ECA's Thirty-third session of the Commission/Twenty-fourth meeting of the Conference of Ministers/Seventh Conference of African Ministers of Finance
6 - 8 May 1999 Addis Ababa, Ethiopia

III. Official Development Assistance (ODA)

32. African countries have always striven to complement their national development efforts by mobilizing support from overseas "donors" — the United Nations, bilateral governments and multilateral organizations. In response, various donor agencies have provided official development assistance (ODA) in the form of diverse programmes with varying degrees of recipient participation, and with different results relative to expectations. In addition, the UN General Assembly has, from time to time, adopted a number of initiatives targeted at Africa, often in response to Africa’s request, and sponsored several international conferences on specific development issues of relevance to Africa. These fora are meant to be rallying points for the several stakeholders in Africa’s development to focus, mobilize resources and pull in the same direction for the same cause. Notable among the UN regional initiatives are the UN Programme of Action for African Economic Recovery and Development (UN-PAAERD) 1986-1990, the UN New Agenda for the Development of Africa in the 1990s (UN-NADAF) 1991, and the UN System-wide Special Initiative on Africa (UNSIA), launched in March 1996. The latter was in response to the Cairo Agenda for Action adopted by the OAU Summit in June 1995.

33. The first two initiatives envisaged additional resource flows to the continent — which largely were not forthcoming — while UNSIA’s value-added (as the implementation vehicle of UN-NADAF) is expected to be derived from better coordination of development assistance, synergies between agency programmes and avoidance of waste and duplication. No additional resources are expected to drive the programme. There are also global platforms of action — the products of several UN-sponsored international conferences — in areas of interest to Africa. While the jury is still out on UNSIA, there is evidence of its success in a number of programme sectors, e.g. education and information technology. However, the expected benefits from the earlier UN-PAAERD, and from UN-NADAF generally have not materialized. As well intentioned as they are, these initiatives have not reached the desired goals, causing considerable anxiety and frustration among African leaders, who have high expectations.

34. The global platforms embody quantitative and time-bound programme goals and objectives of direct relevance to Africa’s socioeconomic development. At the Copenhagen Social Summit, the 1995-2000 period was chosen as the time frame within which to achieve important developmental goals, including raising life expectancy, reducing under-five mortality rates by a third and reducing poverty by half. But the global platforms are silent on the resources needed to realize the set targets. Lack of clear sources of additional resources could further add to the frustration of African leaders. Section II of this paper indicated the massive resources needed to reduce poverty by half by the year 2015 in sub-Saharan Africa — even though this would represent a slippage of the Copenhagen targets by 15 years. Can ODA flows to Africa rise sufficiently to partly bridge the resource gap within the relevant time frame? If not, how can we make the most of what is likely to be available? And what reforms of the present development assistance environment and dynamics does this entail?

35. A clear understanding of the aid environment and dynamics is necessary before postulating any reforms. From the outset, aid has had two potentially conflicting objectives. The first was the promotion of long-term growth and the reduction of poverty in developing countries. The second was the promotion of the short-term political and strategic interests of donors. It was not unusual, for example, that aid from OECD countries went to regimes that were political allies of the major Western powers, irrespective of their macroeconomic policy frameworks. And it is no wonder that ODA is declining in the wake of the end of the Cold War. In this context, it is also not surprising that the US, which is running fiscal surpluses, is not raising its ODA/GNP ratio. Hopefully, a combination of altruism and self-interest on the part of donors, i.e. the premise that in the long term, the economic and political security of donors would be enhanced if poor countries were growing, will carry the day (World Bank, 1998).

36. From a developmental point of view, aid was originally conceived in the post-World War II environment in the context of a particular "development paradigm", where poor countries were perceived to be caught in a low-income equilibrium trap, unable to generate adequate savings to promote capital formation and rapid growth. At the low level of development which is characteristic of most sub-Saharan African countries, low domestic savings rates had to be supplemented by foreign savings — in the form of ODA and FDI. The general belief was that capital from developed countries was needed to provide the spurt of growth that would make economic take-off possible. More recent research has shown that the domestic savings rate is positively correlated with the per capita level and growth rate of real GDP (Hadjimichael ET al, 1995), which further strengthens the case for aid to countries with low per capita GDP. In recent times, other aid objectives have been articulated by donors, including poverty reduction, bridging "the gender gap" and the promotion of environmental sustainability and good governance — non-controversial goals. But not all donors emphasize the same aspects in their development assistance programmes. This is a sign that donors can have different priorities in their assistance programmes, which is a source of potential non-complementarity of multi-donor, technical cooperation programmes and one of the elements in the controversy about aid.

37. Until recently there was little controversy, if any, about the role of development assistance in recipient countries. While the evidence on aid effectiveness is mixed, it is clear from recent research that when the right policy conditions prevail, aid can be effective in the promotion of growth and the alleviation and reduction of poverty. But aid can be ineffective or harmful in a poor policy environment . Effective aid complements private investment. It enables key public investment programmes in infrastructure and human resources to be carried out in a non-inflationary manner, which lowers operational costs and improves the efficiency of private investment. Studies have shown that in reforming countries, foreign aid acts as a magnet that "crowds in" private investment by a ratio of almost $2 to every $1 of aid. This is due to the fact that aid increases the confidence of the private sector and helps to provide public services that investors need, such as education and infrastructure. The recent positive trend in private capital inflows to Africa makes the contribution from official development assistance more important in terms of strengthening governments’ ability to make long-term investments that are vital for private sector-led economic growth.

38. Official financial assistance leads to faster growth, reduction of poverty and improvements in social indicators in countries with sound economic Among low-income countries with good economic policies, per capita management. "The effect is large: with sound country management, 1 per cent of GDP in assistance translates into a 1 per cent decline in poverty and a similar decline in infant mortality" (World Bank, 1998b, p. 14). GDP growth of those receiving large amounts of aid was higher than that of those receiving small amounts (3.5 per cent versus 2.0 per cent growth per year). With the present aid allocation and sound macroeconomic policy environment, aid is effective in sustainably lifting some 30 million people per annum out of absolute poverty

39. More efficient allocation between countries on the basis of their relative poverty levels and quality of their policy programmes could dramatically enhance the impact of aid. Recent studies have shown that the impact on poverty reduction of reallocating aid more efficiently can only be matched by a four-fold increase in aid budgets. With a poverty-efficient allocation, aid could lift roughly 80 million people per annum out of absolute poverty.

40. On average, aid has not been as effective in Africa as would be desired. While aid has generally appeared to be important to Africa, the outcomes have been different from country to country. Questions began to be asked about the effectiveness of aid in the promotion of growth and poverty reduction, as aid has appeared in different cases to be highly effective, totally ineffective and everything in between. The poor performance is attributed to a host of factors, including the lack of recipient ownership; ineffective management of aid resources by donors and recipients; prevalence of donor-driven programmes and poor aid coordination. With the budgets of aid beneficiary countries strained, inadequate project counterpart funds and a shortage of resources for operations and recurrent maintenance have plagued donor-financed projects (Burnside and Dollar, 1997, p.5).

41. Policy implications for Africa of the above findings are very clear. With a good macroeconomic environment, aid can indeed be a powerful tool for the promotion of growth and the reduction of poverty. Without continued improvement in the macroeconomic policy environment, the perception and reality that aid has not been effective would persist. Fortunately, an increasing number of African countries have improved, or are in the process of improving their macroeconomic policy environment. Thus, it is ironic and tragic that the volume of aid to Africa may decline just as the environment for effective aid utilization is improving (World Bank, 1998b). African countries would best be further advised that as overall aid flows continue to decline, the continent could begin to lose out on aid allocations both in absolute and relative terms, compared to other regions with relatively better economic performance and aid effectiveness records. Therefore, it is incumbent on African countries to deepen their policy and institutional reforms in order to attract additional aid and use it more effectively.

42. Aid dependency is also an issue of concern for Africa — although in the short run, it is quite inevitable. While there is considerable country variability, aid dependency measured by the ODA/GDP ratio has already risen from an average of 2.7 per cent in 1974-84 to 5.0 per cent in 1990-96. For other indices of aid dependency, see Appendix Table 3. The high aid dependency is a reflection of the low savings prevalent in African countries. It has serious implications for the sustainability of the development momentum in Africa and adds to the number of questions being asked about optimum levels of aid and aid effectiveness. Without the reforms outlined above, aid effectiveness is likely to remain low and aid dependency perpetuated. Policy makers need to keep at the top of the agenda the issues of improving the efficiency and impact of public expenditures financed with foreign aid resources and "optimizing" aid’s share in development expenditures, so as to aim at reducing aid dependency in the long run. They also need to foster a new donor-beneficiary relationship in which multi-donor aid programmes are focused on an Africa-driven agenda, in order to strengthen the impact of aid.

43. Past experience with aid on the part of donors and beneficiary countries suggests an urgent need to reexamine current aid modalities with the aim of increasing aid effectiveness. Both donors and developing countries seem to agree on this issue. A key objective of the reforms should be to break the spiral of the weakness in (recipient) country capacity (for programming, monitoring and evaluation), which has led to escalating donor intrusiveness in public expenditure decisions (motivated by the urge to disburse funds) — which in turn has further weakened recipient country capacity. The key to breaking this spiral is to put in place a mechanism for consensus building among key African development stakeholders (including donors) around an Africa-led agenda and to return spending authority, control and accountability to the beneficiary countries.

44. Towards this goal, the framework advocated by the OECD DAC and the recent call by the UN Secretary-General, as well as the World Bank President for a holistic and comprehensive approach to Africa’s development are welcome steps. The Special Programme of Assistance to Africa (SPA) partnership has also come on board in terms of advocating a more prominent and systematic incorporation of perspectives from SPA countries; strengthening the focus on aid effectiveness through the development of new aid instruments; performance monitoring; selectivity and more effective follow-through within agencies and on the ground. The emphasis of the new thinking is the integration at national level and among global players of macroeconomic aspects of development with fundamental long-term issues of the structure, scope and substance of societal development. They imply open sharing of information among all players and clear leadership by developing country governments in the programming and implementation of development programmes. Moving a step towards operationalizing the holistic and comprehensive framework, the World Bank’s proposal articulates a matrix that juxtaposes the structural prerequisites for sustainable growth and poverty alleviation with the activities of donors and partners who can assist in the process of attaining those structural objectives. The matrix is a tool for identifying unmet needs and for strengthening cooperation, transparency, partnership and accountability for results.

45. In such a comprehensive framework for aid, for example, aid, debt and other factors impinging on the development process would not be considered in isolation. Creditor governments and their ODA agencies would act in concert: the ODA arm to ensure that aid composition is consistent not only with the long-term need for fiscal and external balance in the debtor country, but also with long-term structural transformation needs. Creditor governments would ensure that the terms of debt relief support rather than subvert ODA objectives and, debt relief arrangements do not have the effect of diverting ODA intended to promote economic development. The OECD DAC report emphasizes, among other things, that well-targeted debt relief could make a real difference to the achievement of social and poverty reduction goals by the 21^st century. At the same time, it would help to reduce dependence on aid. When operational, the comprehensive approach would be a major step towards enhancing the effectiveness of ODA in the African development process.

46. Aiming to facilitate Africa’s lead in driving the continent’s development agenda — on which aid would selectively focus — and with the support of the OAU and ADB, ECA has launched the African Development Forum (ADF) as a regional and country-level process to rally Africa’s development stakeholders, among them donors, around key issues and programmes. The overall objective of the ADF is to facilitate a process of consensus building among the key stakeholders of Africa’s development on a shared vision of the continent and a strategy and instruments for realizing that vision. We expect some 200 to 300 invited participants from African governments, civil society, researchers and academics, intergovernmental organizations and donors at each forum, which will focus on a specific theme each year and will set goals and priorities for the continent. The forum will result in sharply defined, time-bound actionable programmes that can be implemented within the capacity of African countries. Because selected partners will be invited to participate in proceedings of the Forum, or its other activities, the Forum will facilitate donor contributions to consensus building. It will also enhance the donor community’s familiarity with African development aspirations and priorities, which will enable donor programmes to be more responsive to locally determined needs.

47. The ADF process is designed to strengthen cohesion in multi-donor assistance programmes and to tap synergies of various agencies in support of Africa’s development. It will bridge, and hopefully make unnecessary, the continued proliferation of new external agency-led initiatives towards a future vision of Africa — initiatives which, in any event, have proved difficult to translate into cohesive programmes. It will also answer the call of the UN Secretary-General to Africa’s regional institutions to take the lead in facilitating a well thought out and articulated development agenda for the continent, which is Africa-led and appropriately supported by the international community. The first forum will be held in Addis Ababa in October 1999 on the theme: "The Challenge of Globalization and the Information Age", which will further promote the objectives of the African Information Society Initiative.