In the decade before the global financial crisis,
Africas economies seemed finally to have defied modern
history as they surged forward with unprecedented momentum.
Sky-high commodity prices, improved macroeconomic management
and a flood of foreign capital appeared to have reversed the
regions fortunes once and for all, after countless years
of hampered development. And a wave of debt relief programmes,
notably the Heavily Indebted Poor Countries (HIPC) and
Multilateral Debt Relief Initiative (MDRI), lent a much needed
boost to sovereign balance sheets from Congo to Senegal.
The result was near-universal optimism that the
continents anti-poverty drive, buoyed by aid flows and
robust economic expansion, would bear much needed fruit.
But the 2008 financial crisis changed all that. As exports,
capital flows and bank lending collapsed, so too did the
regions drive towards economic development. Although
investment, consumption and trade are once again picking up,
the jury is out on whether the global crisis will prove a
cyclical blip in the regions growth cycle, or whether
further economic gloom in western economies will haunt
Africas development story once more.
The uncertainty has lent new urgency to calls for more aid.
The World Bank, aid agencies and NGOs are urging the
international community to ramp up aid to offset the impact of
weak growth. According to the Organization for Economic
Cooperation and Development (OECD), total net overseas
development assistance (ODA) rose 0.7% in real terms relative
to last year.
You cant call this a counter-cyclical
response, says Dirk Willem te Velde, economist at the
Overseas Development Institute (ODI). Aid is a policy and
not a direct outcome of economic behaviour. As a result, aid
should have been increased as a counter-cyclical measure. But
it was not.
Over the past two years, Africa has stepped up its reliance
on multilateral support, finding itself largely unable to
stimulate domestic economies with monetary or fiscal tools. The
IMF provided sub-Saharan Africa with $3.6 billion in
concessional loans (effectively zero-interest rates) last year,
while disbursing $1.4 billion in IMF balance-of-payment
support. In total, this represents nearly a five-fold increase
compared with 2008, bringing into sharp relief the surge in
Africas sovereign financing needs.
But deep recessions and high public debt burdens in advanced
economies put paid to the idea that donors saddled with
9.2% budget deficits in 2009 would scale up aid and
provide Africa with a short-term stimulus last year.
Whats more, western governments have already hiked their
structural aid commitments over the years, according to the
OECD. It estimates aid flows excluding debt relief
from traditional donors to Africa tripled between 2000
and 2008 from $8 billion to $24 billion.
But market panic over the Greek debt crisis and its fallout
on Europe could be a game-changer. Fears are growing that aid
cuts in the rich world will become a structural consequence of
the global crisis. The ferocity of the downturn and the
unprecedented levels of public debt burdens would have heaped
on the risks, says economist Homi Kharas, a senior fellow at
the Brookings Institution. Even though aid is a very
small fraction of GDP, it is discretionary funding, so by
definition it is liable for a chop as governments look to cut
their deficits in the face of growing threats that their
sovereign credit rating will be downgraded.
The Greek debt crisis has set off a wave of spending cuts
around the globe as governments worry that fragile market
confidence in public debt sustainability particularly in
the eurozone will trigger a jump in sovereign financing
costs. As a result, fears are mounting that aid budgets will be
slashed for political reasons too, as voters faced with massive
belt-tightening measures balk at the prospect of increasing
overseas aid financing.
Empirical studies confirm the link between donor
economic cycles and aid flows, especially during severe
downturns, says Alexei Kireyev, an IMF economist.
Spain, Greece and Portugal which cut aid by 1.2%, 12%
and 15.7% last year are poised for further budget cuts,
although ODIs Velde notes that they are relatively
small donors, so they wont affect the aggregate aid flows
to Africa that much.
The broader implications are more distressing, however. Adds
Velde: The market panic in the eurozone over sovereign
debt and subsequent budget cuts in southern Europe has
increased the risk of cutbacks in aid in the rest of
Heightened sovereign debt fears in the rich world hit at a
critical time for international development. This year marks
the deadline for donors to deliver their aid commitments made
at the G8 (France, Germany, Italy, Japan, United Kingdom and
Russia) Summit in Gleneagles in 2005, where rich countries
pledged $130 billion in aid by 2010, a commitment heralded at
the time by Bono, musician and development activist, as
the beginning of the end of poverty in Africa.
Such statements seen in the harsh post-crisis light now seem
wildly off the mark. Most African governments are off track to
meet the UNs Millennium Development Goals by 2015.
In April, before Europe committed to unprecedented bailout
packages for Greece and the eurozone, the Donor Action
Committee warned that the aid disbursements to Africa this year
are likely to be $14 billion short of the $25 billion increase
pledged in 2005, measured in 2004 dollars.
Overall, overseas development aid this year is expected to
hit $108 billion expressed in 2004 dollars, an increase of $28
billion over the 2004 baseline. The overseas aid (ODA) to gross
national income (GNI) level ratio is set to rise over the same
period from 0.26% to an estimated 0.32%. But this leaves an aid
shortfall of $18 billion (in 2004 dollars) against the 2005
commitments, once the effects of reduced GNI are taken into
account, the OECD said last month.
LARGER AND SMALLER
But according to statistics published by the ONE Campaign,
an aid advocacy NGO, overseas aid in the G8 is set to fall
further. It estimates aid this year will be $13.6 billion more
than 2004 in other words, a 49% shortfall on the 2005
Overall, we have seen since 2005 the largest ever
increase in aid to Africa over a five-year period, says
Jamie Drummond, co-founder of the ONE Campaign with Bono.
But the figures are significantly lower than the [OECD
group of donor assistance countries] DAC promises.
According to the ONE Campaign, the shortfall is principally
accounted for by Italy, whose 2010 aid budget represents a real
terms cut of 6% over 2004 levels, while Germany and France are
set to deliver only a quarter of their aid pledges.
Irelands real GDP contraction of 1.5% this year has
sparked a E100 million aid cut, with the development budget
already cut by 19% last year.
Overall just $4 billion of the total $18 billion
shortfall was a direct result of the global financial crisis
reducing national income, principally in Ireland and Italy,
says the OECD.
Brookings Kharas says: The financial crisis is a
poor excuse for not meeting aid targets. The OECDs
projection for DAC country GNI for 2010 is only 2.6% below what
was expected in 2005 when aid commitments were made at
This year is also a landmark as it represents the mid-point
between the historic Gleneagles summit and the 2015 target date
for meeting the 0.7% ODA/GNI ratio. The OECD says the
Gleneagles promise made by 15 European Union countries to raise
their overseas aid budgets to at least 0.51% of national income
this year would be broken by six nations: France, Germany,
Austria, Portugal, Greece and Italy. Italian aid in 2010 is
likely to be just 0.19% of its national income, spurring the
wrath of aid campaigners.
Italy should be thrown out of the G8 and barred from
all global discussions on aid as it has completely failed to
fulfil its aid pledges, says Drummond.
The global financial crisis has laid bare the structural
weakness of the West faced with ageing populations, weak
banking systems and over-indebted governments and households.
According to the IMF, the average decline in GDP in the OECD
group of donor assistance countries hit 3.7% in 2009 while only
a modest 2% growth is forecast in 2010.
Aid declines with lower growth, a worsening of the
fiscal stance, and higher debt in donor countries, although the
statistical relationships are not always strong, says
Kireyev. On the latter point, optimists point to the UK where
all three major parties have pledged to achieve the 0.7% aid to
GDP target by 2013 despite facing one of the largest
deficits in the EU at 11.4% and have vowed to enshrine
this in law.
This historic cross-party consensus has fed optimism.
Drummond says the UK is an example where political leaders are
responding to citizen demands to elevate the status of aid
budgets, akin to military spending. Citing the need to ramp up
aid to address security, immigration and international health
concerns, he argues development assistance is a self-interested
policy in an integrated world economy and requires long-term
Nevertheless, even if countries commit to
keeping aid programmes constant as a share of GDP, this would
translate into lower aid flows, says Kireyev.
Kharas also fears that climate change financing for
which rich countries have pledged to provide developing
economies with $30 billion annually until 2012 and then $100
billion until 2020 will compete with aid to
Yet donors shouldnt be tainted with the same brush.
According to Kharas, a former World Bank chief economist, rich
countries can be classified into four groups. In the first
group, Sweden, Belgium, Spain, and the United Kingdom can be
characterized as ambitious and largely successful in delivering
on their promises.
The second group includes Australia, New Zealand, Norway and
Canada, which under-promise but over-deliver.
The third, which includes the US and Japan the two
largest economies in the G8, which are set to spend 0.19% and
0.18% of their GDP on aid, respectively promise little
and deliver little.
And the fourth Italy, Greece, Ireland and France
over-promise and significantly under-deliver. The
first two groups deserve to be commended for their ambition and
success, while the last two groups should be scrutinized as to
whether they are bearing their fair share of the global poverty
reduction effort, says Kharas.
Nevertheless, in aggregate, aid is expected to have risen
36% in real terms between 2004 and 2010. For all the
clamour around failed aid pledges, its important to
remember: this is the largest volume increase ever in ODA over
such a period, and does not depend on the large increase in
debt relief which boosted the aid numbers in
200507, says Kharas.
Development assistance is rising even if the
ambitious 2005 pledges have been broken. Against this backdrop,
vocal aid critics many of whom argue that corruption and
weak economic governance have squandered the money and hampered
growth have stepped up their attacks. One of the more
high-profile accounts of the theory that large-scale
development assistance has ripped Africa apart by sanctioning
corruption was economist Dambisa Moyos polemic Dead Aid
But the raging battle between self-styled pragmatists and
aid romantics, who trumpet the virtues of overseas aid in
financing healthcare, sanitation and medicine, has
polarized debate to the detriment of international
development, says Velde at the ODI.
This debate certainly wont help donors to
deliver the 2015 commitments, he says.