Chapter 1 Introduction
- Matthew Gaertner, Laure Redifer, Pedro Conceição, Rafael Portillo, Luis-Felipe Zanna, Jan Gottschalk, Andrew Berg, Ayodele Odusola, Brett House, and José Saúl Lizondo
- Published Date:
- March 2012
Much of sub-Saharan Africa (SSA) has grown strongly in recent years. Since about 1995, and for the first time in decades, low-income countries (LICs) in the region have been growing faster, on average, than developed countries and some other regions of the world (Figure 1.1). Many of these countries have also made great strides toward achieving the Millennium Development Goals (MDGs). Progress on reducing poverty and other MDG targets has been rapid since the late 1990s. The share of people living in extreme poverty (on less than US$1.25 a day in purchasing power parity terms) increased slightly in the 1990s, peaking at more than 58 percent in 1999, but dropped to 51 percent in 2005. The Human Development Index (HDI) for Africa confirms the remarkable progress since 2000. In 1990, the HDI for Africa stood at 0.35. By 2000, it had deteriorated to 0.32. In 2010 it reached 0.40. This corresponds to an average annual rate of improvement in the HDI in Africa of more than 2 percent between 2000 and 2010, by far the most rapid compared with other regions over the last 10 years.
Figure 1.1.Sub-Saharan Africa Is Catching Up to Developed Regions
Source: World Economic Outlook database.
Although the food price shock of 2008 and the global recession of 2008–09 hit the SSA region hard, growth in 2009 for the average country in this region was better than it was, on average, from 1980 through 1995. Assuming the global economy continues to recover, prospects for the coming years are good, and most of the region is expected to bounce back fairly well.4
Despite rapid development progress in the last 10 years, the HDI remains too low and the gains too uneven, both within and across countries. Many countries remain mired in persistent poverty, and even in the most successful countries, progress has been unequal. For instance, Ghana and Uganda have had rapid rates of poverty reduction, but their 2010 MDG reports affirmed that large regional, occupational, and gender disparities remain.5
Both the successes and the failures of growth and development reflect many factors, including domestic policies. Success requires macroeconomic and political stability combined with prodevelopment structural policies and improved governance. Policies have improved in recent years in many SSA countries and—along with higher aid—have already yielded important gains. But this policy achievement needs to be deepened within even the most successful cases and broadened to the rest.
The international community can contribute to future success by living up to its aid commitments and providing more coordination in aid delivery. Scaling up aid is critical to helping SSA countries achieve the MDGs by 2015. But aid also needs to become more predictable so that African countries can implement sustained national development programs for reaching these goals. Similarly, collaboration among development partners operating in Africa must be enhanced to bolster aid efficiency.
This report analyzes the implications of scaling up aid to Africa in line with international commitments and in support of national development strategies. The 10 pilot cases (Benin, the Central African Republic, Ghana, Liberia, Niger, Rwanda, Tanzania, Togo, Sierra Leone, and Zambia) were selected by the MDG Africa Steering Group, in consultation with national authorities.6
The goal was to support the governments in preparing scenarios outlining how they could implement existing national development plans if additional resources were made available to double aid to Africa to US$50 billion.7 The studies were done in 2008–09, and this consolidation was undertaken in 2011. Although some of the “projections” discussed in the specific case studies are now in the past, the underlying messages of the case studies remain relevant.
The case studies investigate the impact of raising aid to $85 per capita in each country (in 2004 prices).8 This amount corresponds to the average aid per capita in SSA if the $50 billion Gleneagles commitments were met.9 The equal per capita allocation is a simplifying assumption that was judged to be a better benchmark than other alternatives.
The contribution of the report derives from the collaboration of country authorities, the UNDP, and IMF staff in developing the country studies using a common framework. The report looks at what each of the 10 countries might do at the sectoral level if aid were available on the scale committed to by the Group of Eight (G-8) in 2005 at the Gleneagles summit. It also looks at the macroeconomic implications of scaling up development assistance on growth, inflation, the real exchange rate, and other macroeconomic indicators. The goal is to ensure that scaled-up development assistance can be delivered in a manner consistent with macroeconomic stability. Macroeconomic analysis is only one step toward the ultimate objective—achievement of the MDGs—but looking at specific MDG outcomes is beyond the scope of this paper.
Both micro- and macroeconomic analyses are necessary to ensure that projects and policies are identified to accelerate MDG progress. The critical question at the project level is whether the additional aid will educate more people, deliver more critical health services, and build much-needed infrastructure. The key macroeconomic questions are, will public investment stimulate private sector activity? Will economy-wide effects such as higher inflation and real exchange rate appreciation—“Dutch disease”—cause unintended negative consequences? How can these effects best be managed?
The micro- and macroeconomic analyses are also interrelated. Project-by-project analysis can predict great promise, but if the projects that flow from such analysis in aggregate impede private investment or shrink productivity growth in the export sector, overall outcomes will disappoint. Similarly, macroeconomic projections need to rely on sectoral and project-level assumptions, notably about the ability of the country to execute well-designed projects successfully.
The report is intentionally long on forward-looking analysis and short on ex post assessments. It does not reopen the debate about the average effectiveness of aid in a large sample of countries and time periods, nor does it reexamine the wealth of microeconomic studies that appraise specific types of projects or interventions. The focus, instead, is on aggregating and analyzing the plausible effects of well-executed plans for scaled-up aid and development efforts. It is hoped that this analysis will illustrate what is possible with determined efforts by donors to fulfill aid commitments and by recipients to craft careful development plans and implement them in the context of supportive macroeconomic policies. In the future, systematic assessment of what has worked and why will remain important.
As a result of the global financial crisis, the international environment has become somewhat less favorable for LICs. At the same time, donors face sharply increased budget challenges of their own, making their commitments more challenging, though no less important. In this environment, attention has turned to nonconcessional finance for public investment in LICs. The relative merit of such funding is beyond the scope of this report, except with regard to two important points. First, many of the conclusions about the need for scaled-up public investment and the requirements for it to succeed apply equally well to investment financed by nonconcessional lending. Second, however, debt-led scaling up raises a host of additional issues, such as the fiscal challenges of financing even very productive projects and the risk of a return to debt distress that could undermine the achievements of the Heavily Indebted Poor Countries process and the Multilateral Debt Relief Initiative. In sum, higher nonconcessional lending is at best a very risky and imperfect substitute for more aid.
The main conclusions of the report are
- A further increase in aid is still necessary to meet the Gleneagles commitments. Although aid to SSA has risen in recent years, it remains well below the goals set in 2005.
- Existing development plans are underfunded across the pilot countries, and fulfillment of the Gleneagles commitments would go a long way toward closing these gaps.
- Existing development plans could be used effectively to shape the spending of increased aid. Such plans generally integrate public investment programs for the use of additional aid with the following: (i) MDG-based development priorities, which are drawn from countries’ Poverty Reduction Strategy Papers (PRSPs); and (ii) multiyear budgets, which are based on Medium-Term Expenditure Frameworks. This approach ensures consistency with existing spending plans, domestic revenue efforts, and nonconcessional borrowing, where such borrowing is available.
- Scaled-up aid will be most efficient if it is well integrated with recipient budget and implementation systems. It is also important that recipient countries emphasize continued improvements in public financial management and complementary mobilization of domestic resources in line with their potential.
- The sectoral focus of existing national development plans is on infrastructure and human development, both critical to meeting the MDGs.
- The macroeconomic analysis conducted here suggests that scaling up to meet the Gleneagles commitments can have a substantial positive influence on growth, as long as the projects are well designed and well implemented.
- Macroeconomic management needs to avoid counteracting the benefits of aid, while still preserving overall macroeconomic stability. Aid, if sufficiently concessional, allows scaled-up spending along with minimized risks to debt sustainability. Some temporary real exchange rate appreciation—through inflation in a pegged exchange rate regime—and temporary adjustment in the size of tradables compared with nontradables sectors can be expected. The duration of this adjustment varies, but in some cases could be years.
- Over the longer term, the extent to which growth is enhanced by scaled-up spending depends critically on the volume, efficiency, effectiveness, and sectoral allocation of public investment. Much MDGs-related spending likely has to take place in the nontradables sector. However, if the tradables sector is an especially strong driver of productivity growth, the stakes are higher for the effective use of aid. If aid helps build public capital and raises productivity in the tradables sector, aid can produce even greater gains in overall growth, causing “Dutch vigor.” If aid is wasted, however, the diversion of scarce resources from the tradables sector could reduce productivity growth over time, causing “Dutch disease.” The key is to use aid well, and, if the role of the tradables sector in productivity growth is deemed especially strong, devote more aid to promoting that sector by investing in, for example, ports, roads, and electric power.
The paper is organized as follows. Chapter 2 reviews the evolution of aid in recent years and compares it with commitments. Chapter 3 describes the sectoral and microeconomic foundations of the pilot studies. Chapter 4 presents the macroeconomic implications of scaling up aid and spending as outlined in Chapter 3, discusses some of the policy challenges implied, and provides a synthesis of the insights from the 10 country case studies. The Appendix, at the end of the paper, summarizes each of the country studies.