Sun, Jan 04, 2009 - Page 9 News List

Cash transfers to Africa could work, but ...

Partner countries must be ready to invest in their own institutions

By Goran Holmqvist

Europe has made an ambitious commitment to scale up its aid to Africa and Africa’s challenges call for that greater engagement. But boosting aid to countries that are already aid-dependent requires clearer delivery mechanisms and a degree of budgetary predictability. Something new is called for and cash transfers directly to poor people could be an alternative — but only as a part of a longer-term vision of partner countries’ welfare systems.

The EU has committed itself and its member states to increase aid flows to 0.56 percent of GDP by next year and 0.7 percent by 2015 — with a big focus on Africa. The combined aid commitments of OECD Development Assistance Committee member countries would mean a doubling of official development assistance to Africa between 2004 and next year — that is, if they are honored.

It is, after all, fair to question whether donor countries will stick to these commitments and, indeed, whether conditions in partner countries will permit them to. But a theoretical doubling of African aid by next year — with the possibility of even more after that — offers a huge opportunity to combat poverty. So tackling any obstacles that could inhibit the effective application of these additional resources is a priority.

While Africa’s needs are relatively well known, there are challenges in scaling up aid to tackle them. This reflects such problems as macroeconomic management, aid-dependency syndromes, absorption capacity, transaction costs, and — related to all of it — the risk of decreasing returns as aid levels rise. Given the current aid-to-GDP ratios in sub-Saharan Africa — with approximately half of countries yielding ratios of above 10 percent even before future increases in aid are taken into account — these challenges must be taken seriously.

Donors and their partners agree on a way forward that could, in theory, tackle these challenges. The agreement is contained in the so-called Paris Agenda, which defines principles of ownership, alignment, and harmonization. It calls for the improved predictability of aid flows, with budget support and program-based aid as the preferred means of delivering support. It is an agenda for improved partnerships, reduced transaction costs, and increased efficiency.

It is when the Paris Agenda leaves theory and confronts reality that problems emerge. Budget support suffers from low credibility, not only among donor taxpayers, but also among citizens in recipient countries. While it assumes predictable financial flows, such predictability can be spurious. After all, neither donor countries nor their partners are exempt from such problems as corruption, political crises, armed conflicts, human rights abuses, vested interests, or international power politics.

As a result, placing so many eggs in one basket leaves the business of aid provision looking increasingly risky. Furthermore, budget support that’s linked to national poverty-reduction strategies also rests on the questionable assumption that the political economy of a partner country works to the benefit of the poorest.

Politics on the donor side is no less complicated, with growing aid budgets often viewed by taxpayers as excessive at a time when the anti-aid lobby is becoming more vocal. When donors finance 50 percent or more of a country’s national budget, they may sometimes find intervention unavoidable — donors certainly have the power to intervene. That could mean more conditions being placed on aid, not fewer — even if the rhetoric sometimes appears to suggest the opposite.

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