July 27, 2000
Africa needs a massive injection of external financing to kick start and maintain growth in the region if it is to break its dependence on aid, a new UN report said Thursday.
Large amounts of official aid is the "only feasible way" to help break the "vicious circle" of inadequate and volatile financial flows and erratic growth in the region, the UN Conference on Trade and Development report said.
Doubling official financing to sub-Saharan Africa to an annual 20 billion dollars (21 billion euros) could help trigger increased national savings and investment, as well as faster growth. The region received an annual average of 10 billion dollars in official flows over the last five years, the report published Thursday said.
But any initial big push needs to be accompanied by policies which recognise the need for market-based incentives, as well as a greater role for the state and institution building, it said. "The only feasible way to end aid dependence is to launch a massive aid programme and to sustain rapid growth for a sufficiently long period so as to allow domestic savings and external private flows to gradually replace official aid," the report entitled Capital Flows and Growth in Africa said.
Sustained and rapid growth should draw external private capital flows, the report said, and "donor fatigue" would give way to enthusiasm from investors, with private capital gradually replacing official flows.
Private flows of financing today make up less than two percent of gross domestic product (GDP) for sub-Saharan Africa, about half the average for other developing countries.
During the 1990s, nearly 40 percent of net capital inflows into the region were transferred back to creditor countries in interest payments and profit remittances.
UNCTAD points to East Asian countries which managed to break free of the vicious circle of poverty and inadequate domestic resources during the 1960s and 1970s . It suggests if GDP growth could be raised to about six percent a year and kept at that rate for 10-12 years through a large amount of official aid and domestic policies, official financing would gradually be less needed, as alternative sources of financing came forward.
Flows of private capital as a proportion of gross national product (GNP) have fallen and long-term bank lending has completely disappeared since the mid-1980s. In sub-Saharan Africa private inflows have mainly been in the shape of foreign direct investment and short-term bank lending.
But the report states that most countries have failed to attract foreign direct investment which has been concentrated in a handful of oil and mineral-rich countries.
Despite being limited in volume, official inflows, including official development grants, multilateral and bilateral lending have made up a rising proportion of total capital inflows due to even sharper declines in private capital.
Capital inflows vary greatly among countries. For example, for countries with a per capita income of around 1,000 dollars the average annual per capita inflow in 1990-1998 ranged from seven dollars (such as in the Democratic Republic of Congo) to 70 dollars (in Zambia), the report said.
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