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1 Aid and State Formation in Africa: What the Rich World Cannot Do ODI, London, May 22, 2006 Nancy Birdsall President Center for Global Development Washington,

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Presentation on theme: "1 Aid and State Formation in Africa: What the Rich World Cannot Do ODI, London, May 22, 2006 Nancy Birdsall President Center for Global Development Washington,"— Presentation transcript:

1 1 Aid and State Formation in Africa: What the Rich World Cannot Do ODI, London, May 22, 2006 Nancy Birdsall President Center for Global Development Washington, D.C.

2 2 Outline Part I: The donors dilemma: three decades of massive aid to still-poor countries, mostly in SSA Part II: The IPT and the aid-institutions paradox: aid is not helping and may even by hurting Part III: What donors can and cannot do about poverty and state failure in SSA

3 3 Part I: The donors dilemma A large set of countries remains poor (20% of more of the population living on a $1 a day or less) And have received massive amounts of aid (10% of GDP or more) Aid intensity varies among these poor countries, but most are in Sub-Saharan Africa O An institutional poverty trap?

4 4

5 5 Aid dependency varies among these poor countries, but most are in Sub-Saharan Africa

6 6 Defining the institutional poverty trap: What an institutional poverty trap is not Not a Sachs-type poverty trap

7 7 Convergence and divergence

8 8 The best and worst 10-year average growth rates within countries Source: Reproduced from Jones and Olker (2005).

9 9 Growth spurts are not pure recovery income after best 10 year growth episode relative to prior GDP peak Source: Reproduced from Jones and Olker (2005).

10 10 Basic facts of growth and poverty do not support notion of poverty trap defined as a persistent low-level equilibrium (Berg et. al.) Poor countries are not a persistently well- defined group Easterly (2005): growth rates are not statistically lower in poor countries; income levels are not stationary There is lots of movement across quintiles of countries, including growth successes and growth disasters

11 11 Growth Successes... Source: Reproduced from Berg and Leite (2006).

12 12 Growth Successes... Source: Reproduced from Berg and Leite (2006).

13 13 Maybe there are traps for a subset of countries, e.g. tropical landlocked countries Source: Reproduced from Berg and Leite (2006).

14 14 But even tropical landlocked countries in SSA have had growth accelerations (adapted from Berg et. al.)

15 15 The real problem: Growth accelerations in SSA have not led to autonomous sustained growth (take-offs) Africas problem is more duration of growth spells (Berg et. al.) There are growth reversals Sounds more like an institutional poverty trap than a conventional low savings poverty trap

16 16 Some growth reversals... Source: Reproduced from Berg and Leite (2006).

17 17 Defining the institutional poverty trap: What an institutional poverty trap is not Not a debt trap: aid transfers have financed debt payments Source: Birdsall, Claessens, and Diwan (2003).

18 18 Defining the institutional poverty trap: What an institutional poverty trap is not Not a simple corruption problem, or lack of democracy (East Asian tigers in the 1960s and 1970s; Indonesia 1970s through 1997; Vietnam and China 1990s to 2005. All these have had decade-long or more growth)

19 19 Defining the institutional poverty trap: What an institutional poverty trap is not Not a Sachs-type poverty trap Not a debt trap per se Not a simple corruption problem, or lack of democracy

20 20 What the institutional poverty trap is: some inadequate definitions Vicious circle in which poor institutions impede sustainable growth which undermines building of sound institutions The absence of a developmental state a la Leftwich): Lack of effective state institutions that generate predictable, credible and clear rules of the game that enable markets to operate and support investment, invention, efficiency and thus economic growth The absence of at least one of two characteristics: an autonomous state (from interest groups; East Asia) with capable civil service, or sufficient direct accountability (India, free press, democratic institutions)

21 21 Ex ante efforts at measuring institutions have not (yet) been particularly successful Sub-Saharan African low-income countries as a group scored better on the ICRG measure of institutional quality in 1985 than other low-income countries, but have fared worse on growth Good institutions are by definition stable and credible, but some countries ICRG indices fell more than 44 percent between 1985 and 1997 MCA eligibility and CPIA scores are not consistent, nor are Freedom House, ICRG and CPIA scores with other measures of capacity, legitimacy etc.

22 22 Sub-Saharan African countries as a group scored better on the ICRG in 1985 than other low-income countries

23 23 Sub-Saharan African countries as a group scored better on the ICRG in 1985 than other low-income countries

24 24 Though some countries ICRG indices rose between 1985 and 1997…

25 25 Bureaucratic quality increased little over the same period

26 26 MCA eligibility and CPIA scores are not consistent, Eliminated from MCA by corruption criteria Countries actually selected for the MCA CPIA ranking by quintile 2002 Albania Bangladesh Malawi Moldova Mozambique - Mozambique 2233322333 Missed MCA by one indicator (out of 16) Countries actually selected for the MCA Benin Burkina Faso Georgia India Mali Mauritania Sao Tome and Principe Togo Benin - Georgia - Mali - 2241215522412155 Additional countries selected for the MCA Cape Verde Vanuatu 1414 Sources: Radelet, Steve (2003) Challenging Foreign Aid, The Center for Global Development; and International Development Association (2004) Allocating IDA Funds based on Performance. Fourth Annual Report on IDAs Country Assessment and Allocation Process.

27 27 …nor are CPIA scores with other measures of capacity, legitimacy etc.

28 28 Institutional quality ex ante does not seem to be associated with a subsequent growth acceleration; if anything growth in SSA raises (the measure of) institutional quality Institutional quality before and after growth accelerations by region, 1970s-1990s

29 29 What characteristics makes a country more likely to be in an institutional poverty trap? Natural resources (exception: Botswana) Low natural openness (landlocked, non-trading neighbors) Primary commodity dependent – subject to terms of trade shocks Historically high inequality; and small non-state/SOE- dependent middle class High levels of prebendalism Civil service pay low

30 30 Natural resource rich countries have lower enrollment and literacy rates

31 31 The wrong asset: Open, globalizing countries dependent on commodity prices have not grown

32 32 Source: Reproduced from Berg and Leite (2006).

33 33 Source: Reproduced from Berg and Leite (2006).

34 34 Inequality is high in all developing countries

35 35 But in Africa, the middle strata get a smaller piece of the pie …

36 36 But in Africa, the middle strata get a smaller piece of the pie

37 37 Prevalent prebendalism (which is worse for growth than clientelism) Prebendalism refers to the handing out of prebends, in which individuals are given public offices in order for them to benefit from personal access to state resources. (van de Walle, 2005, p. 20) President Mobuto Sese Seko of Zaire famously commanded his ministers to enrich themselves but not to steal too much. (van de Walle, 2005, p. 21)

38 38 Civil service pay is low In many Sub-Saharan African countries the real value of civil servant wages has declined by 50-70% since the 1970s (Lindauer and Nunberg, 1994). In the late 1990s a mid-level economist in Kenya could make $250 per month working for the goverment, compared to $3,000-$6,000 if working for an NGO or a donor program (Brautigan, 2000).

39 39 What characteristics are associated with our intuition that a country is in an institutional poverty trap?

40 40 Conclusion Part I Many low-income countries are probably suffering from the institutional poverty trap, even when they are growing But the ex post definition and multiple symptoms make it hard to identify the institutional poverty trap ex ante, let alone pin down its causes And we do not know how to help countries escape this trap since it is mainly about politics and power-sharing Next: Are we making things worse when we try to help?

41 41 Part I: The donors dilemma Part II: Country-based aid is not helping and is probably hurting Part III: What donors can and cannot do

42 42 Part II: Country-based aid is not helping and is probably hurting: Dutch disease and competitiveness Government revenue Accountability Donor fragmentation and poaching The NGO bypass issue Technical assistance The Washington Consensus, a.k.a. Policy autonomy and missed opportunities The exit issue Volatility

43 43 Dutch disease

44 44 Government revenue Sub-Saharan Africa still relies on trade taxes

45 45 Government revenue: Many low-income and lower middle- income countries could increase tax revenue Source: Moss, Pettersson, and van de Walle (2005).

46 46 Accountability

47 47 Donor Fragmentation and Bureaucratic Quality in Sub-Saharan Africa Source: Reproduced from Knack and Rahman (2004).

48 48 The NGO bypass issue

49 49 Technical assistance Expatriate personnel working for aid agencies and NGOs rarely are required to pay local income taxes. At one point in Tanzania, the total for government wages and salaries (which are taxed) was $100 million, while the salary bill for technical assistants supplied under aid programs (and not taxed) was $200 million. (Berg, 1993 cited in Brautigam and Knack, 2004, p. 262)

50 50 The Washington Consensus, a.k.a. Policy autonomy and missed opportunities

51 51 The exit issue Number of Adjustment Loans to the 20 Countries with Most Adjustment Loans Over the Period 1980-1999. 14-19 loans Niger, Zambia, Madagascar, Togo, Malawi, Mali, Mauritania, Kenya, Bolivia, Philippines, Jamaica, Bangladesh 20-25 loans 26-30 loans Senegal, Uganda, Mexico, Morocco, Pakistan Côte dIvoire, Ghana, Argentina Out of these countries, only Bangladesh, Pakistan and Uganda achieved annual per capita growth rates above 2% over the period from their first adjustment loan to 1999. Notes: These are IMF and World Bank adjustment loans. The average number of adjustment loans for these countries over the period is 19 compared to the average of 7 for all developing countries. Source: Easterly (2002) What Did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans. Center for Global Development Working Paper 11.

52 52 Volatility Source: Reproduced from Bulir and Haman (2006). Volatility of aid flows by country, 1975-2003

53 53 The resulting risk of doubling country-based aid Aid intensity under Big Push scenarios Source: Moss and Subramanian (2005).

54 54 Conclusion Part II

55 55 Part I: The donors dilemma Part II: Country-based aid is not helping and is probably hurting Part III: What donors can and cannot do

56 56 A. Humility and regret: Living with the institutional poverty trap of most African countries Eliminate debt more expeditiously Provide aid in grant form until per capita income exceeds $500 But only through government budgets and only with some matching funds from government revenue Set specific, measurable, time-bound goals a lá MDGs for all country-based aid Increase share of aid going through multilaterals End policy and process conditionality, instead finance programs on the basis of results More impact evaluation Exit countries where head of state stays in office beyond 10-12 years

57 57 B. Beyond country aid EITI Advocate and support direct distribution of proceeds of natural resources Global warming Trade and TRIPS Making markets for vaccines; Green Revolution for Africa International migration

58 58 Conclusion

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