Foreign aid can strengthen governments.
May 1, 2008
With Responses From
Foreign aid can strengthen governments.
The soft winds of the Indian Ocean and the view from the cliffs overlooking Maputo would be enough to make anyone fall in love with southern Africa. But my trip to Mozambique in 2001 (and my subsequent work there) did much more than that—it made me an optimist about Africa. Peace, democracy, market-friendly policies, and investment and trade with South Africa had already led to nine years of impressive growth. The prospects for the future looked even better—much of Mozambique’s official debt was about to be cancelled, foreign investment was flooding in, and export projections were spectacular. As of writing, Mozambique has enjoyed fifteen years of 8-percent-per-year growth and a sharp reduction in poverty. Even more encouragingly, the list of African countries experiencing sustained growth is lengthening.
Edward Miguel discusses some of the potential reasons for the upswing in growth and warns that conflict, which continues to devastate important regions of the continent, could all too easily shatter these hopeful trends. Making generalizations about a continent as large and diverse as Africa is perilous, but some trends do shine through. Miguel focuses on improvements in democracy and terms of trade, and points to the influence of Chinese investment. He is somewhat dismissive of the role aid has played and calls for reductions in agricultural subsidies to further improve African terms of trade. I, too, will focus on China, trade, and aid, issues on which I have a somewhat different take.
Chinese investment in Africa has been celebrated for reducing the influence of old colonial powers, and feared as the start of a new debt spiral. But China’s increasing economic presence in Africa may be more notable for its suddenness than its size. And sudden changes in flows of investment are often not sustained for long periods. Before we get carried away about Chinese investment it is worth noting that the entire stock of Chinese foreign direct investment (FDI) in Africa in 2005 was just one tenth of the flow of new FDI from the United Kingdom into Africa the previous year.
Potentially more important than the import of capital has been the import of cheap manufactured goods from China, which has enabled Africans to afford products they would not otherwise have been able to enjoy. Cheap Chinese bicycles are everywhere in Busia, the Kenyan town Miguel describes. They help transport agricultural produce to market and are the basis of a thriving taxi trade whereby customers sit sidesaddle on the back. In Sierra Leone, where the radio is a key source of information about politics, cheap Chinese radios are helping inform and connect a highly dispersed population.
The commodity price boom—whether generated by China or not—has indeed helped sub-Saharan Africa, which has experienced a 50 percent increase in total trade since 2000. But it would be wrong to conclude that further price rises of agricultural products, which would likely follow a cut in rich country agricultural subsidies, would necessarily benefit Africa. While sub-Saharan Africa is a net exporter of cotton, it is a net importer of basic food stuffs such as maize and wheat, which means that, on average, it gains from rich country subsidies on these products.
Miguel concludes that aid can explain neither Africa’s growth, which picked up in the mid-90s and accelerated around 2000, nor its improved democratic or educational institutions, because aid first fell and then rose during the 1990s and 2000s. But this claim misses the dramatic change in aid-distribution philosophy that took root during that period. During the Cold War, aid was often used to support “our” despots no matter how bad their policies. The dramatic fall in aid in the 1990s in part reflects cutting off those dictators. Donors became more selective about whom they would support and tied aid in countries like Kenya to moves towards democracy and control of corruption. Is it not at least possible that this “housecleaning” supported or even triggered some of the moves to democracy observed shortly afterwards? Democractic advancements in turn have helped deliver the improvements in access to education Miguel points to, as politicians discover that voters find abolishing fees for primary health and education attractive.
It is easy to point to the ongoing corruption scandals and vote rigging in Kenya as evidence of the failure of this policy, but would we (or, more importantly, would Kenyans) prefer to return to the days when criticism of government or mention of AIDS were barred in the press, as was the case when I first visited Kenya in 1986? Let us not fall into the trap of equating lack of complete success with failure, as is common in the discussions of aid.
How big a factor in Africa’s success was the release of aid from the political constraints of the Cold War? It is impossible to say because it coincided with a recognition within African governments that planning was not going to deliver development, and that market-price signals and economic stability were powerful tools in generating growth. In Mozambique in 2001, I watched the Minister of Finance berate her colleagues for even daring to think of risking long-run economic stability for short run political gain. More than the new mega export-oriented investment projects opening in Maputo, it was this that made me optimistic. Is there room to improve the way aid supports the governments of countries like Mozambique? Absolutely, and that is what many economists—Miguel included—now do through careful impact evaluations. But was the hand of the Finance minister strengthened by the philosophical and financial support of the donors, responsible for 40 percent of the budget? You bet. ©
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