumentality and, indeed, its very definition. In short, scepticism about the value of aid rests to a large degree on selective economic reasoning and questionable interpretation of economic history.

11. One reason why aid has not always succeeded in accelerating growth and development is that these have not always been among its objectives. But, as spelt out in past UNCTAD reports on Africa, even when they have, as with adjustment programmes, the links have been poorly thought through, have failed to accommodate local conditions, and all too often have been guided by a search for quick economic fixes.

12. Another major source of the inefficiency and ineffectiveness of much aid is the lack of coherence among donors and their objectives and requirements, and a failure to reconcile these with the needs, priorities and preferences of the countries receiving assistance. The sheer multiplicity of donors, with different outlooks, accounting systems and priorities have created a landscape of aid that, at best, can only be described as chaotic. This has in turn stretched the administrative capacities of the recipient countries to breaking point and undermined any pretence of local ownership of development programmes. The institutional capacities of the receiving countries have been further weakened by the pressures to reduce the size and functions of the state, a prominent feature of the adjustment programmes driven by international finance institutions. ...

14. Recent initiatives such as the 2005 Paris Declaration on Aid Effectiveness are ipso facto recognition of the serious shortcomings in the way that the international aid system has been operating. The recommendations of the Declaration can indeed be helpful in raising the quality and effectiveness of aid. Nevertheless, if donors' recognition of the need for greater local ownership of aid programmes is to be taken at face value, the de-politicization of aid, greater policy space for the recipients of aid and less intrusive policy conditions are all prerequisites for ensuring that aid results in more positive outcomes. In order to attain these objectives, there needs to be a greater multilateralization of aid so that the distorting influence of individual donor preferences is reduced. ...

15. A greater multilateralization of aid can help to reduce unnecessary and costly competition (and associated fragmentation) among donors, and thus greatly reduce administrative costs. It can also provide a buttress against the politicization of aid which has been so damaging in the past. But there also needs to be reform of the existing multilateral institutions that currently provide aid on condition that the recipient country adopts policies acceptable to (and usually formulated by) the international financial institutions. The nature of the current Poverty Reduction Strategy Paper process does not lend itself to the longer-term planning that will be required if a doubling of aid is to be employed to maximum effect. The time is perhaps right to revisit the idea, first broached in the mid-1950s, of a UN funding window for African development.

16. A new international architecture for aid must ensure, first and foremost, that it is used to encourage and supplement national resource mobilization and to fill the gap between national rates of saving and the rates of investment required to meet national development goals, including the MDGs. There is now greater recognition of the need for aid to be increasingly used for budget support, thus implying that it should be seen as part of a comprehensive fiscal and financing package for the implementation of national programmes and priorities and, as such, that it should be subject to parliamentary oversight and scrutiny in the recipient countries. ...

17. Recalling one of the most successful aid programmes of the past, both the British Prime Minister and his Chancellor of the Exchequer have called for a Marshall Plan for Africa. Although the problems of reconstruction in post-war Europe were very different from the problems of development facing Africa today, the differences should not be allowed to obscure the fact that many of the features of the Marshall Plan that helped to make it a success point to useful lessons that can inform the creation of a new aid architecture. These include recognition that shock therapy was neither politically or economically feasible ...; that piecemeal approaches to aid had not stimulated recovery and that a more coordinated approach was required with each beneficiary state drawing up a four-year plan for recovery; ... that the aid package was generous with a large grant element; and that the European countries were expected to cooperate among themselves and the aid programme was to be coordinated in a regional body.

18. The Marshall Plan recognized that investing in structural change required providing the recipient countries with sufficient breathing space and flexibility to bring often difficult and painful policies to fruition. This report does not pretend that the Marshall Plan can be replicated in detail for Africa, but there is no doubt that the processes and organizing principles that governed the Plan suggest a much better and more coherent model than is currently available for addressing many of the problems and issues surrounding aid delivery and impact. ...

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