Foreign Economic Aid: Is It Essential For Sub-Saharan Africa’s Development

Introduction

Certainly, if poverty is the business from which you earn, more poverty means more business for you. This explains why if any effort to stop aid was to emerge, it would find the strongest resistance not from local people but from the NGO officials and from donor nations. Let us still flashback to 1957, where Hubert Humphrey the 38th Vice President of the USA advised USA that in order to extend her influence and control foreign nations, food aid is the key tool to be utilized.He explained that when one depends on you for food, you can influence him politically, religiously, socially and above all economically.

Furthermore, back in 1964 where a senator of the USA McCoven replied to his citizens who were complaining as to why a lot of money leaves their nations as aid to Africa as if there are no needy persons in US.MacCoven comforted them by informing them that the nations we aid today, tomorrow will be our consumers.This is very much seen even today, for instance when money comes as aid to buy drugs for treating HIV or TB or any other disease, it just passes through the hands of the recipient country and returns to the donor nation since it is the producer of that drugs.Yet it leaves the recipient nation with a lot of interest to pay. To pay that interest that country has to cut the government’s funds from hospitals, schools, lays off civil workers, salary reductions, increase taxes etc. See how aid that we hope to solve our problems simply multiplies them (Mutyaba, 2015).

Aid is assistance given by governments and other agencies for the purpose of tackling a particular problem. 500 billion dollars were pumped into Africa between 1960 and 1997 as aid. In July 2005, Tony Blair made aid for Africa a centerpiece of presidency of the G8 meeting in Scotland. President George Bush too tripled aid for Africa to $43 billion in 2001. Even Japan favored a $200 million to improve Africa’s investment climate yet we are still as we were or even worse off. We would argue that aid is causing more problems because it makes us dependent (Mutyaba, 2015).

Is foreign economic aid essential for Sub-Saharan Africa’s development? I am tempted to argue that aid is disastrous for Africa, especially Sub-Saharan Africa. Failure of foreign economic aid has both internal and external factors.

Aid in Sub-Saharan Africa

The Marshall plan provided more than 13 billion dollars for the purpose of reviving European economies and stabilizing their political structures. The Marshal Plan also known as the European Recovery Program (ERP) recorded an historical success by reviving the devastated European economies and raising the Western European GNP by 25%. What drove policy makers to design foreign aid policies? This question takes us to the heart of the realist view of national security. Realists would argue that states, as the primary unit of analysis, act on the basis of self-interest, and, due to an anarchical state in the realm of international politics, nations seek to maximize their power in order to attain their national security and promote their values and economic welfare.

In light of this, it is apparent that the Marshall plan was clearly consistent with the realist approach. The plan was designed to overcome the Soviet Union’s threat of the spread of Communism in Eastern Europe and beyond; it was thus, a policy consisting of containing Communism by preventing its progression in Western Europe and in the rest of the world. It was also engineered to boost the American economy because the recipient countries were bound to purchase their goods and services in the United States. In either case, aid was designed to promote the donor’s national interests.

Over the past 50 years, Sub Saharan Africa has received over 500 billion Dollars in foreign aid from the OECD, Arab countries, China, the International Monetary Fund and the World Bank. Yet, the region continues to struggle in a vast ocean of extreme poverty with high rates of unemployment, illiteracy, infant mortality, poor nutrition, poor healthcare, infrastructure.. This heartbreaking paradox brings us to ponder: why foreign aid fails to promote economic growth and development in Sub-Saharan Africa. We will attempt to explore the internal and external factors which have culminated in the failure of foreign aid and what other financial alternatives we can explore to advance our development (Diakhate, 2012).

There is criticism that donors may give with one hand, through large amounts of development aid, yet take away with the other, through strict trade or migration policies, or by getting a foothold for foreign corporations.

If the large commitment of resources to rebuild the devastated European economies has been successful, such has not been the case for Sub-Saharan Africa. Thompson Ayodole, executive director of the Initiative for Public Policy Analysis argued that ‘Helping Africa is a noble cause, but the campaign has become a theater of the absurd, the blind leading the clueless. The record of Western aid to Africa is one of abysmal failure. More than 500 billion dollars in foreign aid – the equivalent of four Marshall Aid plans was pumped into Africa between 1960 and 1997. Instead of increasing development, aid has created dependence.’ This argument implicitly points the finger at both, the blind and the clueless, representing respectively the donors and the recipients of aid, as having shared responsibility in the failure of foreign aid to promote development and growth in Africa.

The Donors

Aid Dependence

Both Europeans and Africans came to the conclusion that foreign aid has created a vicious cycle of dependence. According to Deborah Brautigam, “Aid dependence can be defined as a situation in which a country cannot perform many of the core functions of government, such as operations and maintenance, or the delivery of basic public services, without foreign aid funding and expertise.” Soft budget constraint syndrome occurs whenever an organization spends more than its revenues and relies on external subsidies to offset its expenditures and balance its budget. These bailouts allow failed states to continue the same practices that cause them to fail in the first place.

By making additional resources available, foreign aid encourages greater spending. Rather than supplementing domestic saving, it simply replaces it. Moyo states for this reason that “As foreign aid comes in, domestic savings decline; that is, investment falls. This is not to give the impression that a whole population is awash with aid money, as it only reaches relatively few, very select hands. With all the tempting aid monies can offer, which are notoriously fungible, the few spend it on consumer goods, instead of saving the cash. As savings decline, local banks have less money to lend for domestic investment. Economic studies confirm this hypothesis, finding that increases in foreign aid are correlated with declining domestic savings rates.”

Tied Aid

It has been noted that aid is more strategically designed to meet the donors’ economic and political goals because of the donor’s conditionality. There is a correlation linking foreign assistance and recipient countries export. The argument behind this correlation shows that aid is used to give an edge to donor countries that ship their goods to aid recipient countries.

This form of aid is known as ‘tied aid.’ Tied aid consists of attaching strings to the financial assistance package for the benefit of the aid provider who requires the aid beneficiary to buy noncompetitive goods from the donor country. This practice helps boost the donors’ exports and makes aid more costly for the recipients. The value of the aid is substantially reduced;subsequently, the donors’ conditionality becomes detrimental to the recipient countries’ ability to formulate adequately their own trade policy.

Preconceived Generalizations/ Misconception of Africa

Dr. William Easterly argues that “the response of the West to Africa’s tragedy has been constant throughout the years, from economist Walt Rostow and John F. Kennedy in 1960 to economist Jeffrey Sachs and Tony Blair in 2005: give more aid. Walt Rostow, motivated by acceleration of the Cold War, called for doubling foreign aid in 1960; World Bank President, McNamara called for doubling of aid in 1973: the World Bank again called for doubling of aid with the end of the Cold War in 1990. World Bank President Wolfensohn called for doubling aid with the beginning of the terrorist wars in 2001. As just noted, G-8 Summit in July 2005 agreed to double aid to Africa. Aid to Africa did rise steadily throughout this period (tripling as a percent of African GDP from the 1970s to 1990s), but African growth remained stuck at zero percent per capita.” As we can see, the result does not match all the efforts deployed by the West to overcome poverty in Sub-Saharan Africa. Easterly concludes…Either the various views of the roots of poverty in Africa were too simplistic, or the attempts to change these root causes underestimated the difficulty of doing so from the outside, or both. The recipient countries, overwhelmingly, carry a fair share of the burden.

On the part of the recipient countries, instability is a major roadblock to development. Peace and development go hand in hand. Stability is a prerequisite condition for development and long-lasting prosperity. Unfortunately, the continent of Africa, from Cairo to the Cape, has witnessed all types of conflicts.

Poor leadership and corruption although ironically unfortunate seem to be the most relevant trait to determine who should be a head of state or a government official in Sub-Saharan Africa. This has hampered the impact of economic aid.

Financial Alternatives

Dambisa Moyo gave more reliable and more effective alternatives that if implemented will aid our development. Moyo noted two reasons why we need financial alternatives to aid, these are: i) Donors are growing weary because maybe they do not think aid works or their aid purse is shrinking. Aid has been on the decline for the past 20 years. ii) Donor countries are facing their own financial problems. Bush’s war on terror cost the US over $3 trillion coupled with a decrease in their productive young, increase in health costs, lower tax revenues, hence there is less to give away. Furthermore, the 2008 financial crisis confirmed how reliably unreliable aid is.

However, Moyo is not naïve because she recognizes the fact that aid cannot just drop to zero in a day so she proposes a gradual but certain elimination of aid in 5-10 years. We will look at these alternatives one after the other.

Bonds

Bonds are interest bearing certificates sold by corporations and governments to raise money for expansion or capital. Bonds are effectively loans or IOUs (I owe you) but they differ from aid in 3 ways: i) Interest on aid lower than interest on bonds but most times aid turns out to be more costly if we consider all the negative impacts in ultimately has. ii) Aid loans are paid over longer periods; WB loans can take up to 50 years while bonds last between 10 to 30 years. iii) Aid terms are much more lenient than those of bonds in case of default.

However, first the country or corporation needs to acquire a rating from one or more of the rating agencies like Moody’s Investor’s Service because they guide investors on the risks involved in lending to a particular country.

Second, the country needs to woo potential investors as to why they lend them money.

Third and final stage they agree terms and interest rates and then the country gets its cash with no strings attached. Even when bonds issued rose to $1.5 trillion, only $10 million was from Africa.

However, Moyo also suggested that Africa can develop local bond markets with our local currencies. The WB in 2007 launched the Global Bond (GEMLOC) program to allow local and global investments to flow into local currency bond markets

Foreign Direct Investment (FDI) can drive economic growth because it brings in cash, creates jobs, aids in technology transfer, equip local firms to open up to international markets and it improves expertise through competition. This in turn improves the standard of living. We attract less than 1% of global capital flows. In theory, capital should flow from rich to poor countries because it is cheaper to produce same quality products in poor countries than in rich ones. SSA lags behind in FDI because of rampant corruption, unnecessary bureaucracy, stringent laws, high taxes which makes business a nightmare. Poor infrastructure, transport, and power lead to high production costs which are not good for business.

Conclusion

Aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth. (Moyo, 2009)

The evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the whims of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa’s population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster.Even after the very aggressive debt-relief campaigns in the 1990s, African countries still pay close to $20 billion in debt repayments per annum, a stark reminder that aid is not free. In order to keep the system going, debt is repaid at the expense of African education and health care.

References

1. Ayodele, Nolutshung, Sunwabe, T. (2005, September 14). African Perspectives on Aid: Foreign Assistance Will Not Pull Africa Out of Poverty. Retrieved from https://www.cato.org/publications/economic-development-bulletin/african-perspectives-aid-foreign-assistance-will-not-pull-africa-out-poverty
2. Diakhate,B. (2012). Why Foreign Aid Fails to Promote Economic Growth in Sub-Saharan Africa? Available at https://www.seneweb.com/blogs/badoza/why-foreign-aid-fails-to-promote-economic-growth-in-sub-saharan-africa_b_6.html [Accessed 24 February, 2020].
3. Mutyaba E. (2015). Can Foreign Aid Be the Solution to Africa’s Problems? New Vision printing. Available https://www.newvision.co.ug/new_vision/news/1329450/foreign-aid-solution-africa [Accessed 24 February, 2020].
4. Manning, R. (2012). Aid as a Second-Best Solution: Seven Problems of Effectiveness and How to Tackle Them. Available at http://recom.wider.unu.edu/article/second-best-solution-seven-problems-aid-effectiveness [Accessed 2 March, 2020].
5. Moyo, D. (2009). Dead Aid: Why Aid Is Not Working And How There Is A Better Way For Africa. United States of America: Penguin Books.
6. Moyo, D. (2009).Why Foreign Aid Is Hurting Africa. Wall Street Journal. Available at https://pols306.files.wordpress.com/2011/08/moyo-on-aid-in-africa-wsj.pdf [Accessed 3 March, 2020].