[stop-imf] Aid will not lift growth in Africa, warns IMF

[robert weissman]

FT.com
Financial Times

Aid will not lift growth in Africa, warns IMF
 >By Andrew Balls in Washington
 >Published: June 29 2005 22:00 | Last updated: June 29 2005 22:00
 >>

The International Monetary Fund has warned that governments, donors,
campaigners and pop stars need to be far more modest in their claims
that increased aid will solve Africa's problems.

Days before the Live-8 concerts around the world, and next week's Group
of Eight countries summit in Scotland, the IMF has released two
extensive research papers that suggest aid flows to poor countries have
not led to higher growth rates, the main driver of poverty reduction.

=93We need to be careful given the chequered history of aid, that we do
not place more hopes on aid as an instrument of development than it is
capable of delivering,=94 the fund said.

The research, which took into account duration, type of donor and
governance record of recipient, found aid did not boost growth.

This conflicts with the findings of an influential World Bank study five
years ago that found aid boosted growth in countries with good policy
environments.

=93The basic message is that it is good that people are talking about
increasing aid flows but that we have to find ways to make them more
effective. =93It is not the case that all that matters is good
governance,=94 said Raghuram Rajan, the fund=92s chief economist and
co-author of the reports. =93We know far less about what makes aid work
than the public or governments would like. By acting like we know all
the answers raises false expectations.=94

The UK Commission for Africa has stressed the need for measured and
sustained increases in aid to poor countries and careful consideration
of what works best. The IMF research recommended a focus on trade as
well as aid.

Mr Rajan, and Arvind Subramanian, head of macroeconomic studies, argued
that the contribution of aid flows to a country's rising exchange rate -
undermining export competitiveness- was one reason why they failed to
have a positive impact on growth. This may occur even when the aid
provided to the government is well used.

Aid might also have contributed to poor productivity by depressing
exports, the IMF research shows. Productivity growth is the most
important determinant of living standards.

Economists call the impact of large windfall gains on an economy=92s
exchange rate and export competitiveness the =93Dutch disease=94, referring
to the process whereby the discovery of Dutch natural gas reserves in
the 1960s led to an appreciation of the country=92s currency and a decline
in its export sectors.

=93The bad news is that even if delivered with the best intentions and
used carefully by recipient governments, there are side effects like
adverse effects on competitiveness, which can offset aid=92s beneficial
effect on growth,=94 the fund said. =93The good news is that by paying
careful attention to macroeconomic management and issues like absorptive
capacity, perhaps aid may have a better chance of success. =93

The IMF makes a distinction between aid that is given to promote growth
and humanitarian aid, for example, after natural disasters, saying that
the two should not be confused. =93Humanitarian aid to save lives is right
regardless of the macro effects. But when the aid is focusing on growth,
you need to take into account the macro effects,=94 Mr Rajan said.

Separately, the World Bank highlighted improving recent economic
performance in Africa. The bank's African Development Indicators showed
that since 1995 growth in sub-Saharan Africa has averaged 3.3 per cent
per year, compared with 1.7 per cent in the previous decade.

John Page, World Bank chief Africa economist, said: =93There is a happy
coincidence of the high level of political attention on Africa and more
evidence in the data to support hopes of a turning point in Africa now
than there has been in the past 20 years.=94

Mr Page pointed to greater differentiation in the data. While a number
of African countries continue to struggle, 15 countries have grown on
average by more than 5 per cent a year over the past decade, including
Botswana, Burkina Faso, Ghana, Uganda and Tanzania.

The spread of democracy, the willingness of African governments to take
responsibility for promoting growth and development, and reduced
impediments to private-sector led growth, and some evidence of better
natural resource management has supported growth, the bank said.

=93It=92s a much more varied picture, it=92s not all doom and gloom any
longer. Where there has been robust growth there has been poverty
reduction and improvements in social indicators,=94 Mr Page said. =93The
turnaround story is the most important thing that emerges from the data.=94

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