A Need for a Massive Aid Program for Africa

Surely, wouldn’t a massive infusion of aid into Africa be pouring money down a rat hole? Isn't this the mistake that was made in the past–enormous generosity by the rich countries only to see it wasted on misconceived projects, bad economic management, or siphoned away into war and corruption, as is evident in Zimbabwe, Congo, and Somalia right now?

The rat hole is one view, whereas an equally plausible argument is that they more are fiscally responsible than they did a decade ago. They have good macro-economic management and low inflation rates and have set up management systems that would use the money better than in the past.

Before COVID-19, most of Africa was doing reasonably well. But now it is being hit by the fallout from the virus and the subsequent downturn in the economies of the rich world as supply chains struggle with the aftermath, the anticipated recession in the West and the fallout from the war in Ukraine.

 Last month the International Monetary Fund held a gloomy press conference on Africa’s immediate prospects. They said, “We expect growth to slow sharply this year from 4.7% in 2021 to 3.6% this year as the worldwide slowdowns, tighter global financial conditions, and volatile commodity prices spill into a region already wary from a prolonged pandemic.”

 This is the moment not to tell Africa to tighten its belt but rather to give Africa a big new push. If the money can be found to purchase expensive weapons for Ukraine, then certainly it could be found for Africa. The question is not so much of the Western countries not having money to give, but political willingness. The IMF has made it clear that the matter is urgent and involves far more people than are being hurt in Ukraine:

 “Many countries find themselves being pushed close to the edge. The most recent turmoil is just the latest in a series of shocks over the past few years, all of which have taken a toll on the region's policy space. Rising food and energy prices are striking at the region's most vulnerable. Public debt has reached almost 60 percent of GDP, leaving the region with debt levels last seen in the early 2000's. In fact, 19 of the region's 35 low-income countries are now at high risk of debt distress or in debt distress, and inflation rates have accelerated to levels not seen in about 15 years”.

However, other voices wonder whether African recipients are really going to be organized well enough to use a new round of relief to build up education and health programs for the poorest sectors of society when the Islamic militants are tearing apart good governance in Somalia, Mali, and the Central African Republic? Look at the corruption in Zimbabwe, Congo, and South Africa and the messy politics, local uprisings, the misuse of oil wealth and corruption in Africa’s largest country, Nigeria or the Ethiopians having got their economy going–faster than anywhere else in the world­–have slipped back into civil war. Thus, they conclude that Africans can’t hack it.

I wager that 90% of Europeans and Americans don’t realize quite how big Africa is. In fact, China, India, Europe, and the US could all fit inside Africa. Africa is huge and contains an enormous variety of different set-ups. It is a question of finding the many parts that are well run and doing well and helping them. Take Nigeria. Last month the Financial Times made a special 3-page report on Nigeria’s mushrooming IT sector. It made for an astonishing read. Parts of the private sector in Nigeria are literally humming along.

A group of economists, working under the aegis of the much-underrated United Nations Conference on Trade and Development, have stuck their necks out, arguing that "doubling the current amount of aid to give a big push to African economies today could end their aid dependence within a decade". This, they say, "would sustain rapid growth for a sufficiently long period and allow domestic savings and external private flows to gradually replace foreign aid".

Now, African countries face stagnating or falling aid from abroad. At the same time private capital flows have also dried up, despite all the many reforms to liberalize their economies and make them more attractive to foreign investors. African countries, like their Asian counterparts, have experienced great volatility in investment flows, though without attracting the same attention of the international community since Africa's capacity to upset the world financial system is zero.

Yet it is only 30 to 40 years ago that these Asian countries that now have the power to unsettle markets in London or New York had as little clout as Africa has today. Their experience of high-powered growth over two generations suggests that if in Africa national income could be raised by around 6% a year and sustained for a decade or so then private capital would be attracted in sufficient amounts to make aid much less necessary. Often overlooked is that in the early 1970s some African countries experienced increases in investment and growth at rates faster than in some of the East Asian countries. Only two countries, Botswana, and Mauritius, have shown what the rest of Africa might have achieved with more sensible policies and better government to become middle-income countries as they did.

Two important things are known about private investment. First, it follows behind growth rather than leads it. Second, an increase in lending by the World Bank and the International Monetary Fund, is a catalyst for private capital inflows. This, in a nutshell, is the argument for more aid.

Of course, a greater injection of aid will be translated into rapid growth only if the aid is used for imports necessary to increase productive capacity and is not used for financing capital outflows or building up excess reserves, as happened in the past. Much aid has simply gone in trying to compensate for the resulting losses and there has been not much left over for developing sustained growth. However, the effort in the late 1990s to "squeeze Africa into shape" by pushing it to follow International Monetary Fund-prescribed "structural adjustment" did not markedly improved Africa's predicament. In fact, it caused a lot more suffering. By encouraging countries to rely on market forces the IMF ignored shortcomings in markets, institutions, and infrastructure.

When the state was withdrawn from economic activity often enough private enterprise did not move in to take its place. Incentives may have been generated but then there was little response from would-be entrepreneurs for want of physical and human infrastructure. It is too often overlooked, when evaluating the success of the Asian "Tigers", that the Asian governments pushed hard with direct intervention to encourage savings and to accelerate capital accumulation.

Therefore, what is needed now in Africa is a judicious combination of a BIG PUSH in external aid and a reorientation of domestic policies away from the mistakes of the past. Both market institutions and state institutions must be encouraged. Then Africa will have a chance of triggering a virtuous circle of rising national savings, investment, and faster growth. There is no good reason why Africa shouldn’t emulate Asia.

At the weekend, the protagonists in Ethiopia’s civil war made a peace deal. There’s no reason why the country cannot quickly return to its annual growth rates of 10% a year. And if Ethiopia can do it, then most of the rest of Africa should be able to do it too. But the continent does need that aid.

Copyright © 2022 By JONATHAN POWER