Is Aid Oil?

Is Aid Oil?

An analysis of whether Africa can absorb more aid.
Paul Collier
June 16th, 2005
Centre for the Study of African Economies,
Department of Economics,
Oxford University


1. Introduction
The Report of the Commission for Africa, Our Common Interest, has proposed a
large
increase in aid to the region. The underlying motivation for this proposal
is an acute sense
of Africa's needs. Africa's neediness cannot be contested: on past trends it
will
increasingly become the epicenter of global poverty. The controversial
aspect of the
Commission's proposal is whether additional aid will be effective in
addressing these
evident needs. Criticisms of aid expansion can be grouped into two camps.
The more
radical critique sees aid as having been a cause of Africa's problems, which
expansion
would intensify rather than resolve. This view, which in academic circles
goes back to
Peter Bauer, is widely held in the US, and is also probably the dominant
position in
British public opinion.
1
An apparently softer, but potentially equally debilitating critique
sees aid as useful but subject to diminishing returns. On this view Africa
is already
around the point at which expansion of aid would be ineffective.
While extra aid is merely prospective, the current boom in the prices of
natural resources
is already delivering a massive increase in the resource transfer to Africa.
This does not
of itself make increased aid redundant: the resource boom is highly
selective, with only
around a third of Africa's population living in countries that are
substantial beneficiaries
of higher resource prices. Nevertheless, the two flows invite comparison.
They are the
two largest external resource flows to African governments and so
potentially generate
similar opportunities for investment and growth. The current surge in
resource rents at
least superficially provides a "natural experiment' for the consequences of
a large
expansion in aid.
If this is so, the latest growth data provide a somewhat discouraging
prognosis. During
2004 Africa's oil economies received an unprecedented bonanza in resource
rents. If big
unconditional resource inflows work, we should expect this bonanza to have
decisively
raised the growth rate of the non-oil part of their economies. In fact,
during 2004 the
growth rate of the non-oil part of the African oil exporters' economies was
identical to
the rest of Africa (IMF, 2005, Table SA2). The huge windfall to these
countries did not
confer any growth advantage whatsoever beyond the oil sector. The radical
critics of aid
would be unsurprised by this failure of an oil bonanza to induce growth, and
would
extrapolate this failure to aid. The key hypothesized causal mechanism is
that both are
"sovereign rents', generating dysfunctional rent-seeking behavior.
However, at least as regards the detail of how revenues are transferred, aid
and oil rents
differ. Resource rents are unrestricted finance for governments, allocated
on a near-
random basis. By contrast, aid is provided in four purposive ways: technical
assistance,
projects, packages linked to conditions on past or prospective government
behavior, and
debt relief. These modalities of transfer bring with them both expertise and
conditions in
varying degrees. Aid allocation is purposive both between countries and
within countries.
The expertise and conditions that come with aid, together with its purposive
allocation,
1
See for example, "Vast majority thinks Africa aid is wasted, poll shows',
The Daily Telegraph, June 4
th
,
2005.
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Page 3
may be merely second-order qualifying footnotes to a basic equivalence of
aid to oil, or
they may give rise to first-order differences in consequences for
development
effectiveness.
While donors would like to think that their actions enhance the
effectiveness of aid above
that of natural resource rents, a priori either mode of transfer could be
associated with
superior development outcomes. The governments of developing countries
frequently
complain about the delivery modalities of aid. They criticize technical
assistance as a
waste of money. They criticize project aid for being uncoordinated, and
requiring
procedures that divert government attention. They criticize conditionality
for
undermining government autonomy and frustrating government priorities.
Recipient
governments would undoubtedly see resource rents as superior,
dollar-for-dollar, to aid.
The different allocations of the two revenue flows as between countries
might also
generate differences in average effectiveness. Again, however, the
presumption that
because aid allocations are purposive, aid should generate superior average
outcomes to
resource rents is not necessarily correct. Resource extraction companies
have tended to
avoid investment in the most politically disturbed environments. For
example, although
oil reserves in Chad and Sudan were discovered in the 1950s, they were not
exploited
until the twenty-first century. By contrast, aid has sometimes been targeted
on highly
problematic governments for strategic reasons, such as Western support for
Zaire during
the Cold War.
Although there are now literatures on the development effects of aid and
resource rents,
the two have not been explicitly compared. Section 2 attempts to make this
comparison.
Section 3 addresses the question as to why aid is so much more effective for
development
than oil revenues: evidently, and contrary to much popular perception, past
aid modalities
have been strikingly successful in adding value to the resource transfer.
Section 4
addresses the question as to whether, given this success, there is scope for
"scaling-up'
aid in the literal sense of simply increasingly it proportionately across
existing modalities.
I argue that unfortunately the evidence points to the scope being rather
limited. However,
in Section 5 I build on the evidence of previous sections to propose six
innovations that
may have the potential radically to increase aid absorption.
2. Simulating a big push? The development consequences of resource rents and
aid
compared.
The current boom in the prices of natural resources is greeted with
enthusiasm by the
governments of Africa's exporting countries. I have already noted that at
least in the short
term the consequences of this bonanza have been somewhat disappointing, at
least for
their non-oil economies. While these short term outcomes may merely reflect
lags in
economic responses, they conform to a global pattern. Indeed, global
responses to
resource rents are considerably more disturbing than indicated by this short
term response
in Africa. Far from extra time revealing benefits, it reveals costs. A new
study measures
resource rents annually since 1970 for each country, rents being the surplus
of revenues
over costs of production (Collier and Hoeffler, 2005). It finds that
resource rents
significantly reduce growth: the impact effect is negligible, but with a lag
of around four
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years the rents have a significantly negative effect. These new results are
entirely
consistent with the large existing literature on the adverse effects of
resource revenues.
In the 1970s the dominant explanation was Dutch disease. Recently, without
rejecting
Dutch disease as being part of the problem, more emphasis has been placed
upon the
adverse effects of resource rents upon governance. This focus on governance
is pertinent
for the African aid debate. Aid may potentially have similarly adverse
effects on
governance as resource rents. Further, around a third of Africa has
sufficiently large
resource rents for the governance problems generated by these rents to be
critical.
Collier and Hoeffler provide an account as to why natural resource rents
worsen
governance. They find that resource rents subvert and indeed reverse the
normally
beneficial economic effects of democracy. In the absence of resource rents
democracies
growth more rapidly than autocracies, but with large resource rents
autocracies
outperform democracies. The critical level of resource rents beyond which
democracies
under-perform is around 8% of GDP. They suggest that resource rents tend to
tip the
balance between two different strategies of electoral competition. In a
normal democracy
parties compete to spend public revenues effectively on public goods,
balancing the
benefits against the costs of taxation. However, an alternative way of
gaining votes is to
bribe opinion leaders through private patronage. Where voters have strong
ethnic
loyalties and limited objective information, as is common in Africa,
patronage politics is
likely to be more cost-effective. In these conditions the only inhibition on
the government
from adopting patronage politics is if public revenues are protected from
embezzlement
by checks and balances. Electoral competition in conditions of ethnic
loyalties and poor
information drives political parties towards patronage, and only strong
checks and
balances can prevent it.
They indeed find that checks and balances significantly and distinctively
raise growth in
the context of large natural resource rents. For example, press freedom
shows up
statistically as being critical in mitigating the adverse effects of
electoral competition.
Unfortunately, although resource-rich countries most need checks and
balances, they are
least likely to have them: over time, restraints are gradually eroded by
resource rents. The
most likely mechanism for this erosion is that large resource rents
radically reduce the
need for taxation. An indication of this comes from comparing Africa's oil
exporters with
its other economies. On average there is no difference in government
expenditure as a
share of GDP: the governments of oil economies do not spend more, they tax
less.
2
Scrutiny of government is a public good the supply of which is commonly
provoked by
the tax burden. The lack of scrutiny in countries with large resource rents
makes it easier
for public revenues to be diverted into patronage: not only are public
revenues larger, but
they are less well defended. Hence, on this thesis, resource rents subvert
democracy by
making patronage politics financially feasible. In such environments, trust
must be placed
not in the good faith of political parties, but in the efficacy of
appropriate checks and
balances that enforce accountability of politicians to citizens.
Where social conditions make patronage politics cost-effective, one
financial parameter
is critical in determining whether electoral competition takes this
destructive form or
2
See IMF, 2005, Table SA11.
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Page 5
facilitates development through public goods provision. This is the ratio of
"sovereign
rents' to "scrutinized revenues'. Here, "sovereignty' refers not to the
rights of the nation
versus external actors, but to the rights of the government versus citizens.
Sovereign rents
are that part of public revenue over which there is no effective scrutiny.
Given political
pressures to raise finance for patronage, the government will be driven to
use sovereign
rents in this way. Political leaders who attempt to resist these pressures
risk being
replaced by those willing to do what is necessary to maximize electoral
support.
Conversely, "scrutinized revenues' are that part of public revenue over
which scrutiny is
able to enforce spending on public goods.
Since patronage politics is expensive, the lower are sovereign rents the
more difficult is
patronage politics. Conversely, the larger are scrutinized revenues the more
prominent is
public goods provision in political debate. Hence, as sovereign rents are
diminished and
scrutinized revenues increased, there comes a point at which, even in social
conditions of
ethnic loyalties and poor information, the winning electoral strategy
becomes effective
delivery of public goods rather than patronage. The ratio of scrutinized
revenues to
sovereign rents determines the incentive for effective government. The key
menace of
sovereign rents is not that they are "wasted' on patronage, but that they
can destroy the
normal incentive for effective government provided by citizen pressure.
I have described sovereign rents and scrutinized revenues as if there were
two distinct
flows, one subject to scrutiny and the other not. Sometimes, most notably in
respect of
aid, this may indeed be the case. However, more commonly, the ratio is
determined by a
generalized level of scrutiny across all public revenues: the level of
scrutiny determines
the proportion of public funds that can be diverted into patronage. The
ratio may differ
more across types of expenditure than across types of revenue: for example,
it is probably
easier to divert expenditures on capital projects into patronage than to
divert expenditures
intended for salaries. Differences in the intensity of scrutiny between
resource rents and
aid may potentially generate different consequences for growth. This is the
issue to which
I now turn.
Unlike resource rents, aid has generally been found to be effective in
raising growth.
Clemens et al. (2004) provide the most recent and systematic study. They
find that
economic aid (as opposed to aid for other purposes) has significantly and
substantially
raised growth in Africa. Bad as Africa's growth performance has been over
the past three
decades, it would have been markedly worse without aid. Aid evidently has
very different
effects from resource rents. Indeed, when aid is introduced alongside
resource rents in the
Collier-Hoeffler growth regressions described above, the hypothesis that
they have the
same effect can be decisively rejected. This suggests that the superior
average results of
aid are not simply due to better allocation among countries: within a given
county aid and
resource rents have distinctive effects. In turn, this tells us that the
in-country modalities
of aid have made an important difference.
Aid agencies are adding value to the transfers that they administer, and
indeed doing so to
a very considerable degree. The evidence of oil implies that aid agencies
face an intrinsic
problem: the baseline effect of resource transfers is negative and the
agencies have to
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offset this by purposive allocation and complementary inputs. Nevertheless,
such an
activity need not be forlorn: an analogy with the effects of hospitals might
help to clarify
the point. The baseline for hospital activity is also significantly
negative. By bringing
patients with a variety of illnesses together in a single building, a
hospital transmits
disease. Even in well-run hospitals, many people contract illnesses from
others while
there, and spread these illnesses when they leave. Nevertheless, societies
rightly see
hospitals as vital: the value-added of a well-run hospital far offsets this
negative baseline
effect. This seems to be the story with aid agencies. The radical critics of
aid are correct
in the sense that the effects they point to are adverse and important, as
demonstrated by
oil. But their overall assessment is as wrong as would be a proposal to
close hospitals.
Indeed, their critique would be far more usefully directed to reforming the
governance of
oil revenues: the task of making oil work more like aid is far more
promising than the
task of making aid work better.
Why does aid have such different growth consequences to resource rents?
Whereas
resource rents appear to undermine the political process, aid does not,
enabling the
additional resources to have a growth-enhancing effect through investment
and other
productive expenditures. This may be the net outcome of two opposing
effects. On the
one hand, we would expect aid to increase sovereign rents by reducing the
need for
taxation. However, offsetting this, aid comes with various donor-imposed
mechanisms of
scrutiny which may spill over onto other expenditures and so substitute for
reduced
pressure from citizens. To take this analysis further, I now consider the
four modalities of
aid delivery.
3. Why is aid more effective than oil?
Recall that aid is delivered through technical assistance, projects,
packages with
conditions, and debt relief. Each of these is so distinctive that their
effects on sovereign
rents and scrutinized revenues, and hence on the incentives for effective
government,
need to be considered separately.
3.1 Technical assistance
Technical assistance is not money in the hands of recipient governments.
Thus it does not
increase sovereign rents. Indeed, to the extent that it is effective, it is
likely to increase
scrutinized revenues and so increase the incentive for effective government,
precisely
contrary to the effect of resource rents.
Perhaps because of this, technical assistance tends to be unpopular with
recipient
governments. Sometimes the fact that around a quarter of aid is in the form
of technical
assistance is depicted as a scandal, or even as a deceitful way of inflating
the true aid
figures. Nevertheless, such aid can potentially both build capacity in the
public sector and
substitute for the lack of it. A key test of such capacity building and
substitution is
whether it assists policy change. Potentially, technical assistance might
induce reform,
persuading governments of the need for change. Alternatively, when
periodically,
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reformers happen to attain political power but lack the capacity to design
and implement
effective change, technical assistance might support reform.
Recent research suggests that technical assistance does not induce reform
but that it is
highly effective in supporting it. Provided at the appropriate moment,
technical assistance
substantially increases the chances of success during incipient turnarounds
from
situations in which policies and governance are very weak (Chauvet and
Collier, 2005).
3
Further, since these configurations of weak policy and governance are
otherwise highly
persistent, the payoff to effective assistance is very high. The highest
payoff is to large
technical assistance programs provided early during incipient reform. A
package worth
5% of GDP sustained for four years substantially raises the chance that the
incipient
reform will progress to major sustained change. On average, such a package
would cost
about $1bn per country and the payoff would be around 15 times its cost. At
present,
technical assistance early in reform is typically supplied at far below this
level. However,
technical assistance can also be ineffective. When it is provided prior to
any sign that
reform has already commenced, it appears to have no significant effect on
improving the
chance that a turnaround will occur. Donors can spend their money preaching,
but
governments are unreceptive.
3.2 Projects
Aid in the form of projects is commonly criticized as cumbersome and
uncoordinated.
One attraction of projects is the partly illusory notion of accountability
that it provides to
donors. They can reassure their legislatures that aid has been spent on an
identifiable set
of activities that can then be evaluated. This can be illusory because of
fungibility: many
donor projects would otherwise have been financed by the government, and so
donor
money actually releases government finance for other priorities. However,
where aid is
very large relative to government budgets as is often the case in Africa,
fungibility is
reduced at least at the margin. For example, once government funding of the
development budget has fallen to zero, as is the case in some countries,
there is simply no
further scope for fungibility.
Even in the absence of fungibility, some project aid can be embezzled and so
augment
sovereign rents. However, projects also augment public goods. Donor projects
must go
through due process. A reasonable indication of the counterfactual of
African government
expenditure in the absence of donor projects is provided by Nigeria. The
combination of
3
Statistical analysis of the payoff to technical assistance during
turnarounds must confront the problem of its
endogeneity: if donors get the allocation of assistance right, they will
direct it to the most promising turnaround
situations. The resulting association between assistance and successful
turnarounds can easily be misinterpreted:
whereas in fact likely success is causing an inflow of assistance, the
association may be seen as assistance causing
successful turnaround. Chauvet and Collier control for this problem by using
a standard set of instruments for aid.
While some changes in aid reflect changes in the circumstances of
recipients, other changes reflect changes
experienced by the donor. For example, since Cote d'Èvoire gets a lot of
French aid and Ethiopia a lot of Italian aid,
when the French aid budget goes up and the Italian aid budget goes down, aid
to Cote d'Èvoire is likely to increase
relative to that to Ethiopia. Further, since donors differ in the proportion
of their aid which is in the form of technical
assistance, it is possible to isolate changes in technical assistance that
are unrelated to circumstances in the recipient
country.
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oil, military regimes and a large population was sufficient to make project
aid utterly
marginal to Nigeria's development. In Nigeria, even the elementary
requirement of
putting out government projects to competitive tender was abandoned. Such a
requirement is standard to all donor projects. The demise of competitive
tendering
dramatically inflated the costs of projects in Nigeria, something that can
be quantified
thanks to its reintroduction as part of the current reforms. Competitive
tendering has
lowered the cost of projects by around 40% (Transparency International,
2005). Hence,
the scrutiny inherent in projects is likely to have been markedly higher
than that for the
own resources of governments.
In addition to due process, donor projects bring sector knowledge and
management
techniques. Even governments that are making a huge success of development,
such as
China, are willing to pay for such knowledge. An indication of this is that
China
continues to borrow from the World Bank. China does not need the money, its
reserves
dwarf the resources of the World Bank and in any case it could borrow more
cheaply on
the markets. Evidently, it values the knowledge that comes as part of the
lending
package.
3.3 Conditionality
Donors have made various attempts to link aid to the behavior of African
governments.
One rationale has been to provide an incentive for behavioral change: in
this case
potentially the main pay-off to aid is the behavioral change it induces
rather than the
actual use to which the resources are put. A different and less ambitious
rationale has
been to channel aid into those environments where behavior is already most
conducive to
aid effectiveness. The potential array of design choices for conditionality
is defined by
the time period and the indicator on which aid is conditioned.
The time period can be ex ante or ex post: that is forward looking or
backward looking.
Ex ante conditionality, where it is credible, provides the strongest
incentive effect
because the donor specifies precisely both the amount and timing of aid that
will be
provided, and the government performance that is required. Ex post
conditionality
provides a more reliable means of channeling aid into specific behavioral
environments,
because the behavior is already in place before the aid is agreed. It may
have some
incentive effects but they are likely to be weak because in general
governments do not
know until some time after implementing change whether it will result in
more aid.
The indicator on which aid is conditioned can be policies, outcomes, such as
reductions
in infant mortality, or governance. This two-by-three space gives six
potential designs for
conditionality (see Table 1).
Table 1: The Matrix of Design Options for Conditionality
Policies
Outcomes
Governance
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Ex ante World Bank in
1980s;
IMF currently
European Union
Currently
Ex post World Bank
currently (IDA);
DFID currently
US currently, (MCA)
Ex ante policy conditionality
In the 1980s the World Bank invented ex ante policy conditionality. The
motivation was
in part that it realized that the policy environments in which it was
operating was often
seriously deficient. Further, the emerging need for large scale defensive
lending to
prevent default could not be achieved through the slow and cumbersome
modality of
projects. It therefore developed an instrument aimed at improving policy
through
negotiated aid conditionality: aid was provided in return for the promise of
policy reform.
The resource transfer was termed structural adjustment lending. On the whole
this was
unsuccessful (Dollar and Svensson, 2000). The failure reflected two
fundamental
weaknesses. First, governments learned to game the system by reneging on
their
promises. Aid was committed on the basis of a promise, yet the limited
continuity in
Bank decision-taking and the strong incentives to disburse made enforcement
through
future aid commitments incredible. In the event, some governments were able
to sell the
same promise of reform to the Bank several times. This weakness of
conditionality is a
straightforward instance of a class of problem known in economics as time
inconsistency.
The second weakness was that the coercive nature of the Bank's promotion of
policy
reform deepened government resistance to policy change. This is also a
straightforward
instance of a class of problem known in the psychology literature as
"reactance' (Collier,
2001).
While not abandoning conditionality, donors recognized these failures and
and by the late
1990s had substantially changed its design. The only agency left operating
the ex ante
policy conditionality mode was the IMF. Because of its core mission of
responding to
crises, the Fund did not have the option of change: of necessity it
continued to direct its
finance into situations in which the key problem was that policies needed
rapid revision.
However, the Fund took note of the ownership issue by reining back the scope
of its
conditionality to those policy changes that were demonstrably critical to
the success of
the program.
Ex post policy conditionality
The World Bank gradually shifted to ex post policy conditionality. That is,
aid was
allocated not on the basis of promises of policy change, but on the basis of
attained levels
of policy. The instruments for this were the Poverty Reduction Strategy
Papers (PRSPs)
which were to be drawn up by each country, and the Country Policy and
Institutional
Assessment, an annual rating of attained levels of policies which was used
to guide
allocations of the Bank's concessional lending, IDA. The term for such
lending is budget
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support. This reform substantially addressed both reactance and time
inconsistency.
Governments were now designing their own policies: governments were "in the
driver's
seat', and "owned' their policies. Any promises they chose to make were to
their citizens
not to donors. Some major bilaterals, most notably DFID, followed broadly
the same
allocation principles.
Ex ante outcome conditionality
The European Union retained ex ante conditionality, but switched from
policies to
outcomes: governments promised to achieve certain outcomes such as
reductions in
infant mortality in return for aid. This also substantially overcame the
problem of
ownership: governments were free to attain outcomes with whatever policies
they wanted
as long as they delivered the donor-desired outcomes. However, the
time-consistency
problem remained and was indeed probably accentuated. To see this, consider
what
happens if a government breaches its commitments. It is possible to detect
that a policy
commitment has not been kept well before a failure in an outcome commitment
can be
detected, and even once such a breach has been detected the government can
resort to the
argument that the missed outcome was due to circumstances beyond its
control.
Ex post governance conditionality
The US government switched to ex post governance conditionality, through its
new
vehicle, the Millennium Challenge Account (MCA). In this allocation
mechanism the
dominant consideration was the attained level of governance processes.
Underlying the
shift to governance conditionality were considerations both of legitimacy
and efficacy. In
terms of legitimacy, while policy conditionality was recognized as an
intrusion upon
national sovereignty, governance conditionality was concerned with
strengthening the
accountability of governments to their own citizens. So conceived,
governance
conditionality was intended to accelerate the process that elsewhere had
taken centuries
whereby governments came to share sovereignty with their citizens. In terms
of efficacy,
weak policies were diagnosed as generally reflecting underlying weaknesses
in
governance.
Mutual conditionality
Meanwhile, African governments themselves recognized that ex ante policy
conditionality had not merely been an affront to their sovereignty, but had
painted them
into a deeply damaging corner in which they were seen as invariably
resistant to reform.
The resulting perception had probably contributed to the severe erosion in
aggregate aid
flows during the 1990s. The governments of Nigeria and South Africa,
Africa's two
major powers and both newly democratic, led an internal movement for
improvements in
governance. Both through the power of their example, and through the peer
pressure
formalized in the review mechanism of NEPAD, they offered prospects of
improved
governance across the region. This was the basis for the Monterrey
Consensus, in which
African governments committed to improve governance and donors committed to
increase aid. The purported spirit of these commitments was that of mutual
trust rather
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than of formal conditionality: donor distrust had been replaced by donor
trust. However,
the deal can equally be understood as the passage from donor mistrust to
mutual mistrust.
Because neither side trusted the other, each side committed to gradual
processes of
improvement each of which could be monitored. African governments committed
to
regular self-scrutiny of political and economic governance through the peer
review
mechanism of NEPAD, and donors committed to move towards the UN target of
aid at
0.7% of GNP. Both parties committed to periodic monitoring at G8 meetings
and at
specially convened conferences. The recognition of mutual distrust has thus
initiated a
gradual shuffle towards the desired deal of improved governance matched by
increased
aid. The problem of reactance is addressed because there is no policy
conditionality, and
indeed no explicit conditionality at all. The problem of time inconsistency
œ this time for
both parties - is addressed by the two processes being in tandem: each party
must be able
to demonstrate to the other credible evidence of progress at each review
meeting.
However, the Monterrey Consensus introduces a new problem into
conditionality: each
side in this deal has very little control over its members and so is subject
to a potentially
severe free-rider problem. The limits of NEPAD's power to influence
recalcitrant
governments have been cruelly exposed over Zimbabwe. The limits of OECD
coordination have been similarly exposed in a highly variable pattern of
donor
commitments. Each side has tried to assist the other to coordinate. The MCA,
which was
announced at Monterrey, can be seen as an attempt to reinforce the NEPAD
incentives
for improvements in governance. Similarly, the recent creation of an
independent league
table of donor country performance can be seen as a way of increasing
pressure on
recalcitrant donors.
3.4 Debt relief
Debt relief is primarily driven by the ethical confusion and bureaucratic
duplication
involved in providing aid while at the same time demanding debt repayment.
However,
the case for debt relief would be more compelling were oil revenues more
effective than
aid: debt relief is the aid modality that, unless carefully managed, comes
closest to
turning aid into oil.
Once debts are cancelled a government has no incentive to abide by any
continuing
conditions. HIPC arrangements have attempted to overcome this problem by
having
donors pay debt service into an account which only liquidates the debt at
some future
date, the liquidation being conditional upon adherence to certain
conditions. However, it
remains to be seen whether this will be a credible threat. Fundamentally,
time-
consistency problems can only be overcome by conditioning behavior upon
flows rather
than stocks. Not only does debt relief face a potentially severe time
consistency problem,
the criteria of allocation tend to favor precisely the bad policy and
governance
environments where resources are least likely to be effective. This is
because large debts
to GDP or exports tend to arise where the latter have been depressed due to
the policy
and governance environment.
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The case for debt relief is, however, strengthened by four other
considerations:
unsustainable debt, odious debt, debt overhangs, and signals of
international approval.
Not all debt relief is a resource transfer. Indeed, were "debt
sustainability' to be taken
literally as the criterion for debt relief, then it would not generate any
resource transfer.
The only debt that would be written off would be that which was
unsustainable œ it could
not have been repaid. Such debt relief is strongly to be encouraged. Indeed,
were official
creditors subject to the same regulations as commercial banks, such debt
write-off would
be a legal requirement. However, to reiterate, by definition it would not
produce a
resource transfer to debtor countries. In practice, however, most debt
relief does produce
a resource transfer: the criterion of "sustainability' is a political
fig-leaf rather than an
economic assessment.
Where debts have been incurred by unaccountable governments that are
manifestly not
likely to use the money for the benefit of their populations, the lender
lacks moral
authority: the debt is odious. A significant variant of this is where the
borrowing
government has borrowed advantageously thanks to penalty clauses which it
has then
chosen to breach, leaving successor governments with the legacy of the
penalties. If
lenders introduce penalties knowing that the borrowing government lacks the
integrity to
avoid triggering them, the resulting liabilities are odious.
Debt relief locks donors into a resource transfer. It thus tackles the time
consistency
problem as perceived by recipient countries and this extra certainty can
have favorable
economic effects. Government debt reflects future tax liabilities œ the
overhang effect -
that can discourage private investment, since the investments will become
the future tax
base for the economy. Firms that invest in highly indebted economies are
thus
volunteering to be milked. By removing the uncertainty over how these debts
will be
repaid, debt relief thus encourages private investment.
Finally, whereas aid is a flow and so not particularly newsworthy, debt
relief is an event.
It therefore has the potential to provide a signal from the international
organizations that
the recipient government has already implemented changes that they judge to
be
important. Because the underlying behavioral changes are likely to have been
incremental, they may also have failed to attract media attention. The key
audience for
such a signal is usually international investors, but it may on occasion be
the domestic
population which has lacked objective information on which to judge
government
performance. Evidently, such a signal effect depends upon debt relief being
conditioned
upon attained performance.
4. So should aid be "scaled up'?
Were resource rents effective in development it would be a simple matter to
raise aid
effectiveness. There would be no difficulty in turning aid into oil:
technically this could
be done through either unconditional budget support or unconditional debt
relief.
Politically such a change would be popular with recipients and many NGOs and
indeed
characterizes the broad thrust of the current aid discourse. However, given
the
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considerably superior performance of past aid relative to resource rents,
such a
transformation of the modalities of aid would most probably reduce rather
than enhance
its effectiveness. The radical critics of aid are correct in arguing that
large sovereign rents
have been detrimental to development, but wrong in their casual conflation
of resource
rents and aid. So, have the existing modalities of aid created conditions
whereby it can
productively be scaled up?
4.1 What will be achieved on current modalities: evidence from past
experience?
Given that aid as channeled through existing modalities is effective in the
growth process,
the evidence might appear to support a substantial scaling up. However, like
much of the
literature, Clemens et al. find that aid is subject to diminishing returns.
They estimate that
economic aid hits the point at which it ceases to contribute to growth when
it is around
8% of GDP. Although some African counties receive less than this in economic
aid, on
average on this figure there would seem to be little scope for expansion. A
few of the
countries with aid inflows well below 8% are indeed "aid orphans,' that is
countries that
have only weak historical ties with the important bilateral donors: here
scaling aid up
would be appropriate without qualification. However, other apparently
under-aided
countries either have serious governance problems such as Zimbabwe, or large
resource
rents, and in such cases donors may well be appropriately taking into
account factors that
are inadequately considered in the econometric models.
The evidence for diminishing returns is not overwhelming, but it the best
assessment of
the dispassionate empirical literature, and it has some plausibility. It
suggests that aid to
Africa has more-or-less reached its appropriate scale. In Section 5 I
challenge this
position head-on. First, however, I consider a more conventional
justification for
enhanced aid: times have changed.
4.2 Have recent changes invalidated past experience?
Improved policies and governance in Africa
There is reasonable evidence that policies and governance are improving in
Africa. This
is certainly indicated by the Country Policy and Institutional Assessment of
the World
Bank, an annual country-by-country rating system. The average CPIA score for
Africa
has risen considerably. While this might possibly reflect "grade inflation'
on the part of
World Bank staff, objective performance as indicated by higher growth and
lower
inflation is also at a historic high. African governments might also point
to the
establishment of NEPAD and the AU as being indicative of greater concern
with
governance and as vehicles for its improvement. However, the NEPAD process
of peer
review is still in its infancy, and the earliest sensible evaluation would
be around 2007.
Although loosely modeled upon the OECD process of peer review, it is in some
respects
noticeably weaker: indeed, unlike the OECD, the mechanism is predominantly
one of
self-evaluation, rather than peer evaluation.
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Whether improvements in policies and governance actually increase the
absorptive
capacity for aid is surprisingly controversial: the econometric evidence is
mixed and
hotly disputed. This may be due to a conflation of two distinct processes.
As discussed
above, there is evidence that aid can sometimes be highly effective in
promoting policy
turnarounds in the weakest policy and governance environments. It can also
cushion
adverse shocks in the most vulnerable countries. These may be muddying an
underlying
but highly likely economic relationship that better policies and governance
raise the
return to public spending. My own view is that to the extent that the
improvement in
African policies and governance is genuine it will surely have increased
absorptive
capacity for aid. Clearly, improvement is not region-wide. However, the aid
allocation
rules of IDA and many other agencies already incorporate appropriate
selectivity. Hence,
an improvement in the average CPIA for Africa warrants an increase in
overall resources,
which existing procedures can then be left to allocate.
Improved donor practices
The second justification for expanded aid is that donor practices have
improved:
administering and managing aid has becoming less costly to its recipients,
and donors are
allocating aid more appropriately. Underlying this is a change in the
motivation for aid.
Until the 1990s much aid was provided for political reasons associated with
the Cold War
with relatively little engagement from OECD electorates. The focus on the
Millennium
Development Goals both reflects and promotes a greater concern among both
donors and
electorates that aid should be effective in reducing poverty. The extent to
which practices
have improved and its effect upon aid absorption is as yet not quantified.
Nevertheless,
my expectation is that this has received more emphasis than is warranted.
Most debate on
aid absorption is donor-dominated and the discussion may reflect a
self-absorbed focus
on the minutiae of their operations.
5. Potential innovations in aid modalities: complements to scaling up
Thus, so far, the more moderate critics of aid expansion appear to be
correct: aid is useful
but the scope for proportionate "scaling-up' is limited. The limits to
scaling up should not
surprise us. If a mouse were "scaled up' proportionately to the size on an
elephant it
would collapse under its own weight: increased size usually requires radical
change in
design. The present composition of aid may well be appropriate for its
present scale, but
not for a substantially larger scale. I now turn to six innovations that
have the scope to
yield quantum changes in aid absorption. The first four are new "funds'.
Unlike the new
Global Funds they are not specific to some narrowly defined activity such as
primary
education, nor would they require new bureaucracies. Rather, they would be
additional
money that donors would allocate to specific countries in particular
circumstances: they
would reflect changes in country allocation criteria. The remaining two
innovations are
complementary policies that both donors and African governments could
feasibly adopt
to address particular constraints on aid absorption.
5.1 Fund 1: Finance for big pushes
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While diminishing returns are plausible in theory and appear on average to
hold in
practice, there are circumstances in which, at least over a range, aid can
be expected to
yield increasing returns. The theory underlying this is sometimes referred
to as the theory
of the big push: it depends on the existence of complementarities and
thresholds.
Potentially complementarities and thresholds could apply to a variety of
development
goals. However, for Africa the critical problem has been a lack of economic
growth and
this is the objective on which I will focus.
Complementarities in the growth process imply that if several things are
done together
the returns to all of them are higher. Improved ports may only be useful if
the rural road
network is improved so that produce can be transported, and the extra
produce may not
be forthcoming unless credit facilities are enhanced. If each of these
improvements can
be made incrementally, then the economy can shuffle forwards: slightly
better ports
induce slightly better roads, which then feed back onto the returns to
roads. However, the
process of creeping improvement might be arrested altogether if there are
also important
thresholds.
Thresholds in the growth process imply that only once some scale of change
is reached
does investment become effective. One threshold that may be very important
for some
African countries is the point at which the country becomes competitive in
global
markets for manufactures. There is now strong evidence that there are
powerful
economies of agglomeration in manufacturing. Given that Asia already has
such
agglomerations, this creates a threshold that currently shuts Africa out of
global markets
in which it might well be competitive if only it could reach the necessary
scale. Note that
when Asia broke into export manufacturing it did not face competition from
established
low-wage producers and so did not encounter such a threshold problem. A key
attraction
of manufacturing exports as a growth strategy is that because African
countries are so
small relative to the global market, once they were over the threshold of
competitiveness
they could in effect grow without limit. EPZs could be used as focal points
for
infrastructure and business services that lower the costs of exporting.
The conjunction of complementarities and thresholds requires coordinated
leaps: no
investment looks to be worthwhile in isolation. Aid can provide both the
resources and
the coordination to make these leaps. Although the potential is largely
speculative, the
effect of such aid would be remarkably easy to monitor. By benchmarking the
costs in an
activity against the global competition it would be clear by how much costs
would need
to be lowered, and by monitoring these costs it would be apparent whether
aid
investments had achieved the objective.
A different type of threshold is that once growth rates become exceptional,
they get
noticed. Africa has not been devoid of economic success stories, but its
successes,
notably Botswana and Mauritius, have been very small countries. Were a few
larger
countries to grow rapidly, especially if the growth took the economy well
beyond any
previous point so that it could not be belittled as a mere recovery, the
pioneers would
become role models. In economic terms, beyond some growth threshold success
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generates learning externalities. It is not possible to quantify such
benefits, but the
process has obviously been important in both Asia and Latin America.
The big push postulates a range of increasing returns. This has a radical
implication for
aid allocation: aid should be concentrated in a few countries at a time. It
would obviously
be sensible to concentrate aid in those countries whose governments had
developed
ambitious but credible growth strategies. For example, if the key objective
is to break into
global manufacturing markets it would be sensible to concentrate on
countries that are
coastal, and that do not have large resource rents with attendant Dutch
disease effects.
Further, it would be sensible to concentrate on those countries that
currently have
manufacturing costs that are closest to competitive global levels. Such a
strategy of
concentrating aid would raise some political difficulties. However, for any
one country it
would essentially be temporary: aid would be big until the country was over
the
threshold, and then donors would move on down the queue of potential
recipients. If the
theory of the big push is correct, such a sequenced selectivity would be in
the interests of
all recipients.
There have been no recent experiments with such big push aid and so it is
not possible to
verify empirically whether such a strategy would work unless it is tried on
an
experimental basis in some countries. Within a chosen country donors would
simply need
to align their support around a growth strategy which could be part of a
PRSP. The more
difficult part is a significant increase in country selectivity. The most
difficult part is that
choices as to which countries were being favored would need to be common
across
donors.
5.2 Fund 2: Venture capital for turnarounds in failing states
As we have seen, technical assistance is effective in supporting
turnarounds. Situations of
incipient reform could have been supported more speedily and more
substantially with
technical assistance, and subsequently with more finance. This requires
changes in donor
allocation procedures and evaluation methods.
In terms of procedures, donors need to be able to respond swiftly to
turnarounds with
large increases in technical assistance. In effect, the provision of
technical assistance
should be organized more akin to emergency relief than to normal projects.
Without
changes in aid evaluation, aid agencies are unlikely to put more money into
turnarounds.
Like most bureaucracies, aid agencies are risk averse: staff avoid
situations in which their
decisions lead to visible failure. Much of the time, even with appropriately
supportive
aid, turnarounds will continue to abort. The rationale for support is not
that it has a high
probability of success, but that where it does make a difference the pay-off
is massive.
Such uses of aid need to be evaluated in ways analogous to a venture capital
fund. That
is, staff decisions are not assessed investment-by-investment, but rather on
the overall
return on a portfolio of decisions. The current attention to "results
orientation' in aid
agencies may have the inadvertent consequence of increasing risk aversion,
and so aid for
turnarounds probably needs a distinct fund which would be evaluated only as
an
aggregate.
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Post-conflict situations, of which Africa now has several, could also
productively absorb
considerably more aid that has typically been provided. Such situations are
distinctive not
only in their manifest need for reconstruction, but in their need for policy
reform.
Typically, countries emerge from conflict with a legacy of very poor
policies. However,
whereas poor policies are usually highly persistent, in post-conflict
situations they are
fluid. Starting from the same level, substantial turnaround is around four
times more
likely if the situation is post-conflict (Chauvet and Collier, 2005).
Indeed, by the end of
the first post-conflict decade, as long as there is no relapse into
conflict, policies (as
measured by the CPIA) are typically above the developing country average
(Collier and
Hoeffler, 2004). Aid is found to be more productive in the growth process
during this
decade than in other periods. Although some post-conflict situations, such
as Bosnia,
have attracted large aid inflows, the more typical situation is that there
is an initial spurt
of aid for the first couple of years after which it tapers out. Collier and
Hoeffler find that
this is not the pattern most conducive to growth: the peak phase for aid to
accelerate
development appears to be during the middle of the decade rather than at the
beginning.
Perhaps, in the early post-conflict period, although needs are great, the
capacity to spend
money effectively is limited and so large aid is more useful after
institutions have been
rebuilt. Overall, they find that aid flows to post-conflict situations could
productively be
substantially increased relative to historical levels.
Just as the big push approach is attractive because of the externalities
that follow from
having some strong successes in the region, so turnarounds are particularly
attractive
because those states that are currently failing generate large costs for
their neighbors.
Indeed, funding for turnarounds is the most promising way of using aid to
address the
problem of failing states, about which there is widespread global concern.
5.3 Fund 3: Aid in the context of weak governance: an alternative to social
funds
Where African governments are even moderately accountable to their citizens,
donor
conditionality is inappropriate: donors should be supporting credible
government-
conceived strategies. Unfortunately, in some African countries governments
are far from
being accountable to their citizens. At present, such countries receive
little aid and given
current aid modalities this is probably appropriate. The main aid modality
designed for
these environments is "social funds'. These finance projects channeled
directly to
communities rather than through the government. In effect, they pretend that
the
government was not there. The issue is whether donors might devise a more
effective
alternative.
Donors should not attempt to play the role of substitute citizens. However,
there may be
scope for redesigning conditionality so as to change the incentives in the
weakest
governance environments towards greater accountability to citizens. Recall
that I have
suggested that based on the evidence from resource rents, the roots of weak
governance
are the circumstances in which patronage politics trumps the delivery of
public goods.
Potentially, aid can be used to address this problem rather than to compound
it. To do this
aid would need to reduce the finance available for patronage and increase
expenditures
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on public goods. This can be thought of as ex ante governance
conditionality. If feasible
it offers the enormous advantage of channeling aid resources into the
countries with the
greatest needs for public goods, while at the same time addressing the
problems of weak
governance.
As implied by Table 1, the option of ex ante governance conditionality has
not yet been
tried to any extent. This is surprising because it is far more legitimate
than other forms of
conditionality. The essence of governance conditionality is that aid is
being used to
increase accountability not to donors, but to citizens. The sovereignty of
the government
is being limited, but not the sovereignty of the country. Such struggles to
limit the
sovereignty of governments occurred throughout the now-developed world.
International
pressures are generally judged to have played a crucial role in these
struggles: external
military threats forced governments to raise tax revenues, and this in turn
empowered
citizens to demand that governments create checks on their own power.
Clearly, this is
neither a feasible nor a desirable process in modern Africa, but other
external pressures
may be needed as a substitute.
The arrangements put in place for the management of revenues from the
Chad-Cameroon
pipeline provide a rare illustration of how ex ante governance
conditionality might work.
The arrangements actually addressed how resource rents should be used, but
the principle
could equally well be applied to aid flows. Indeed whereas the circumstances
in which oil
revenues came to be restrained are unique, the application to aid could
readily be
generalized to many other situations. Chad is a pre-reform environment in
which
resources under the sole control of the government are likely to be badly
used. This was
the rationale for the Revenue Management Law which required that 80% of the
resource
rents were to go into a special fund. Money from this fund could only be
spent upon a
specified set of social priorities, and this money must be incremental to
government
spending. To ensure that spending was incremental, the law required the
government to
allocate at least the same proportion of its non-oil revenue on these
priority sectors as it
had done in 2002, prior to the oil, namely 42%. The money in the special
fund could only
be released from the fund on the authority of a college including
representatives from
civil society, who would verify that all expenditures were indeed for the
approved
purposes. The money into the fund was released from an escrow account on a
quarterly
basis. This arrangement was time-consistent in the key sense that because
verification
was continuous the government did not have stronger incentives to make
promises than it
had to fulfill them.
These arrangements provide a possible model of ex ante governance
conditionality in
environments where governance is weak but needs for public goods are great.
As in that
model, aid would come as budget support, but would be limited to particular
parts of the
budget. As in that model, aid would be matched by the government's own
resources,
channeled into the same system month-by-month, on which draw-downs from the
aid-
funded resource flow would be conditioned. At the core of this system would
be
independent scrutiny such as that provided by the college, which would
verify and
authorize each item of expenditure from the resources provided. A key
advantage of such
an arrangement is that it would expand resources devoted to public goods
provision, at
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the same time as it squeezed sovereign rents of the government, and hence
the finance of
patronage. At some point the winning political strategy would switch from
patronage to
public goods provision. Once this switch occurred, the aid could gradually
evolve into
unrestricted budget support.
Not all governments where governance is weak would opt for such
arrangements,
although on the evidence of Chad some clearly would. However, the different
choices
would reveal where the improvement of governance was more and less
tractable. One
lesson to be learnt from the past failures of conditionality is to recognize
that the
instrument is indeed likely to have limits to its effectiveness. Unlike past
experience, the
choices of governments would reveal the likely limits before resources were
committed.
5.4 Fund 4: Aid to cushion terms of trade shocks
A final potential use of aid is to cushion adverse terms of trade shocks.
Whereas most
non-African developing countries have diversified their exports away from a
narrow
range of primary commodities, several African countries remain highly
vulnerable.
Uganda, Ghana and Madagascar, each with governments implementing economic
reforms, have been hit by large adverse terms of trade effects at
politically vulnerable
moments. There have been some experiments with using aid to provide direct
insurance
for African exporters. However, such an approach is administratively complex
and
misses the point that large shocks generate macroeconomic effects. The
depreciation of
the real exchange rate in response to a shock cushions exporters and
transfers the income
loss to other agents in the economy: it is thus like an automatic domestic
insurance
arrangement. What is most needed is therefore not a scheme targeted on
individual
exporters, but rather one that cushions the entire economy. Much the easiest
way of doing
this is for aid flows to governments to be countercyclical to the terms of
trade. The
essence of such a scheme is that it should be swift, and for this it needs
to be as near to
automatic as possible. Past aid schemes for cushioning shocks such as Stabex
fail this
test. One study finds that adverse terms of trade shocks have large adverse
repercussions
for growth but that timely aid can offset these effects, implying
exceptionally high returns
to aid (Collier and Dehn, 2001).
5.5 Complementary policies 1: offsetting Dutch disease
One likely reason for diminishing returns to aid is Dutch disease. Dutch
disease occurs
when aid reduces the competitiveness of the tradable sector. Many analysts
of the growth
process stress the importance of a depreciated real exchange rate,
(Hausmann, Pritchett
and Rodrik, 2003), and the Dutch disease effect of aid is a recurrent
concern of the IMF
(Rajan and Subramanian, 2005). There are four means of avoiding this
problem.
First, incremental aid can be targeted to expenditures that reduce some of
the costs that
are faced by important parts of the tradable sector, such as transport costs
and power
costs.
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Secondly, the import content of aid can be increased. Both technical
assistance and
infrastructure projects have much higher import content than expenditure on
government
salaries and so have a smaller impact on the real exchange rate,
dollar-for-dollar. It is
notable that the social priorities favored by donors during the past decade
neither reduced
costs in the tradable sector nor directly raised the demand for imports.
Third, recipient governments can offset the increase in the supply of
imports implied by
aid, with an increase in the demand for imports. The instrument for
achieving such an
offsetting increase in demand is trade liberalization. Where Dutch disease
is a real
concern, donors may need to confine large increases in aid to those
governments which
coordinate aid increases with trade liberalizations. Note that the purpose
of the
liberalization would not be to open markets to firms in donor countries, but
rather to
prevent the exchange rate effects of aid from contradicting its objectives.
This could, for
example, be achieved by a trade liberalization in favor of other developing
regions:
Africa currently has higher trade barriers against other developing regions
that against the
OECD. Since virtually all recipient governments currently impose fairly high
trade
restrictions there is plenty of room for increases in import demand.
Fourth, developed countries could reduce their current trade barriers to
developing
countries. This would raise the price received by exporters in aid-receiving
countries and
so would offset the disincentive to exports created by an appreciation in
the exchange
rate.
5.6 Complementary policies 2: donor coordination without harmonization
To the extent that improved donor coordination matters, the present approach
of
"harmonization' is on the past record unlikely to deliver much change. After
all, with
largely the same players the European Commission failed to achieve
harmonization of
product standards despite many years of effort. A simple approach to
reducing the
demands placed upon recipient administrations is for donors to adopt a
mutual
recognition of each others procedures. Mutual recognition was the key
procedural
advance that enabled the European Union to develop an integrated market for
goods: if a
product was accepted as meeting conditions for sale in the market of any
member country
it was accepted in all of them. The strategy of mutual recognition replaced
harmonization, which, though attractive in theory, proved impossible to
achieve in
practice. The history of aid coordination to date has in effect been that
the unattainable
holy grail of harmonization has impeded more practical alternatives. With
mutual
recognition, a recipient government would be free to adopt whichever donor
system was
most compatible with its own procedures. Other donors would then adopt that
system for
that country. Donors would find themselves running different systems in
different
countries, but this administrative burden is probably within their
competence. The
problem at present is that it is the weak administrations of recipient
countries that are
confronted with the burden of multiple systems. However, if donors found the
burden of
multiple systems intolerable, this would be the only incentive for
harmonization that is
likely to prove effective.
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Page 21
Beyond coordination and mutual recognition, much the most effective way of
coordinating aid is to pool resources financially, letting a single agent
decide how to use
them within certain agreed limits. To a degree this is done already. Donors
pool funds
into IDA, leaving the World Bank to implement. They also pool resources into
budget
support, leaving the government to implement. However, for political reasons
bilateral
donors retain most of their funds for their own projects. One political
reason is that
projects provide at least a semblance of accountability. For example, when
the
government of Malawi was criticized in the international media for
purchasing a fleet of
Mercedes, DFID was able to claim that this had not been financed by British
aid because
all aid to Malawi was in the form of projects. Were budget support to be
redesigned in
such a way as to provide much greater accountability, effectively precluding
such uses by
recipient governments, it might be possible for donors to devote more
resources to it.
6. Conclusion
If aid is like oil the economic case for a major expansion of aid to Africa
is disturbingly
weak. The evidence strongly indicates that on average aid has been much more
effective
at promoting development than oil. Since both are transfers to governments,
the profound
difference in their consequences must lie in the details of how aid
transfers are made.
Even though aid is not like oil, the scope for substantial expansion may
nevertheless be
limited by diminishing returns. The available evidence suggests that if aid
is simply
scaled-up proportionately, the incremental aid might indeed be much less
effective,
dollar-for-dollar, than existing aid.
There is, however, scope for innovations. Additional aid could support four
strategies that
have to date been neglected: a big push through concentrating large
resources in the most
promising environments; assistance for turnarounds; in the weakest
environments finance
for public goods channeled through required improvements in governance; and
finally aid
to cushion terms of trade shocks. Each of these would generate externalities
across the
region. Investing aid in accentuating success would provide African role
models for the
rest of Africa to follow. Investing aid in the weakest environments would
reduce the
crisis situations that spill over onto neighbors. There is also scope for
complementary
policy changes that would mitigate Dutch disease and reduce the transactions
costs
associated with aid projects.
The evidence for these innovations varies. The most speculative is the big
push.
However, fortuitously, it lends itself to being an evaluated experiment. The
country-
sequenced strategy implied by the logic of scale economies simulates a pilot
experiment,
and since success involves being a role model for the region, performance is
inherently
observable to donors. There is thus a good case for trying the approach,
recognizing that
it may have to be abandoned. The venture capital model of financing
incipient
turnarounds is, by contrast, the most difficult to evaluate, but there is
reasonably robust
statistical evidence that it would have a very high payoff. The attempt to
use ex ante
governance conditionality to build new institutions for channeling money
into the
weakest and most needy environments is new territory but not inherently
risky. The
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Page 22
money would only flow where the new institutions of governance ensured it
would be
genuinely accounted for, and provided some prospect of increased
accountability to
citizens. The provision of aid for macroeconomic insurance against shocks
would begin
to address the evident problem that the poorest countries face high levels
of risk and so
need some contingent financing. While the evidence for a high pay-off is
currently
limited, the lack of contingent financing instruments can only be rectified
by a phase of
experimentation. The evidence for the complementary policies is analytic
rather than
empirical and essentially straightforward.
Something surely needs to be done decisively to raise African growth rates:
the continued
marginalization of Africa in the world economy would have incalculable
consequences
that it is in our common interest to avert. The new strategies look
sufficiently promising
to be worth trying. New strategies do not come with guarantees, but in the
face of
problems that have proved intractable there is no alternative to such
strategic
experimentation.
Finally, I note that in this article I have used the gulf between the
development
consequences of aid and oil to consider aid. However, the more important
implication
from the aid-oil contrast is for oil. If oil could be turned into aid the
development
consequences would be enormous. Oil and other resource rents are in
aggregate much
larger flows to developing countries than aid, and their effects to date
have been on
average significantly negative. Raising the development effectiveness of oil
revenues and
other natural resource rents must, however, be the subject of a separate
paper.
References
Chauvet, L. and P. Collier, 2005, Policy Turnarounds in Failing States,
Department of
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