Prom­ises, prom­ises

IMF calls for aid as rich coun­tries fail to de­liver

Finweek English Edition - - Economic trends & analysis - GRETA STEYN

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.

SUB-SA­HA­RAN AFRICA… CAN RE­CENT GROWTH MO­MEN­TUM BE SUS­TAINED?

Source: IMF

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