The G-20 & Africa: Rethinking the Aid Model

Long before Detroit's CEOs flew their corporate jets to D.C. to ask for a bailout, Pres. Mobutu regularly chartered Concordes to court Western donors to increase aid for Zaire.

The response in Washington to the automakers was an outcry of hypocrisy and a re-examination of the prospects of the auto industry at large.

The response in Washington to the African dictator was renewed support for World Bank loans and IMF credit lines for more budget aid in the late 1970s and throughout the 1980s.

Though the comparison between private industry and a cold war political-play may be imperfect, the point is that lenders to Africa are still not critically evaluating how well yet another round of aid will work, even after more than $1 trillion in aid, given over the past 60 years, has largely failed to achieve its intended effects on the continent.

Just consider the following: between 1970 and 1998, while aid flows were at their peak, poverty in Africa actually rose from 11 percent to 66 percent.

Furthermore, African leaders are seldom asked to return with a more credible agenda for how they'll spend the money.

In "Dead Aid" Dambisa Moyo, a Zambian-born economist and Goldman Sachs banker, uses these statistics, among many, to argue that the Western-style aid development model has actually undermined Africa in the long-run, paralyzing its ability to generate indigenous growth.

According to Moyo, the economies of the most aid-dependent countries have on average shrank .2% over the past 30 years. "Aid has been, and continues to be an unmitigated political, economic and humanitarian disaster for most parts of the developing world," she writes.

The aid that will be asked for at the G-20 this week is emergency aid to be sure, not the type of general budget aid doled out for decades by the international financial institutions. Nonetheless, the conference should be used to raise wider concerns about the aid model of development in Africa, particularly as governments discuss reforming the IMF.

The failures of donor aid have been rampant, and documented, even by the World Bank itself, one of Africa's major lenders. For Moyo these failures reflect fundamental systemic flaws:

First of all, handouts create the wrong incentives. Secondly, dumping money into a developing economy will raise its currency and kill exports, as well as encourage bureaucracy.

Aid in Africa has spawned crippling amounts of corruption because weak conditionalities make donor money easy to steal. More importantly, when NGOs take over the provision of public services (such as health and education) the government is no longer accountable to its people. (Mobutu alone looted about $5 billion from Zaire's coffers, according to Transparency International).

Sadly, an African government's level of corruption also tends to have little impact on its ability to get more loans. For example, the World Bank estimated that only 20 cents of very $1 dollar of Uganda's government spending on education reached its targeted primary local school in the 1990s, while they providing vast amounts of budget aid. At the present, Zimbabwe is seeking roughly $10 billion more in assistance loans to re-build its incinerated economy - a country where corruption can only be matched by it inflation.

Instead of extending credit lines, and throwing celebrity rock concerts to cancel those debts, perhaps it is time to re-examine what has worked and where that help is likely to come from.

Smart trade, foreign investment and access to capital markets provide robust opportunities for growth.

As the G-20 debates protectionism, now is the time to address one of the most egregious examples of unfair trade - agricultural subsidies in the United States, European Union and Japan that rob developing nations of agriculture export industries.

Africa in particular boasts certain comparative advantage for exporting primary products, but cannot compete against the distortions created by the Common Agriculture Policy (which still eats up more than 40% of the E.U.'s budget [PDF]) and U.S. subsides against crops such as cotton. Africa loses up to $500 billion per year because of trade embargos, according to some estimates.

Interestingly, on this point Moyo also notes, that China has now become the most practical market for African produce, with huge potential for growth.

With IMF reform on the table this week, China has good reason to insist on changes before handing over another $50 billion. Not only does their low voting quota marginalize their influence, but they're also pouring money into Africa through other institutions and avenues.

In an op-ed published in the London Times last week, titled "G20 Must Look Beyond the Needs of the Top 20," Vice Premier Wang Qishan pointed out China's contributions to Africa via South-South co-operation and made a convincing case to reform the IMF quota system to one weighted to GDP per capita, not foreign exchange reserves.

The problems with China's investments in Africa, and their lack of political contingencies, are well-known. The recent plunge in commodity prices has made them more salient. For example, a sharp pullback has devastated Zambia as their copper mining industry implodes.

The need for internationally regulated responsible investment makes reforming the IMF urgent. It is critical to look beyond just the short-term credit crisis band-aid strategy though to long-term alternatives to aid: sustainable investment in growth.