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Reframing the economic rationale of African foreign aid

 Analogy with the gambler—will pity/charity help him?  The media coverage is appealing to empathy, call for

money to relieve poverty

 International community-responsible for decreasing the

income gap between rich and poor,-=capital inflows towards developing countries

 Sporadic cases of success from foreign aid-=generalized,

overestimating results -=more money involved

 $600 billion so far from the West to Africa, approximately

$50 billion of international assistance each year flow in the country

 How is Africa today? Still famine, hunger, disease, illiteracy

and conflict.

 Where has all the money gone? Wasted? Or where them

not enough to uplift the Africans’ conditions?

 More aid, less aid, or none at all?  Why don’t the academics and policy-makers agree?

 There is evidence of ineffective foreign assistance  Poverty reduction remains the main criteria that qualifies Africa for


 Is aid equalized to charity?  Are good intentions turned into bad outcomes?  Is the aid sustained by any economic rationale? Or is it a political and

social perception of the concept?

 What does this mean for the future economic situation of Africa, and

what needs to be changed?

 Jeffrey Sachs/ Bono school of thought--Aid

Cheerleaders, More Aid! Sachs: “The end of poverty” and “Common wealth” Increasing aid will decrease extreme poverty by 2025 UN MDGs-assumes that aid is growth promoting “Gap theory”—aid promotes growth , augments the foreign exchange needed in production in aiddependent ventures (Chenery and Strout)

 Burnside and Dollar (1997)—correlation between aid

and economic growth, but when aid is applied in a good policy environment (prerequisite).  Collier and Dollar(2001) aid is conditionally effective,

conditions: policy environment, governance, rate of corruption and conflict  Nathan Andrews (2009)—consideration of socio-

cultural factors in aid performance

 William Easterly(2006) “Can foreign aid buy growth?  “Foreign aid does not fill the saving-investment gap when investing

incentives are not present”  Marginal approach instead of transformational approach  Dambisa Moyo (2009) “Dead Aid” 

Samaritan’s Dilemma (Gibson, 2005)-aid reduces the incentives to invest, especially when the recipient is assured that future poverty will call for more aid

 Dutch disease (Ryan, 2005)—reduce the recipient’s country


 Riddell—obstacles at donor level as well

Why foreign aid, despite the good intentions of the donor to alleviate poverty, is resulting a distorting variable, rather than effective, in the equation of economic growth? How is foreign aid neglecting and challenging (unsuccessfully although) the economic rationale of growth? How can aid system be improved in order to increase the economic effectiveness, given the context of Africa?

ď‚— To argue that the illusion of aid as poverty reliever lacks

economic rationale, since it is sporadic and short-term focused, rather than long-term sustainability ď‚— To understand the role of the foreign aid in the equation

of economic growth and why foreign aid cannot influence directly economic growth ď‚— To reassess the aid system through disaggregation of aid

to improve its effectiveness in terms of development rather than economic growth per se.

 Deductive approach-review of the existing literature     

through critically accessing it Economic assessment (analysis) of foreign aid Assumptions; Abstract from human rights (pro humanitarian aid) Abstract from the political economy of aid (interests of the donor and recipient) Political context and institutions are relevant to the point of their capability in generating economic efficient policies (political nuances of the government are excluded)

 What do they mean by foreign aid?  How do they measure the effectiveness of an aid

program? Inputs vs. outputs? Or the process?

 Foreign aid= from humanitarian relief to budget

intervention  Effectiveness=efficiency=increase in productivity, hence increase in economic growth

 Public finances –enterprises, how aid negatively influences their


 The government is economically dependent by the citizens  Negatively impacts the relation between government and entrepreneurs (the

engines for wealth generation) or other internal sources of income generation

 Why?  Public finances are not impacted by tax collection, but by foreign aid  Low accountability to citizens (accountable to the donor)  Few incentives to invest, or trade,  The poor don’t have a voice in the policy making  The elites are getting paid by the foreign aid for their loyalty (keeps in power

clientelistic regimes)

 Supporting wrong policies and bad intentioned actors

for the sake of pity, empathy toward poverty  Aid= part of the problem, not a solution  Reducing poverty in the short term (up to the

humanitarian relief of poverty) vs. discouraging initiative in the long term?—”Poverty trap”  Who are the real actors of income generation in a country?  Aid, -the wrong medicine for the sick Africa

 Economic growth is linked with the concept of income

generation, =productivity using efficiently internal resources=innovation=creating incentives for investment

 Aid is linked with the concept of wealth, different from income,

does not contribute directly to growth, but only through investments, putting the wealth within the production frontier. Aid stimulated consumption, but not investment

 When to fill in with aid? S<I  S+Aid=Investment, but in Africa, S+Aid=consumption (political

context, patronage) -=Inflation

 Disaggregate aid and take into account its heterogeneity-

=some aid is helpful, e.g humanitarian aid, but still no impact on economic growth  Sectoral approach=microfinance—support success, punish

failure, don’t support someone just because he is poor, but support him because he is bringing something new  Spillover effect, effective results from aid in a specific

sector would provide incentives for others. (marginal approach)

 Know the internal composition of a country, internal dynamics  Consider each actor (be it economic or political actor) and

evaluate its potential

 Support the ones that show engagement, that are being

innovative ( government, private enterpreneurs, civil societywhich one is performing better? )

 Foreign aid==support incentives,  Fill the gap savings-investments, when initiatives are present,

or otherwise stimulate them.

Expected Revenue

Shs 2.5 trillion

Expected foreign aid

Shs 1.9 trillion

Recurrent expenditure

Shs 2.6 trillion

Development expenditure

Shs 1.8 trillion

Public administration

690 billion


380 billion

Agriculture (80% employed)

18 billion


374 billion


636 billion

Trade and industry

43 billion

 70 cabinet ministers  114 presidential advisors  81 units of local government  333 members of parliament  134 commissions and semi autonomous government


 The qualifications for foreign aid should not be based on

poverty reduction but on opportunity supporting

 Foreign aid cannot buy economic growth, if the political,

cultural environment is not engaged in internally producing income, rather than inefficiently distributing wealth( aid)

 Foreign aid affects private initiatives and public finance (fiscal

policy and accountability)

 Aid system needs to be reassessed, supportive of success

(productive enterprise), discouraging wrong behaviors and attitudes.

Pro aid, against pity