July 27, 2000
Doubling the current amount of aid to give a big push to African economies today could end their aid dependence within a decade. This is, in a nutshell, the message from a study on "Capital Flows and Growth in Africa" released today by UNCTAD. [NOTE: You need ADOBE Acrobat to read this document.]
The report (43 pages, UNCTAD/GDS/MDPB/7) finds that "the only feasible way to end aid dependence (of Africa) 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 flows".
An increase in official flows to US$20 billion could trigger a virtuous circle of rising national savings and investment and faster growth in Sub-Saharan Africa (SSA). Sustained and rapid growth should attract external private capital flows. Donor fatigue would thus give way to investor enthusiasm, with private capital gradually replacing official flows.
The UNCTAD economists base their simulations and policy conclusions on lessons from experiences in Asia and Latin America. They assume a 6 per cent growth target with domestic investment rising to at least 22 per cent of GDP. This would increase not only savings, but per capita consumption could rise by some 30 per cent at the end of the ten year period, making a dent in poverty. The report finds that such a growth path for Africa is well within the realms of plausible policy making. But it will require a serious rethink and in a spirit of open dialogue and pragmatism.
Essential to any African growth story must be the emergence of a domestic entrepreneurial class reinvesting its savings in productive domestic sectors. Two decades of structural adjustment have taught that this does not follow from "getting prices right" if physical and human infrastructure gaps limit supply responses. More efficient institutional capacities are essential and more public investment will be needed.
Strategic policies, commensurate with the level of development, are required; where agriculture is still dominant, agricultural pricing and investment policies are key to raising productive resources while at later stages, establishing a virtuous link between profits and savings, restraining luxury consumption and promoting institutional savings will pose new challenges for policy makers.
Aid Fatigue in Perspective
Total net capital inflows to Sub-Saharan Africa (excluding Nigeria) have declined over the past three decades. Private flows today represent less than 2 per cent of GDP for the region - half the average for other developing countries. Experience shows that private capital flows lag rather than lead growth. Such inflows have also become much less productive than in the past. In the 1990s, almost 40 per cent were transferred back to creditor countries as interest payments and profit remittances.
Over the past five years SSA has received an annual average of US$10billion in official flows - three quarters of total inflows. But this hardly reflects the generosity of donors; total net official inflows which peaked at US$43 per head in 1983 had fallen to US$30 by the end of the 1990s; in real terms the drop has been over fifty per cent. Furthermore, aid is highly unevenly distributed among countries at similar levels of development.
Aid to Africa since the early 1980s has barely compensated for the resource losses resulting from unfavourable trading conditions. Terms of trade losses and loss of market share have persisted over the past 20 years with policy makers across Africa facing the choice between higher trade deficits or import compression. Between 1997 and 1999, the combined annual index of free market prices for primary commodities, which represent 80 per cent of Africa's export earnings, had fallen by 25 per cent. Added to this, as a result of increased payments difficulties, many countries have accumulated arrears on interest payments on long-term debt equivalent to 14 per cent of the current-account deficit in the period 1989 to 1998.
Current low levels of aid will perpetuate aid dependence as they are not sufficiently large to act as a catalyst for growth. The additional amount required represents merely 5 cents for every US$100 of annual consumer spending in the OECD countries.
Managing Capital Flows
The current level of private capital inflows is too small to fill the resource gap but big enough to make African economies vulnerable to the arbitrage arithmetic of short-term capital flows. According to UNCTAD, the fact that any adverse consequences outside the continent are small has meant a corresponding lack of interest by the international community when financial distress has hit the region.
The UNCTAD study finds that official inflows through multilateral and bilateral lending can be a catalyst for private flows. But it also finds that in Africa such lending falls away as growth picks up. The study advocates regulation and control of short-term capital flows to retain an important part of capital inflows for financing imports and productive investment, and to attain greater stability of exchange rates which holds the key for successful export performance.
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