If past trends continue, the African continent will become the place most affected by poverty. The Report of the Commission on Africa has proposed large increases in aid. But the effectiveness of aid expansion in Africa as compared to other sources of revenue, such as oil, remains disputed.
While the leaders of the world’s most advanced economies, the Group of 8, agreed in 2005 that aid expansion could be the answer to Africa’s problems, radical critics argue that aid itself is the problem. Others say that aid achieves diminishing returns, meaning that increased aid will have less impact. Aid expansion in Africa would therefore be ineffective.
Research from the Centre for the Study of African Economies at Oxford University, in the UK, addresses this controversy through a comparison of aid and oil.
As the two largest external resource flows to African governments, aid and oil could potentially generate similar investment and growth opportunities. Increases in revenues to African oil exporters during 2004 therefore offer a ‘natural experiment’ through which to assess the consequences of a similarly large expansion of aid.
The author observes that:
- Increases in revenues to African oil exporters during 2004 did not in fact raise the growth rates of non-oil parts of their economies.
- Aid and oil revenues differ crucially in that oil provides unrestricted finance to governments, while aid is allocated for specific purposes, often with donor conditions.
- Large oil revenues reduce the need for taxation, thereby reducing scrutiny of government spending and potentially allowing public money to be misused, which undermines democracy.
- Aid is generally accompanied by donor-imposed monitoring mechanisms.
- Aid does not appear to have the same negative effects as oil revenues and is usually effective in raising growth.
- Aid appears, however, to be subject to diminishing returns.
There are four common ways of delivering aid: technical assistance; projects; packages with conditions; and debt relief. The problem of diminishing returns means that doubling aid using these conventional modes would not double its impact. Large increases in aid therefore require different approaches to aid delivery.
The report suggests six possible innovations in aid delivery:
- a fund to finance ‘big pushes’, tackling several improvements in one country simultaneously (for example, funding improved ports, road networks and credit facilities)
- a fund to turn failing states around
- a fund to finance aid projects where governance is weak, as an alternative to social funds
- a fund to offset the negative effects of trade
- policies to offset ‘Dutch disease’ (when increases in aid reduce the competitiveness of the tradable sector)
- policies to encourage donor coordination without harmonisation (adopting the same standards) for example through mutual recognition of aid provided and the pooling of resources.
The author acknowledges that evidence as to whether these innovations work is variable, but some experimentation may be worthwhile in considering aid expansion.
Source(s):
‘Is Aid Oil? An Analysis of Whether Africa can Absorb more Aid’, World
Development, Vol.43, No.9, by Paul Collier, 2006
Funded by:
UK Economic and Social Research Council
id21 Research Highlight: 27 June 2007
Further Information:
Paul Collier
Centre for the Study of African Economies
Economics Department
Manor Road
Oxford OX1 3UQ
UK
Tel:
+44 (0)1865 271084
Fax:
+44 (0)1865 281447
Contact the contributor: paul.collier@economics.ox.ac.uk
Centre for the Study of African Economies, University of Oxford
Other related links:
'Improving aid effectiveness in Africa through general budget support'
'Does aid work?'
'Donors As Paper Tigers. Why Aid With Strings Attached Won't Work'
The curse of aid: Working Paper from the Department of Economics and
Business, University of Pompeu Fabra, Spain (PDF)
Can Foreign Aid Buy Growth? Working Paper form the Development Research
Institute, New York University (PDF)
BLDS Aid Subject Guide
GSDRC Topic Guide on Aid Instruments and Aid Effectiveness
