The False Promise of Gleneagles: Misguided Priorities at the Heart of the New Push for African...

8/14/2019 The False Promise of Gleneagles: Misguided Priorities at the Heart of the New Push for African Development, Cato Development Policy Analysis No. 9

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In response to persisting poverty in Africa, representa-tives from the worlds eight leading industrializednationsGermany, Canada, the United States, France,

Italy, Japan, the United Kingdom, and Russiamet in Glen-eagles, Scotland, in 2005 and agreed on a three-prongedapproach to help Africa. They would increase foreign aid tothe continent, reduce Africas debt, and open their marketsto African exports. Unfortunately, aid has harmed ratherthan helped Africa. It has failed to stimulate growth orreform, and encouraged waste and corruption. For exam-ple, aid has financed 40 percent of military spending in Africa. Similarly, debt relief has failed to prevent Africancountries from falling into debt again.

Trade liberalization has the greatest potential to help Africa emerge from poverty. Yet that is where the leastamount of progress has been made. Negotiations on trade

liberalization have ground to a halt, and the threat of protectionism looms large as the current global economic slowdown worsens.

The Gleneagles Summit, for all its good intentions, gaverise to unrealistic expectations. The heavy emphasis on aidand debt relief made Western actions appear to be chieflyresponsible for poverty alleviation in Africa. In reality, themain obstacles to economic growth in Africa rest withAfricas policies and institutions, such as onerous businesregulations and weak protection of property rights.

Africa remains the poorest and least economically freregion on earth. The West should do all it can to help Africaintegrate with the rest of the world. It should eliminateremaining restrictions on African exports and end Westernfarm subsidies. Africans, however, will have to make most

of the changes needed to tackle African poverty.

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A p r i l 2 4 , 2 0 0 9 G n o . 9

The False Promise of GleneaglesMisguided Priorities at the Heart of the New Push for African Development

by Marian L. Tupy

Marian L. Tupy is a policy analyst at the Cato Institutes Center for Global Liberty and Prosperity.

Executive Summary


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Introduction:A Brief Look at the

State of Africa

Sub-Saharan Africa (hereafter Africa) lagsbehind the rest of the world in most indica-tors of human well-being. Africans sufferfrom (among other afflictions) shorter lifespans; higher rates of infant mortality; high-er incidence of HIV/AIDS, malaria, andtuberculosis; and greater undernourishmentthan people do in other parts of the world.

Overall, Africa scored a mere 0.472 on theUnited Nations 2006 Human DevelopmentIndex, which is measured on a scale from 0 to1, with higher values denoting higher stan-

dards of living. In comparison to Africa, theUnited States scored 0.948 (see Figure 1).1

That is not to say that there have been noimprovements in Africa over the last fewdecades. Between 1961 and 2002, for example,

daily food supplies in terms of consumed calo-ries increased in Africa from 2,055 to 2,207.Infant mortality declined from 177 per 1,000live births between 1950 and 1955 to 101 in2003. Life expectancy at birth rose from 37.4years between 1950 and 1955 to 45.6 years in2003.2

Even so, according to data compiled by Angus Maddison of the University of Groningen, the income gap between Africa and oth-er regions rose between 1960 and 2003.3 In1960, an average Western European was 6.5

2

Sub-SaharanAfrica lags

behind the restof the world in

most indicatorsof human

well-being.

Source: United Nations, Human Development Report 2006 (New York: United Nations, 2006), http://hdr.undp.org/hdr

2006/pdfs/report/HDR_2006_Tables.pdf.

Figure 1

United Nations Human Development Index Values for 2004


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times richer than an average African. By 2003that gap grew to 10.7 times. In 1960, an average African was slightly richer than an averageinhabitant of Asia. By 2003, Asians were 2.4

times richer than Africans (see Figure 2).4The poor performance of Africa is especially

telling considering the progress that other for-merly poor parts of the world have made inrecent years. Between 1975 and 2005, for exam-ple, Chinese and Indian incomes, adjusted forinflation and purchasing power parity, rose by888 percent and 174 percent respectively.5 InAfrica, incomes fell by 5 percent (see Figure 3).6

Not all countries in Africa are desperatelypoor, and not all of them face the same chal-lenges. Figure 4 shows differences in the stan-

dard of living among African countries asmeasured by income per capita adjusted forpurchasing power parity. The annual incomeof the inhabitants of the Seychelles, for exam-ple, was $15,105 in 2006, while that of thepeople of Burundi was a mere $629. On aver-age, the Seychellois are 24 times richer thanthe Burundians.

Outliers aside (like the relatively well-offtourist paradise of Seychelles), there is no deny-ing that Africa has fallen far behind the devel-oped world and that a sizable part of its 770

million people faces existential challenges thatdeveloped countries have already consigned tohistory in the past couple of centuries.7

The Gleneagles Summit:Promises Made

Spurred by the media, Hollywood stars,musicians, and activists, the leaders from theworlds eight leading industrialized nationsmet between July 6 and 8, 2005, in the

Scottish town of Gleneagles to discuss Africa.Joined by their African counterparts, the G8leaders expressed their desire to help build astrong, peaceful and prosperous Africa.

Their ambitious aims included doublingthe size of Africas economy and trade by 2015,delivering increased domestic and foreigninvestment, lifting tens of millions of people

3

Between 1975and 2005 Chinesand Indian

incomes roseby 888 percentand 174 percentrespectively. InAfrica, incomesfell by 5 percent.

Figure 2

Real Income of the Rest of the World Relative to Africa (19602003)

Source: Angus Maddison, Historical Statistics for the World Economy: 12003 AD, http://www.ggdc.net/maddison/

Historical_Statistics/horizontal-file_03-2007.xls.

AfricanRealIncomeRatios

Western

OffshootsWestern

Europe

World Latin

America

Asia

1960

2003

16

14

12

10

8

6

4

2

0


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out of poverty every year, saving millions oflives a year, getting all children into primaryschool, delivering free basic health care andprimary education for all, providing as close aspossible to universal access to treatment for AIDS by 2010, generating employment andother opportunities for young people, and

bringing about an end to conflict in Africa.For their part, African leaders agreed to

deepen transparency and good governance,strengthen democratic institutions and process-es, show zero tolerance for corruption, removeall obstacles to intra-African trade, and bringabout lasting peace and security across the con-tinent.8 In return, the G8 agreed to a number of

initiatives, ranging from extra resources for Africas peacekeepers who are tasked with pre venting and resolving conflicts in Africa, tgreater G8 support for the building of democra-cy, better governance, transparency, and thefight against corruption across the African con-tinent. The G8 also promised to boost invest-

ment in health and education, and to takeaction to combat HIV/AIDS, malaria, TB andother killer diseases.9

This paper will not focus on the commit-ments by African governments. Improvementson peace and security, government efficiencyand transparency, free trade, and the rule of lawin Africa would be welcome news, and to the

4

The priorities setout by the G8,which put aid

and debt reliefahead of trade,are misguided.

Figure 3

Percentage Increase in Per Capita GDP Adjusted for Inflation and Purchasing Power

Parity (19752005)

Source: World Bank, World Development Indicators Online, http://publications.worldbank.org/WDI.

%


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5

Figure 4

African GDP per Capita Adjusted for Purchasing Power Parity in 2006 (constant 2000 international dollars)


Note: The World Bank database does not contain 2006 data for Liberia, Mayotte, Sao Tome, or Somalia.


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extent that the G8 can play a positive role inhelping Africa to achieve those goals, it shoulddo so. Rather, this paper will focus on threecommitments that the G8 made to Africa.First, the G8 agreed to double aid for Africa by

2010. In real terms that increase wouldamount to $25 billion in extra aid by 2010.Second, the G8 agreed that all of the debtsowed by eligible heavily indebted poor coun-tries to the International Development Associ-ation, the International Monetary Fund, andthe African Development Fund should be can-celled. Third, the G8 agreed to redouble theirefforts to achieve a successful conclusionacross the whole of the Doha DevelopmentAgenda . . . [and reaffirmed its] commitment toopen markets more widely to trade in agricul-

tural goods, industrial goods and services, andin agriculture to reduce trade-distorting do-mestic subsidies and eliminate all forms ofexport subsidies by a credible end date.10

The priorities set out by the G8, which putaid and debt relief ahead of trade, are mis-guided. Foreign aid to Africa has indeedincreased and its debt was reduced, but littleprogress has been made on trade liberaliza-tionthe only agreement reached by the G8that could lead to lasting economic improve-ments on the African continent.

Foreign Aid: Time to End It

Between 1975 and 2005, per capita aid toAfrica averaged $24.60 per year. By contrast,in China it averaged $1.50 and in India $2.11

Over the same time period, the compoundedaverage annual GDP growth rate per capitain China was 7.9 percent and in India 3.5 per-cent. In Africa it was a negative 0.16 percent(see Figure 5).12

The importance of growth cannot be over-emphasized. There is not a single example of acountry emerging from widespread povertywithout sustained economic growth. As Uni-versity of Oxford professor Paul Collier writes,Growth is not a cure-all, but lack of growth is akill-all.13 Growth cannot solve all problems inthe developing world, but without growth there

can be no lasting solution to the challengesfaced by developing countries.

Thus, Martin Ravallion and Shaohua Chenof the World Bank write, between 1981 and2005, the number of people with an income

below $1.25 per day in China declined from 84percent to 15.9 percent, reducing the absolutenumber of poor from 835.1 million to 207.7million. In India, poverty declined from 59.8percent to 41.6 percent. (Because of popula-tion growth, however, the number of poor rosefrom 420.5 million to 455.8 million.) In Africa,the poverty rate declined slightly from 53.7percent to 51.2 percent. As in India, popula-tion growth increased the absolute number ofpoor from 213.7 million to 390.6 million.14

The failure of foreign aid to improve

growth rates in Africa has not stood in the wayof those who want to see more of it.15 In 2005,for example, Columbia University professorJeffrey Sachs unveiled his plan to end extremepoverty around the world by 2025. Rich coun-tries, Sachs argued, should commit themselvesto increasing annual aid to the worlds poorestnations from $74 billion in 2006 to $135 bil-lion in 2015.16Also in 2005, the Commissionfor Africa called for doubling aid to Africa to$50 billion by 2010 and tripling it to $75 bil-lion by 2015.17 In the end, the G8 committed

itself to doubling aid to Africa to $50 billionper year.

Is There Need for Aid?In the 1950s and 1960s, many development

economists believed in the vicious cycle ofpoverty theory, which argued that poverty inthe developing world prevented the accumula-tion of domestic savings (i.e., people in poorcountries consumed all of their income and hadnothing left to save and invest). Low savingsresulted in low domestic investment, and low

investment was seen as the main impediment torapid economic growth. Foreign aid, therefore,was intended to fill the apparent gap betweeninsufficient savings and the requisite investmentin the economy. Todays calls for more foreignaid are based largely on the same theory.18

Yet experience contradicts the vicioucycle of poverty theory. Today, many former-

6

The importanceof growth

cannot be over-emphasized.


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ly poor countries enjoy high standards of liv-ing, while others have stagnated or, in somecases, regressed. For example, the 1960 percapita income in South Korea was $1,226. InGhana it was $1,378. By 2003 South Koreahad reached $15,732, while Ghana had fallento $1,360.19As New York University professorWilliam Easterly writes, It doesnt help the

poverty trap story that 11 out of the 28 poor-est countries in 1985 had not been in thepoorest fifth back in 1950. They had gotteninto poverty by declining from above, ratherthan being stuck in it from below, while oth-ers escaped. If the identity of who is in thepoverty trap keeps changing, it must not bemuch of a trap.20

Countries that improve their policies andinstitutionsby increasing their trade open-ness, limiting state intervention in the econo-my, building a business-friendly environment,and emphasizing protection of property rightsand the rule of lawtend to grow faster thanothers.21 Such countries also tend to attract for-eign capital, which can help to increase eco-

nomic growth.22 Improvement in policies andinstitutions also creates a suitable environmentfor growth in domestic investment. As trust ininstitutions such as the rule of law and protec-tion of private property grows, people feel moreconfident investing in the local economy.23

Today, the size and the scope of global cap-ital markets make Africas access to capital

7

The failure offoreign aid toimprove growthrates in Africahas not stood inthe way of thosewho want to seemore of it.

Figure 5

Average Annual per Capita Aid and Growth Rate in China, India, and Africa, 19752005


20

15

10

8

7

6

5

0

5

4

3

2

1

0

US$

-1

25

%

Africa India China


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potentially easier than at any time in the past.Indeed, private capital flows to developingcountries now dwarfs aid flows. According to Adam Lerrick of the American EnterpriseInstitute, The development banks now sup-

ply a mere 2 percent of the average net [capitalworth] $200 billion that the capital marketsprovide.24

The Impact of Aid on Economic Reformsin Africa

Sub-Saharan Africa is the least economi-cally free region in the world.25 There is a gen-eral consensus among economists that Africaneeds to catch up with the rest of the world interms of economic liberalization. Aid is oftenintended to promote policy reform, yet it has

helped to create disincentives to liberaliza-tion for a number of reasons.

For example, aid is often driven by foreignpolicy considerations, not economics. For muchof the Cold War, African countries were givenbilateral and multilateral assistance on the basisof their geopolitical importance to the West andthe Soviet Union. As recent American aid toEthiopia and Chinese aid to Sudan show, geo-political interests continue to influence aid deci-sions today.

Aid has not led to economic reforms in

Africa.26 In the 1980s, the World Bank startedto promote structural adjustment loans thatwere meant to disburse aid to countries inexchange for their commitment to economicreforms.27 Such conditional lending soonproved ineffective, in part because aid agencieshave no enforcement mechanism, and alsobecause they have a well-known bureaucraticincentive to lend, which undermines the cred-ibility of their conditionality.28

In fact, aid may also actively retard policyreform. Between 1970 and 1993, for example,

the World Bank and the IMF gave Zambia 18adjustment loans with little or no reforms tak-ing place, forcing World Bank researchers toconclude that this large amount of assistancesustained a poor policy regime.29 More gener-ally, two World Bank researchers concludedthat higher aid slowed reform [in the devel-oping world] over the 19802000 period.30

Even in those countries that follow sensiblemacroeconomic policies, aid appears to have nopositive effect and may go so far as to discour-age reform. Some World Bank research claimedthat developing countries that follow good fis-

cal, monetary, and trade policies benefit fromforeign aid. But that research has been difficultto independently corroborate. Scholars whoused updated World Bank data found no posi-tive correlation between foreign aid and eco-nomic growth in countries with good poli-cies.31 Research suggests that when govern-ments do decide to undertake economicreforms, they tend to do so because of domesticfactors, including economic crises.32

Problems with Aid Delivery

Most major economies have an independentaid agency. Sometimes, countries give aid ondifferent levels. The European Union, for exam-ple, gives aid through the European Commis-sioner for Development and HumanitarianAid. So do many EU member states, includingAustria, Denmark, Finland, France, GermanyGreat Britain, Ireland, Holland and SwedenMoreover, the Europeans have a strong voice onthe governing boards of the World Bank andIMF. In addition to those official agencies, therehas been a massive increase in the number of

aid-promoting non-governmental organiza-tions (NGOs).33 But effective and efficient deliv-ery of aid has, so far, proved to be an insur-mountable challenge.

The aid industry provides employment formany thousands of people.34 Consequently, alarge percentage of the money spent on foreignaid goes to cover overhead costs, includingadministration, travel, accommodation, etc.35

Michael Maren, a former aid worker, writes thatthe money spent on aid bureaucracies createsperverse incentives. We have to take advantage

of this famine to expand our regular program,argued one aid official that Maren encounteredin Africa. She saw hunger and poverty as agrowth opportunity. Whatever the originalintentions, Maren notes, aid programs hadbecome an end in themselves.36

Moreover, dealing with a multitude ofdonors and aid agencies, all of whom require

8

Aid has not led toeconomic reforms

in Africa.


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some degree of attention, puts an enormousstrain on African bureaucracies. The time andeffort spent on dealing with the needs of theforeign donors rather than dealing with theneeds of the populace has further distanced

African governments from their electorates.

37

The multitude of donors sometimes alsoresults in duplication of their efforts. USAID,for example, has produced a report on corrup-tion in Uganda in 2001, unaware that Britishanalysts had produced a report on the sametopic six months earlier. Similarly, in the early1990s, Tanzania was implementing 15 sepa-rate stand-alone health sector projects fundedby 15 different donors.38

Moreover, many foreign donors have theirown agendas that may be detrimental to the

welfare of the African people. Like the 19th-cen-tury European missionaries who went to Africato spread their vision of a good life, modernday aid missionaries have found in Africa a fer-tile ground for social experiments that wouldnever be accepted in their home countries.Tanzania, for example, is still recovering froman attempt to centrally plan the economy, theso-called Ujaama policy of collectivizationthat was bankrolled to the tune of $10 billionby the socialist governments in Scandinaviancountries in the 1970s and 1980s.39

Research suggests that aid also increasesgovernment spending in the recipient coun-tries.40 In many cases, much of the additionalspending ends up in the pockets of governmentbureaucrats instead of reaching the intendedbeneficiaries. Between 1991 and 1995, for ex-ample, schools in Uganda received only 13 per-cent of the school grants that Uganda was giv-en by the donor community.41

Aid encourages rent-seeking in recipientcountries. Special interest groups and individ-uals focus their efforts not on being produc-

tive, but on lobbying government officials inorder to get access to aid. In that way, aidreduces potential economic output and en-courages corruption and political conflict.42

Moreover, by transferring resources tofavored projects of government officials, com-petition among domestic producers is under-mined. As a result of government favoritism,

parts of the domestic consumer base maybecome captive to firms that provide shoddyand expensive goods and services. Similarly,aid can undermine the international competi-tiveness of African exports by artificially

strengthening the local currency.

43

Finally, the aid community lacks account-ability and feedback. Very few aid agencies andvirtually no individuals are directly responsiblefor specific outcomes. Independent evalua-tions of the effectiveness of donor efforts toalleviate poverty or to arrest the spread of dis-ease, for example, are very rare. Moreover, thedonors often determine what they will supplywithout much regard for what is actually need-ed. This top-down approach has most spectac-ularly failed to alleviate poverty in Africa where

government accountability is weak and institu-tional deficiencies extensive.44

Aid Undermines DemocracyMany people, including former UN secre-

tary general Kofi Annan, have argued that aidis needed in order to promote democracy.45

Stephen Knack of the World Bank, however,found no evidence that aid promoted democ-racy between 1975 and 2000.46 (In fact, the aidagencies have repeatedly bankrolled some ofthe worlds most unsavory regimes.47) Other

research goes further, suggesting that aid mayhurt democratic development in developingcountries.48 That may be the case for severalreasons.

Aid helps to undermine democratic ac-countability in Africa, because African gov-ernments find themselves increasingly an-swerable to the donors, not to the public.Government spending proposals, for exam-ple, allocate funds in accordance with theadvice of foreign experts rather than thewishes of the electorate.49

Aid encourages military spending. Since aidis fungible, it helps some recipient governmentsfree up resources for military purchases thatwould otherwise be spent on roads and educa-tion, for example. Consider the World Banksrecent contribution of $180 million toward thebuilding of the Chad-Cameroon oil pipeline.Fearing that the oil revenue would be misspent,

9

Aid underminesdemocraticaccountability inAfrica, becausethe governmentsfind themselvesanswerable todonors, not tothe public.


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the World Bank got the Chadian governmentto commit to spending it on education, health,and infrastructure. What was the result? Thefirst $4.5 million received as a signing bonusfrom the oil companies was used to buy

weaponsand it is estimated that as much as$12 million may be diverted to buy arms.50

In fact, Paul Collier found that some-thing around 40 percent of Africas militaryspending is inadvertently financed by aid.51

Aid may also fuel armed competition forresources. There is some evidence, for exam-ple, that Somalias civil war was prolonged bythe competition between different factionsfor large amounts of food aid that the coun-try was receiving.52

A growing number of Africans question the

effects of foreign aid on economic growth anddemocracy in Africa. President Paul Kagame ofRwanda, for example, has recently urgedAfricans to be honest about the consequencesof aid dependence, for what really mattersmost for socio-economic transformation is private capital.53 He has called on African gov-ernments to create policy environments inwhich entrepreneurs can flourish. Others, likeUgandan journalist Andrew Mwenda, point tothe negative political impact of aid. Accordingto Mwenda, foreign aid . . . is providing the

government with an independent source ofunearned revenue. That allows the govern-ment to avoid accountability to Ugandas citi-zens.54 Unfortunately, when Mwenda spokeout against further aid at the 2007 Technology,Entertainment, Design conference (TED), theenraged Irish musician Bono heckled Mwendawith shouts of Bollocks! and Thats bull-shit.55 In view of growing evidence that aid hasfailed to deliver growth and democracy toAfrica, Western donors should reevaluate theircommitment to further disbursements of aid

to the continent.

Debt Relief:A Recurrent Problem

Most African debt to the rest of the worldis in the form of public debt that African gov-

ernments owe to other governments, multi-lateral organizations such as the World Bankand IMF, or debt that is otherwise guaran-teed by African governments. In 2007Africas long-term debt stood at $146 billion,

of which $126 billion or 86 percent was pub-lic or publicly guaranteed debt (see Figure 6).The high level of debt, widely considered

to be unsustainable, shows that aid failed inits primary task. Instead of generating eco-nomic growth, aid was poorly used and oftenwasted on white elephant projects or stolenby Africas corrupt political elites.56

Still, African politicians are not the onlyones deserving blame. As the prime ministerof Malaysia, Mahathir bin Mohamad, saidafter the Asian financial crisis in 1997, for

every bad borrower there is a bad lender.57

Through their actions, the World Bank, theIMF, and other official donors have helpedcorrupt and inept regimes that engaged ingross economic mismanagement.

Were it not for official lenders, borrowergovernments would seek loans under marketconditions. Lenders would lend to govern-ments at rates reflecting the risk involved. Themore incompetent governments would beforced to borrow at higher interest rates.Lending by the World Bank and IMF often

achieves the opposite. Those institutions pro-vide concessional loans to the poorest countries and charge those clients uniform interestrates regardless of differences in the policyenvironments or other factors bearing on theability of the borrowing governments torepay.

In response to the mess that they helpedto create, the World Bank and IMF began toprovide debt relief to low-income developingcountries, the vast majority of them in Africa,in 1996. The Debt Relief Initiative for Heavily

Indebted Poor Countries was followed by theenhanced HIPC initiative in 1999 and thenby the creation of the Multilateral Debt ReliefInitiative in 2005. By October 2008, debtreduction packages have been approved for33 countries, 27 of them in Africa, providingUS$51 billion (in end-2007 net present valueterms) in debt-service relief over time.58

10

Paul Collierfound that

somethingaround

40 percent ofAfricas military

spending isinadvertently

financed by aid.


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Rationalizations behind the Debt ReliefThe debt relief was preceded by a global

campaign spearheaded by Jubilee 2000, a

British NGO, which called for cancellation ofpoor countries debts because they are unjustin terms of their origin, as well as because theyworsen poverty.59 Other organizations haveechoed that call. Oxfam, for example, statedthat For the worlds poorest countries todivert vitally needed resources to rich creditorsrather than to spending on the health or edu-cation of their citizens is both immoral andeconomically irrational.60

Indeed, African history after independenceis peppered with examples of despotic rulers

who acquired massive debts but did not bene-fit their respective populations in any mean-ingful way.61 But contrary to Oxfam, there isno automatic link between debt relief andincreased spending on public services andpoverty reduction.62 In fact, the well-inten-tioned advocates of debt relief have beensometimes taken for a ride by cynical politi-

cians who call for debt relief even as they con-tribute to wasteful spending and debt accu-mulation.

Consider the former Tanzanian presidentBenjamin Mkapaa member of Tony BlairsCommission for Africa, who, in addition tothe tripling of aid to Africa, also called for a100 percent cancellation of all debt servicefor all HIPCs and other severely indebtedlow-income countries. Mkapa was appoint-ed to the Commission in spite of his 2002purchase of a $30 million personal jethissecond. A few months earlier, his governmentinfuriated the World Bank by spending $56million, fully one-third of Tanzanias educa-

tion budget, on a military air traffic controlsystem that was to keep track of that coun-trys 19 combat aircraft in various states ofrepair and four unarmed helicopters.63

Nor is it likely that the debt relief will allevi-ate African poverty. Adam Lerrick of CarnegieMellon University notes, Contrary to theplaintive appeals of the NGOs, real debt for-

11

The high level ofdebt shows thataid failed in itsprimary task ofgeneratingeconomic growth

Figure 6

African Public Debt Relative to Long-Term Debt, 1970 to 2007


1970 1975 1980 1985 1990 1995 2000 2005

0

50

Long-term debt

Public and publicly guaranteed debt

150

200

100

US$(billions)


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giveness was granted without fanfare and mul-

tilateral resources were irreversibly lost longago. For decades, not a single African farmerhas labored to pay off a burdensome debt. Andfor decades, the multilateral agencies haveplayed a shell game with what they privatelyacknowledged were worthless developingnation loans by recirculating funding on fanta-sy balance sheets.64

Put differently, the World Bank and IMFrecognized a long time ago that much of Africas debt was uncollectable. And so theyengaged in so-called defensive lending, dis-

bursing new loans to match repayment ofold loansthus perpetually rolling over debtthat African and other HIPC countries, in prac-tice, had already defaulted on (see Figure 7).

In addition to failing to meet its statedobjectives, debt relief may have negative unin-tended consequences. Debt relief createsmoral hazard, in the sense that it penalizes

countries that have practiced fiscal prudence

and rewards countries that have engaged infiscal imprudence. It may thus encourage badbehavior or fiscal imprudence in the future. AsLerrick put it, if you forgive the debt of coun-tries that have accumulated unsustainabledebt burdens, you are favoring them com-pared to countries that have followed prudentpolicies and have not accumulated unsustain-able debt burdens.65

HIPC and MDRI: Self-Serving InitiativesWhy did the World Bank and IMF resort to

accounting tricks to deal with bad Africandebt? Part of the reason is the reputation thatthe two institutions enjoy, which, they boast,was never marred by a loss, a restructuring, ora write-off.66 Moreover, explicit admission offailure with respect to lending to the worldspoorest countries, most of them in Africa,would raise serious questions about the roles

12

Debt reliefpenalizes

countries thathave practiced

fiscal prudenceand rewards

countries thathave engaged

in fiscalimprudence.

Figure 7

Defensive Lending by the World Bank and IMF to HIPC Countries, 19852003

Source: Adam Lerrick, The Debt of the Poorest Nations: A Gold Mine for Development Aid,International Economics

Report, Carnegie Mellon University Gailliot Center for Public Policy, June 2005, p. 8.

US$(millions)


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that the World Bank and IMF have played inthe developing world over the last few decades.

Through the various debt relief initiatives,the World Bank and IMF succeeded in per-suading developed countries to assume much

of the bad debts of African states. Thus, overthe next 40 years or so, American and Euro-pean taxpayers will pay down Africas baddebts by refilling the coffers of the World Bankand IMF, leaving both the reputation and theaccount books of the two international finan-cial institutions in seemingly pristine shape.67

As a result of the developed worlds com-mitment to take on Africas debt burden and toreplenish the World Banks and IMFs coffers,the two institutions will now have more mon-ey to spend on aid disbursements. In the ab-

sence of meaningful political and economicreforms in Africa, the new aid is likely to lead tomore debt in the future. That has happened be-fore. Between 1989 and 1997, the HIPC coun-tries received some $33 billion in debt relief.68

Yet many HIPC countries kept on borrowingwith some of them ending up in deeper debtafterthe debt relief than before.

Ethiopia: A Case Study

Ethiopia has been a major recipient of for-eign aid over the last six decades. Between 1950and 2007, the country received 111 grants fromthe World Bank totaling $5.4 billion. In 2008,there were 28 active World Bank projects inEthiopia worth $2.7 billion.69 In addition to theaid disbursed by the World Bank, Ethiopia hasreceived much aid from bilateral donors. U.S.government assistance, for example, amountedto $2.3 billion between 1991 and 2003.70 Otheraid poured in from European countries as wellas the former Soviet bloc.

By 1998, Ethiopias total external debt stoodat $9.6 billion, or 124 percent of the nationsGDP. One hundred percent of Ethiopias long-term debt was (and remains) public debt owedto foreign governments and internationalfinancial institutions.71 That May, a territorialwar broke out between Ethiopia and Eritrea.The conflict lasted for two years and cost the

lives of some 70,000 people; up to 50,000 of thedead combatants were Ethiopians.72

The objective of the war was to captureBadme, a small town with a population ofabout 1,500 people on the border between the

two countries.

73

According to the InternationalInstitute for Strategic Studies, the Ethiopiangovernment spent $467 million on its militaryin 1999 and Meles Zenawi, the Ethiopian primeminister, admitted that the war cost Ethiopia$1 million a day.74 The annual per capita in-come in Ethiopia stood at $119 in 1999.75

Remarkably, six months after the outbreakof the Badme conflict, the IMF and the WorldBank, sighting much progress in Ethiopia,agreed that the country should be eligible fordebt reduction under the HIPC initiative.76A

year later, Russia wrote off $4 billion ofEthiopian debt.77 But by 2001, Ethiopian debtwas on an upward trajectory again. Then, in2004, Ethiopia finally started receiving $1.3billion in HIPC debt relief.78

The year 2005 marked the tenth anniversaryof Meles Zenawis election as Ethiopias primeminister. Zenawis rule started in a promisingway. When he met with the regional leaders inKampala, Uganda, during his African trip in1998, U.S. president Bill Clinton called the Ethi-opian prime minister one of Africas new gen-

eration of leaders.79 Clintons implication wasthat the new generation of African leaderswould stay clear of the corruption and despo-tism that marked many regimes in post-inde-pendence Africa. As an acknowledgement of hisstatus as one of Africas great and good, Zenawiwas asked to be a member of Tony Blairs Com-mission on Africa in 2004.

In May 2005, some two months after Blairscommission published its findings, Zenawipresided over rigged parliamentary and regionalelections. On the eve of the elections, with early

returns predicting a clear victory for the opposi-tion Coalition for Unity and Democracy andUnited Ethiopian Democratic Forces, Zenawiwent on national television and declared a stateof emergency. With final results unannouncedfor three weeks after the polls and amidstreports of massive fraud, the Ethiopian opposi-tion took to the streets. In the days that fol-

13

Aid and debtrelief have beenlargely divorcedfrom economic

and politicalreforms inEthiopia overthe last decade.


14/28

lowed, 193 protesters were shot dead and 763were wounded in Addis Ababa alone. Some50,000 people were imprisoned, including manyof the leaders of the opposition.80

As Michela Wrong, former Africa corre-spondent for the BBC and Financial Times,wrote at the time, In the Ethiopian capital, aregime that has been hailed by Tony Blair asan example of progressive African govern-ment has shot women and children in thestreets, detained thousands, and rounded upthe opposition leaders who accuse it, withample justification, of rigging elections inMay. Embarrassingly, the forces involved inthese abuses were trained by British policeofficers, at British taxpayers expense.81

Following the 2005 crackdown, the WorldBank suspended new loans to the Zenawi gov-ernmentfor awhile. A mere 12 months later,the World Bank was lending again. To silencethose critical voices who argued against aiddisbursements to African dictators, the WorldBank claimed that instead of directly support-ing the federal budget, it would merely financethe delivery of basic services to the popula-tion through grants to local governments.82

In practical terms, of course, there is little sub-stantive difference between funding of the

nine local governments and subsidizing thefederal budget that financed the local govern-ments in the first place. Indeed, the aid moneyfrees up resources for the federal budget.

The World Banks lending amounted to 9percent of the federal budget in 2008, thoughin 2005 it amounted to as much as 15 per-cent.83 In addition to benefiting from aid dis-

bursed by the World Bank and a consortiumof European countries, Zenawi has alsogained from the financial and political back-ing that the Ethiopian government received

from the Bush administration as Americasvalued friend in the war on terror.84

Berhanu Nega, the deputy chairman of theCoalition for Unity and Democracy who waselected mayor of Addis Ababa in the 2005 elec-tions, but who was subsequently jailed foralmost two years, believes that without foreignaid, the Zenawi government would not be ableto survive for long. What is more, without for-eign aid, Zenawi would find himself without animportant source of foreign exchange that hasenabled the Ethiopian government to arm its

police and military. In the meantime, Nega con-tends, foreign aid has helped to facilitate politi-cal repression in Ethiopia and underminedemocratic evolution in the country. SinceZenawi has closed off all avenues of dissent, anincreasing number of Ethiopians have been tak-ing up arms against the government. Currently,there are civil conflicts of varying intensity ineight out of nine Ethiopian provinces.85

Political repression aside, Ethiopia has notmade much economic progress either. In2007, for example, the World Bank acknowl-

edged that the past 15 years witnessed stabil-ity, significant expansion in schooling, healthservices, roads and other servicesfrom anextraordinarily low base. Nevertheless, theBank was forced to admit, there has been lit-tle overall growth in productivity. Lack of pro-ductivity growth was a particular disappoint-ment in the agricultural sector, which still

14

When itcomes to tradeprotectionism,

Africa is far fromblameless and

is one of theworlds mostprotectionist

regions.

Table 1

Ethiopias Long-Term Debt and Foreign Aid, 19972006 (current US$ in billions)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Long Term Debt 9.4 9.6 5.4 5.3 5.6 6.3 7 6.3 5.9 2.2

Foreign Aid 0.6 0.7 0.6 0.7 1.1 1.3 1.6 1.8 1.9 2


Note: Foreign aid consists of Official Development Assistance and Official Aid. For definitions of Official Develop-

ment Assistance and Official Aid see http://www.oecd.org/glossary/0,3414,fr_2649_33721_1965693_1_1_1_1,00.html

#1965580.


15/28

accounts for 85 percent of employment, andforms the centre of the Governments develop-ment strategy. Primarily because of this, in-come poverty has failed to show significantdeclines over time.86

As ever, the World Banks and IMFs answerto the political and economic situation inEthiopia was more aid and more debt relief.Thus, when Ethiopia became eligible for debtrelief under the terms of the G8s MultilateralDebt Relief Initiative in 2006, her debt wasslashed by an additional $2.3 billion.87

Predictably, Ethiopias representative at theUnited Nations said that the most recent roundof debt reductions was not enough to makesignificant inroads towards attaining theMillennium Development Goals. (Ostensibly,

the MDRI debt relief is supposed to help facili-tate the fulfillment of the Millennium Develop-ment Goals in the worlds poorest countries.)Ethiopia, he claimed, will make more prog-ress towards achieving the Goals if moreresources had been made available through theinternational development cooperation frame-work. Put differently, debt reduction toEthiopia should be accompanied by more aid.88

All indications are that the donor communitywill, once again, oblige the aid requests fromAddis Ababa despite the fact that foreign aid to

Ethiopia has already risen from $643 million in1999 to $2 billion in 2006a nominal increaseof 211 percent.

Aid and debt relief have been largelydivorced from economic and political reformsin Ethiopia over the last decade. If anything,they seemed to have followed serious trans-gressions on the part of the Ethiopian rulingelite. Today, Ethiopian debt is down to the lev-els last seen in the early 1980s, while aid isreaching historical highs.

Trade Liberalization:A Key to Development

The G8 has agreed to a three-pronged ap-proach that is supposed to help Africa escapepoverty. Increased aid and debt relief will be oflimited benefit and may prove to have deleteri-

ous consequences for economic growth. Buttrade liberalization could prove to be a stimulusfor African economies. That is why a successfulconclusion of the Doha round of negotiationson trade liberalization was an integral part of

the G8s plan for Africa. That is also why thedestructive role that the African delegatesplayed in Dohas collapse was so self-defeating.

The Benefits of Trade LiberalizationThe theoretical benefits of trade are well

known. Trade improves global efficiency inresource allocation or, to put it differently, itprovides a superior way of delivering goodsand services to those who value them most. An expanded market allows traders to gainfrom specializing in the production of those

goods and services that they do best (i.e., thelaw of comparative advantage). Trade allowsconsumers to benefit from more-efficientmethods of production. Without large mar-kets for goods and services, it would not beeconomical to separate production into spe-cific operations and plan large productionruns. Large production runs, in turn, are in-strumental to reducing the cost of a product.The reduction of the cost of production leadsto cheaper goods and services, which increas-es the real standard of living.

But what does research say about actual ben-efits to Africa from trade liberalization? In amuch-cited 2005 paper, World Bank research-ers estimated African benefits from trade liber-alization. According to the World Bank, Theresults suggest moving to free global merchan-dise trade would boost real incomes in Sub-Saharan Africa proportionately more than inother developing countries or in high-incomecountries, despite a terms of trade loss in partsof the region. Farm employment and output,the real value of agricultural and food exports,

the real returns to farm land and unskilledlabor, and real net farm incomes would all risein the region, thereby alleviating poverty.89

In real terms, annual welfare in Africawould be $4.8 billion greater in 2015 thanwould be the case had no liberalization takenplace.90 There would be growth in agricultur-al incomes and in employment.91 Moreover,

15

Dohas failureis a tragedy forAfrica. Tradeliberalizationis mostadvantageousto the mostprotectionistcountries.


16/28

Africa stands to gain much from internaltrade liberalization. Denis Medvedev of theWorld Bank has estimated that by 2015,annual welfare gains from intra-African tradeliberalization would amount to 36 percent of

all the welfare gains that Africa stands toreceive from global trade liberalization.92

Developed Countries Need to End TheirProtectionist Policies

The case against developed world protec-tionism against products from developingcountries, including Africa, is well known.Seventy-three percent of poor people in devel-oping countries live in rural areas and 60 per-cent of the labor force in low-income countriesderives its income from agriculture. Agricul-

ture and agro-related services generate 25 per-cent of low-income countries GDP.93

Yet, the developed worlds protection a-gainst the developing worlds agriculturalexports is four to seven times higher than thaton the developing worlds manufacturingexports.94 Many agricultural goods from Africaand other developing countries face tariff esca-lation.95 Tariffs of up to 500 percent are some-times applied by the United States, EuropeanUnion, Japan, and Canada on products thatinclude beef, dairy products, vegetables, fresh

fruit, cereals, sugar, prepared fruit and vegeta-bles, wine, spirits, and tobacco.96

Rich countries support for agricultureundercuts competition from cheaper productsoriginating in the developing world.97 In 2007,agricultural support in the countries of theOrganization for Economic Cooperation andDevelopment came to about $365 billion.98

Agricultural subsidies in rich countries alsocause overproduction of certain farm products.That agricultural surplus is often dumped onthe world markets, which depresses prices and

undermines farmers in poor countries.99Agri-cultural dumping is an especially serious prob-lem for many developing countries, where agri-cultural production enjoys a comparativeadvantage over the developed world. The Euro-pean Unions Common Agricultural Policyalone is estimated to cause $20 billion worth ofannual losses in poor countries.100

In short, because agriculture is such an im-portant part of developing countries econo-mies, and because it receives extensive protectionin developed countries, such protectionismundermines markets and makes the developed

worlds proclamations in favor of free tradesound hollow and hypocritical.

Africa Is One of the Worlds MostProtectionist Regions

Unfortunately, when it comes to trade pro-tectionism, Africa is far from blameless. In fact,Africa is one of the worlds most protectionistregions. Average applied tariff rates in Africa,for example, remain comparatively high.101

Whereas average applied tariffs in high-incomeOrganisation for Economic Co-operation and

Development countries fell from 9.5 percent to2.9 percent between 1988 and 2007 (a 70 per-cent reduction), average applied tariffs in Africaonly fell from 26.6 percent to 13.1 percentbetween 1987 and 2007 (a 50 percent reduc-tion).102

In addition to tariffs, there is a plethora ofnontariff barriers to trade that African coun-tries employ.103According to the Commissionfor Africa, the costs and difficulty of movinggoods across, between, in and out of some African countries can be far higher than in

richer countries, undermining Africas com-petitiveness. . . . In the 1990s, it cost about thesame to clear a 20-foot container throughports of Abidjan or Dakar as it did to ship thesame container all the way to a north-Euro-pean port. Sub-Saharan Africa suffers fromthe highest average customs delays in theworld: for example, Estonia and Lithuaniarequire only one day for customs clearanceversus 30 days on average for Ethiopia.104

African countries also impose significantlyhigher tariffs on one another than rich coun-

tries impose on Africa. The World Bank datashow that African countries levy an averageapplied tariff of 34 percent on agriculturalexports from other African countries. Industrialcountries, by contrast, levy an average appliedtariff of 24 percent on African agriculturalexports. Similarly, African countries maintainan average applied tariff of 21 percent on non-

16

Regional tradein Africa is

significantlysmaller as a

percentage ofAfrican exports

than is the case inWestern Europe

and NorthAmerica.


17/28

agricultural exports from other African coun-tries. Industrial countries maintain an averageapplied tariff of 4 percent on African non-agri-cultural exports.105

Not surprisingly, African intraregional trade

covered only 10 percent of African exports.

106

Incontrast, 68 percent of exports from countriesin Western Europe were exported to otherWestern European countries. Similarly, 40 per-cent of North American exports were to othercountries in North America.107

The Failure of DohaAt the conclusion of the Gleneagles sum-

mit, Tony Blair described the successful con-clusion of the Doha Round of negotiationson trade as a necessary element of our [G8]

work to reduce global poverty.108

The nego-tiations launched in Qatar in 2001 weredubbed the Doha Development Agenda, soas to highlight that the greatest beneficiariesof future trade liberalization would be devel-oping countries, including African countries.Unfortunately, Doha became the first roundof negotiations on trade liberalization in thepostWorld War II era that ended in failure.

Many countries deserve blame for the fail-ure of the Doha round. The Europeans failedto agree to deeper cuts in agricultural tariffs.

Americans failed to agree to real cuts in farmsubsidies. The Indians and the Braziliansfailed to move sufficiently on liberalization oftheir manufacturing sectors. But one of themost destructive and certainly the most self-defeating roles in bringing about the collapseof negotiations was played by the African del-egates.

The Doha round of negotiations on tradeliberalization ran into trouble during the2003 ministerial meeting in Cancun. Eggedon by Oxfam, African and other developing

countries demanded that they be exemptedfrom further commitments to trade liberal-ization.109As far as the African countries wereconcerned, trade liberalization was a one-waystreet: the developed world would open itsmarkets to African goods, while Africa wouldcontinue to shut goods made in the devel-oped world out of African markets.

Economic theory and empirical evidenceshows that there is much wisdom in unilateralliberalization, and developing countries gainenormously from opening their markets to for-eign imports irrespective of what other coun-

tries do. But unilateral liberalization was noton the table in Cancun. Global negotiations ontrade liberalization happen along long-estab-lished mercantilist lines, where countries tradeconcessions on market access with oneanother.

At the heart of this mercantilist view of tradeis a deep misunderstanding of the role that for-eign competition plays in stimulating domesticproduction. Mercantilists see imports as athreat, which is why, at Cancun, African tradeministers emphasized exports and access to

developed world markets, as opposed to open-ing their own countries to foreign goods. Inreality, imports increase competition and spe-cialization, and increased specialization leads toincreased productivity. In a competitive market,reduction of the cost of production then leadsto cheaper goods and services, which in turnincreases the real standard of living. That is amajor reason why people living in more openeconomies tend to be richer.

The Cancun meeting collapsed around aminor issue of trade facilitation. The refusal

of developing countries, including Africanstates, to negotiate about the streamlining ofthe paperwork needed to clear imports at theborder convinced the Mexican chairman ofthe conference that there was no point in dis-cussing the much more contentious issue oftariff reductions. With the battle lines drawnat Cancun, all sides were determined to holdout for the best possible dealwhich wassupposed to be struck at the next ministerialmeeting in Hong Kong in December of 2005.But that deal was never struck, as the meeting

in Hong Kong made little headway.Dohas failure is a tragedy for Africa. Trade

liberalization is, after all, most advantageous tothe most protectionist countries and Africaremains one of the most protectionist regionsin the world. True, Africans were never going toget everything that they wanted. It is also truethat the Doha round exposed the basic hy-

17

As morecountries andregions growprosperous,absolute povertyis increasingly anAfrican, ratherthan a global,problem.


18/28

pocrisy of the developed countries that preachfree trade, but continue to insist on protectingthe sensitive sectors of their economies, likeagriculture.

Reaching an agreement would have been a

step in the right direction. Not only would itallow Africans greater access to developedworld markets than they currently enjoy, butit would also allow Africans to lock in thosenew market access gains without the fear ofbacksliding by some WTO member states.Similarly, it would lock in Africas own com-mitments, making a return to protectionismmore difficult. Importantly, it would allowthe African states to use the WTO adjudica-tion mechanisms to hold other memberstates, including other African countries, true

to their trade liberalization commitments.The WTOs dispute resolution process hasalready proven to be a very effective mecha-nism for small developing countries to forcechange in the trade policies of large devel-oped nations. The above considerations areespecially important now that the worldeconomy has entered a slowdown and fearsof protectionism abound.110

Trade Liberalization Is Not EnoughTrade liberalization is necessary, but not

sufficient, for economic development. As Arvind Panagariya of Columbia Universityobserves, There are complementary condi-tions [to trade openness] such as macroeco-nomic stability, credibility of policy andenforcement of contracts without which thebenefits of openness may fail to material-ize.111 Similarly, membership in the WTOdoes not automatically lead to prosperity.According to Alan Oxley, the former head ofthe General Agreement on Tariffs and Trade,the WTO is a self-help organization. It lays

down rules; it is up to members to work with-in them if they want increases in trade andgrowth.112

How can Africa maximize the benefits fromfuture trade liberalization? The Commissionfor Africa put it best when it argued that amajor problem [that] Africa faces is its weakcapacity to tradedriven by its low productivity

and poor competitiveness.113Put differently, inaddition to greater market access, Africa needsto expand the portfolio of goods and servicesthat the rest of the world may wish to buy. Inorder to achieve that, African countries will have

to undertake major policy changes. Amongother reforms,

Africa has to improve the stability andintegrity of its legal systems. Without afunctioning court system, investors cannotbe sure their contracts will be enforced. Forexample, Africa has few lawyers, many ofwhom are subject to bribes and intimida-tion by the political elite.114

Africa has to tackle the problem of poorgovernance, inefficient bureaucracies, and

corruption. African governments tend tobe unaccountable to the people overwhom they rule. Instead, they often func-tion in order to further the objectives ofthe political elites.115 The constitutionalstructures, legal systems, and civil societiesare not strong enough to insist on thetransparency of the budgetary process,which leads to corruption and embezzle-ment by government officials.116

Africa has to reduce the regulatory bur-den that stifles private sector growth

The World BanksDoing Business reportsshow that improvement in the regulato-ry environment, including cutting of redtape, can result in significantly greaterprivate sector investment and lead tohigher economic growth.117

Africa suffers from a lack of good infrastructure, with dilapidated roads, railways,ports, and airports increasing transportcosts and reducing economic activity.118

Fixing Africas infrastructure is a massivetask that will take much money and many

years to complete, but privatization of in-efficient government monopolies, includ-ing ports and railways, can be done rela-tively easily.

Africa has to address the lack of regionaleconomic integration. Regional trade inAfrica is significantly smaller as a percent-age of African exports than is the case in,

18

The heavyemphasis on aid

and debt reliefmade Westernactions appear

to be chieflyresponsiblefor poverty

alleviation inAfrica.


19/28

for example, Western Europe and NorthAmerica.119 Unfortunately, many regionalfree-trade initiatives remain little morethan ambitious commitments.120

Despite the collapse of the Doha round, freetrade (combined with domestic policy reforms)remains the most effective way for Africa toescape poverty. African countries should notwait for other countries to move ahead withliberalization. It is, therefore, encouraging tosee some African politicians call for more tradeliberalization. South African finance ministerTrevor Manuel, for example, has called for areturn to the aggressive approach to trade lib-eralization of the 1990s, urging that SouthAfrica buck the slow pace of multilateral trade

negotiations and introduce unilateral tradereforms to boost growth.121

Conclusion

Before the United Nations Earth Summitthat took place in Johannesburg in August2002, the former South African presidentThabo Mbeki called on the rich countries toend what he called a system of global apart-heid. As Mbeki said, A global human society

based on poverty for many and prosperity for afew, characterized by islands of wealth, sur-rounded by a sea of poverty, is unsustain-able.122

Mbeki was wide off the mark. As morecountries and regions grow prosperous,absolute poverty is increasingly an African,rather than a global, problem. The extent ofthe problem has, understandably, caught theattention of many well-meaning peoplearound the world. Partly in response to pub-lic pressure, the G8 countries have commit-

ted vast resources in an attempt to alleviateAfrican suffering.

Unfortunately, two out of three initiativesthat the G8 agreed to at Gleneaglesmoreforeign aid and debt reliefare approachesthat have not succeeded in spurring Africangrowth or alleviating the continents poverty.They are unlikely to succeed in the future.

The third initiativegreater trade liberaliza-tionhas failed along with the Doha roundof negotiations on trade. Along with endingagricultural protectionism and subsidies,politicians, movie stars, and other celebrities

should promote the cause of trade liberaliza-tion, which has a proven record of stimulat-ing growth.

Lastly, well-meaning people in the Westmust recognize that most African problemscannot be solved in Western capitals. Africanpoverty is primarily caused by flawed domes-tic policies and institutions. As such, povertycan only be overcome by changes made byAfricans themselves. It is African governmentsthat must ultimately embrace the kinds ofreforms that made other regions in the world

prosper.

NotesI would like to thank Tanja Stumberger for herinvaluable help in producing this paper.

1. Other UN Human Development Index valueswere 0.923 for the Organization for EconomicCooperation and Development countries, 0.795for Latin America and the Caribbean, 0.768 forChina, 0.68 for the Arab states, and 0.611 forIndia.

2. Indur M. Goklany, The Improving State of theWorld: Why Were Living Longer, Healthier, MoreComfortable Lives on a Cleaner Planet (Washington:Cato Institute, 2007), pp. 22, 28, 36.

3. The figures are in 1990 international Geary-Khamis dollars. Angus Maddison, Historical Sta-tistics for the World Economy: 12003 AD, http:

//www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2007.xls. (The start date of 1960was chosen, since it is generally considered to markthe start of the African Independence period.)

4. The gap also grew between Africa and Western

offshoots, such as Australia, Canada, NewZealand, and the United States, from 10.4 in 1960to 15 in 2003. It grew between Africa and theworld average from 2.6 to 3.5, and between Africaand Latin America from 3 to 3.1.

5. Over the same time period, incomes rose by 89percent in the United States, 81 percent in theeurozone, 38 percent in the Middle East andNorth Africa, and 36 percent in Latin America

19

The mainobstacles toeconomic growthin Africa rest wit

Africas policiesand institutions


20/28

and the Caribbean. (The figures are in constant2000 international dollars.) World Bank, WorldDevelopment Indicators Online, October 2007,http://publications.worldbank.org/WDI.

6. Technological improvements in the agricultur-al and health care sectors have driven down the

prices of food and basic medicine in recentdecades. As such, many African indicators of well-being, such as child mortality and longevity, haveimproved despite falling incomes.

7. Equatorial Guinea should not qualify as an Afri-can success story because much of its oil wealth is inthe hands of its ruler and the elite that surroundhim. Equatorial Guinea is the 127th most unequalcountry out of the 177 countries surveyed in the2007/2008 United NationsHuman Development Re-

port 2007/2008(New York: United Nations, 2007),http: //hdrstats.undp.org/indicators/147.html.

8. G8 Gleneagles 2005, Chairs Summary, Glen-

eagles Summit, July 8, 2005, http://www.g8.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1119518698846.

9. Ibid.

10. Ibid.

11. Figures are in current dollars. World Bank,World Development Indicators Online, http://publications.worldbank.org/WDI.

12. Ibid.

13. Paul Collier, The Bottom Billion: Why the PoorestCountries are Failing and What Can Be Done About It(Oxford, UK: Oxford University Press, 2007), p. 190.

14. Ravallion and Chen define poor as those wholive below 1.25 dollars per person per day in 2005dollars adjusted for purchasing power parity. SeeMartin Ravallion and Shaohua Chen, The De-

veloping World Is Poorer Than We Thought, ButNo Less Successful in the Fight Against Poverty,Policy Research Working Paper no. 4703, TheWorld Bank Development Research Group, August2008, pp. 33, 35.

15. As William Easterly writes, Indeed, if any single

objective has characterized the aid communitysince its inception, it is an obsession with increas-ing the total aid money mobilized. . . . In 1951, theUN Group of Experts calculated exactly how muchaid poor countries needed to achieve an annualgrowth rate of 2 percent per capita, coming up withan amount that would equal $20 billion in todaysdollars. Similarly, the economist Walt Rostow cal-culated in 1960 the aid increase (roughly doublethe aid levels at the time) that would lift Asia,

Africa, and Latin America into self-sustaininggrowth . . . (Self-sustaining meant that aid wouldno longer be necessary 10 to 15 years after theincrease.) Despite the looming expiration of the 15-year aid window, then World Bank presidentRobert McNamara called for a doubling of aid in1973, which was repeated at the World Bank in its

1990 World Development Report. Not to be outdone,current World Bank president James Wolfensohnis now advocating a doubling of aid. WilliamEasterly, The Cartel of Good Intentions, Foreign

Policy (July/August 2002): 44.

16. Jeffrey Sachs, The End of Poverty: EconomicPossibilities of Our Time (New York: Penguin Press,2005), p. 296.

17. Commission for Africa, Our Common Interest: Report of the Commission for Africa (London, UK:Commission for Africa, March 2005), p. 327.

18. As Sachs writes in The End of Poverty, When

people are . . . utterly destitute, they need theirentire income, or more, just to survive. There is nomargin of income above survival that can beinvested for the future. This is the main reasonwhy the poorest of the poor are most prone tobecoming trapped with low or negative economicgrowth rates. They are too poor to save for thefuture and thereby accumulate the capital thatcould pull them out of their current misery. SeeSachs, pp. 5657.

19. The figures are in 1990 international Geary-Khamis dollars. Angus Maddison, Historical Sta-tistics for the World Economy: 12003 AD, http

//www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2007.xls.

20. William Easterly, Planners vs. Searchers in For-eign Aid, Asian Development Bank DistinguishedSpeakers Program, January 18, 2006, http://www.adb.org/economics/speakers_program/easterly.pdf.See also William Easterly, Freedom versus Collec-tivism in Foreign Aid, in James Gwartney andRobert Lawson,Economic Freedom of the World: 2006

Annual Report(Vancouver, BC: Fraser Institute,2006).

21. James Gwartney and Robert Lawson, EconomicFreedom of the World: 2008 Annual Report(Vancouver,

BC: Fraser Institute, 2008), p. 18.

22. Ibid. Hong Kong and Singapore are good exam-ples of economies that liberalized and have bene-fited from foreign direct investment. They contin-ue to be among the worlds freest economies andsought-after destinations for foreign capital. EvenChina, which needs further liberalization, has pro-gressed much since the start of its economic re-forms in the late 1970s and has received substantial

20


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foreign direct investment. In 2006, for example,China received $53.3 billion in FDImore than allof the foreign aid that will go to Africa in 2010. ForChinese investment figures, see United NationsConference on Trade and Development, WorldInvestment Report 2007, October 16, 2007, http:

//www.unctad.org/Templates/WebFlyer.asp?intIte

mID=4361&lang=1.

23. Again, China may be used as an example.Though China still has a long way to go withregard to institutional reform, protection of prop-erty has much improved since the era of Maoism.Partly because of those improvements, grossdomestic investment as a percentage of the grossdomestic product was 43 percent in 2005. In Africa,by comparison, it was only 19 percent. (It should bementioned that domestic investment rates reflect,at least to some extent, capital controls that are inplace in China and Africa.) For definition of grossdomestic investment, see World Bank, Key Devel-opment Data and Statistics: 2006, www.world

bank.org/.

24. Adam Lerrick, Good Intentions at the Expenseof the Poor,Financial Times, August 1, 2006.

25. There are many ways in which economic free-dom in Africa is restricted. Many African coun-tries, for example, lack functioning legal systemsthat protect private property. Africa also remainsone of the least integrated regions in the globaleconomy and its private sector is hobbled by someof the most restrictive business regulations in theworld. See James Gwartney and Robert Lawson,

Economic Freedom of the World: 2008 Annual Report

(Vancouver, BC: Fraser Institute, 2008).26. The World Banks own research was forced toadmit as much. According to Craig Burnside andDavid Dollar, there has been no systematic effectof aid on policy. See Craig Burnside and DavidDollar, Aid, Policies and Growth, World Bank,Policy Research Working Paper 1777, 1997, p. 4.

27. Grants are even less effective in stimulating eco-nomic reforms. See Simeon Djankov, Jose G.Montalvo, and Marta Reynal-Querol, Does For-eign Aid Help? Cato Journal26, no. 1 (Winter 2006):17.

28. Mobutu Sese Seko of Zaire, for example,obtained nine structural adjustment loans fromthe aid agencies even though he was personally cor-rupt and even though he pursued destructive eco-nomic policies. See William Easterly, What didStructural Adjustment Adjust? The Association ofPolicies and Growth with Repeated IMF and WorldBank Adjustment Loans, Center for Global Devel-opment, Working Paper 11, October 2002, http://www.cgdev.org/content/publications/detail/2779.

As Ian Vsquez of the Cato Institute notes, aidagencies in some cases temporarily cut off spend-ing, but later resume it. They are in the awkwardposition of trying to discourage bad policy andencourage policy change through loan cut-offsand, at the same time, trying to encourage policychange through the release of more aid if a country

promises such change. Yet releasing that aid wouldonce again jeopardize reforms. Not releasing thataid, on the other hand, would mean that policychange would occur without aid and thus run therisk that the agencies would be viewed as irrelevant.From an institutional perspective, lending agenciessimply cannot afford to let developing countriesreform on their own. Both the aid institutions andthe recipient governments know this, thus furtherreducing the credibility of so-called conditionali-ty. See Ian Vsquez, Official Assistance, Eco-nomic Freedom, and Policy Change: Is Foreign AidLike Champagne? Cato Journal18, no. 2 (Fall 1998):282.

29. David Dollar and William Easterly, The Searchfor the Key: Aid, Investment, and Policies in Africa,Development Research Group, World Bank, 2000,http://www.worldbank.org/html/dec/Publications/Workpapers/wps2000series/wps2070/wps2070.pdf. See also Danny Rodrik, Understanding Eco-nomic Policy Reform,Journal of Economic Literature34 (March 1996): 941.

30. Jac Heckelman and Stephen Knack, Foreign Aid and Market-Liberalizing Reform, WorldBank Policy Research Working Paper 3557, April2005, p. ii.

31. William Easterly, Ross Levine, and David Rod-man, Aid, Policies and Growth: Comment,Ameri-can Economic Review 94, no. 3 (2004): 77480. More-over, Harold Brumm of the United States General

Accountability Office concluded that foreign aidretards growth even in countries that follow sensi-ble policies. Harold J. Brumm, Aid, Policies, andGrowth: Bauer Was Right, Cato Journal 23, no. 2(Fall 2003). Similarly, in a comprehensive review offoreign aid, Raghuram Rajan and Arvind Subra-manian of the IMF found no evidence that aidworks better in better policy [environments]. Rag-huram G. Rajan and Arvind Subramanian, Aidand Growth: What Does the Cross-Country Evi-dence Really Show? International Monetary Fund

Working Paper WP/05/127, June 2005, http://www.imf.org/external/pubs/ ft/wp/2005/wp05127.pdf.

32. Anne Krueger, The Political Economy of PolicyReform in Developing Countries (Cambridge, MA: MITPress, 1993), and Deepak Lal, The Political Econ-omy of Economic Liberalization, World Bank

Review 1, no. 2 (1987), have analyzed the circum-stances under which past liberalization in the devel-oping world took place. In Africa, for example,

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Mauritius liberalized its economy because ofdomestic considerations and not because of theurging of aid agencies. In the 1960s, the economy ofMauritius was heavily dependant on sugar exports.The falling revenues from sugar exports and boom-ing population resulted in falling incomes that ledto riots in 1967. As a result of those riots, the gov-

ernment undertook a number of economic liberal-ization measures that included the establishmentof Export Processing Zones in 1970.

33. In 2006, there were some 40,000 NGOs world-wide. Three thousand NGOs had a consultative sta-tus at the United Nationsthree times more than in1995. See Lerrick, Good Intentions at the Expenseof the Poor. Also, the United Nations Online Net-work in Public Administration and Finance con-tains information on 2,500 aid-promoting NGOs,dealing with African problems ranging from agri-culture, health and education, to micro-credit andHIV/AIDS. See United Nations Online Network inPublic Administration and Finance, Directory of

African NGOs: 2006, http://www.unpan.org/NGO-Africa-Directory/index.htm.

34. The World Bank alone saw its staff expandfrom 657 people in 1960 to 10,000 people in2002. See Easterly, The Cartel of Good Inten-tions, p. 44.

35. The U.S. Government Accountability Office, forexample, found that 65 percent of the U.S. food aidbudget went to overhead. See Feasting on Famine,

Investors Business Daily, May 15, 2007, http://www.ibdeditorials.com/IBDArticles.aspx?id=264123350777343.

36. Michael Maren, The Road to Hell (New York:Free Press, 1997), p. 9.

37. The Tanzanian government, for example,churns out 2,400 donor reports and deals withabout 1,000 donor missions per annum. As a con-sequence, some governments have in the pastdeclared donor holiday, when the donors accessto government officials is restricted. See Easterly,The Cartel of Good Intentions, p. 43.

38. Ibid.

39. George Ayittey, Africa Unchained: The Blueprint

for Africas Future (New York: Palgrave Macmillan,2005), p. 202. Similarly, some Western NGOs, likeOxfam, have urged African countries not to liber-alize their trade regimes even though there is ageneral consensus among academics that freetrade is an important source of economic growthand prosperity.

40. For a review of the literature, see James Njeru,The Impact of Foreign Aid on Public Expenditure:

The Case of Kenya, AERC Research Paper 135(presented at the African Economic Research Con-sortium, Nairobi, November 2003), http://www.aercafrica.org/documents/rp135.pdf.

41. Djankov et al., p. 11.

42. Ibid., pp. 9, 11.

43. As researchers at the IMF found, aid inflowshave systematic adverse effects on a [recipient]countrys competitiveness, as reflected in a declinein the share of labor intensive and tradable indus-tries in the manufacturing sector. We . . . [found]evidence suggesting that these effects stem fromthe real exchange rate overvaluation caused by aidinflows. See Raghuram G. Rajan and Arvind Sub-ramanian, What Undermines Aids Impact onGrowth? IMF Working Paper, International Mon-etary Fund, June 2005, http://www.imf.org/external/pubs/ft/wp/2005/wp05126.pdf.

44. As Easterly reminds us, when it comes to aiddelivery, it is useful to distinguish between thePlanners and the Searchers. He writes, With freemarkets and democracy, economic and politicalsearchers find products and public services that sat-isfy the customers and voters. In autocratic, central-ly planned societies, planners produce shoddy goodsconsumers dont want, and heavily rationed andinferior public services that satisfy no-one. . . . Whatis the counterpart in foreign aid? Here, Plannersannounce good intentions but dont motivate any-one to carry them out; Searchers find things thatwork and get some reward. Planners raise expecta-tions but take no responsibility for meeting them;

Searchers accept responsibility for their actions.Planners determine what to supply; Searchers findout what is in demand. Planners apply global blue-prints; Searchers adapt to local conditions. Plannersat the Top lack knowledge of the Bottom; Searchersfind out what the reality is at the Bottom. Plannersnever hear whether the Planned got what they need-ed; Searchers find out if the customer is satisfied. APlanner thinks he already knows the answers; hethinks of poverty as a technical engineering problemthat his answers will solve. A Searcher admits hedoesnt know the answers in advance. . . . A Searcheronly hopes to find answers to individual problemsby trial-and-error experimentation. A Planner be-lieves outsiders know enough to impose solutions. A

Searcher believes only insiders have enough knowl-edge to find solutions, and that most solutionsmust be homegrown. Easterly, Planners vs. Search-ers in Foreign Aid, pp. 23.

45. Boutros Boutros-Ghali, Human Rights andDemocratization, United Nations Educational, Sci-entific and Cultural Organization, http://www.unesco.org/opi2/human-rights/Pages/English/BoutrosGhaliE.html.

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46. Stephen Knack, Does Foreign Aid Promote De-mocracy? International Studies Quarterly 48 (2004):25166.

47. According to Easterly, The worlds 25 most-undemocratic government rulers (out of 199countries the World Bank rated on democracy)

got a sum of $9 billion in foreign aid in 2002.Similarly, the worlds 25 most-corrupt countriesgot $9.4 billion in foreign aid in 2002. Easterly,Planners vs. Searchers in Foreign Aid, p. 18.

48. See Djankov et al.

49. Commission for Africa, p. 35.

50. Djankov et al., p. 7.

51. Collier, p. 103.

52. Maren, pp. 103104.

53. Paul Kagame, Time for Africa to Insist on De-fining Its Own Future, Business Day, October 3,2007, http://www.businessday.co.za/articles/opinion.aspx?ID=BD4A577756.

54. Andrew Mwenda, Foreign Aid and the Weak-ening of Democratic Accountability in Uganda.

55. Jason Pontin, TED Day 1: Bono Heckles theStage, Technology Review, June 5, 2007, http://www.technologyreview.com/blog/pontin/17618/.

56. The Commission on Africa, for example, esti-mates that stolen African assets held in overseasbank accounts are equivalent to more than half ofthe continents external debt. Commission for

Africa, p. 151.

57. Mahathir bin Mohamad quoted by Ian Vasquez,Debt Relief for Poor Countries: Are the WorldBank and IMF Doing the Right Things? CatoInstitute Policy Forum, July 16, 2001.

58. Net present value compares the value of mon-ey now with the value of money in the future. Aunit of currency today is worth more than a unitof currency in the future because of, among otherfactors, inflation. International Monetary Fund,Debt Relief under the Heavily Indebted Poor

Countries (HIPC) Initiative, October 2008, http://www.imf.org/external/np/exr/facts/hipc.htm.

59. Jubilee Debt Campaign, The Basics aboutDebt, October 2007, http://www.jubileedebtcampaign.org.uk/?lid=98.

60. Oxfam International, Debt Relief: Still Failingthe Poor, April 2001, http://www.oxfamamerica.org/newsandpublications/publications/research_

reports/art923.html/OA-Debt_Relief_Failing_for_Poor.pdf.

61. For an excellent description of the corruptionin Mobutu Sese Sekos Zaire, see Michela Wrong,Inthe Footsteps of Mr. Kurtz: Living on the Brink of Disasterin Mobutus Congo (New York: HarperCollins Pub-

lishers, 2002).

62. United States Government AccountabilityOffice, The United States Has Not Fully FundedIts Share of Debt Relief, and the Impact of DebtRelief on Countries Poverty-Reducing Spending IsUnknown, GAO Report to Congressional Request-ers, January 2009, http://www.gao.gov/new.items/d09162.pdf.

63. Commission for Africa, p. 367. See also, BritishBroadcasting Corporation, World Bank Hits Outat Tanzania Deal, December 21, 2001, http://news.bbc.co.uk/2/hi/uk_news/politics/1723296.stm;Anger at Tanzania Jet Purchase, July 22, 2002,

http://news.bbc.co.uk/2/hi/africa/2144387.stm.

64. Adam Lerrick, The Debt of the PoorestNations: A Gold Mine for Development Aid,Inter-national Economics Report, Carnegie Mellon Univer-sity Gailliot Center for Public Policy, June 2005, p. 1.

65. Adam Lerrick, Debt Relief for Poor Countries: Are the World Bank and IMF Doing the RightThings? Cato Institute Policy Forum, July 16, 2001.

66. Ibid., p. 14.

67. Of course, the taxpayers in the developed coun-tries have already paid once for economic misman-agement in Africawhen their governments usedthe World Bank and IMF to extend the originalloans to Africa.

68. William Easterly, Debt Relief, Foreign Policy127 (NovemberDecember 2001): 2026.

69. Personal communication with Greg Toulmin,World Banks Ethiopia and Sudan country pro-gram coordinator, November 24, 2008.

70. U.S. Department of State, Background Note:Ethiopia, November 2008, http://www.state.gov/r/pa/ei/bgn/2859.htm.

71. World Bank, World Development IndicatorsOnline, http://publications.worldbank.org/WDI.

72. Annan Warns of Another War between Ethiopiaand Eritrea, The Guardian, October 31, 2006, http://www.guardian.co.uk/international/story/0,,1936085,00.html.

73. Eritrea: Border Row Threatens Terrorism

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War, Business Daily, October 12, 2007, http://allafrica.com/stories/200710120024.html.

74. Michela Wrong, personal communication.

75. The figure is in constant 2000 dollars.

76. International Monetary Fund, Ethiopia: En-hanced Initiative for Heavily Indebted Poor Coun-tries (HIPC)Update of Preliminary Document,February 7, 2001, p. 3, http://www.imf.org/external/NP/hipc/2001/eth/ethpd.pdf.

77. African Economic Outlook, Ethiopia, Organi-zation for Economic Cooperation and Develop-ment, 2002, http://www.oecd.org/dataoecd/35/32/1824828.pdf.

78. The HIPC debt relief to the tune of $1.3 billionin net present value will be spread over 15 years(20042019). International Development Associ-ation, Multilateral Debt Relief Initiative (MDRI):

Update on Debt Relief by IDA and Donor Financ-ing to Date, February 2007, http://go.worldbank.org/UX8MUDE4Q0; and, personal communica-tion with John Van Dyck, World Banks senioroperations officer for Ethiopia and Sudan, Feb-ruary 27, 2009.

79. Bill Clinton (transcript of remarks to the peopleof Ghana in West Africa, March 23, 1998), http://www.library.yale.edu/~fboateng/bill.htm.

80. Berhanu Nega, personal communication, Octo-ber 18, 2007. Also see Anthony Mitchell, 193 Pro-testers Said Killed in Ethiopia, Washington Post, Oc-tober 18, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/18/AR2006101800242.html.

81. Michela Wrong, Michela Wrong Asks Why BlairBacks a Brutal Regime, New Statesman, November14, 2005, http://www.newstatesman.com/200511140011.

82. World Bank, Ethiopia: World Bank Group Ap-proves Plan to Protect Basic Services, ImproveGovernance, May 26, 2006, http://goliath.ecnext.com/coms2/gi_0199-5572610/Ethiopia-World-Bank-Group-Approves.html.

83. Personal communication with Greg Toulmin.

84. U.S. AID, Ethiopia, October 2007, http://www.usaid.gov/policy/budget/cbj2006/afr/et.html.

85. Berhanu Nega, personal communication,October 18, 2007.

86. World Bank, Ethiopia: Accelerating Equitable

Growth, World Bank Country Economic Memo-randum, April 2007, p. ix, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/04/25/000020953_20070425090039/Rendered/PDF/386620ET.pdf

87. The figure is in 2006 dollars. International

Development Association, Multilateral Debt Re-lief Initiative (MDRI): Update on Debt Relief byIDA and Donor Financing to Date.

88. United Nations, Developing Countries NeedBolder, More Innovative Solutions to Help ThemOut of External Debt Trap: Second CommitteeTold, October 15, 2007, http://www.un.org/News/Press/docs/2007/gaef3181.doc.htm.

89. Kym Anderson, Will Martin, and DominiqueVan Der Mensbrugghe, Would Multilateral TradeReforms Benefit Sub-Saharan Africa? World BankPolicy Research Working Paper 3616, June 2005(revised October 2005), http://www-wds.worldba

nk.org/external/default/WDSContentServer/IW3P/IB/2005/06/21/000112742_20050621153823/Rendered/PDF/wps3616.pdf.

90. Ibid. The value of net exports would rise from$6 billion in 2001 to $27 billion in 2015, and the

volume of trade would increase by 23 percent(The study assumes 2001 to be the baseline year.)

91. Arvind Panagariya has questioned the positiveeffect of trade liberalization on African countries.He argued that some African countries may beworse off as a result of trade opening. Kym

Anderson, Will Martin and Dominique Van Der

Mensbrugghe provide empirical evidence counter-ing Panagariyas thesis in Would MultilateralTrade Reforms Benefit Sub-Saharan Africa?

92. Personal communication with Denis Med-vedev, August 18, 2005.

93. World Bank, Global Economic Prospects 2004:Realizing the Development Promise of the Doha Agenda(Washington: World Bank, 2003), p. 103, http://www.worldbank.org/prospects/gep2004/full.pdf

94. Ibid., pp. xvixvii.

95. Tariff escalation implies higher import duties

on semi-processed products than on raw materi-als and even higher tariffs on finished goods.Tariff escalation protects domestic processingindustries and discourages the development ofprocessing industries in the count

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