PRO AID, AGAINST PITY !

Reframing the economic rationale of African foreign aid

Analogy with the gambler—will pity/charity help him?

The media coverage is appealing to empathy, call for money to relieve poverty

International community-responsible for decreasing the income gap between rich and poor,-=capital inflows towards developing countries

Sporadic cases of success from foreign aid-=generalized, overestimating results -=more money involved

$600 billion so far from the West to Africa, approximately $50 billion of international assistance each year flow in the country

How is Africa today? Still famine, hunger, disease, illiteracy and conflict.

Where has all the money gone? Wasted? Or where them not enough to uplift the Africans’ conditions?

More aid, less aid, or none at all?

Why don’t the academics and policy-makers agree?

There is evidence of ineffective foreign assistance

Poverty reduction remains the main criteria that qualifies Africa for aid.

Is aid equalized to charity?

Are good intentions turned into bad outcomes?

Is the aid sustained by any economic rationale? Or is it a political and social perception of the concept?

What does this mean for the future economic situation of Africa, and what needs to be changed?

Jeffrey Sachs/ Bono school of thought--Aid Cheerleaders, More Aid!

Sachs: “The end of poverty” and “Common wealth”

Increasing aid will decrease extreme poverty by 2025

UN MDGs-assumes that aid is growth promoting“Gap theory”—aid promotes growth , augments

the foreign exchange needed in production in aid-dependent ventures (Chenery and Strout)

Burnside and Dollar (1997)—correlation between aid and economic growth, but when aid is applied in a good policy environment (prerequisite).

Collier and Dollar(2001) aid is conditionally effective, conditions: policy environment, governance, rate of corruption and conflict

Nathan Andrews (2009)—consideration of socio-cultural factors in aid performance

William Easterly(2006) “Can foreign aid buy growth? “Foreign aid does not fill the saving-investment gap when

investing incentives are not present” Marginal approach instead of transformational approach

Dambisa Moyo (2009) “Dead Aid”

Samaritan’s Dilemma (Gibson, 2005)-aid reduces the incentives to invest, especially when the recipient is assured that future poverty will call for more aid

Dutch disease (Ryan, 2005)—reduce the recipient’s country competitiveness

Riddell—obstacles at donor level as well

Why foreign aid, despite the good intentions of the donor to alleviate poverty, is resulting a distorting variable, rather than effective, in the equation of economic growth?

How is foreign aid neglecting and challenging (unsuccessfully although) the economic rationale of growth?

How can aid system be improved in order to increase the economic effectiveness, given the context of Africa?

To argue that the illusion of aid as poverty reliever lacks economic rationale, since it is sporadic and short-term focused, rather than long-term sustainability

To understand the role of the foreign aid in the equation of economic growth and why foreign aid cannot influence directly economic growth

To reassess the aid system through disaggregation of aid to improve its effectiveness in terms of development rather than economic growth per se.

Deductive approach-review of the existing literature through critically accessing it

Economic assessment (analysis) of foreign aidAssumptions;Abstract from human rights (pro humanitarian

aid)Abstract from the political economy of aid

(interests of the donor and recipient)Political context and institutions are relevant to

the point of their capability in generating economic efficient policies (political nuances of the government are excluded)

What do they mean by foreign aid?How do they measure the effectiveness of an aid

program? Inputs vs. outputs? Or the process?

Foreign aid= from humanitarian relief to budget intervention

Effectiveness=efficiency=increase in productivity, hence increase in economic growth

Public finances –enterprises, how aid negatively influences their relationship?

The government is economically dependent by the citizens Negatively impacts the relation between government and

entrepreneurs (the engines for wealth generation) or other internal sources of income generation

Why?

Public finances are not impacted by tax collection, but by foreign aid

Low accountability to citizens (accountable to the donor) Few incentives to invest, or trade, The poor don’t have a voice in the policy making The elites are getting paid by the foreign aid for their loyalty (keeps

in power clientelistic regimes)

Supporting wrong policies and bad intentioned actors for the sake of pity, empathy toward poverty

Aid= part of the problem, not a solution

Reducing poverty in the short term (up to the humanitarian relief of poverty) vs. discouraging initiative in the long term?—”Poverty trap”

Who are the real actors of income generation in a country?

Aid, -the wrong medicine for the sick Africa

Economic growth is linked with the concept of income generation, =productivity using efficiently internal resources=innovation=creating incentives for investment

Aid is linked with the concept of wealth, different from income, does not contribute directly to growth, but only through investments, putting the wealth within the production frontier. Aid stimulated consumption, but not investment

When to fill in with aid? S<IS+Aid=Investment, but in Africa, S+Aid=consumption

(political context, patronage) -=Inflation

Disaggregate aid and take into account its heterogeneity-=some aid is helpful, e.g humanitarian aid, but still no impact on economic growth

Sectoral approach=microfinance—support success, punish failure, don’t support someone just because he is poor, but support him because he is bringing something new

Spillover effect, effective results from aid in a specific sector would provide incentives for others. (marginal approach)

Know the internal composition of a country, internal dynamics

Consider each actor (be it economic or political actor) and evaluate its potential

Support the ones that show engagement, that are being innovative ( government, private enterpreneurs, civil society-which one is performing better? )

Foreign aid==support incentives,

Fill the gap savings-investments, when initiatives are present, or otherwise stimulate them.

Expected Revenue Shs 2.5 trillion

Expected foreign aid Shs 1.9 trillion

Recurrent expenditure Shs 2.6 trillion

Development expenditure Shs 1.8 trillion

Public administration 690 billionmilitary 380 billionAgriculture (80% employed) 18 billionhealth 374 billioneducation 636 billionTrade and industry 43 billion

70 cabinet ministers114 presidential advisors81 units of local government333 members of parliament134 commissions and semi autonomous

government bodies

The qualifications for foreign aid should not be based on poverty reduction but on opportunity supporting

Foreign aid cannot buy economic growth, if the political, cultural environment is not engaged in internally producing income, rather than inefficiently distributing wealth( aid)

Foreign aid affects private initiatives and public finance (fiscal policy and accountability)

Aid system needs to be reassessed, supportive of success (productive enterprise), discouraging wrong behaviors and attitudes.