Elsevier

World Development

Volume 34, Issue 9, September 2006, Pages 1482-1497
World Development

Is Aid Oil? An Analysis Of Whether Africa Can Absorb More Aid

https://doi.org/10.1016/j.worlddev.2006.01.002Get rights and content

Summary

This paper considers whether Africa can absorb a doubling of aid. If oil revenues provide a “natural experiment” the results are disappointing: far from being transformational, they have been markedly less successful than aid. One implication is that the delivery modalities of aid, though heavily criticized, have substantially added value: the paper discusses which modalities may have been most useful. Unfortunately, aid appears to be subject to diminishing returns, so that doubling aid through conventional modalities would not double its impact. The paper concludes by considering innovations in aid modalities, which might offset diminishing returns.

Introduction

The Report of the Commission for Africa, Our Common Interest, proposed a large increase in aid to the region, a proposal that was promptly accepted by the 2005 G8 meeting. The underlying motivation for this commitment was 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 United States, 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, 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 21st 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 and concludes that aid appears to be markedly more effective than resource rents. Section 3 addresses the question as to why this might be the case: why might aid be more effective for development than oil? If, indeed, aid has been more effective than oil, it must be attributable to one or other aspect of the modalities that distinguish the delivery of aid. Contrary to much popular perception, past aid modalities must in some way have succeeded in adding value to the resource transfer. The section considers each modality of aid in turn as a potential explanation for successful value-added. Section 4 addresses the question as to whether, given this past success, there is scope for “scaling-up” aid in the literal sense of simply increasing 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.

Section snippets

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. The dysfunctional longer-term effects of resource rents have been well explored, following the

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.

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 considerably superior performance of past aid relative to resource rents,

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 of 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

Conclusion

If aid is like oil, the economic case for a major expansion of aid to Africa is disturbingly weak. The evidence indicates that on average aid has been more effective at promoting development than oil. Since both are transfers to governments, the 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

Acknowledgement

I would like to thank Sir Nicholas Stern, Tony Venables, the participants at a seminar at DFID, and three referees for helpful comments on previous drafts of this paper. This research was supported by the Global Poverty Research Group of the Economic and Social Research Council.

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