IMF calls for aid as rich countries fail to deliver
THE INTERNATIONAL Monetary Fund is increasingly acknowledging that foreign development aid can boost growth in African economies. That comes at a time when there’s growing international concern that rich countries are breaking their promises made in 2005 of a massive increase in aid to poorer countries.
The IMF is regarded as the main arbiter of what’s good and bad in economic policy. Whether you agree with the institution or not, it’s an inescapable fact that the IMF’s views are taken almost as gospel by the markets. In the past, the fund hasn’t supported aid as a tool for growth.
Currently, Africa’s growth performance is impressive. However, the question to be asked is whether it can be sustained. Delivery on aid promises is one of the factors that can help African economies to continue expanding at high rates.
Soon after the rich countries made their pledges of huge increases in aid, two IMF economists in September 2005 released research that poured cold water on the idea that aid was a cure for poor countries’ economic ills. In two papers, IMF economists argued that the benefits of financial aid are dissipated over the long term.
One of the reasons put forward at the time for aid not working was that it weakened institutions by creating a culture of dependency. An example was that a country depending on aid flows could become more lax in raising tax revenues, making it more dependent on aid. If that aid wasn’t forthcoming, the beneficial effects would dissipate.
Another reason cited by the IMF researchers was that a big inflow of foreign exchange would cause developing countries’ currencies to appreciate, rendering them less competitive.
The papers created something of a furore at a time when Britain’s Chancellor of the Exchequer, Gordon Brown, was leading the charge for more aid to poor countries. In 2005, the G8 promised to increase aid to US$50bn/year by 2010.
The IMF was stung by the criticism of its research and said that the researchers’ views were not necessarily its own. Now it’s saying that a major increase in aid will help boost growth in Africa.
In the IMF’s latest World Economic Outlook it says: “Delivery on aid commitments by the advanced economies would … help sustain growth momentum and support progress toward achieving the millennium development goals.”
It’s important to note that the increase in aid is only one of many different issues that the IMF mentions for Africa’s growth momentum to be sustained. On the one
Aid from the richest 22 countries fell by 5,1% in 2006
compared with 2005 – the first decline since 1996.
hand, a strong global economy is needed, because African countries are so dependent on exporting commodities. On the other, sound economic policies need to be implemented.
The IMF says the latter includes trade liberalisation, strengthening of institutions and improving the business climate. The IMF hopes such measures will help spur private sector activity away from excessive reliance on commodities. Other issues are also mentioned.
The acknowledgement that aid is a factor is to be welcomed. However, the British non-government organisation Oxfam points out on its website that rich countries are going back on their promises. Given the failure to deliver, it’s a pity that the IMF hasn’t done more to highlight the issue.
Oxfam analyses the 2006 overseas aid figures recently published by the OECD, which show that aid from the richest 22 countries fell by 5,1% compared to 2005 – the first time that aid has fallen since 1996.
Oxfam says the figures are again massively inflated by one-off debt cancellations to Iraq and Nigeria. “While cancelling the debts of poor countries is vital in the fight against poverty, the Iraq and Nigeria debt deals are counted in a way that hugely overstates their effect on poverty and masks the true picture of aid levels,” Oxfam says. The NGO estimates that this inflation was $13bn last year.
The figures released by the OECD show that total aid provided in 2006 was $103,9bn – down from $106,8bn in 2005. Oxfam says that equates to 10% of world military spending.
While a number of countries, including Germany and France, have recorded a slight increase in aid, it’s not nearly enough to reach the targets they promised. However, Britain and Spain have bucked the trend, with 13% and 20% increases respectively. Japanese aid fell by almost 10%.
“This is deeply embarrassing to the G8, and particularly for the Germans, who are chairing this year’s summit in two months’ time. The G8 must prove its promises were more than empty rhetoric and set binding timetables that clearly show when and how it will deliver real aid increases. This should be long term, predictable aid to build strong public services, particularly in health and education,” says Oxfam’s Max Lawson.