The worrying link between aid and growth in Africa

AFRICA’S robust economic growth over the past decade has raised hopes the poorest continent can reduce reliance on aid. The problem with this scenario is its failure to consider the role aid may be playing in the “Africa Rising” narrative.

Looking for a link between aid and growth, an unmistakable pattern emerges from the numbers.

World Bank data shows foreign donor aid to Africa from the OECD group of wealthy countries was just under $13bn in 2000 and soared to $41bn in 2006, and then slipped, before rebounding and hitting more than $46bn in 2011.

Chinese official inflows also surged during this period, though much of this was credit support or “oil-backed loans” and would not count as aid by OECD definitions, according to AidData, a research initiative tracking more than $5.5trillion in development finance from more than 90 donors, including China.

The first decade of this century saw a concerted effort to boost western aid to Africa, marked by antipoverty campaigns headed by celebrities such as Irish rock star Bono, which featured debt forgiveness on a large scale and other initiatives.

It was also the decade when African growth took off.

From 2001 to 2010, the International Monetary Fund (IMF) said six of the world’s 10 fastestgrowing economies were in Africa: Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda.

Nigeria and Angola are Africa’s top oil producers and Chad a recent petrostate, so surging crude prices had a lot to do with their growth. But it is instructive to look at aid flows into Ethiopia, Mozambique and Rwanda, which did not have oil dollars.

Rwanda and Mozambique both saw net aid from rich donor countries roughly triple between 2000 and 2011 — in the case of the former from $341m to about $1.3bn, close to 18% of its gross domestic product (GDP). Western aid to Ethiopia soared about fourfold from $906m in 2000 to a peak of more than $3.8bn in 2009. Much of Africa’s growth is consumption driven, and aid can stimulate that, such as when used to support national budgets.

Examples of recent aid linked to growth in Africa include subsidies to peasant farmers in Zambia and Malawi, credited with lifting harvests for the staple maize crops in countries where farming still makes a massive contribution to GDP.

In her 2009 book Dead Aid, Zambian economist and aid critic Dambisa Moyo noted that in the previous 50 years more than “$1- trillion in development-related aid has been transferred from rich countries to Africa”, with little to show for it. But the past decade or so has seen a difference in the sheer scale of flows into Africa, with AidData estimating it at $404bn from wealthy western donors from 2000 to 2011.

AidData has also tracked $75bn in official flows from China — most of it not technically defined as aid — over the same period, for a total of about $500bn surging into Africa from donors.

And there has been a change in emphasis. Good governance and other conditions — at least from the West — have been placed on aid with more vigour than in the past and increased transparency has helped to ensure some of it is better spent.

But seen through the prism of the region’s laggards, the link between aid and growth is not so apparent. Zimbabwe’s economy contracted sharply in the first decade of the century, but aid flows rose to $718m in 2011 from $177m in 2000.

Much of this would have been humanitarian aid as Zimbabwe suffered periodic food shortages related to a wider economic collapse triggered in part by the seizure of white-owned commercial farms for redistribution to landless blacks.

Eritrea had GDP growth of 0.7% from 2003 to 2011 but its aid coffers swelled from $67.5m in 2000 to $163.27m in 2011, with a $350m peak in 2005.

An influential 2011 paper, “Counting Chickens When They Hatch”, concluded that “increases in aid have been followed on average by modest increases in investment and growth”.

Then there is the old trade versus aid argument.

The value of exports from the region soared to $420bn — about 10 times annual aid flows — from $100bn between 2000 and 2011, according to the World Bank.

But the linkage between trade and GDP expansion is not cut and dry. Three-quarters of the region’s exports are natural resources — stoked by a now cooling commodity boom — while 60% of Africa’s recent economic growth has come from consumption. Minerals and metals account for the lion’s share of regional giant SA’s exports, but mining only for 6% of GDP.

Meanwhile, the annual value of the region’s manufactured goods from 2000 to 2011 only rose from $13bn to $33bn — so aid flows still outpace manufacturing revenue.

This is worrying as it essentially means Africa still relies more on handouts than it does on making things that its own inhabitants or the rest of the world want to buy.