Appolinario Gpe Final Research Paper-1[1]
-
Upload
robert-defia -
Category
Documents
-
view
218 -
download
0
Transcript of Appolinario Gpe Final Research Paper-1[1]
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
1/36
Effectiveness of Foreign Aid in Zambia
1
THE EFFECTIVENESS OF FOREIG AID
CASE STUDY: ZAMBIA
Written by:
Uliane APPOLINARIO
Email: [email protected]
Geneva June 08th
, 2009
MASTERENETUDESDU
DEVELOPPEMENT
GLOBALPOLITICALECONOMY
Academic Year: 2008 -2009 (Spring)
Professors: Cedric DUPONTDaniel TRACA
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
2/36
Effectiveness of Foreign Aid in Zambia
2
Table of Contents
Introduction 2
1. Contextualizing Foreign Aid - The Theoretical Framework about Aid
Effectiveness
1.1 Aid and Development Theories 4
1.2 The Big Push Model 4
1.3 The Paradox of the Lack of Growth: Failure of Aid? 7
1.4 Aid and Policy: a New Perspective 8
1.5 Aid: Is it Working or Not? The debate Easterly x Sachs 11
2. The Main Constraints of Foreign Aid in Sub-Saharan Africa
2.1 What is Wrong with Sub-Saharan Africa? 13
2.2 The Problem of Ownership x Policy-based Conditionalities 14
2.3 World Bank Policies and Reform Strategies 16
3. Case Study Country Aid Effectiveness in Zambia
3.1 Problem Overview 19
3.2 Aid and Policy in Zambia 21
3.3 The Kaunda Years 21
3.4 The Reform Period under MMD 1991 - 23
3.5 Analytical Framework : The outcomes of a decade of failed reform in Zambia
3.5.1 Evolution of Social Indicators 27
3.5.2 Economic Growth: The Failure of decade Lost 28
3.5.3 Aid Dependency 30
3.6 What has gone wrong? And what can be done? 32
4. Conclusion 33
5. Bibliography 34
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
3/36
Effectiveness of Foreign Aid in Zambia
3
Introduction
William Easterly started his article Can Foreign Aid Save Africa presenting his
scepticism on the good intentions at the attitude of some governments to increase
the amount of foreign aid to very poor countries in order to help their population
which is dying of hunger and serious diseases. He mentions the speech of Gordon
Brown, the UK Chancellor when he called for a doubling of foreign aid in January
2005 in an attempt to show how easy to do good is. Others world leaders have also
called upon a big push in Africa to end poverty, and people ask if a Marshall
Plan to Africa could not save this country. In July of 2005, the G8 agreed to
double foreign aid to Africa, from $ 25 billion a year to $ 50 billion to finance the
big push (Easterly, 2005). Today, this amount of cash has been certainly
compromised specially by the current financial crises, and even the promise of the
new president of the United States of America, Barack Obama, before being
elected, of doubling the foreign aid to Africa will certainly not be achieved. But
despite the monetary amount of money invested to save poor countries , we
might rather question: Has this aid been effective? Many studies have showed that
not, or at least, not proportionally to the amount of aid.
In this sense, the effectiveness of foreign aid has been the reason of a growing
number of debates and academic productions in the last years. A considerable
number of studies and researches show that after some decades of increasing
volume of financial flows to poor countries, the results seen today are substantially
far from the expected result of the foreign aid to the recipient countries (see for
example). Thus, the main reason for the increasing number of debates around this
theme reflects the attempts to address a main problematic: Why aid is not showing
the results that it was supposed to show? In other words: Why increasing flows of
investments sent to poor countries are not being able to promote economic growth
and social development? And following: What can be done to achieve a more
effective foreign aid?
A exhaustive - but not conclusive - literature has already been trying to answer
these questions and thus, my main interest on this work is try to discuss critically
some of these works with a main focus on questions which will be raised starting
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
4/36
Effectiveness of Foreign Aid in Zambia
4
with the analysis of the theoretical debate around the effectiveness of aid as well
as the study of some data and evidences ins Sub-Saharan Africa. The methodology
adopted in this paper presents as follows: With basis on this theoretical debate as
well on the evidences that I have found and which will be presented further, I will
focus my study on a central question: Which are the main factors that lead to the
failure of foreign assistance in SSA countries both to improve the quality of
institutions as well as to reduce poverty? My main argument to this question is
that: The lack of confidence by the donors regarding the government of recipient
countries, has motivated the formers to adopt a high number of conditionalities
which had a negative effects both to ownership of the aid and to the political
environment of the recipient countries. The country case study considered in this
paper will be used in order to try to verify the feasibility of this argumentation.
Zambia was chosen for presenting a challenging case, but despite of the
specificities of this country, it can be considered to be an illustrative case, which
can somehow represents the course followed by most of sub-Saharan countries in
the last 30 years of foreign aid1.
Finally, I will divide the study as follows: Session 1 will present a brief
contextualization of the foreign aid and the evolution of the debate around aid
effectiveness. Session 2 will present the main constraints of foreign aid to Sub-
Saharan Africa giving a special attention to the World Bank policies and the
conditionalities of the structural adjustments and finally Session 3 will provide an
illustration through the study of the case of Zambia.
1 There are a lot specificities among the countries in Sub-Saharan African, but a general trend thatreflects the most of these countries followed unsuccessful plans of adjustments, high level ofendebtness and rise of indicators of poverty. Most recently, the World Bank has published a studynamed Aid and Reform in Africa where there is a compilation of analysis of ten SSA countries.The World Bank classifies the ten countries according to the success of implementation of reforms
and improvement of institutions in (1) successful reformers, (2) Post-Socialist reformers, (3) Mixedreformers and (4) Non-reformers. But paradoxically, even the successful reformers, Ghana andUganda, were not able to pay the external debt and had to have the debt cancelled.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
5/36
Effectiveness of Foreign Aid in Zambia
5
1. Contextualizing Foreign Aid - The Theoretical Framework about Aid
Effectiveness
1.1 Aid and development theories
In this session, I will present a brief literature review that has been trying to raise
the main concerns about aid effectiveness. A very important point to be highlight
before starting our review is that aid strategy was somehow related to the
mainstream development though of each decade. To broadly sketch (and
oversimplify the changes), in the 70s the main emphasis was to improve the world
income distribution by directing aid more to the poorest nations. In the 1980s,
there was increased awareness of the importance of government policies to give
favourable incentives to the private sector, get prices right, facilitate free trade and
maintain macroeconomic stability. This was reflected in a concrete policy change:
the introduction of the structural adjustment lending by the World Bank and the
international Monetary Fund in 1979-80 to give loans to developing countries
conditional on them adopting these policies. Then beginning in the 1990s, there
was increasing emphasis on the quality of government institutions such as
democracy, accountability and control of corruption. The new approaches in the
1980s suggested that individual projects would have high returns only if national
government policies were favourable, and then beginning in the 1990s only if
institutions were supportive (Easterly 2007). All these approaches to development
will serve as a support to the allocation of and the pattern of foreign aid. We will
see more detailed this discussion in the present topic.
1.2 The Big Push Model
The macroeconomic theoretical basis to promoting financial aid has appeared on
1950s and had as the starting point the Big Push Model. Briefly this model states
that Africa is poor because the continent is stuck in a poverty trap. To get out of
the poverty trap, they need a large aid finance increased in investments, which
would be the Big Push. In this sense, the Harrod-Domar growth model was
extensively used to discuss the mechanisms of how a poverty trap arises.
According to this model, a determined level of savings is necessary to promote
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
6/36
Effectiveness of Foreign Aid in Zambia
6
stability and growth of the economies. If saving is too low to keep up with
population growth and the depreciation of capital, then per capita growth will be
zero or negative (Easterly 2005). Thus, some development economists in 1950s
and 1960s postulated a desirable per capita growth rate and calculate the
investment requirement to meet this target the distance between the low
domestic saving rate and the investment requirement was called the Financial
Gap. In this sense, the role of aid was to fill this financial gap (Rostow 1960)
(Chenery 1996) (Easterly 2005).
Later, by modifying the rigidities in the growth model and introducing the trade
deficit, the two-gap models developed by Chenery and Bruno (1962) and Chenery
and Strout (1966) improved on the analytical framework. Taylor (1988, 1990) and
Bacha2 (1990) introduced the fiscal gap as another constraint requiring external
financing to augment governments tax effort in a noninflationary way. The two
major conclusions that emerge from the literature with respect to the effectiveness
of aid are that: (i) foreign aid should aim at raising domestic savings to a level
sufficient to finance the investment needed to sustain the targeted growth rate of
GDP; and (ii) foreign aid should not discourage the recipient countries from
seeking to relieve the foreign exchange constraint by improving competitiveness a
and export diversification (Agrawal 1993).
The empirical relationship between the size of foreign assistance and its impact on
both the GDP growth rate as well as domestic savings behaviour has been
extensively debated. Some studies have questioned the usefulness of aid and
showed that there is little or no correlation between aid inflows to developing
countries and their GDP growth rates (for example, Gupta and Islam, 1983; or
Mosley, 1987) and also that there is a negative impact of increased foreign aid on
domestic savings (for example, Weisskopf, 1972). Other studies, however, do not
confirm these relationships and there are a multitude of studies that have generally
concluded that aid has been beneficial to the growth prospects of developing
2Citation of Nisha AHMED, Zafar MERDED, Michael and NORDL, Roger Agrawal, StructuralAdjustment, Economic Performance and Aid Dependency in Tanzania , Working Paper Series -
Country operations, Eastern Africa Department The World Bank and Fiscal Affairs and AfricanDepartaments and International Monetary Fund Deepa.lments InternationMaol netarFyu nd(Washington: World Bank, 1993), 1-28.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
7/36
Effectiveness of Foreign Aid in Zambia
7
countries (for example, Cassen, 1986; or Riddell, 1987)3 (Agrawal 1993).
1.3 The Paradox of Lack of Growth: Failure of Aid?
All these studies have in common the analysis of the role of aid under
macroeconomic aspects. Today it can be considered a simplistic view because it
started with the assumption that just a flow of capital entering the treasure of the
recipient country can have a positive effect that would engender the economic
growth and that economic growth would reduce poverty. Paradoxically, evidences
show that most of these studies went toward a wrong way and principally that
there has been a negative correlation between raise of aid flows which was
called by many prestigious economist (e.g. Sachs, 2006) and the effective
economic growth of most of recipient countries specially in Africa. The graphic
bellow illustrates this relation in a period where the flows of aid to Africa have
raised steadily (tripling as a percentage of African GDP from 1970s to 1990s), but
African growth remains stuck at zero percent per capita (Easterly 2005).
Fig. 1 Aid and Growth in Africa (10 years moving average)
Source: Easterly, 2005
Because of the failure on attempting to find evidences that just foreign aid per se
would be able to promote economic growth and consequently poverty reduction4
3Ibid
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
8/36
Effectiveness of Foreign Aid in Zambia
8
the literature on aid effectiveness started to make some progress and take account
on the severe problem of reverse causality with the use of variables which
included not just macroeconomic factors, but at this new era the political variables.
1.4. Aid and Policy: a new perspective
Peter Boone (1996) was one of the first to consider the relation between aid and
political environment. He was extremely critical to the effects of foreign aid to
political institutions. He arrives even to mention that foreign aid programs were
launched long before the existence of a compelling theory, or compelling evidence
that proved they could work and massive aid programs that began after the second
world war, but only took off in the 1960s, are an unprecedented economic
experiment (Boone 1996). But most interesting Boone has stated that aid does not
significantly increase investment and growth, nor benefit the poor as measured by
improvements in human development indicators, but it does increase the size of
government. He finds that the impact of aid does not vary according to whether
recipient governments are liberal democratic or highly repressive. But liberal
political regimes and democracies, ceteris paribus, have on average 30% lower
infant mortality than the least free regimes. This may be due to greater
empowerment of the poor under liberal regimes even though the political elite
continues to receive the benefits of aid programs. An implication is that short term
aid targeted to support new liberal regimes may be a more successful means of
reducing poverty than current programs (Boone 1996).
Most recently, Burnside and Dollar (2000), have also included the political
environment aspect to the analysis of aid effectiveness but differently of Boone,
they follow a much more liberal perspective and they do find a relation between
growth and aid. The main argument of Burnside and Dollar is that aid accelerates
4There is another debate concerning the relations of economic growth and poverty reduction andsome evidences of a negative relation between these factors. The neoclassical economy believed ina positive relation concerning economic growth and poverty reduction based on the idea of Trickledown. It states that in a first moment, economic growth would concentrate wealth, bus so far thisgrowth achieve a certain level, the wealth would trickle down to the poorest of the society and thenreduce inequalities and poverty as well. Some evidences shows that there was no trickle down to
most of poor countries and despite some considerable level of growth the level of poverty has evenincreased. For further information on this debate see Dollar and Kray, (2002); Weisbrot, Naimanand Kim, (2000) and Ravaillon, M, (2005).
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
9/36
Effectiveness of Foreign Aid in Zambia
9
growth in developing countries with sound institutions and policies, but has less or
no effect in countries in which institutions and policies are poor (Burnside &
Dollar,2000). This result is argued to be quite intuitive: a corrupt, incompetent
government is not going to use aid wisely and outside donors are not going to be
able to force it to change it habits. This evidence is supportive of the growing
trend among aid agencies toward greater selectivity that is, channelling
relatively more aid resources to poor countries with reasonably good institutions
and policies (Burnside & Dollar, 2000 : 3). It is important to note here that this
can be challenging not just for recipients who will be obliged to improve the
quality of their institutions, but also to donors, to whom strategic allocation of aid
might be reviewed.
The graphic bellow illustrates the hypothesis of Burnside and Dollar.
Fig.2 Growth, Aid and Policy
Source: Burnside&Dollar, 2000
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
10/36
Effectiveness of Foreign Aid in Zambia
10
Another finding at the article of these two authors, which will be very important to
our case study, is what concerns the impact of aid on institutions and policies.
They argue that there is a consensus around the fact that aid, as traditionally
practiced has not systematic, beneficial effects on institutions and policies
(Burnside and Dollar). This is important when we consider that many donors have,
several times even increased the amount of aid to a recipient country that has
steadily showed bad political performances, expecting to improve the quality of
institutions. This is for example the case of Zambia, which will be discussed
further. Coming back to Burnside and Dollar, they argue that in particular, there is
a broad agreement that giving a large amount of financial aid to a country with
poor economic institutions and policies is not likely to stimulate reform, and in
fact it may retard it (Burnside & Dollar 2000 : 4).
Two important problems rise of the analysis of Burnside and Dollar. The first one
is how to define good institutions. In this sense some researchers question the
long list of things that must be done and the casual chain from good governance
to development, by exploring the particular histories of developed countries,
suggesting that specific conditions of good governance are basic characteristics
needed for sustained development secure property rights and contracts, for
example -, while other governance factors emerge over time in conjunction with or
in consequence of economic growth and poverty reduction (Grindle 2007).
Furthermore the World Bank has suffered much criticism by prescribing a model
of governance based on Western values of democracy and free market.
The second problem is the idea of selectivity. Assuming that the foreign aid will
just have a positive impact on countries with a sound policy, countries with bad
policies will be excluded of aid, then what to do with their population. The Paris
declaration has embodied the principle of selectivity in order to improve the
quality of aid and specially to serve as an incentive to countries with poor policies,
to pursue the improvement of the institutions5.
5 To further information, see the document of the Paris Declaration on the web sitehttp://www.oecd.org/document/18/0,2340,en_2649_3236398_35401554_1_1_1_1,00.html
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
11/36
Effectiveness of Foreign Aid in Zambia
11
Following this same reasoning, Van de Walle states that according to many studies
the foreign aid to Sub-Saharan Africa has presented a very small effect, being in
several cases negative both to growth and poverty reduction. He argues that,
because of corruption, the most part of the poor people in these countries has never
received any kind of aid (Van de Walle, 1999)
Should we then use only policy and institutional quality as measure in determining
aid flows? Should countries with poor policy and poor institutional quality receive
no aid at all and then all their population would pay the price by the path followed
by the government? This would probably be to rash a conclusion. Recent research
by Clemens, Radelet, and Bhavnani (2004) takes an entirely different approach.
Instead of focusing on the different policy and institutional characteristics of
recipient countries, they focus on the characteristics of different types of aid flows.
Importantly, they consider only what they term short impact, which includes
budget and balance of payment support, infrastructure investments, and aid for
productive sector such as agriculture and industry. In contrast to previous studies,
they find a strong impact of aid on growth (and thus in poverty reduction, at least
to some extend) regardless of institutions and policies In light of such evidence, it
is necessary to be cautious and avoid a new faddism or herd behaviour in the
relocation of aid flows to a small group of countries that meet the criteria. Timely
interventions to support reform efforts and to avert famines and other crises
remain a vital function of aid (Clemens, Steven and Rikhil 2004)(Goldin 2007).
1.5 Aid: Is it working or not? The debate Easterly x Sachs
The most recent debate on foreign aid is between Jeffrey Sachs and William
Easterly. Sachs is optimist about the possibilities of the foreign aid. He consider
that the money invested in aid is still just a small value compared to wastes in war,
subsides etc. He notes that aid and technology has improved the life of many
societies specially regarding health and education. According to him:
Life-saving and poverty-reducing measures raise the productivity of the
poor so that they can earn and invest their way out of extreme poverty, and
these measures do so at an amazingly low cost. To extend these proven
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
12/36
Effectiveness of Foreign Aid in Zambia
12
technologies throughout the poorest parts of Africa would require around
$75 billion per year from all donors, of which the US share would be
around $30 billion per year, or roughly 25 cents per every $100 of US
national income. (Sachs 2006).
William Easterly is extremely critical to this assumption and the overall effect to
aid to Africa. In response to Sachs, he states that:
Poverty in Africa is the outcome of much deeper factors such as political
elites who seek mainly to protect their own position, dysfunctional
institutions like corruption and lack of property rights, and a long history
of exploitation and meddling from abroad (the slave trade, colonial
depredations, the creation of artificial states, military interventions). It
takes breathtaking hubris to assert that this mess can be fixed for the tidy
sum of $75 billion. A similar hubris leads to amnesia concerning the many
previous generations of technical experts that have ineffectively tried
Sachs's "proven strategies" to end African poverty (Easterly, 2007).
And continues
Poverty never has been ended and never will be ended by foreign experts
or foreign aid. Poverty will end as it has ended everywhere else, by
homegrown political, economic, and social reformers and entrepreneurs
that unleash the power of democracy and free markets (Easterly, 2007)
Easterly view s of aid is substantially skeptic and considers most the destructive
effects of aid as well as how aid was, most of times, tied to political and sector
strategies, rather being pro-poor oriented. See for example (Easterly, 2007)6
6
In this study, Easterly focus on the problem of allocation of aid and he shows us that aid has beenmuch more associated to strategic interest (for example, political and economic) rather than pro-
poor oriented. This lead to a problem of allocation and coordination of aid. Many countries see aconcentration of aid in a certain sector, whereas the better strategy, according to Easterly should beto diversify aid and find a better coordination among the donors.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
13/36
Effectiveness of Foreign Aid in Zambia
13
In the same line of scepticism of Easterly, Collier argues that as a general rule, aid
tends to retard the growth of the labour-intensive export industries that are a poor
countrys most effective engine of growth. And much aid gets diverted into
military spending (Collier, 2005)
2. The Main Constraints of Foreign Aid in Sub-Saharan Africa
2.1 What is Wrong with Sub-Saharan Africa?
Sub-Saharan Africa is often cited as the paradigmatic example of destructive
political effects of foreign aid. There is a set of constraints that lead several
authors to state that foreign aid to Africa has been failing. Briefly summarizing,
the main evidences are:
- Existing aid organizations have achieved very little poverty reduction despite theastronomical sums of money they have spent on SSA (Easterly 2006);
- Many countries in SSA, which have received a large amount of aid have,paradoxically, increased the indicators of poverty in the last years;
- Larges amounts of aid have made some countries extremely dependent on foreignassistance to supply basic services;
- Corruption and aid fungibility have been some main problems.
In this topic, we will focus in two main problems in order to support the main
argument of this paper: The problem of ownership and policy-based
conditionalities. Indeed, the option to focus in these problems does not reflect
that we will neglect, which I consider some of the root causes of poverty
corruption and lack of a strong state as well a broad range of structural problems
faced by SSA states since the very beginning of their formation but rather, it
reflects my understanding, that because of these root causes, both donors and
recipient countries are failing to find a way in which aid will effectively promote
growth and specially reach the poorest. By one side, recipients are not able to
assure that the development assistance will find a safe place and money will be
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
14/36
Effectiveness of Foreign Aid in Zambia
14
properly used. Then, by the other side, donors will try to assure the maximum of
certainty by imposing more and more conditionalities and this will have a negative
impact on ownership. We will better discuss this relation on the next topic.
2.2 The problem of ownership x policy-based conditionalities
There are many problems faced when two countries or a multilateral organization
and a country work together in order to establish an aid arrangement. This happens
essentially because donors and recipients have different perceptions and different
interest. This is a main problem of development assistance. One could simple ask
if both the interest of donors and recipients might simple be fight poverty and raise
the standard living of the population. Unfortunately the answer is not. Easterly,
2005 has showed in a very illustrative study, how donors allocation of foreign aid
has varied along the time and how it was related to political and economic
strategies.
But supposing that both interest of donors and recipients is to fight poverty in
recipient countries, the problems is not solved. The perceptions on how to
implement the most appropriate strategy to reduce poverty can be very different.
Donors will always have an advantage of being creditors and this gives then a
stronger position to impose what we call conditionalities. The conditionalities
have as the main objective to solve the problem of the broken feed back loop7, in
other words to provide the most possible environment of certainty where funds of
donors will be applied.
Considering the financial aid or the aid to the balance of payments made by the
World Bank and the IMF in 1980s to most of the Sub-Saharan countries, the set of
conditionalities more known as structural adjustment had the main objective of
increasing the probability of prompt repayment of dent and sometimes even to
ensure that the funds do not support (including grants) do not support policies
inconsistency with the values of the creditors. In other words, the creditors/donors
typically want the funds to be used productively, and that the recipient government
7 See Severino & Charnot 2007
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
15/36
Effectiveness of Foreign Aid in Zambia
15
is able to collect taxes and the country able to generate the foreign exchange to
facilitate timely repayment of any debt assumed (Johnson, 2005).
But the hard side of the conditionalities is that, according to critics, conditionality
is often used as an attempt to buy policy change with financial aid ignores certain
countervailing factors. Most notably, the aid by alleviating fiscal and payments
pressures could daunt the incentive for policy change. This aggravates a time
inconsistency problem, namely, that once the aid was received unless the
government wanted the reform it could reverse it. In addition, when a government
does not sustain the reform, it has not been typically punished, for reasons that
include the fact that to cut off the recipient country from further assistance would
aggravate its payments problem thereby threatening its ability to repay the very aid
donors, where relevant (Collier, 2001). For this reason, we note several examples,
and here I mention again the case of Zambia, where financial flows persisted even
when conditionalities were not filled and the political environment was going even
worse.
Regardless all the discussion about the effectiveness or not of the conditionalities,
a main problem the second main problem that I propose to analyse in this section
- raise from the simple existence of this kind of arrangement: the ownership
problem.
Van de Walle considers that ownership is of the main problems of effectiveness of
foreign aid in Africa. According with this author, recipient governments have the
ownership of a financial activity of the foreign aid when they are convinced that
the aid will enforce their power and their interest (Van de Walle, 1999).
To Johnson, 2005 if a country owns a programme, it has the right to insist on
making the final decisions without coercion on the contents of a programme. In
addition, the country accepts without coercion the obligation to take full
responsibility for the outcome of the programme and hence for the welfare
consequences to its citizens and for certain external effects on noncitizens.
Furthermore, the above right and obligation would be generally acknowledged by
all other parties such as creditors, international organizations, and other countries
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
16/36
Effectiveness of Foreign Aid in Zambia
16
who have anything to do with the programme (Johnson, 2005).
For Ranis, 1995, it seems clear that the lending cum conditionality process works
well only when local polities have decided, largely on their own, possibly with
outside technical help, to address their reform needs, effect certain policy changes
sequentially, and approach the international community for financial help in
getting there' (Ranis, 1995 from Dollar and Svenson).
2.3 World Bank Policies and Reform Strategies: Can Conditionalities Promote
Good Governance?
When we talk about foreign aid by the World Bank and the International Monetary
Fund, an important point in terms of conditionalities is the structural adjustment.
As already stated, the structural adjustment programs came out of another view of
why Africa is poor, and this gained prominence in the early 1980s with the advent
of the Washington Consensus. This view says that Africa is poor because its
government have chosen bad policies. The bad policies view of Africas poverty
led to a different view of the role of aid. In this sense, throughout the imposition
of a set of macroeconomic conditionalities, the role of the Western donors should
be to induce changes in the political context of the recipient countries. The
structural adjustment loans (SALs) of the IMF and the World Bank were the
embodiment of this approach. As already argued in a previous session, Western
donors and international institutions were not very successful in changing policy
(Alesina and Dollar 2002, Burnside and Dollar 2000, Van de Walle 2001, 2005,
Easterly 2005).
According to Goldin 2007, the adjustment program that came into their own in
part in response to the severe macroeconomic imbalances of the 1970s, including
these that were the result of oil shock, had own problems. Donors incorrectly
believed that conditionalities on loans and grants could substitute for country
ownership of reforms. Too often, governments receiving aid were not truly
committed to reforms. Moreover, neither donors nor governments focused
sufficiently on alleviating poverty in designing adjustment programs. In the late
1970s, and early 1980, the pendulum in leading donor countries swung to the new
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
17/36
Effectiveness of Foreign Aid in Zambia
17
policies of Ronald Regan in the United States, Margaret Tachter in The United
Kingdom, and Helmut Kohl in the Federal Republic of Germany. This was
reflected in the World Bank by a new emphasis on getting the prices right and
the articulation of the Washington Consensus, and the aid community focused
on macroeconomic reform in developing countries. While it was necessary to
achieve macroeconomic stability as a prerequisite for sustainable growth and
poverty reduction, both donor and recipient countries underestimated the
importance of governance, of institutional reforms, and social investments as a
complement to macroeconomic and trade reforms. Prescriptions for reform were
too often formulaic, ignoring the central need for country specificity in the design,
sequencing and implementation of reforms (Goldin 2007).
This author thus considers that, as a result, weak of governance and institutions
reduced the amount of productivity growth and poverty reduction that could result
from the macroeconomic reforms and many of these factors were present in
Africa, contributing to the impoverishment of this continent. In this sense, Goldin
considers that t here are many causes to slow development in Africa, including
poor domestic policies and institutions and weak commitment to reform, but too
often aid did little to improve the situation and in some cases even worsened it
(Goldin 2007).
An illustration of the impoverishment of Sub-Saharan Africa is well showed in a
study by Easterly, 2005. He picked out the African countries that were in the top
20 worlds wide in number of structural adjustment loans received from the World
Bank and IMF. Most African countries that received intensive treatment from
structural adjustment have negative or zero growth and some have high inflation.
On balance, the outcomes associated with frequent structural adjustment lending
are poor negative growth or high inflation, or both. Of course, there is a selection
problem in that countries that are already in trouble were the ones that were
chosen to receive these loans. However it is hard to believe in a positive effect of
structural adjustment lending despite the selection problem, for three reasons:
First, things were so bad in so many recipient of structural adjustments that it
stretches belief that it had a strong positive effect. Second, since structural
adjustment loans were repeated year after year, one wonders why the patient did
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
18/36
Effectiveness of Foreign Aid in Zambia
18
not improve after repeated doses of the medicine. Finally, formal statistical
methods to control for possible reverse causality from crises to treatment still finds
that structural adjustment lending had a zero or negative effect on economic
growth (Easterly, 2005).
Przeworski and Veeland, using a bivariate, dynamic version of the Heckman
selection model have a very interesting study on this issue. They find that the
effects of the IMF programs on growth are negative, and even selection is taken
into account, IMF programs still appear to reduce growth. Thus, they show that
countries could have a better performance on economic growth without the IMF
loans. (Przeworski & Veeland, 2000)
Another piece of evidence is that even the considered success stories by the
report aid and reform in Africa, namely Ghana and Uganda could not play back
zero interest Structural Adjustment Loans, and the World Bank and IMF had to
forgive the debts through the Heavily Indebt Poor Countries.
Collier has argued that the failure of the conditionalities imposed by the World
Bank 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 is
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). In this regard, Hirshman has
talked about the perversity thesis. It consists on the belief that an attempt to push
the society in one direction will move it the opposite way. According to
Hirshmman, 1991 the perversity thesis is a standard justification for being against
government programmes.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
19/36
Effectiveness of Foreign Aid in Zambia
19
But maybe, the main mistake made by donors specially in the 80s is that in
general they have not discriminated effectively among different countries and
different phases of the reform process and they have tended to provide the same
package of assistance everywhere and at all times. In this sense, failures in
implementation result from lack of political will of the authorities or simply from
inadequate capacity (Johnson, 2005).
3. Case Study Country Aid Effectiveness in Zambia
3.1 Problem Overview
Zambia is a very challenging country to study the effectiveness of foreign aid. As
argued in a report of the World Bank, in Zambia more than in most other sub-
saharian african countries, financial aid from the international donor community
over the last two decades has been tied to the implementation of economic policy
reform (Van de Walle and Rakner 2001 : 535). But the conditinalities combined
with a complicated relationship between donors and the government of Zambia
have damaged the effectiveness of a big ammount of money which was one of the
major flux of aid in Africa for many years. Thus, the relationship with the
government of Zambia with these institutions as well as to the bilateral donors is
something very important to our analysis especially when we consider the problem
of lack of ownership.
Since the independency from England, in 1964, this country has been extremely
dependent on foreign aid, while at the same time an increasing number of
Zambians have seen their social and economic conditions deteriorated. As we will
see further illustrated on social and economic indicators, there is evidences that
over the last 35 years the indicators of poverty have increased in a sense that puts
this country as one of the poorest in sub-Saharan Africa. For the most of the 1990s
a staggering 65-70 % of the population has been living on or below the poverty
line. Given the political and economic role of foreign aid in the country it is highly
relevant to ask how well the aid from the most important donors reflects the
pressing issue of poverty reduction (Carlsson, et al. 2000 : vi)
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
20/36
Effectiveness of Foreign Aid in Zambia
20
There is a wide range of methodological regressions to evaluate the impact of the
financial aid in a country and good methodology will consider a broad set of
macroeconomic and structural factors. My purpose in this paper is more limited. I
will adopt an analytical framework and my main objective in this part is to show
how political instability in Zambia has affected the impact of foreign aid.
The analytical framework is presented as follows:
Fig.3 - Analytic Scheme
Elabored by Appolinario, U.
Political instability will be an independent variable which will have adverse effects
both to donors and investors confidence and consequently to the implementation
of reforms. This leads to the failure of the role of foreign aid. The evidences
adopted to verify this argument will be (E1) Economic performance, (E2)
Evolution of social indicators, (E3) Aid dependency. The adoption of these
indicators lays on the fact that the mains purpose of the foreign aid is argued to be
the rise of standard livings of the population of recipient country trough the
economic growth. Aid dependency for the other side can be a negative signal that
the country is not responding productively to the amount of money lent.
In order to introduce the problematic of the political environment I will present in
the next sub sessions a brief analysis of the evolution of the relations between
donors and government of Zambia and how aid was sensible to the issue of
governance and reform.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
21/36
Effectiveness of Foreign Aid in Zambia
21
3.2 Aid and Policy in Zambia
To study policy of the foreign aid to Zambia, we can divide the history of this
country in two main periods (1) From independence in 1964 to the adoption of a
multiparty system in 1991 the period know as the Kaunda years; and (2) from
1991 to nowadays, dominated by the MMD, or the Chiluba years. As we will see
in the following session, the flows of external aid and the behavior of donors were
directly conditioned to the performance of reforms and to the political willingness
to accept donors conditionalities.
3.3The Kaunda Years
Right after independency, Zambia experienced a period of growth and stability,
with the economy based specially on copper sector. The mining companies were
traditionally the most important employers in the economy, and copper itself was
the biggest generator of foreign exchange. It thus provided the basis for the
import-substituting industrialization efforts that the government had embarked on
in the 1960s. The Zambian Government considered the sector so important for its
development that the mines were nationalized by the beginning of the 1970s
(Bigsten and Kayizzi-Mugerwa 2000).
However a dramatic slowdown in the economy and the end of the successful years
started with the global recession of the 1970s. As a first impact, the copper
incomes fell dramatically. The government was initially not willing to adjust, but
borrowed large amounts of money to maintain the copper mines and the public
sector, in the process building up a large debt. The first adjustment programme,
with IMF backing, was introduced in 1978. This Action Programme led to a
certain measure of stabilization, but the government failed to maintain reform
momentum. Another structural adjustment programme was embarked on in 1983,
with the major goal of correcting price distortions. Included was the decontrol of
interest rates, deregulation of prices, and general reduction of tariffs. The
government also sought to reform the parastatals, as well as the taxation system. A
notable feature of the programme was its emphasis on raising agricultural
production, which would be achieved by agricultural producer-price increases.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
22/36
Effectiveness of Foreign Aid in Zambia
22
However, as in earlier attempts, the success of the new programmes was
conditioned on support for the policies by the elite and urban dwellers (Bigsten
and Kayizzi-Mugerwa 2000). The reforms were highly unpopular and moreover
also tended to undermine the position of the ruling partys main political
constituencies (see Bates and Collier, 1993). This leads to a context of political
instability in the country. President Kaunda replaced key members of his
economic policy team in April 1986. The shift culminated in May 1987 in the
abandonment of the IMF-supported adjustment programme altogether, putting an
end to the most sustained reform attempt during the Kaunda era (Bigsten and
Kayizzi-Mugerwa 2000).
Curiously, despite the political instability in the country in this period, the foreign
aid has increased.
The graphic bellow illustrates the relation between aid and policy in Kaunda era.
Fig.4 Aid and policy performance in SSA
Source: World Bank, 1998
According to the World Bank, there are a number of reasons why donors have
given so much assistance to poor countries with weak policies and Zambia
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
23/36
Effectiveness of Foreign Aid in Zambia
23
illustrates it. Donors hope that aid will induce policy reform, but unfortunately,
money has proved to be quite ineffective in generating reform in this country.
Foreign aid increased steadily reaching 11 percent of real GDP in the early
1990s. However, policy got worse throughout this period. Despite a series of
structural adjustment loans from the World Bank and the IMF, there was no
substantial improvement in policy before a new government came to power in the
early 1990s (Pritchett and Dollar 1998). It shows us that, instead of improving
political institutions, in Kaunda era, aid had a negative effect and might have
retarded the reforms instead of promoting them.
3.4 The Reform Period under MMD 1991 The misleading of a promissory
decade
The opposition won the elections in 1991 on a liberal platform of commitment to
reforms and the IMF. To the donors, the introduction of a multiparty system was a
promise of a new era based on reforms and for this reason they increased the
support to Zambia, with aid, at close to US$1.5 billion, reaching its all time peak,
in 1992 (Bigsten and Kayizzi-Mugerwa 2000).
Two main programs were adopted in a attempting to show that the new
government was committed to economic reforms. The first one was the Economic
Program Reform (EPR) with the goal of arresting the economy decline, and the
second, the Rights Accumulation Programme (RAP) supported by the IMF. At the
end of 1995, the government had made enough progress under RAP to resume
borrowing from the IMF and this was the first time that Zambia had actually
completed an agreement with the Fund (Bigsten and Kayizzi-Mugerwa 2000).
Another initiative toward the economic reforms was the establishment of the
Zambian Privatization Agency in 1992 and the Public Sector reform launched in
1992.
As expected by the donors, the new government introduced some measures which
included rapid liberalization of external trade and payments system, and a
movement towards a market-determined exchange rate; depreciation of Kwacha
the domestic currency; removal of exchange controls on current transactions and
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
24/36
Effectiveness of Foreign Aid in Zambia
24
removal of all licensing and quantitative restrictions on imports and exports were
removed, and the tariff structure was rationalized. By 1994, Zambia had one of the
most liberal foreign exchange regimes in SSA and the International cooperation
institutions have considered Zambia a case of success.
Considering all the reforms implemented in this period, I will argue here that the
core of the failure of the external aid in Zambia is to be discussed specially on
MMD government. Not because the relations with the donors were more turbulent
in this period than the period of Kaunda, but rather because, different of Kaunda
mandate, at the beginning, this party was strong committed to reforms requested
by the donors and indeed, none of the reform measures implemented have been
reverser and no aid agreements with the IFIs have been canceled (Van de Walle
and Rakner 2001). Even one of the most sensible issues, the privatization of the
mining sector was put into practice starting on 1997. So, how can we explain that
the MMD years achieved so little in terms of growth and that the poverty
indicators increased even more rapidly in this period? Was that an signal that the
structural adjustment prescription by the World Bank and the IMF were going
toward a wrong direction.
According to Van de Walle and Rakner 2001, a number of explanations for the
limited supply response have been offered ranging from claims that the
governments commitment to reform has waned, to sequencing errors, inverstor
security, exogenous factors and Zambias landlocked status. They argue that most
of these explanations point to one commonality : The precarious absence of a
genuine strategy for economic development set forth by the MMD government.
Long term development goals have also largely been absent from the donors
strategy (Van de Walle and Rakner 2001). In this sense the failure of the foreign
aid can be felt both in the economic and in the political field.
Bigsten argues that it also seems quite likely that the slow reform of the mining
sector that always was polically difficult, did cost a lot in terms of lost momentum
and financially in termis of subsiddies throughtl the 1990s and this foot-dragging
also sent the wrong signal to potential investors about the governments reform
commitment.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
25/36
Effectiveness of Foreign Aid in Zambia
25
However these measures were not sufficient to stabilize the economy and soon the
population was unsatisfied with the government. Furthermore, although the MMD
has taken a set of economic reforms, the same cannot be said about the political
institutions. Other aspects of reform programm, most notably institutional reforms,
have lagged behind (Van de Walle and Rakner 2001) and this fact has caused
many constrainst in the relation government and bilateral donors.
In fact, the government maintained the autocratic legislation of Kaunda still intact,
and with this legislation, the new government soon came to abuse its power. One
of the first episodes that illustrate this fact took place just one year after the
elections. Fear of oppositions by the side of Kaunda, led to the declaration of a
state of emergency in 1993. The MMD then changed the constitution to bar
Kaunda from running in future elections in 1996 and the elections in this year was
indeed considered flawed by many observers (Van de Walle and Rakner 2001).
The conduct of the elections proved that the Chiluba government was willing to
compromise the rule of law, was intolerant of criticism and willing to exploit its
majority position and control of government resources to undermine its opponents
(Van de Walle and Rakner 2001). This met extensive opposition from the
domestic press, civil society, opposition parties and donors. (Bigsten and Kayizzi-
Mugerwa 2000). At this same time, it has been also raised concerns about issues
of corruption and drug trafficking within high political offices (Van de Walle and
Rakner 2001).
As a consequence of these political crisis, the majority of Zambias bilateral
donors withheld balance-of-payment support from 1996-1998. In June 1996, US,
Norway, Sweden, the Netherlands, Germany and Japan cut off balance-of-
payments support to protest the exclusion of Kenneth Kaunda from the
presidential elections. At the Consultative group meeting in July, US 150 million
was pledged in balance-of-payment support, conditional on governance reform.
Again in May, 1998 Consultative Group Meeting Zambias donors pledged US
530 million in balance-of-payment support but the disbursement was made
contingent on the sale of the cooper mines and further improvements of the
governance record. Most bilateral support was again held back. However, it must
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
26/36
Effectiveness of Foreign Aid in Zambia
26
be noted that the financial cuts have in most affected programme aid, or balance of
payment support. The governance situation in Zambia has nit improved
significantly in recent years. Furthermore, the privatization of ZCCM has not been
finalized. (Van de Walle and Rakner 2001)
It is clear that the post-election period (1996), the international community appears
to have lost faith in the effectiveness of the conditionalities instruments. The
Zambian government on its side has adopted a rather skeptical attitude towards the
donors, increasingly viewing the process of policy reform as externally imposed
and charging the donors of moving goals post. Thus, within a few years, the
international donor communitys view on Zambia appears to have changed from a
position as a most promising reformer to a most reluctant reformer (Van de Walle
and Rakner 2001).
It seems clear that the turbulent relation between donors and the government of
Zambia was related much more to the unwillingness of the government to reform
the political institutions and this fact had several consequences to investors
confidence and consequently to the economy of Zambia. By the donors part, since
the government of Zambia has given many signals that they were not willing to
reform political instituitons, this leads to a crisis of confidence and despite the
implementation of the structural adjustment, many donors have reduced and even
interrupted the flows of aid for several times in this period.
The curious thing is that, despite all those indicators, it cannot be argued that the
direction of the governments overall econcomic policies has been altered, as so
often was the case during the Kaunda years. The Zambian government has, in
principle remained commited to stabilization and the economic liberalization
process throught its first electoral period and also into the second period. What
remains unclear is : The pressure exercised by donors toward governance and
democratic issues really reflect their committment with these principles, or rather
the fear that they had of the constraints that the political environment could cause
to the plans of privatization and economic liberalization ? This is still a ongoing
question present in all the debate on foreign aid and that certainly will challenge
the especialist in this field toward an improvement of this tool to achieve a real
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
27/36
Effectiveness of Foreign Aid in Zambia
27
development in recipient countries8.
3.5 Analytical Framework : The outcomes of a decade of failed reform in Zambia
3.5.1 Evolution of Social Indicators
The poverty situation of Zambian population started to increase after the 80s with
the world recession and the substantial fall on copper prices, the most important
resource of exportation to this country. The situation deteriorated to such an extent
that, in 1985, the World Bank re-classified Zambia from a low income to a low-
income country. By the early 1990s, Zambia had reached a level where the UN
General Assembly included Zambia on the list of least developed countries. Thus,
during the last 35 years, Zambia has experienced the worst economic decline in
Sub-Saharan Africa. In this sense, Carlsson, 2000 argues that to make matters
worse, it is difficult to see a rapid change for the better (Carlsson, et al. 2000).
According to this author, the high levels of poverty in Zambia have been
characterized as a social crisis (Carlsson, et al. 2000). But not just the failure of the
economic policies and the impossibility of this country to achieve political
instability have been responsible to this situation. The dramatic effects of the
AIDS epidemic, increasing rates of population growth and consecutive droughts
have all played their role in shaping this crisis (Carlsson, et al. 2000).
The table below shows the evolution of some social indicators. The general
tendency is degradation in all social indicators. For example, life expectancy has
declined from 51 years to 48 and real income per capita has been reduced by
almost half in this period.
8 There is an extensive debate on how to improve the effectiveness of foreign aid and it has a strong
linkage to donors intentions. For more information on this debate, see www.ocde.org
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
28/36
Effectiveness of Foreign Aid in Zambia
28
Fig.5 Zambia: Evolution of Social Indicators from 1985 to 1995
Source: Bonnick 1997: 56 cited in (Van de Walle and Rakner 2001)
The poverty indicators are even more warning. In 2001, about 68% of Zambians
live below the recognized national poverty line, with rural poverty rates standing
at about 78% and urban rates of 53%9. The IDH of Zambia is one of the lowest in
the world, 0.453 and its classification and in 2006 the classification of this country
in the ranking was 165.10
3.5.2 Economic Growth: The Failure of Decade Lost
After almost a decade of uninterrupted policy reforms, the record in terms of
economic growth, employment creation, investiments and poverty reduction
remains extremely weak. In terms of macro economic growth indicators, the
Zambian economy has shrunk and is now smaller than it was in 1991. With a 25
per cent increase in population over the last decade, per capita income has dropped
by 4 per cent annually in the last decade, thus extending the long period of
economic decline that begun in the 1970s. Mineral production has declined
throughout the decade formal employment has been reduced in all sectors but
public admnistration and social indicators reveal that poverty and infant mortality
9
Development Indicators Unit, Statistics Division, United Nations. "Population below nationalpoverty line, total, percentage".http://mdgs.un.org/unsd/mdg/SeriesDetail.aspx?srid=581&crid=8910 Fromhttp://hdr.undp.org/en/statistics/ on June, 08th, 2009
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
29/36
Effectiveness of Foreign Aid in Zambia
29
have increased since the 1980s (Van de Walle and Rakner 2001).
The graph below shows the gap between the economic growth that Zambia was
supposed to have achieve with the large amount of foreing aid according to the
Harrod-Domar Model and the real growth achieved in this period.
Fig.6 The Gap between Harrod-Domar model and the reality in Zambia
Source: Easterly, 1997
Even in the context of Sub-Saharan Africa performance, Zambias ecomomic
decline has been extreme. Real GDP per capita is stimated to have more than
halved since 1970. The need to restructure and diversify the economy was an early
concern in Zambia. Andersson, 2000 argues that Since independence in 1964, a
number of attempts have been made to reduce the dependence on copper. First,
import substitution was vigorously supported. Today, the oversized industries
from import-substitution era produce way below installed capacities and are now
seen as hindrances to the development of a viable manufacturing sector based on
small-scale firms and using a technology in keeping with Zambias meagre
resources (Ardersson, 2000).
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
30/36
Effectiveness of Foreign Aid in Zambia
30
The following indicators below show the declining rates of growth that the
economy of Zambia has experienced since 80s.
Fig. 7 Macroeconomic Data for Zambia
Year GDP Growth Inflation Budget defict as
share of GDP
1964 12,9 3.1 5.7
1979 -3 9.7 -9.1
1985 1.6 37.3 -15.2
1990 -0.5 117.5 -8.3
1992 -1.7 197.4 -2.5
1994 -8.6 52.3 -6.8
1998 -2.0 24.5 -4.3
Source: IMF Financial Statistics, Central Statistical Office and Bank of Zambia
Cited in Andersson, 2000.p.12. Adaped by Appolinario, U.
3.5.3 Aid Dependency
Over the years Zambia has developed into one of the most aid dependesnt
countries in Sub-Saharan Africa. In 1992, Zambia received an aid per capita of
USD 125; this was about 3,2 times as much as SSA as a whole (World Bank 1999)
(Carlsson, et al. 2000)
Fig. 8 The aid dependency of Zambia, 1992 and 1997
Source: (Carlsson, et al. 2000)
When interpreting aid dependency ratios the World Bank had the following to say
(World Bank, 1999)
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
31/36
Effectiveness of Foreign Aid in Zambia
31
Care must be taken in drawing policy conclusions. For foreign policy
reasons some countries have traditionally received large amounts of
assistance. Thus, aid dependency ratios may reveal as much about the
interest of donors as they do about the need of recipients.
In this sense, Carlsson argues that the volume and composition of external
assistance to Zambia has been conditioned by the country willingness to reform
and by the degree of economic adversity (Carlsson, et al. 2000).
It is important to understand that the reduction showed in the table does not reflect
that the productive activities in the country has increased, but rather that the
donors have withdrawn their support to this country mainly because the political
instability of the final of 90s.
The external debt burden is also another indicator of aid dependency. Statistics
shows that, the Zambias debt stock remains unsustainable. The debt/export ratio
has gone from an impossible 515% in 1995 to an even more impossible level of
741% in 1998. Just in 2005, Zambia attained HIPC status and in 2006 MDRI
status, which resulted in debt reduction from $7.2bn to $0.5bn (World Bank,
2008).
Fig. 9 The External Debt of Zambia, 19951998
Source: Ministry of Finance and Economic Development. Lusaka.
Cited in (Carlsson, et al. 2000)p.6
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
32/36
Effectiveness of Foreign Aid in Zambia
32
What has gone wrong? And what can be done?
It seems quite evident that it was the lack of a sound political environment that has
caused the failure of these two decades of foreign aid in Zambia. Nevertheless, it
cannot be assumed that it is of entire responsibility of the government. Indeed the
instable political scenario of 90s in Zambia has adversely affected the confidence
of donors and in this sense not even the economic reforms were able to show the
compensate it. However, a key factor that must be considered is the absence of
commitment by the donors side to a sound national development project. In this
sense, Zambia has become extremely dependent on foreign aid to supply basic
services to the population and when the flows of aid were reduced or interrupted,
this was strongly harmful to the most of the population. The high debt burden has
also affect adversely the national accounts of this country for many years and
because of the political instability of 90s, Zambia has achieved the status to have
the debts cancel just in 2005.
In sum, Zambia is a clear case of essential panorama to which foreign aid created
an vicious circle in which institutional weakness on the recipient side encourage
donors practices that undermined national ownership of aid.
But, if aid can just be effective in stable environments, what to do with poor
countries with poor environments as the case of Zambia, for example? According
to Moyo, an economist from Zambia, aid apparatus has not only come to trap poor
and indebted Zambia but in her view is the root cause of poverty. The central
argument of her book Dead Aid, is that aid is the fundamental cause of poverty
and therefore eliminating aid is critical to spur growth in ailing African states. She
uses the common statement that aid distorts incentives among policy makers and
society at large (Moyo, 2009). The solution proposed by Moyo is quite radical: cut
definitely aid and adopt a strategy of access to international markets, supported by
microfinance, trade, FDI and remittances (Moyo, 2009). According to Moyo, the
access of African countries to the international market will operate also as a toll of
selectivity and in this sense can serve as an incentive to improvements in
governance.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
33/36
Effectiveness of Foreign Aid in Zambia
33
4. Conclusion
In this study I have focus on the main constraints of foreign aid and the costs that
entire populations of African countries has paid and will continue to pay, instead
of really taking benefits of the foreign workers. It is important to highlight that in
the last years the main concerns about the adverse effects of foreign aid were part
of a debate that has primarily focused the problems of the recipient side, specially
the problems of governance in recipient countries. Today, the debate starts to
address also the problems of coordination between donors and this recognition of
the responsibility of donors has showed a new tendency to this kind of assistance.
The Paris Principles and the creation of the Poverty Reduction Strategic Papers,
have at the same time given more responsibility to donors and more ownership to
recipients. It seems to be contradictory at a first glance, but it is not. Actually the
responsibility of donors is more concerned with the principles of the foreign aid
and the main purpose of development and poverty reduction. At the same time, the
recipient governments have the role of decide the national priorities. If this fact
will represent a new paradigm to the foreign aid is still an ongoing question, but
the recognition that donors were also responsible for many years of failure of this
tool to development, is maybe a considerable advantage.
The principle of selectivity raised by the Paris Declaration can be a effective tool
to encourage states to adopt better policies, but for the other side it can also
neglect very poor populations at the measure that states with poor environment
policies will not receive aid. A solution to these populations can be an increase of
project and humanitarian assistance. The problem is that the effectiveness of this
kind of aid can be very limited in the long term considering most of cases of
political instability, there will always be a wide range of factors operating in the
contrary side and neutralize or even damage the effects of aid.
In sum, much still remains to be done both to donors and recipient countries.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
34/36
Effectiveness of Foreign Aid in Zambia
34
5. Bibliography
Agrawal, Nisha AHMED, Zafar MERDED, Michael and NORDL, Roger.
Structural Adjustment, Economic Performance and Aid Dependency in Tanzania .
Working Paper Series - Country operations, Eastern Africa Department, World
Bank 1993, 1-28.
Alesina, Alberto and David Dollar. "Who Gives Foreign Aid To Whom And
Why?," Journal of Economic Growth, 2000, v5(1,Mar), 33-63
Andersson, Per-Ake, Hkan Persson, Arne Bigsten, 2000, Foreign Aid, Debt and
Growth in Zambia. Reserch report no. 112. Afrikainstitutet, Motala, Sweden
Bigsten, Arne, and Steve Kayizzi-Mugerwa. The Political Economy of Policy
Failure in Zambia. Working Papers in Economics no 23, Department of
Economics, Gteborg: Gteborg University, 2000, 1-18.
Boone, Peter. "Politics and the Effectiveness of Foreign Aid."European Economic
Review 40 (1996): 289-329.
Burnside, Craig and Dollar, David. "Aid, Policies and Growth." American
Economic Review 90 (2000): 847-68.
Carlsson, Jerker, Patrick Chibbamullilo, Orjuela, and Saasa Oliver. Poverty and
European Aid in Zambia A study of the Poverty Orientation of European Aid to
Zambia. Working Paper 138, Overseas Development Institute, Sweden: The
Nordic Africa Institute Uppsala, 2000, 71.
Chenery, H and A.M Strout. "Foreign Assistance and Economic Development."
The American Economic Review 56 (1996): 679-731.
Clemens, Michael A., Radelet Steven, and Bhavnani Rikhil. "Counting chickens
when they hatch: The short-term effect of aid on growth." Center for Global
DevelopmentWorking Paper Number 44 (July 2004): 58.
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
35/36
Effectiveness of Foreign Aid in Zambia
35
Collier, P., 2005. Is Aid Oil? An analysis of whether Africa can absorb more aid.
Centre for the Study of African Economies, Department of Economics,Oxford
University.
Collier, P. and Bates, R., 1995 The Politics and Economics of Policy Reform in
Zambia, Journal of African Economies, Volume 4, Number 1, 115-143
Easterly, William. "Are Aid Agencies Improving?" Global and Economic
Development Working Paper n.9 (Brookings Institutions), 2007: 1-46.
Easterly, W., 2006, The white man's burden : why the West's efforts to aid the rest
have done so much ill and so little good. New York : The Penguin Pr.
Easterly, William. "Can Foreign Aid Save Africa." Clemens Lecture Series (Saint
John's University) 17 (December 2005): 1-28.
Easterly, William The Ghost of Financing Gap How the Harrod-Domar Policy
Paper L807, 1997
Goldin, Ian and Reinert, Kenneth. Globalization for Development. Washington:
World Bank and Palgrave Macmillan, 2007.
Grindle, M. S. (2007). "Good enough governance revisited." Development Policy
Review 25, no. 5 (September 2007): 553-574.
Hirschman, Albert, 1991. The Rhetoric of Reaction: Perversity, Futility, Jeopardy.
Cambridge, MA: The Belknap Press of Harvard University Press.
Johnson, Omotunde E.G. 2005. Country Ownership of Reform Programmes and
the Implications for Conditionality. G-24 Discussion Paper Series No. 35, January
- United Nations Conference to Trade and Development
-
8/3/2019 Appolinario Gpe Final Research Paper-1[1]
36/36
Effectiveness of Foreign Aid in Zambia
Moyo, Dambisa, 2009. Dead aid : why aid is not working and how there is a better
way for Africa / New York : Farrar, Straus and Giroux.
Pritchett, Lant, and David Dollar. Assessing Aid What Works, What Doesn't, and
Why. Evaluation Report, World Bank, New York, N.Y 10016: OXFORD
UNIVERSITYP RESS, 1998, 1-160.
Radelet, Steven, 2004 Aid Effectiveness and the Millennium Development Goals
Center for Global Development Working Paper No. 39.
Rostow, W. W. "The stages of Economic Growth: A non-comunist manifesto."
1960.
Saasa, Oliver S., 2002, Aid and poverty reduction in Zambia : mission
unaccomplished. Uppsala : The Nordic Africa Institute.
Sachs, Jeffrey. "How Aid Can Work ." The New York Review of Books 53, no. 20
(December 2006): 1-3.
Severino, Jean-Michel, 2007 LAide Publique au Dveloppement. Repres series,
Editions La Dcouverte, Paris.
Van de Walle, Nicolas, and Lise Rakner. "Zambia." In Aid and Reform in Africa,
by Devaraja Shantayanan, David R Dollar and Holmgren Trogny, 535-623.
Washington, DC: The World Bank, 2001.
Van de Walle, Nicolas and Johnston Timothy A.1999 Repenser l'aide l'Afrique /
et trad. de l'anglais par Paulette Graud Paris : Ed. Karthala.
Vreeland, James Raymond and Przeworski Adam, 2000 The effect of IMF
programs on economic growth Journal of Development Economics Vol. 62 , 385
421. New York University.