Foreign Aid continued and Africa

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Foreign Aid (continued) and Africa

• October 31, 2007

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Readings for Today

• Van de Walle
• Sachs
• Economist Article

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Overview

• Continuation of Foreign Aid lecture from Monday
• Current controversies (Debt relief)
• The debate over Aid in Africa
• Mwenda lecture on Aid and Africa

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Current Controversies III Debt Relief

• Precursor in Paris Club reschedulings
• HIPC I (1996)
• Emphasized debt stock reduction and
  sustainability
• Included debt owed to multilaterals
• Enhanced HIPC Framework (HIPC II, 1999)
• Multilateral Debt Reduction Initiative (2005)
  canceling all debt to IMF, African Development
  Bank and International Development Association

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Debt Relief II

• Country must
• Face an unsustainable debt burden (debt
  sustainability analysis differential levels of
  relief across countries)
• Have developed a track record of good economic
  policy through Bank and Fund programs (lt three
  years)
• Have developed a Poverty Reduction Strategy Paper
  (PRSP) that involves wide participation and
  consultation
• The foregoing results in a decision to grant
  relief (the decision point), and some interim
  relief

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Debt Relief III

• After further demonstration of good policy and
  one year of implementing the PRSP, they are
  granted full relief (completion point), but full
  relief is not all debt
• On average, HIPC has reduced debt in 18 countries
  that are post-completion point by half
• and net transfers to HIPC countries doubled
  1999-2004, while aid to other countries increased
  by a third.
• But success in poverty reduction has been
  difficult to track, and focus on expenditures
  means more social spending, but not necessarily
  effective

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Aid (percentage of GDP)
Mediocre
Good policy
Poor policy
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Some Conclusions

• Strong pressures on aid
• Fiscal problems and lack of political support
• Overextended ODF negative net flows and time for
  relief?
• A move toward selectivity and grants?
• The contested nature of conditionality will not
  go away because of the constituent bases of
  lending

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Africa

• Second largest, second most populous continent
  (after Asia)
• 53 countries
• Lowest average GDP per capita

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Colonial Control 1914
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Politics of Permanent Crisis

• Neopatrimonial political authority
• Effects of Foreign Aid
• State Autonomy vs. State Capacity
• Partial Reform Syndrome
• Clientelism, low capacity, elite beliefs

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Conflicting Arguments on Aid

• More aid is needed
• Escaping the poverty trap
• Aid is a large part of the problem of
  underdevelopment