Some cautionary notes on aid

Longtime readers of danieldrezner.com — all seven of you — are aware of my studied ambivalence about the idea that boosting foreign aid and debt relief to Africa will improve economic conditions in that area. With the Live8 concert approaching, and the One campaign being hyped by celebrities (including a certain former poli sci student from south of the border), it seems worth pointing out that there’s a big difference between wanting to help alleviate poverty and pandemics in Africa and actually doing it. It’s with that frame of mind that I came across this Financial Times story by Andrew Balls:

The International Monetary Fund has warned that governments, donors, campaigners and pop stars need to be far more modest in their claims that increased aid will solve Africa’s problems. Days before the Live-8 concerts around the world, and next week’s Group of Eight countries summit in Scotland, the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction. ?We need to be careful given the chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering,? the fund said. The research, which took into account duration, type of donor and governance record of recipient, found aid did not boost growth. This conflicts with the findings of an influential World Bank study five years ago that found aid boosted growth in countries with good policy environments. ?The basic message is that it is good that people are talking about increasing aid flows but that we have to find ways to make them more effective. ?It is not the case that all that matters is good governance,? said Raghuram Rajan, the fund?s chief economist and co-author of the reports. ?We know far less about what makes aid work than the public or governments would like. By acting like we know all the answers raises false expectations.?

Read the whole thing. Oh, and for conservatives who stress the productive role that remittances can play in fostering economic growth, be sure to click onto this IMF staff paper by Ralph Chami, Connel Fullenkamp, and Samir Jahjah. The abstract:

There is a general presumption in the literature and among policymakers that immigrant remittances play the same role in economic development as foreign direct investment and other capital flows, but this is an open question. We develop a model of remittances based on the economics of the family that implies that remittances are not profit-driven, but are compensatory transfers, and should have a negative correlation with GDP growth. This is in contrast to the positive correlation of profit-driven capital flows with GDP growth. We test this implication of our model using a new panel data set on remittances and find a robust negative correlation between remittances and GDP growth. This indicates that remittances may not be intended to serve as a source of capital for economic development.

[So you’re saying the situation is hopeless–ed.] Nope. The FT story goes on to observe:

Separately, the World Bank highlighted improving recent economic performance in Africa. The bank’s African Development Indicators showed that since 1995 growth in sub-Saharan Africa has averaged 3.3 per cent per year, compared with 1.7 per cent in the previous decade. John Page, World Bank chief Africa economist, said: ?There is a happy coincidence of the high level of political attention on Africa and more evidence in the data to support hopes of a turning point in Africa now than there has been in the past 20 years.? Mr Page pointed to greater differentiation in the data. While a number of African countries continue to struggle, 15 countries have grown on average by more than 5 per cent a year over the past decade, including Botswana, Burkina Faso, Ghana, Uganda and Tanzania. The spread of democracy, the willingness of African governments to take responsibility for promoting growth and development, and reduced impediments to private-sector led growth, and some evidence of better natural resource management has supported growth, the bank said. ?It?s a much more varied picture, it?s not all doom and gloom any longer. Where there has been robust growth there has been poverty reduction and improvements in social indicators,? Mr Page said. ?The turnaround story is the most important thing that emerges from the data.?

Click here for the World Bank’s press release on its latest Africa report.