Would aid save Africa from effects of global financial crunch?

By Emmanuel K. Dogbevi

The global food and energy crisis, and now the financial crisis are making the future of life in Africa more uncertain, especially for the poor, and Africa has been relying on aid for over 60 years now to solve its economic and development challenges. To what extent has aid worked?

The developed world has spent around 600 billion dollars on aid since 1958, and yet the number of sub-Saharan Africans living in poverty keep increasing.

Meanwhile, the full impacts of the global financial crisis is expected to hit the continent, but the extent of the effect is not known yet, making the outlook even more ominous.

Donald Kaberuka, president of the African Development Bank, said on October 7, 2008: “Although Africa is relatively protected from the initial impacts on the financial markets, the continent could be seriously affected by the weakening of global economic growth and a decline in demand for products from emerging markets… The current crisis will increase the cost of borrowing on capital markets, and make access to the markets more difficult… Budgetary pressures resulting from the various rescue plans could reduce the volume of aid and investments in Africa, and lead to rise of protectionism.”

While the banking sector on the continent has not as yet felt the spiraling effects of the global financial collapse, FDI, remittances and African economies in general are shrinking.

According to an IMF World Economic Outlook Reported of October 2008; “Economic growth in Sub-Saharan Africa (SSA) is expected to moderate in the face of the financial turmoil and high energy and food prices… Overall growth is projected to decline from near 7 percent in 2007 to just over 6 percent 2008-2009.”

For instance in Ghana inflation for January 2009 has hit over 19% and Nigeria, the largest economy in West Africa which in 2005 paid up its external debt of $14 billion is now piling up external debt, which has so far reached $3.76 billion and inflation in that country is rising.

Ghana on the other hand received debt forgiveness. The Heavily Indebted Poor Countries (HIPC) initiative and other debt forgiveness programs canceled billions of dollars in debts and as a result, Ghana’s debt fell to around 41 percent of gross domestic product in 2006, from 70 percent of 2005.

However, high state spending deficits, partly due to measures to alleviate electricity shortages and high oil import costs, pushed government debt back up to 52 percent of GDP in 2007, according to ratings agency Standard & Poor’s – that was in June 2008.

The country is currently running a budget deficit of 13.3% of GDP.

Analysts do not think Africa can come out of the woods by depending on aid. Indeed, it is feared that even aid inflows to the continent would equally shrink as donor countries battle their own recession.

The Accra High Level Conference on Aid Effectiveness held in Accra, Ghana in September 2008 emphasised the fact that aid is not sufficient to deal with the continent’s development problems, and other factors ought to be looked at. Factors such as corruption, the strengthening of internal mechanisms and fair trade should be tackled to address the continent’s development challenges.

A large amount of aid money to the continent is siphoned into individual pockets and there are no properly established check and balance mechanisms for the use of aid money, and in instances where they exist, they hardly function effectively to make sure aid money meant for development go into these areas.

Dabansi Moyo, an economist with the World Bank is of the view that “development is not rocket science, it is very clear what works in terms of development. Africa has got lots of role models and doesn’t have to look to America and Europe, but can look to emerging economies.”

She told the BBC that Africa can do what these economies have done. “They have not relied on aid, they have gone to the capital markets, they’ve attracted trade and foreign direct investment and encouraged microfinance.” She advised that a very important factor like microfinance can be done on individual bases and “we don’t have to rely on governments to do that.”

She said further that there is no need to argue on the basis of a strong moral imperative to help Africa. She said, “We as a global society need to decide whether we want Africa to continue to be a drag on the global economy or to participate as an equal participant on the global stage?”

“If we want to see Africa and Africans as equal partners and its economies to grow, and its people to break out of the chain of poverty and grow,” she argued, “then this is the model, the model that we know works, it must be through trade, entrepreneurship, through capital market and fdi and through participation of locals, this is the model.”

She expressed concern about the fact that 60 years on Africa has no infrastructure. Most African countries are not growing because there are no entrepreneurs and the governments cannot raise the money through taxes to invest in education, health and other social services, she said.

Comparing Africa to some of the rapidly emerging economies, she said 60 years ago some of these countries were poorer than Africa. These countries she said, did not rely on aid, “they figured out what to do,”she emphasized.

“It is time for Africa to break out of the vicious aid cycle,” she said.

The global financial, food and energy crisis is not relenting anytime soon, and Africa as a continent must take a decision to move beyond aid and do the right things that have worked for other countries, especially, emerging economies of Asia, because aid won’t save the continent.