Aid dependence and the MDGs

Meeting the Millennium Development Goals (MDGs) requires billions of dollars. The fix-all solution often mentioned is simply to increase aid flows. Demba Moussa Dembele critiques the foreign aid industry, explaining why aid is more of an enemy than a friend, how aid dependency has been augmented by IMF and World Bank conditions and what the hidden political and economic costs are for African countries.

The present focus on the Millennium Development Goals (MDGs) has reignited the debate on the need for more aid to developing countries to help them meet the MDGs by 2015. However, this has inevitably rekindled the parallel debate as to whether more aid is really the answer. Will extra money simply shore up inefficient governments and feed government corruption? One response to this is to say we must bypass government and make money available directly to NGOs and other organizations. At the same time, others claim that what is needed is not more aid, but a fundamental transformation of international power relationships, especially reform of international trade and finance rules to allow African and other developing countries to sell their goods and services at a fair price.

A number of ideas for raising more money to meet the MDGs have been floated recently. While the UN Millennium Project’s report, Investing in Development,[1] calls for an overall huge increase in aid, the Commission for Africa report calls for a doubling of aid to Africa.[2] The French government’s Landau Report suggests a number of innovative sources of financing,[3] while Gordon Brown’s International Finance Facility proposal envisages selling bonds issued by industrialized countries with a view to raising money in financial markets to finance development.

A central misconception about aid

But before going into the debate on whether aid does encourage dependency and inefficiency, we need to address a particular misconception: that aid to developing countries, known as official development assistance (ODA), is an act of simple generosity towards poor countries in dire need of capital to invest in education, health, infrastructure, and so forth, and that it comes with no strings attached. Development assistance is neither value-free nor benevolent. It has served and continues to serve the economic, political and strategic interests of ‘donor’ countries. This was particularly so during the Cold War period. It is even more evident today, especially from the USA.

The Millennium Challenge Account (MCA), for instance, the Bush Administration’s main tool for foreign ‘aid’, is laden with ideological, political and economic conditions. Eligible countries should support, or not oppose, US foreign policy; they should adopt ‘free market’ reforms, good governance practices, and so forth. It could also be added that so far, not a single dollar from the MCA has been delivered to African countries.

Furthermore, with the onset of the debt crisis in the late 1970s, Western governments and multilateral institutions under their control started imposing crippling conditions on aid to impoverished countries.

An instrument, not a gift

So aid is an instrument, not a gift. For many Western countries and institutions, it plays a key role in their overall strategy to maintain and even expand their influence in Africa. This is particularly true for former colonial powers such as France and Britain, which have used aid to maintain their influence in former colonies, in economic, financial, military and strategic areas. This type of aid does create dependency and it is intended to, since its primary objective is to shore up regimes that are ‘friendly’ to Western countries, regardless of the nature of those regimes. This explains, among other things, why a dictatorial and inept regime like Mobutu’s in the former Zaire was kept afloat despite the looting of his country’s resources and the rampant corruption that characterized his regime. Billions of dollars looted by Mobutu are still stashed in Western banks while the Congolese people continue to live in abject poverty.

Giving with one hand …

Another problem with aid is that it mostly benefits donor countries. Despite the formal end to the practice of ‘tied aid’, the money disbursed as aid goes mainly to foreign-controlled enterprises and aid flows are used to buy goods and services from donor countries. The prices of those goods are often higher than the market price of similar goods. Export credit agencies and banks in Western countries have played a key role in that area. A recent report by ActionAid pointed out that for every dollar disbursed by France and the US in the form of aid, 89 per cent and 86 per cent return home, respectively.[4]

More strings attached

Moreover, since the start of the debt crisis, aid dependency has been aggravated by conditions imposed by the IMF and World Bank. Since the 1980s, aid from Western countries has been conditional on recipient countries implementing policies dictated by these two institutions. Even aid from former colonial powers to their former colonies is now conditional on signing an agreement with the IMF. But it has become clear that these policies have done more harm than good. A recent report by Christian Aid indicates that over the last 20 years, the imposition of trade liberalization has cost African countries a staggering $272 billion, a sum that could have paid back the continent’s debt.[5] The report adds that the loss was roughly equivalent to the amount of foreign aid received by African countries during the same period.

The Christian Aid report corroborates findings by UNCTAD in 2001[6] which show that policy conditionalities imposed on African countries, especially trade liberalization and deregulation, have also cost the continent in deteriorating terms of trade and increased capital flight, which is higher than in any other region in the world. UNCTAD observed that, had Africa’s terms of trade remained at their 1980 level, the continent’s share in world trade would have been twice its current share; per capita income could have been 50 per cent higher; and annual growth would have increased by an additional 1.4 per cent. Worse still, this deterioration, combined with increased capital flight and debt repayments, led to a net transfer of real resources from Africa to the rich countries! Clearly, with stable terms of trade, African countries would have been much better off and would depend less on foreign aid.

Unfair trade and aid dependency

To give an illustration: in 2002, subsidies for cotton provided by the US caused a 25 per cent decrease in cotton prices, which translated into a loss of $300 million by African exporters, such as Mali, Benin and Burkina Faso, a higher sum than the entire ‘debt relief’ ($230 million) promised by the IMF and the World Bank to all African countries eligible for the HIPC Initiative.[7] Subsidies by OECD countries – which, according to UNDP, cost more than six times what they spend on aid to poor countries – have increased African countries’ food deficit and dependency.[8] By flooding African markets with cheap, subsidized food, industrialized countries destroy domestic food production and increase African countries’ dependency on food imports, which are paid for through new loans or ‘aid’ from the same industrialized countries.

The debt crisis and aid dependency

These things – the cost of complying with conditions imposed by donors and lenders and subsidies on domestic produce by OECD countries – help explain, among other things, the worsening of the debt crisis, which in turn has meant greater dependency on foreign aid. In the 1980s and 1990s, the average debt service was roughly equal or even higher than foreign aid to African countries. Part of that aid was even used to pay back old debts, including multilateral debts. All this reinforced dependency on external sources, especially the World Bank, the IMF and the African Development Bank. And, as a report by UNCTAD in 2004 indicates, Sub-Saharan Africa’s debt soared in the 1980s and 1990s, the peak years of structural adjustment.[9] According to the report, though African countries had reimbursed $550 billion to creditors against $540 billion in loans between 1970 and 2002, Africa is still saddled with a debt estimated at $300 billion. This is a vicious circle which, up to now, has shown no sign of being broken.

Internal factors

What about the question as to whether aid simply encourages corruption and inefficiency? According to a recent article in the Ugandan daily, The Monitor, the country depends on international donors for 50 per cent of its budget. But the Uganda Revenue Authority collects only about 57 per cent of taxes due because of institutional weaknesses in tax administration and because ‘the rich and politically powerful don’t pay taxes’. Meanwhile, Uganda spends $200 million on the military, where $70 million is enough for its security needs, and a Ministry of Finance study shows that public administration expenditure could be cut by 50 per cent. Uganda, therefore, does not need aid, says the article; what it needs is to improve its tax administration, clamp down on tax evaders, and abandon its corrupt and profligate military and public administration expenditure.

It is true that corruption is still rampant in many African countries and African civil society organizations have raised this problem time and again. In several countries anti-corruption NGOs are working tirelessly to raise public awareness and expose corrupt officials and practices. This is part of our struggle for more democratic, accountable and transparent governments. There is no doubt that the elimination of corruption would contribute to reducing dependency on foreign aid through improvement in public savings and more effective tax collection systems that would help raise significant amounts of money for the state.

But, once again, the problem of corruption has two sides: the corruptor and the corrupt. However, Western governments and multilateral agencies tend to focus exclusively on African governments and overlook the role of foreign companies and banks in maintaining corruption.

But here too Western countries have had a crucial influence. First, the imposition of structural adjustment programmes by the IMF and World Bank has considerably weakened African states and impaired their ability to fight corruption more effectively. In the 1990s, for instance, many countries lost some of their best civil servants as a result of ‘voluntary leaves’ recommended by these two institutions, more concerned by the wage bill than the quality of the civil service. In addition, they propose fighting corruption by a further financial squeeze of the state through the establishment of a myriad of ‘independent’ agencies that take away resources that should normally go to the state. But this is a mistake, since corruption may simply move from central government to local governments and so-called ‘independent’ agencies. The best way to fight corruption is through democratic scrutiny and accountability of elected officials.

African economies have inherited structural weaknesses from colonization, which have made them more vulnerable to external shocks, such as commodity price fluctuations and higher interest rates. In addition, these economies depend to a large extent on trade and financial flows with former colonial powers. This also tends to foster aid dependency: when exports fall, African countries rely on hard currencies for imports of equipment, foodstuffs and essential goods.

The costs of aid dependency

The dependency on foreign aid has political as well as economic costs. It is obvious that a country that depends on foreign assistance for up to 40 per cent of its budget cannot control its own policies. Instead, as the IMF and World Bank’s structural adjustment programmes show, donors dictate economic and financial policies, based on their own world view and interests. The structural adjustment programmes, imposed by the IMF and World Bank, are a reflection of that reality. As already indicated, this has worsened the economic crisis and deepened external dependency, while the conditions attached to such multilateral aid are the principal cause of the abject poverty affecting more than half of the African population.

In short, much of the so-called aid given by Western countries and the loans made by multilateral institutions are not based on developing countries’ real needs, nor on any performance criteria, but primarily on the interests of ‘donors’. It’s time, now, to consider some possible alternatives.

What is the alternative?

Obviously, there is no easy solution to the problem of aid dependency. There are no quick fixes nor a general policy applicable to all countries. However, we think that the following proposals should be explored by African and Western countries as a basis for a lasting solution to the problem.

- Cancel unconditionally the debt of all African countries. This is a precondition for any possibility of recovery. Once the burden of debt is lifted, aid will no longer be simply a means of perpetuating an instrument of domination.

- Repatriate stolen wealth. Even the Commission for Africa Report acknowledges that tens of billions of dollars in stolen wealth are kept in Western countries. Some estimates put that stolen wealth at 70 per cent of private wealth, excluding land. The repatriation of that would significantly limit African countries’ need for foreign aid.

- End IMF and World Bank policies. Trade liberalization, deregulation, fiscal austerity and privatization have been some of the leading factors behind the worsening of African countries’ financial crisis and their growing dependence on foreign aid. They have also increased capital flight, which reached unprecedented proportions during the 1980s and 1990s.

- Abolish unfair trade policies and promote fair trade. Africa needs fair trade (rather than ‘free’ trade, which has exacerbated African countries’ need for hard currencies and thus their dependence on foreign aid).

In a fair trade framework, one acknowledges the asymmetry between African and industrialized countries’ economies. Fair trade would therefore keep in place special preferences for African exports, especially agricultural exports. Subsidies in Western countries which make African imports prohibitively expensive would be abolished. It would stop the dumping of subsidized products in African markets to the detriment of local production. Finally, it would support proposals for international agreements, as often suggested by UNCTAD, aimed at stabilizing commodity prices so as to limit, if not eliminate, the decline in African terms of trade.

This set of policies is the opposite of ‘free’ trade, which pretends to establish a ‘level playing field’ between African and industrialized countries!

- Change internal policies. The above policies must be complemented by fundamental internal changes. They include eliminating wasteful spending and fighting corruption more effectively. They also include more transparent decision-making and more accountable governments and institutions. At the continental level, the African Union must pursue its efforts to hold member states to some common standards so that economic and financial policies can be improved for the benefit of their citizens.

Summing up

Does aid create dependency? The short answer is that, on the terms on which it has generally been given, it does, but it need not. Aid dependence is the result of both internal factors and deliberate external policies. Aid has been made to serve both the foreign policies of Western states and their wider economic interests. The terms of that aid, combined with Western protectionism, have been designed to keep Africa as a source of commodities and a consumer of manufactured goods from industrialized countries. This creates further aid dependence as the need for hard currencies is made more acute by the deterioration in the continent’s terms of trade.

On the other hand, aid which is consistent with African countries’ needs and priorities can certainly be a positive factor. The solution to aid dependence does not lie in a further privatization of that aid through corporations, like the MCA, or through Western NGOs. It lies rather in fundamental policy changes, both at the international and internal levels, which will rebalance many of the transactions, both economic and political, between Africa and the richer countries. More fundamentally still, Africa needs to put its own house in order and count first and foremost on its own resources. No amount of foreign aid alone will ever develop the continent.[10]

* Demba Moussa Dembele is Director, African Forum on Alternatives, Dakar (Senegal). He can be contacted at [email][email protected] or [email][email protected]

* Please send comments to [email protected]

* This article first appeared in the September issue of the Alliance Magazine and is gratefully reproduced here with permission. Alliance is the leading magazine on philanthropy and social investment across the world. Published quarterly by Allavida, it tracks the latest trends and developments providing expert analysis from northern and southern perspectives. Visit http://www.allavida.org/alliance/alliancehome.html

References:

1 See Aid Real Aid.pdf

5 Christian Aid (2005) The economics of failure: the real costs of ‘free’ trade. See www.christianaid.org

6 UNCTAD (2001) Economic Development in Africa. Performance, prospects and policy issues. New York & Geneva: United Nations.

7 UNCTAD (2003) Trade and Development Report 2003 New York & Geneva: United Nations.

8 UNDP (2003) Making Global Trade Work for the Poor London: Earthscan.

9 UNCTAD (2004) Economic Development in Africa. Debt Sustainability: Oasis or mirage? New York & Geneva: United Nations.

10 For further information on African positions that are critical of the whole set of relationships between Africa and Western countries, see Firoze Manji and Patrick Burnett (eds) (2005) African Voices on Development and Social Justice. Editorials from Pambazuka News 2004 Dar es Salaam: Mkuki Na Nyota Publishers. See also AFRODAD Reality Check on Development Aid Annual Reports. See