1. African Economic Development XII
African Economic Development XII. DEVELOPMENT ASSISTANCE: THE AFRICAN RECORD
Yiagadeesen (Teddy) Samy
Professor
Norman Paterson School of International Affairs
Carleton University
March 29, 2017

2. Today’s lecture
Examination of the African record with respect to development assistance, also known as foreign aid, foreign assistance, aid, ODA (official development assistance).

3. AGENDA 1) What is foreign aid?
Official Development Assistance (ODA).
Data on foreign aid, generally, and to Africa specifically: macro data; sectoral and project level data
2) How has development assistance policy evolved over time?
Briefly examine evolution of development assistance policy during last 70 years.
3) Aid allocation
Why is aid given? Who receives aid and why?
4) Aid effectiveness
Does aid work or not?
Under what circumstances does aid work?

4. Introduction
Some of the fastest growing economies in the world are African and yet several African countries remain dependent on foreign aid today (as a percentage of Gross National Income (GNI) or central government expenditure).
Table 1: Growth Rates in Sub-Saharan Africa
Period
GDP Growth (%)
GDP Per Capita Growth (%)
4.26
1.74
4.36
1.59
1.43
-1.41
1.96
-0.78
5.48
2.69
4.31
1.51
Source: calculated using data from WDI database, World Bank

5. Introduction
Aid/GNI ratios for countries such as Burundi, the Central African Republic, Liberia, Sierra Leone and South Sudan are higher than 10% (2014 data), which is one indicator of aid dependence.
We can also examine aid per capita or aid as a percentage of central government expenditure.
Aid as a percentage of central government expenditure > 50% in countries such as Benin, Burkina Faso, Mali, Mozambique and Rwanda.

6. Introduction Table 2: Aid Dependency Ratios, Selected Countries,
Sub-Saharan Africa, 2014
Country
Net ODA received (% of GNI)
Net ODA received per capita (current US$)
Liberia
44.31
Cape Verde
448
Central African Republic
35.94
Sao Tome and Principe
207
Somalia
21.10
169
Sierra Leone
18.87
South Sudan
165
16.61
144
Burundi
16.22
127
Rwanda
13.33
105
Burkina Faso
9.19
Gabon 66
Uganda
6.19
Malawi 56
Swaziland
2.05
Cameroon 37
Namibia
1.77
Ethiopia
Sudan
1.22
Congo, Dem. Rep. 32
Nigeria
0.45 22
Mauritius
0.39
South Africa 20
0.31 14
Angola
0.20 10
Equatorial Guinea
0.01 1
Sub-Saharan Africa
2.77 48
Source: World Development Indicators, World Bank

7. Introduction
Aid effectiveness, that is, whether long-term development aid works or not, remains a hotly contested issue.

8. Introduction Why the focus on aid effectiveness?
Large amounts of aid did not translate into growth.
Aid did not induce economic reform, was often mismanaged and embezzled by corrupt political elites.
Donors did not always align with the priorities of the recipients.
Methodological problems and challenges of evaluation.

9. Introduction Aid has not been a complete failure.
Health: drugs and treatment against HIV/AIDS, malaria and other diseases.
Access to education
Debt relief

10. Introduction
Africa’s growth turnaround has coincided with a period of increasing aid flows to the region since the early 2000s, after the adoption of the Millennium Development Goals (MDGs).

11. Introduction
Since late 1990s, absolute poverty rates have declined in sub-Saharan Africa
Table 3: Evolution of Absolute Poverty,
Population Living Below $1.90 a day
In Millions
In %
Region
1981
1990
2002
2013
East Asia and Pacific
1111
966
535 71
80.5
60.2
29.0
3.5
Europe and Central Asia
n.a. 9 29 10
1.9
6.3
2.2
Latin America and the Caribbean 63 34
16.7
15.8
13.0
5.4
Middle East and North Africa 14
6.0
South Asia
504
505
552
256
54.7
44.6
38.5
15.1
Sub-Saharan Africa
276
391
389
54.3
55.6
41.0
Total of 6 regions
1895
1840
1588
766
44.3
42.0
30.0
12.6
World Total
34.8
25.3
10.7
Source: PovcalNet, World Bank

12. Introduction
Higher spending on the social sectors (health and education) have led to improvements across the region: enrolment rates and gender gaps in education, child mortality rates.
But many challenges remain.
Fragile and Conflict-Affected states (FCAS)
Persistence of absolute poverty
Low human development – see just released Human Development Report 2016
How to meet the recently adopted Sustainable Development Goals (SDGs)? 17 goals and 169 targets.

13. Fragile States Index 2016 from the Fund for Peace
Introduction
Fragile States Index 2016 from the Fund for Peace

14. What is foreign aid?
International transfer of monetary and in-kind resources from a (typically rich) country or international organization to a (typically developing) recipient country.
Grants or concessional loans
Aid is also provided by non-official actors (e.g. NGOs, private foundations, charities).
Ideally, aid should be for emergency relief and/or development, not “international welfare”, not commercial, not political/strategic.

15. What is foreign aid? Bilateral vs. Multilateral aid.
Bilateral aid: allows donors to have more control over their aid budgets and to engage directly with partner countries.
Multilateral aid: pools resources and knowledge together; less strategic?

16. What is foreign aid?
Most commonly used measure of foreign aid is official development assistance (ODA).
The concept of ODA was introduced by the Development Assistance Committee in 1969.
There are 3 key elements to the concept of ODA:
Concessional: reflects the degree of generosity.
Grants or concessional loans
Official: government.
Promotion of economic development: intent (that is, declared goals) and not outcome.

17. What is foreign aid? ODA includes: Military aid is excluded
Technical assistance.
Transfers via NGOs (intermediaries) by official agencies.
Humanitarian assistance.
Debt relief
Refugee costs (very pertinent today)
Military aid is excluded
See: “Is It ODA?” at

18. What is foreign aid?
The Development Assistance Committee (DAC): set up in and formerly known as the Development Assistance Group.
The DAC is the main body through which the OECD examines issues related to cooperation with developing countries. Hence, known as OECD DAC.
Forum for member countries to discuss their role as bilateral donors.
Historically, OECD DAC members have provided the vast majority of total ODA; number expected to fall as more (emerging) donors become important .

19. What is foreign aid?
List of DAC members (30)

20. Magnitudes and Patterns
Aid volumes
Between 1960 and 2014, sub-Saharan Africa has received US$ 1.2 trillion in foreign aid from all donors and US$ 800 billion from DAC donors.
The United States, France and the United Kingdom have been the largest donors to sub-Saharan Africa, historically and in recent years.
We do not have good data on aid from non-official sources (e.g. NGOs and private foundations). Some non-DAC members, but not all, report their numbers to the DAC.

21. Magnitudes and Patterns
Foreign aid to Africa from all donors,
Source: OECD DAC statistics

22. Magnitudes and Patterns
Aid volumes and shares
Between 2005 to 2014, sub-Saharan Africa received more than a third of ODA disbursed by DAC member countries, which is the largest proportion regionally, followed by Central and South Asia.
This should not be surprising based on economic need.
Canada’s development assistance to sub-Saharan Africa doubled between 2005 and 2010, from US$ 665m to US$ 1.4bn (17.7% to 26.5% of total Canadian aid). It has declined from 2013 to 2015.

23. Magnitudes and Patterns
Canadian Foreign Aid to Sub-Saharan Africa,
Source: Constructed using OECD DAC statistics

24. Magnitudes and Patterns
10 of 25 countries of focus for Canadian development assistance are in sub- Saharan Africa

25. Magnitudes and Patterns
Canadian ODA to countries of focus in sub-Saharan Africa, 2015
Countries of Focus
Income Status
Fragile
ODA (CAD $)
Benin
Low-income No
23,926,311
Burkina Faso
Yes
45,591,052
Dem. Rep. of the Congo
92,166,332
Ethiopia
193,653,982
Ghana
Lower-middle-income
105,116,226
Mali
152,807,909
Mozambique
121,378,325
Senegal
85,708,976
South Sudan
128,937,836
Tanzania
174,255,034
Source: Constructed using data from CIDP (cidpnsi.ca)

26. Magnitudes and Patterns
Aid volumes
Largest recipients in 2014: Ethiopia, South Sudan, Kenya, Tanzania and Mozambique.
Top 10 recipients received half of the overall amount.
Aid darlings and aid orphans (incl. when we consider aid per capita).
The overall trend is an increase in ODA over time, despite significant decrease in 1990s, and recovery thereafter.

27. Magnitudes and Patterns
Aid volumes
At the sectoral level, a significant share of ODA to Africa has gone to the social and economic sectors in recent years.
Debt relief was significant in the early to mid-2000s (HIPC and MDRI).
For Canadian data, see
For project level aid data, see

28. Magnitudes and Patterns
Example: South Sudan

29. Magnitudes and Patterns
Donor generosity to ALL recipients: aid volumes and ratios
Net ODA by DAC donors in 2015 as a percentage of GNI
Source: OECD DAC statistics

30. Magnitudes and Patterns
Donor generosity to ALL recipients: aid volumes and ratios
Net ODA by DAC donors in amounts
Source: OECD DAC statistics

31. Evolution of Development Assistance Policy
Bretton Woods Conference in 1944: creation of the International Bank for Reconstruction and Development (IBRD, original institution of the World Bank) and the International Monetary Fund (IMF).
US created Marshall Plan to help Western European countries rebuild their economies after the end of the Second World War.

32. Evolution of Development Assistance Policy
Importance of financial capital for development emphasized after success of Marshall Plan.
Other developments:
Arthur Lewis (1954): industrialization using surplus labor
Harrod (1939) and Domar (1946), hence Harrod- Domar growth model provided the analytical framework for foreign aid as capital to achieve a target growth rate.

33. Evolution of Development Assistance Policy
Extension of Harrod-Domar model to an open-economy framework by Chenery and Strout (1966): foreign aid to fill either a savings gap or a foreign exchange gap.
Development Assistance Group (DAG) created in 1960 and renamed Development Assistance Committee (DAC) a year later.
Establishment of bilateral aid programs:
USAID (1961)
Canada’s external aid office (1960) became the Canadian International Development Agency or CIDA (1968)

34. Evolution of Development Assistance Policy
The International Development Association (IDA) was established in 1960 as the other lending arm of the World Bank to help the world’s poorest countries.
African Development Bank founded in 1964.
DAC adopted the concept of ODA in 1969.

35. Evolution of Development Assistance Policy
Pearson Commission Report proposed the 0.7% of GNI target.
The 0.7% target remains a powerful lobbying tool today.
It is based on the income of donors, not the needs of recipients.
It is based on the two-gap extension of the Harrod- Domar model.

36. Evolution of Development Assistance Policy
Sweden, Netherlands and Norway were among the first to meet the 0.7% target.
World Bank and bilateral donors switched their focus from growth to poverty reduction.
1975 British White Paper on aid recommended a focus on the poorest countries, many of whom in Africa.
Foreign aid begins to move away from large-scale infrastructure to sectoral approaches (e.g. agriculture, rural development, social sectors).

37. Evolution of Development Assistance Policy
Debt crisis and beginning of structural adjustment loans; the World Bank and IMF begin to impose policy reform or conditionality.
The World Bank switches its emphasis from project to program lending.
1985 DAC review indicates limited benefits to African countries from foreign aid.
Concept of “governance” shows up in a World Bank report on sub-Saharan Africa.

38. Evolution of Development Assistance Policy
Continuation of structural adjustment and stabilization.
Sub-Saharan Africa continues to struggle – poor governance and lack of strong institutions.
Decade of aid fatigue resulting from end of Cold War and global recession of early 1990s, as well as dissatisfaction with conditionality.
Debt relief initiative for Heavily Indebted Poor Countries (HIPCs) launched in 1996 by the World Bank and IMF.

39. Evolution of Development Assistance Policy
OECD (1996) Shaping the 21st Century: sets the stage for the MDGs
World Bank (1998) Assessing Aid:
Aid works in countries with a good policy environment (e.g. Botswana in 1960s, Ghana in late 1980s, Uganda in 1990s) vs. DRC under Mobutu Sese Seko). Hence, focus on selectivity in aid allocation.
Need to improve economic policies and institutions in developing countries.

40. Evolution of Development Assistance Policy
Burnside and Dollar (2000) study “Aid, Policies and Growth,” published in American Economic Review.
Establishment of Millennium Challenge Corporation (MCC): Africa is the largest recipient of development assistance from the MCC.
Adoption of Millennium Declaration by UNGA and the Millennium Development Goals (MDGs) a year later.
Establishment of DAC task force on donor practices in

41. Evolution of Development Assistance Policy
First High-Level Forum on Aid Effectiveness held in Rome in 2003:development institutions and recipient countries agreed to harmonize their efforts and adapt them to country context.
MDGs led to increased aid spending on poverty reduction, social sectors (education and health) and global partnerships.
First Financing for Development Conference held in Mexico in 2002, and let to the Monterrey Consensus.
Highlighted importance of ODA for African countries; more aid for MDGs; 0.7% target and % to LDCs.

42. Evolution of Development Assistance Policy
2005 report of Commission for Africa recommends doubling of aid to Africa by 2010; ask rich countries to commit to a timetable to meet 0.7% target. Emphasized quality of aid and how it is delivered.
Multilateral Debt Relief Initiative (MDRI) proposed by the G8 to cancel 100% debt owed to World Bank, IMF and African Development Bank.

43. Evolution of Development Assistance Policy
Second High-Level Forum on aid effectiveness results in Paris Declaration on aid effectiveness: becomes a blueprint for donors and recipients.
Principles of ownership, alignment, harmonization, managing for results and mutual accountability.

44. Evolution of Development Assistance Policy
Third High-Level Forum on aid effectiveness in Accra, Ghana in 2008: proposed four main areas for improvement, namely, ownership, inclusive partnerships, delivering results and capacity development.
Attended by private foundations and CSOs.
Second Financing for Development Conference held in Doha in 2008.

45. Evolution of Development Assistance Policy
Fourth High-Level Forum on aid effectiveness in Busan, South Korea, in 2011.
Participation of even more actors, namely the private sector and non-DAC donors.
Busan Partnership for Effective Development Cooperation
Four principles for achieving effective development: ownership, focus on results, inclusive development partnerships, and transparency and accountability.

46. Evolution of Development Assistance Policy
Busan Partnership (con’td): ‘development cooperation’ instead of ‘aid effectiveness’ – aid as a complement to other sources of development financing.
Global Partnership for Effective Development Cooperation established in 2012.
Like the Paris Declaration, it has a monitoring framework.

47. Evolution of Development Assistance Policy
2015: Third Financing for Development Conference held in Addis Ababa.
Reaffirmed aid target commitments: 0.7% and % of ODA/GNI to LDCs.

48. Evolution of Development Assistance Policy
2015: Adoption of 2030 Agenda for sustainable development and the Sustainable Development Goals (SDGs).
17 goals and 169 targets.
A much broader and ambitious agenda than the MDGs, and that aid alone cannot meet.

49. Aid Allocation The Economics of International Assistance
Shortage of capital was traditionally recognized as an important constraint to development.
Domestic saving rate did not provide enough investment for a certain “target” growth rate.
Foreign aid needed to bridge the gap between investment and savings (i.e. savings gap).

50. Aid Allocation The Economics of International Assistance
The economic rationale for foreign aid comes from the so-called two-gap models (McKinnon, 1964; Chenery and Strout, 1966).
Countries are faced with either a shortage of domestic savings for investment (a savings gap) or a shortage of foreign exchange to pay for imports of capital and intermediate goods necessary for growth.
At any moment, one of these gaps will be binding, and the model implies that countries need foreign savings (aid) to fill these gaps.

51. Aid Allocation The Economics of International Assistance
Simple one-gap Harrod-Domar growth model:
𝑔 𝑌 = 𝑠 𝑣
where g is growth of income, s is the savings rate and v is the capital-output ratio.

52. Aid Allocation
The Economics of International Assistance: numerical example from Clemens and Moss (2005):
Suppose $4 of capital is required for $1 of output (i.e. v = 4). If the required growth rate is 5% and output is $100m, how much aid is required when domestic savings are $15m?
If growth rate is 5%, then we also need a 5% growth in capital.
Since output is $100m, then capital $400m.
Growth in capital = 5% * 400 = $20m
Aid = $20m - $15m = $5m

53. Aid Allocation The Economics of International Assistance
Criticisms of model:
Model is unrealistic. Constant v and underlying stock of unemployed labor resources are not good assumptions for a growth model. There is no limit on how much an economy could grow – all that is needed is continued investment.
In the context of aid, the main problem is the relationship between aid and investment. In a model where agents optimize, why should aid go into investment?
If agents behave rationally and smoothen consumption, they will consume part of aid and invest part of it.

54. Aid Allocation
There is no such thing as a centralized system to allocate aid by matching what is given with what is needed.
In donor countries, these decisions are made by parliaments annually (sometimes over 2-4 year spending frameworks).
Decisions by donors are largely independent of each other.
For some modalities (SWAps) there is coordination.

55. Aid Allocation
Aid is given for many reasons: emergency situations (solidarity); development (growth & poverty reduction); promote political and strategic interests of donors; promote commercial interests of donors; historical ties.
More recently: global public goods/reduce global public bads; human rights.
Most donors use a “mixed strategy”, namely “altruism, solidarity, poverty, need” vs. different types of self-interest.

56. Aid Allocation Summary of donor motivations: Humanitarian Ethical
Developmental: fill gaps
Commercial
Political/Strategic
Former colonies
Commonwealth and Francophonie
Cold War Politics

57. Aid Allocation
Alesina and Dollar (2000): political and strategic factors are important determinants of aid allocation.
‘UN friend’, openness to trade, colonial past.
Berthelemy and Tichit (2002): bias towards former colonies has declined since the end of the Cold War and donors are increasingly rewarding good policy outcomes since 1990.

58. Aid Allocation
Schraeder et al. (1998): examine aid policies of France, Japan, Sweden and the US toward Africa.
Find that strategic and ideological factors are more important than altruism.
The distinction between developmental and non- developmental factors is not always easy.
Geopolitical factors lead countries to allocate more aid to very poor countries.

59. Aid Allocation Bilateral vs. Multilateral aid allocation:
Specific criteria e.g. Canada’s ODA Accountability Act
“Canadian official development assistance abroad is provided with a central focus on poverty reduction and in a manner that is consistent with Canadian values, Canadian foreign policy, the principles of the Paris Declaration on Aid Effectiveness of March 2, 2005, sustainable development and democracy promotion and that promotes international human rights standards.”
World Bank CPIA, also known as IDA Resource Allocation Index.

60. Aid Allocation Bilateral vs. Multilateral aid allocation:
African Development Fund: uses Performance-Based Allocation (PBA) system to allocate resources.
PBA considers both the performance and need of recipients.

61. Aid Allocation
Increasing emphasis on performance (that is, selectivity) vs. Cold War Politics and corruption (e.g. Mobutu).
Increase in democracy aid to sub-Saharan Africa (Resnick, 2015).
Progress on untying of aid (Clay et al. 2009) in the case of Burkina Faso, Ghana, South Africa and Zambia – contributes to ownership, alignment.

62. Aid Effectiveness What can aid accomplish (in theory)? The Positives
Humanitarian assistance and reconstruction; saving lives.
Fill financial and knowledge gaps; capacity building.
Catalyze long-term growth and development through various channels.
Investment.
Economic reform.
Political and institutional reform.
Build trade capacity (aid for trade).

63. Aid Effectiveness What can aid accomplish (in theory)? The Negatives
Supporting corrupt regimes.
Culture of dependency.
Donor vs. recipient priorities; too much donor influence.
Tied aid.
Fungibility.
Volatility.
Delay reforms (e.g. tax collection).
Exchange rate appreciation (Dutch disease).

64. Aid Effectiveness
Consensus since early 2000s: aid must be delivered more effectively and is not simply about quantity.
Various ways to measure aid effectiveness:
Project evaluations
Macro studies of impact of aid on growth
Processes of aid delivery (Paris Declaration principles and indicators)
Randomized-controlled trials (RCTs)

65. Aid Effectiveness Data issues and methodological problems
Private aid and emerging donors.
Many macro studies do not differentiate between types of aid.
Project evaluation:
Systematic evaluation; assessment of long-term cumulative and systemic impacts; baseline data; independence of evaluators; attribution problem.
RCTs: causal mechanisms and external validity.

66. Aid Effectiveness Macro aid effectiveness
Cross-country analyses have yielded contradictory findings, both generally, and in the case of Africa specifically.
For example:
Gomanee et al. (2005): aid and growth in 25 sub-Saharan African countries from 1970 to 1997 – aid not effective enough.
Loxley and Sackey (2008): aid and growth in 40 African countries (36 in SSA) from 1973 to 2004: aid has a statistically significant and positive impact on growth.

67. Aid Effectiveness Why aid does not work? Aid fungibility.
Consumption vs. investment.
Corrupt regimes; countries with poor policies.
Absorptive capacity and diminishing returns to aid.
Aid volatility.
Weakens tax collection and the fiscal pact.
Exchange rate appreciation.

68. Aid Effectiveness Aid modalities:
Project evaluations show better results (micro-macro paradox).
We examine projects evaluated by the Independent Evaluation Group of the World Bank:
More than 70% of projects in urban development, social protection, transport and poverty reduction are moderately satisfactory or better.
In the case of public sector governance, agriculture and rural development, less than 55% are moderately satisfactory or better.
Programme-Based Approaches (PBAs): attribution and causality are difficult to ascertain.

69. Conclusion
When it comes to foreign aid or development assistant, we know a lot more about what works and what does not work.
Both quantity and quality of aid matter.
Aid focused on poverty reduction (needs of recipients).
New and differentiated approaches (e.g. grants vs. loans, cash on delivery, conditional and unconditional cash transfers.)

70. Conclusion
As the number of low-income countries in Africa decreases, the new middle-income countries will be in a better position to mobilize more resources domestically.
Increasingly, aid will focus on FCAS and global public goods.

71. Conclusion
Aid is not a panacea for Africa’s development but it is necessary and can play an important role.
The aid landscape has changed a lot in the last few years and one important change has been the emergence of new actors such as China, which we will examine next week.