THE CHALLENGE
OF SCALING UP
AID FOR AFRICA
By
Louis Kasekende
Chief Economist
1
OUTLINE OF THE PRESENTATION
I.
Introduction
II.
Context of Scaled Up Aid
III. Can Africa Absorb and Spend More Aid?
IV. How Can We Strengthen the Foundations for
Absorbing Scaled Up Aid?
V.
Conclusion
2
I. Introduction
Debate : scaling up aid, and capacity of Africa to absorb it.
i.
African Development Report 2006 is on Aid, Debt
Relief and Development in Africa.
ii. UNCTAD 2006 Economic Development in Africa
Report focuses on Doubling Aid: Making the “Big
Push” Work.
iii. IMF and World Bank have published a number of
articles on the macroeconomics of scaling up aid.
Why the interest? Promised scaling up of aid, principally
to Africa and the past disappointing results of aid.
3
II.
The Context of Scaled Up Aid
• Africa is falling behind in
meeting MDGs
•Only 9 countries are on
track to meet at least more
than 4 MDGs
• None of the countries will
meet the goal of halving
poverty by 2015
Countries
On Target
Moderate
Slow/Reversing
No Data
Total Africa
Satisfactory
Performance Ratio
(On Target and Moderate)
Goal 1 Goal 2 Goal 3 Goal 4 Goal 5 Goal 6 Goal 7
0
28
8
24
19
13
18
6
17
0
21
2
17
13
35
6
7
5
11
22
9
13
2
38
3
21
1
13
53
53
53
53
53
53
53
11.30% 84.90% 15.10% 84.90% 39.60% 56.60% 58.50%
Progress Towards Achieving MDGs
35
30
25
20
15
10
5
0
Goal 1
Goal 2
On target
Goal 3
Moderate
Goal 4
Goal 5
Goal 6
Goal 7
Slow /Reversing
4
II. Context of Scaled Up Aid
Increased focus by the International Community and
African Leaders on what needs to be done?
i.
NEPAD: Advocates a development paradigm based
on collective responsibility, ownership, development
of new partnerships, and mobilisation of local
capacities and resources.
ii. The Monterrey Conference in 2002: international
community affirmed commitment to increasing aid
and making progress towards the MDGs, and
address the particular difficulties facing SSA.
5
II. Context of Scaled-Up Aid
iii. Summit in Gleneagles made commitments to increase
ODA levels to developing countries by about US$50
billion a year by 2010, with half allocated to Africa.
Aid to Africa will therefore double.
iv. Proliferation of Global Funds: e.g. The Global Fund
to Fight AIDS, Tuberculosis and Malaria , Global
Environment Facility (GEF) and the Global
Education Fund (GEF).
6
II. Context of Scaled-Up Aid
Recent data indicates a recovery of aid flows
ODA Flow s to Developing Countries (US$ m illion)
100,000.0
80,000.0
60,000.0
40,000.0
20,000.0
0.0
1996
1997
1998
1999
Total Net ODA to Developing Countries
2000
2001
2002
Africa (total)
2003
2004
SSA
7
II. Context of Scaling Up Aid
 ODA to SSA was US$23.9 bn in 2004, up from US$12.2 bn in
1999.
 Since 1999, the level of ODA to Africa has nearly doubled to
reach US$28 bn in 2004.
ODA Flows to Africa, 1998-2004
30
US$ Billion
25
20
15
10
5
0
1998
1999
2000
Africa
2001
2002
2003
SSA
2004
8
• With the exception of
Egypt, most of the
increase in aid has gone
to low-income countries.
• Reforming countries are
major recipients of
increased aid flows.
Africa - Ten Largest Recipients of Net ODA
from all Donors, 1997-2004
(As % of Net Total to Africa)
Egypt
8.0
Tanzania
7.0
DRC
6.4
Mozambique
6.3
Ethiopia
6.1
Uganda
4.2
Ghana
4.0
Zambia
3.2
Cameroon
3.1
Madagascar
3.0
Total ODA to
Africa
US $ 153.7
Billions
9
Although recent increases in ODA have gone mostly to Iraq and
Afghanistan, there are more African countries in the top 10.
Top 10 Recipients of the Increase in net ODA, 2001-04
Iraq
Afghanistan
Congo, Dem. Rep.
Madagascar
Angola
Zambia
Ghana
Ethiopia
Sudan
Senegal
0
1000
2000
3000
4000
5000
US$ Billion
10
Donors are increasing the proportion of GNI given as aid.
Also, 5 EU countries have adopted specific deadlines to
reach the 0.7% of GNI target.
Chart 24: Net ODA from Bilateral Donors to Developing Countries in 2005
( As % of GNI)
Norw ay
Sw eden
Luxembourg
Netherlands
0.93
0.92
0.87
0.82
Denmark
Belgium
Austria
United Kingdom
France
Finland
Sw itzerland
Ireland
Germany
Canada
Italy
Spain
Japan
New Zealand
Australia
Greece
United States
Portugal
0.81
0.53
0.52
0.48
0.47
0.47
0.44
0.41
Agreed Target =
0.7% of GNI
0.35
0.34
0.29
0.29
0.28
0.27
0.25
0.24
0.22
0.21
11
II.
Context of Scaled Up Aid
With respect to Africa, recent increases in aid flows and the
expected scaling-up raises two questions
•
Can Africa effectively absorb and spend the scaled
up aid?
•
What can be done to improve the absorption and
spending of scale up aid?
These are the questions we will address in this presentation.
12
III.
Can Africa Absorb More Aid?
A.
The Big Push Argument: to reach MDGs, higher
levels of aid are required.
Estimates vary:
The Millennium Project puts projected ODA
requirements at US$35 billion in 2006, growing to
US$195 billion by 2015.
The African Commission calls for an additional
US$25 billion ODA per year to be implemented by
2010, and a further $50 billion by 2015. Focus
spending on social sector and infrastructure.
13
B.
Africa is making progress in laying down the
foundations for scaled-up development:

Policy environment has improved

Resumption of economic growth

Improving Public financial management

Stronger development partnerships—in a
small but growing number of countries,
(e.g. Mozambique, Uganda, Tanzania, and
recently Zambia).
14
CPIA Scores (2005)
Improved Policy Environment
• Over the years, African
countries have made gains in
policy performance.
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Economic
Management
Structral
Policies
LIC
Policies for
Social Inclusion
Public Sector
Mgnt
Total
MIC
Countries Showing Stronger Performance
• More countries (close to
70%) had CPIA scores above
3.0
45
40
35
Number of Countries
• CPIA ratings show that in
2005 the average score for
LICs was 3.2
30
25
20
15
10
5
0
Economic
Management
Structral Policies Policies for Social
Inclusion
Score below 3
Public Sector
Mgnt
Total
Score above 3
15
Economic growth in Africa has been relatively robust.
Africa: Real GDP Growth Rates, (%)
5.3
6.0
5.0
4.0
4.9
3.5
4.7
4.0
3.0
3.5
2.0
1.0
0.0
2000
2001
2002
2003
2004
2005
16
Over the years, public sector management is improving in
Africa, as well as quality of governance. An average CPIA
score of 3.0 for low income African countries.
Key Public Sector Management CPIA Scores (2005)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Property
Rights & Rule
Based
Governace
Quality of
Budgetary
& Financial
Managmt.
Efficiency of
Revenue
Mobilization
LIC
Quality of
Transparency,
Public Admin Accountability
& Corruption in
Pub. Sector
Average
MIC
17
But challenges stand in the way of scaled up aid
Like other investments, aid is subject to diminishing returns,
which could be reached anywhere between 15% and 45% of
GDP, beyond which additional benefits of aid inflows become
negative.
A number of African countries are already significantly aid
dependent. In 2004, 19 countries had aid to GDP debt ratios
above 15%.
18
MACROECONOMIC CHALLENGES
• Increased aid has supported increased
consumption and investment and presented an
opportunity for sustained economic growth and
poverty reduction;
• Donor financing is akin to central bank financing
with the difference being the associated reserve
build up that can support sterilisation or financing
additional imports;
19
MACROECONOMIC CHALLENGES
• There is an inherent risk of complicating
macroeconomic management; an appreciation of the
exchange rate and upward pressure on interest rates
when BS flows are sterilised;
• But associated productivity gains mitigate this effect;
indeed evidence of Uganda shows weak evidence of a
“Dutch disease”;
• Non traditional exports have performed exceptionally
well; case by case approach recommended in assessing
this problem.
20
Absorptive capacity is also limited by the structural
vulnerability of African countries, v.i.z,
•
Shortage of skilled labour (teachers, nurses,
doctors, engineers, etc)
•
Potential infrastructure bottlenecks
•
Weak capital markets
21
IV.
How Can we Strengthen the Foundations
for Absorbing Scaled Up Aid?
To ensure efficient absorption and spending
of scaled up aid will require the collective
efforts of African countries and the
international community.
22
A.
What should African Countries Do?
Minimise Dutch Disease Risks by combining prudent
macroeconomic policies with structural policies;
Invest in reducing the costs of doing business.
Increase investments in infrastructure, health and
education to reduce structural constraints. In a
number of African countries, poor infrastructure
accounts for 30-40% of transaction costs for
producers.
23
Direct resources in improving productivity of labour;
increasing investment in education.
Implement Governance reforms, especially with regard to
improving the efficiency of public resource utilisation controls.
Improve fiduciary standards: sound accounting procedures,
budget management capacity and audit.
High political commitment to reforms and demonstrable
development results on the ground.
24
B.
What Should the International Community Do?
i. Understand the specificity of individual countries:
scaling up must be built around a thorough understanding
of the binding constraints to growth in individual
countries, including institutional, structural and policy
constraints. Also, support accountable domestic
institutions.
25
ii. Firmer commitments and more predictable flows,
which should be extended to also finance recurrent costs,
such as salaries of teachers, doctors and nurses.
iii. Provide more aid through the budget as alternative
aid delivery modality to improve alignment with the
needs and requirements of African countries to ensure
effective utilisation of aid.
iv. Improve coordination and harmonisation:
uncoordinated and numerous donor demands contribute
to aid ineffectiveness. Bilateral donors may consider giving
more aid through multilaterals in the context of a reformed
global aid architecture.
26
C. What Role Can the AfDB Play?
Background
 Africa’s premier financial institution, est. in 1964.
 Third largest source of multilateral assistance to Africa.
Africa - Ne t ODA from M ultilate ral Donors - Te n
Large s t Donors , 1997-2004
(As % of Ne t Total to Africa)
IDA
38.0
34.0
EC
Af DF
8.0
UNHCR
3.4
UNDP
3.3
WFP
3.2
UNICEF
3.0
unta
2.3
Other UN
2.0
UNFPA
1.0
Total
Multiilateral
ODA to Africa
US $ 52.1
Billions
27
C. What Role Can the AfDB Play :
i. Provide Policy Advice
ii. Greater Aid Selectivity : Increase investment in
Infrastructure
iii. Harmonisation and Management for Results
iv. Strengthen Country Systems
v. Allocation of Resources based on Country
Performance
vi. Support to post-conflict and fragile states
28
V.
Conclusion
Constraints to scaling up aid to African countries and
their ability to absorb additional aid is a major concern.
But, by putting in place appropriate systems, policies
and institutions, and with the support of the
international community Africa can absorb the scale-up
aid.
29