10 February 2013

Ethiopia: Equating Aid With Money Is Obsolete


Africa's emergence is the new consensus. For the second time in a just a few months, a major international journal has run a cover illustrating the new found optimism on the continent. After The Economist's mea culpa (correcting its previous assessment of a "hopeless continent"), TIME magazine recently re-ran an earlier title: "Africarising".

This is no fluke;Africa's economies are growing and the continent is much wealthier today than it ever has been before. This is despite the fact that collectively it remains the poorest continent on the planet. Many African nations, 22 to be precise, have already reached Middle Income Country (so called "MIC") status and more will do so by 2025.

Today, Africa includes a diverse mix of countries, ranging from the poorest in the world to the fastest growing; from war-torn countries to vibrant democracies; from oil-rich economies to Information & Communications Technology (ICT) champions and the list goes on.

This has important implications on the aid architecture. Until now, Africa was at the centre of a global aid effort. But, what if Africa continues to grow strongly and steadily? What will be the role of international partners, often called "donors", in this new configuration? Is aid becoming obsolete?

I do not think so, rather the opposite! Many Africans still experience deep poverty.

The challenge is so huge that 10 years of moderately strong growth is just a down-payment in the fight against poverty. Today, some 400 million Africans, roughly 40pc of the total population, still live on 1.25 dollars a day, or less.

Newfound wealth means little to them if it is not distributed equally. Some countries are becoming richer, often as a result of oil discoveries, with very little impact on the lives of the average citizens.

Fundamentally, if the poor remain neglected, a country's development outlook has not changed. What is new, however, is that some of these MICs no longer need aid money to fill development gaps.

In principle, they have enough internal resources. Yet they still need assistance in designing programs that help them to spend their new resources efficiently, especially if they wish to target the poor. Aid programs, if designed well, can help do precisely this.

Kenya is a perfect illustration of this new aid reality. Today, Kenya's budget is roughly 12 billion dollars, about 30pc of the country's economy. This share is one of the highest in Africa, making the state the biggest player in the economy.

Donors are small players in comparison, even though the amount of aid recovered over the last 10 years witnessed a sharp decline from the 1990s. Today, aid to Kenya is around 1.5 billion dollars, amounting to a little over 10pc of total expenditures, of which only half is reflected in the budget.

Bilateral partners, like the United States and China, still prefer to implement their programs outside of government systems; likewise new players, especially NGOs, typically choose to execute their programs directly, rather than through the administration.

So what needs to change in the way aid is being delivered? How can it maintain its relevance, and even further, become more effective than in the past?

We need to acknowledge and celebrate the demise of the old North-South paradigm. With Asia's emergence and China's spectacular turnaround, former recipients of aid are now new donors.

The previous regime, with rich countries in the North supporting poor countries in the South through government-to-government and multilateral relationships, is changing rapidly. Today, relationships are much more complex and varied, and there is a host of new players on the pitch.

Aid will increasingly be about transferring knowledge, rather than money. No matter how significantly some donors may scale-up their financial commitments, aid money will remain small compared to domestic resources in recipient countries.

If current trends continue, most of today's stable low-income countries will reach MIC status by 2025. Going forward, traditional aid (of the brick-and-mortar type) will focus increasingly on emergencies and fragile states. In others, transferring know-how and skills will be the name of the game.

Innovation and support to countries' systems will drive the impact of future aid. By 2025, Africa will have a majority of MICs.

But, as countries climb up the income ladder, they will face new and more complex policy challenges. In order not to stay stuck in the middle income trap, African countries will need to innovate, including in traditional sectors, such as; education, health and transport.

The resources will be there, but the challenge will be to make sure services are actually delivered and with a high level of quality. In these countries, aid should move from building infrastructure (schools, clinics and roads) to improving the machine room (the systems through which education, health and transport are being provided).

Simply put; if we continue to equate aid with only money, it will become obsolete in most countries over the next decade or two, except perhaps in fragile states. However, if it is focused on transferring knowledge, which developing countries require to catch up and compete, it will remain indispensable.

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