{UAH} US-Africa conference on trade and investment

The History, Relevance and Role of Foreign aid in Africa's Trade and investment

Keynote address by Eric Kashambuzi at the 4^th US-Africa Conference in Los Angeles, California, USA: August 15-16, 2014

I was introduced to the concept of foreign aid also known as Official Development Assistance (ODA) as a graduate student in Economics at the University of California, Berkeley, USA.   

Foreign aid is an instrument used by a developed country government to assist a developing country government directly or through another institution like the World Bank or the United Nations Development Program (UNDP) or a Non-governmental organization to create an enabling environment to accelerate economic growth and improve social welfare by inter alia attracting private sector to invest in production and trade. Foreign aid serves as a catalyst to be phased out when recipient countries have reached the stage to sustain their economies and societies.

Foreign aid is increasingly being used to address security challenges in recipient countries because it has been recognized that investment in Africa has been severely constrained by a politically unstable environment. The African Union Commission is working with the United Nations, the World Bank, the European Union and the African development Bank among others to address the challenge of conflict in many parts of the continent. They have already jointly visited the Great Lakes and Sahelian regions and plans are underway for a joint mission to the Horn of Africa.

President Kennedy was among those who observed that security concerns in developing countries that hinder investment and trade could be addressed through faster growth and stronger economic and political institutions (Anne Krueger et al., 1989).   

One of the first books I read on foreign aid was titled "International Aid: An Introduction to the problem of the flow of public resources from rich to poor countries" by I. M. D. Little and J. M. Clifford published in 1965 when ODA had stagnated.  

In 1970 the General Assembly of the United Nations adopted resolution 2626 calling on developed countries to allocate 0.7 percent of their Gross National Income (GNI) as official development assistance to the developing countries. Before 2001 the GNI was called Gross National Product (GNP) (Paul Hopper 2012). 

The 0.7 percent target was first recommended when drawing up the first Development Decade proposed by President Kennedy in 1961 when he addressed the General Assembly of the United Nations.

Despite the efforts that have been made since then, many donors have not reached the 0.7 percent of their GNI as ODA except the six countries of Sweden, Norway, Denmark, Netherlands, Luxemburg and the United Kingdom.

There are voices calling for foreign aid to be terminated in part because it creates dependency and distorts priorities and resource allocation in part through conditionality (T. G. Weiss et al., 2005) or facilitates external interference in developing countries affairs.

I have worked in the aid industry since 1973. While I agree that foreign aid should not breed dependency and become a permanent feature, I feel that when effectively and efficiently utilized ODA, however small, plays a vital catalytic role in helping to build infrastructure, institutions, human capital and designing policies essential for creating an enabling environment for a profitable private sector engagement in investment and trade.

The United Nations General Assembly that is preparing a post-2015 development agenda from 2016 through 2030 to succeed the Millennium Development Goals (MDGs) that end on December 31, 2015 has renewed interest in foreign aid and called on developed countries to implement fully their ODA target of 0.7 percent to developing countries.

Foreign aid comprises grants and concessional or soft loans (Anthony Hall and James Midgley 2004) that are undertaken largely by official agencies. The principal objective is to promote development and social welfare (Robert Cassen et al., 1986).   

This conference could not have taken place at a better time. The recently concluded U.S. – Africa Leaders Summit in Washington DC discussed trade and investment among other topics. Useful information has been made available about planned activities as follow-up to the Summit.

An assessment of the African Growth and Opportunity Act (AGOA)undertaken by the Brookings Institution and the United Nations Economic Commission for Africa (ECA) has concluded that AGOA provides many benefits to the African countries and recommended that it should be renewed when it expires next year.

African governments have renewed their determination to strategically participate in national economies in partnership with the business sector and increase investments particularly in infrastructure (transport, ICT and energy), human capital formation and transformation of Africa's economic structure through industrialization to add value to commodities. Africa should draw on lessons from the Asian countries where public and private partnership has been employed in trade and investment programs.

African governments have also underscored the importance of peace, security, good governance, justice and inclusive societies at all levels in facilitating economic growth and development.   

African governments have thus called on development partners – bilateral and multilateral – the private sector and philanthropic groups to extend a helping hand so that constraints that have hindered Africa's investment and trade are removed.

Thankfully, Africa has vast untapped human and natural resources and economic growth is now the second fastest in the world. Africa has a young and vibrant population with all the advantages including cheap labor and markets for domestically produced goods and services and imports.

The private sector has been involved in the preparation for the United Nations post-2015 development agenda. It has indicated willingness to play its role in African economies and elsewhere in an economically, socially and environmentally responsible and accountable manner.

Unlike in the past when the public and private sectors were virtually mutually exclusive because the state had been considered the problem and not the solution to economic problems, it has now been recognized that the public and private sectors need to work together in a complementary and strategic manner according to their comparative advantages. It has also been recognized that low investments in infrastructure, institutions and human capital by African governments have constrained private investments and trade. Consequently Africa's attraction of foreign direct investment has remained small concentrated in a few areas especially extractive sectors and Africa's contribution to global trade stands at a mere 3 percent (Africa MDGs Report 2013).

Foreign aid or international development cooperation is largely a post World War II phenomenon. The United Nations Charter that was adopted by the United Nations General Assembly in 1945 called on the international community to address economic and social challenges in the developing countries.

Article I (2) states that the purpose of the Charter is inter alia "To achieve international cooperation in solving international problems of an economic, social, cultural or humanitarian character and in promoting and encouraging respect for human rights and fundamental freedoms for all without distinction as to race, sex, language, or religion".

Article 55 stresses the importance of promoting conditions of economic and social progress and commitment to full employment.

The international community responded favorably including through the Colombo Plan of 1951, a Commonwealth initiative for Asian countries later joined by the United States and Japan (Hall and Midgley 2004).

The United States response goes back to President Harry Truman. In the early days the United States provided over 50 percent of the total development assistance (Anna Krueger et al., 1989).

According to the Oxford Companion to the United States History, the United States understood foreign aid to include private or public bilateral or multilateral assistance to nations suffering the ravages of war, natural calamity, or long-standing poverty. Foreign aid may also be given for reasons relating to U.S. economic, diplomatic, or national security interests.

The concept of foreign aid is derived from humanitarian and moral concerns and in, a larger sense, from the process of colonialism, world wars and economic depression of the 1930s.

It was believed that once poor nations received capital and technology, they would 'take-off' into self-sustained economic growth and foreign aid would be terminated.  

By the 1940s, U.S. public and private policy makers had embraced an economic development theory that identified the causes of poverty and underdevelopment as internal to particular societies. Their solutions centered on external private capital transfers and technical assistance and on the operation of free trade and comparative advantage.

During the second half of the 20^th century, foreign aid in USA meant giving capital in the form of grants and/or loans, technology, equipment and food to the less developed world. It also involved state efforts to enhance the proper functioning of market forces.

Giving foreign aid serves U.S. overlapping purposes. Aid could help expand export markets to alleviate American domestic industrial and agricultural surpluses, guarantee the availability of strategic natural resources from recipient countries, or bolster the political fortunes of foreign allies. Thus, in this sense, foreign aid is more than development aid.   

The official commitment by the United States to assist low income developing countries began with the Point Four Program announced by President Harry Truman in his second inaugural address in 1949, later translated into the 1950 Act for International Development. The Act proposed, inter alia, that American technical experts help agrarian nations to stimulate their domestic economies and export selected crops and raw materials and enhance their ability to purchase American exports, attract American private foreign capital and become integrated into the global economy.

The Foreign Assistance Act of 1961 – following President Kennedy's call at the United Nations General Assembly in September 1961 for a Development Decade – created the United States Agency for International Development (USAID). The Act identified development aid as a mechanism for improving the lives of poor people in developing nations and undermining the appeal of a socialist model of economic development (B. S. Boyer 2001).

During the 2014 US/Africa Summit, President Obama while addressing 50 African leaders stressed a long-term partnership so that Africans buy United States goods and United States buys African products. To achieve this goal the right conditions must be created for American companies to invest in Africa. To jump-start the process the president announced $12 billion to fund Power Africa Initiative that will provide electricity. He added that people should be able to start a business and ship their goods without having to pay a bribe or hiring someone else's cousin. President Obama also announced that the White House will work with Congress to extend the African Growth and Opportunity Act.   

The rising demand for aid can be traced to the end of the Second World War as many territories in Asia, the Middle East and Africa gained independence with high aspirations but limited financial, technical and human resources, hence the appeal for foreign aid. The United Kingdom, France and Belgium expanded their commitments. When German, Italian and Japanese economies recovered after the war they too initiated foreign aid inter alia to help them to compete for markets in the newly independent countries.      

America responded favorably in part because failure to reduce poverty and its offshoots of hunger, disease and illiteracy could breed instability endangering international peace and security. Pope Paul VI who was concerned about a possible global insecurity originating in low income countries appealed for help from developed to developing nations. He referred to development as a new name for peace.  

President Harry Truman stressed that the only way to guarantee a stable world was to have a vast development program for developing countries run by the United Nations and its specialized agencies (T. G. Weiss et al., 2005). He declared that the United States must embark on a bold program to make its scientific and industrial advances available for the economic improvement and social progress of developing countries whose economies are primitive and stagnant and people live in conditions of misery, poverty, hunger and disease. USA should extend its technical knowledge to them to help them realize their aspirations for a better life. Truman emphasized that in cooperation with other nations through the United Nations and its agencies USA would foster capital investment in areas needing development and contribute to the achievement of peace, plenty and freedom. With the cooperation of business, private capital, agriculture and labor in the United States, this program can greatly increase the industrial activity in other nations and raise substantially their standard of living.

He added that all countries including the United States will greatly benefit from a constructive program that better utilizes the world's human and natural resources. Experience shows that our commerce with other countries expands as they progress industrially and economically.

Only by helping the least fortunate of its members to help themselves can the human family achieve the decent and satisfying life that is the right of all people, Truman stressed (G. B. Hunt 2005).

He pledged to launch an ambitious program for its provision, both separately and jointly, through international cooperation (D. Bhouraskar 2007).

While addressing the United Nations General Assembly in 1961, President John F. Kennedy proposed the creation of the first Development Decade. He urged other United Nations member states and their peoples to intensify efforts to mobilize and sustain support for measures to accelerate progress towards self-sustaining economic growth and social progress in developing countries.

The principal goal was acceleration of economic growth and support in the specific sectors of education, agriculture and industry, food security and nutrition and biodiversity as well as water, mineral and energy resources; health, housing, transport and communications. The Kennedy administration also encouraged trade between industrialized and developing countries. In the field of education, the Peace Corps program has benefitted many African countries in human capital formation.

Foreign aid plays a significant role in supporting physical and human investments such as roads, utilities, power, transport, health, education and water supply and sanitation essential for private sector development. To this end, the World Bank provides concessional loans through the International Development Association (IDA) and supports the private sector through the International Finance Corporation (IFC). Similarly, the UNDP which was created in 1965 established an Expanded Program of Technical Assistance (EPTA) and a Special Fund (SF) the latter to assist the private sector through pre-feasibility studies.  During UNDP Administrator Bill Draper's time the bulk of the program was devoted to supporting the private sector in developing countries.

The Reagan administration's international cooperation program focused on economic growth, market forces and trickle-down policies and much assistance was redirected to serve the private sector  

Foreign aid agencies were directed to advise developing countries to adopt liberalization and structural adjustment programs favoring trade while unfortunately reducing the role of the state in the economy.  

Thus, since the 1980s, African governments were directed to slash expenditures including investments in infrastructure, institutions and social sectors especially education and healthcare. These austerity measures were supposed to be temporary but they have not gone away and have constrained investments in infrastructure such as roads and affordable energy essential for investment and trade.

Thankfully, the problem has been recognized by African and American leaders and at the United Nations General Assembly and is being addressed.  

Hopefully, this conference will reflect on how the business sector will partner with African states in a mutually reinforcing manner in the years ahead.    

Since its inception the United Nations has helped in designing and implementing development programs in consultation with the business sector. It established a committee of independent experts on Development Planning (CDP) for the first development decade. It analyzed technical and policy issues to be incorporated into the Decade program. It recommended an annual economic growth target of 5 percent in developing countries and proposed that 0.7 percent of developed countries Gross National Income (GNI) be set aside as official development assistance to developing countries.

The 1969 Pearson report on Partners in Development recommended a growth rate of 6 percent per annum in the developing countries as the minimum to transform and sustain developing countries' economies and endorsed 0.7 percent target as ODA.

The United Nations currently discussing the post-2015 development agenda has proposed that the annual economic growth of GDP in the Least Developed Countries should be at least 7 percent and endorsed the 0.7 percent target for ODA.    

However, right from the beginning, to access foreign aid, recipient countries had to meet some conditions which included preparing a national development plan. For example, Nigeria prepared its development plan running from 1962 through 1968. Satisfied, the Kennedy administration disbursed to Nigeria $80 million for implementing the plan (T. G. Weiss 2005).           

Other conditions include tied aid, meaning that the recipient country would receive equipment, expertise and food from the country giving that aid although these could be obtained from a cheaper source.

As time passed, other conditions emerged. In the late 1960s development partners concluded that rapid population growth was the main threat to economic growth and poverty eradication. Population control programs were therefore made conditional for receiving aid.

Robert McNamara then president of the World Bank observed while addressing ministers of finance that "The rapid growth of population is the greatest barrier to economic growth and social well-being of [the people of] our member states". To accelerate economic development, population growth had to be checked through birth control popularly known as family planning or reproductive health and rights.

Ipso facto, developing countries were urged to design family planning programs with the help of international institutions including the United Nations. The World Bank established a population development program and approved the first family planning loan in 1970. The United Nations created its own fund for population activities (UNFPA). Recipient countries that did not meet these conditions risked being denied foreign assistance.

In Sub-Saharan Africa the first national family planning program was drawn up in Kenya in 1968, followed by Ghana in 1970 and later by Botwana and Senegal (Archie Mafeje and Samir Radwan 1995).

Kenya which gained independence in 1963 after a bloody guerrilla war in the early 1950s was in no mood for birth control. However, expatriate advisers pressed the government to promote population control as there would be consequences if it failed to do so. Fearing that it might diminish its credit rating in international banking circles, the government reluctantly accepted birth control program and hired foreign experts to draw it up and implement it. But this is what happens when there is no popular support: in Kenya the program simply failed (B. Hartmann 1995). To this day family planning or reproductive rights have remained controversial for cultural, economic and religious reasons.   

To resolve the controversy, alternative solutions to reduce population growth are being suggested. They include ending early and forced child marriage to be achieved in part by keeping children in school longer through providing free and compulsory education to at least secondary level. Providing school lunch as adopted by NEPAD would improve school attendance and performance especially of girls. Educated and empowered women would then take care of their reproductive behavior without legislation or conditionality. Quality family planning services that are easily accessible would be provided for those who volunteer to use them.   

Considering that foreign aid volume is not likely to increase substantially in the next 15 years, there are proposals that the available funds should be limited to the Least Developed Countries (LDCs), Land Locked Developing Countries (LLDCs) and Small Island Developing states (SIDS) that are vulnerable to external shocks such as hurricanes. Goal 10 of the United Nations report on sustainable development goals (SDGs) on reducing inequality within and among countries has called for ODA and financial flows including foreign direct investments (FDI) to states where the need is greatest in particular LDCs, African countries, SIDS and LLDCs.

Within these groups of countries, the United Nations has specifically called for an increase in aid and loans for trade, investment and productive capacity development particularly in LDCs.  

Earlier in 2009 the Doha Declaration on financing for development emphasized aid for trade as an important component of the measures that will assist developing countries take advantage of opportunities offered by the international trading system.

The Doha Declaration also stressed that private international capital flows, particularly foreign direct investments (FDI) are vital complements to low income countries development efforts.  

But the Doha development round of negotiations to improve market access of LDC's products to the markets of developed countries has been stalled.

Given the current economic and social challenges in donor countries, there is a renewed chorus whether or not aid is still relevant or why should these countries continue to give aid when they need help at home where challenges of poverty and unemployment are being experienced.  

The answer that was given to this question in the Pearson report of 1969 remains relevant today. It stated inter alia "that it is only right for those who have to share with those who have not. … Concern with the needs of other and poorer nations is the expression of a new and fundamental aspect of the modern age – the awareness that we live in a village world, that we belong to a world community.

"It is this which makes the desire to help into more than a moral impulse felt by an individual; and [turns it] into a political and social imperative for governments, which now accept at least a degree of accountability in their relations with each other.

"It is recognition that concern with improvement of the human condition is no longer divisible. If the rich countries try to make it so, if they concentrate on the elimination of poverty and backwardness at home and ignore them abroad, what would happen to the principles by which they seek to live? Could the moral and social foundations of their own societies remain firm and steady if they washed their hands of the plight of others?"(Pearson 1969).  

Another reason for giving aid even under economic stress is that foreign aid benefits aid givers as well, helping them to solve their domestic challenges.   

There are other motives for giving aid for example as competition for export markets and natural resources has intensifies. Technical assistance has also been found to promote exports of aid givers (Little and Clifford 1965). Above all, aid helps to create an enabling environment for foreign private sector investment in developing countries.

For these reasons the US government should be urged to continue to contribute to foreign aid ultimately reaching the 0.7 percent target.  

It has been suggested that in coming years the terms and conditions of giving and receiving aid need to be reviewed and changes made as appropriate. Since the 1960s aid has been reviewed many times including by the United Nations that resulted in the creation of the United Nations Development Program (UNDP) in 1965. The World Bank commissioned review missions including in 1969 and 1998.

The United States has also conducted missions. For instance in 1982 the government appointed a team to evaluate the effectiveness or impact of development assistance.

A comprehensive review might be necessary before or shortly after the start of the new development agenda in 2016. Issues of accountability and support to national budgets need to be examined as well. There are cases including in the Great Lakes region of Africa where development aid has been diverted to non-development activities or stolen or just mismanaged. A review of foreign assistance to Ethiopia has revealed that foreign aid money is used by project staff to stay in expensive hotels for long periods thereby diverting funds for development purposes (Ben Ramalingham 2013).

The capacity to absorb aid in least developed countries also needs to be examined comprehensively because in the LDCs where aid is needed the most is where the absorptive capacity is the weakest in part because of brain drain. Based on these observations, the focus on aid is drifting towards more effective use of available resources than asking for more. 

It is also crucial that when recommendations are made and accepted or action plans are drawn up they should be implemented.

Failure to implement agreed upon recommendations can be seen from those made by the Pearson mission of 1969 whose implementation in Africa fell short as demonstrated hereunder.   

The Pearson mission made ten recommendations including on foreign aid, trade and investment. For purposes of this presentation, they have been collapsed into seven.

The first recommendation called for the creation of a framework for free and equitable international trade. We are in 2014 and African countries have not yet enjoyed a free and equitable trading system. The Doha development round that was designed to facilitate global trade has been stalled.

The second recommendation was to promote the flow of foreign private investment. As of now, foreign private investment flows to Africa have remained small and concentrated in a few extractive sectors.

The third was about a better partnership, a clearer purpose, and a greater coherence in development aid. Aid is still tied in many instances, conditions continue to be imposed, partnership remains an exercise largely in power relation between the strong and the weak and aid giving is still scattered among different sectors without harmonization among donors on the one hand and between them and recipient governments on the other hand. The Rio+20 Conference has called for integration of economic growth, social inclusion and environmental protection. This will require political will and new institutions and methodology to succeed.  

The fourth recommendation called for an increase in the volume of aid to 0.7 percent target. To date as we noted above only six countries have met or exceeded the target. While this recommendation is still relevant it has been suggested that in the next development agenda emphasis should be placed on efficient and effective use of available resources than on asking for more.

The fifth recommendation called for redirecting aid to sectors where it is needed most as in agriculture and education. Instead aid to agriculture in general has suffered a long-term decline, falling from 17 percent of sector allocation in the mid-1980s to a mere 6 percent in 2006/7 (Paul Hopper 2012).

The sixth recommendation called for slow population growth largely through family planning. Family planning remains controversial and has not received popular support in Africa hence slow population decline. A mutually agreed upon arrangement between donors and African governments needs to be worked out.

The seventh recommendation was about revitalization of aid to research and development and education in general. Research and development have been starved of funds on the African continent. Education funding has focused on primary education since the 1990s. Education funding needs to go beyond primary level and also focus on quality and relevance to provide the necessary skills. Governments, universities, business sector and worker representatives need to collaborate in this vital area.   

Before concluding let me summarize what we have learned.

First, foreign aid benefits both the donor and recipient countries.

Second, when properly and efficiently utilized foreign aid provides a critical component that contributes to creating an enabling environment for private sector development.

Third, aid to Africa including from the United States should be increased but more significantly it should be more efficiently utilized. Transparency in resource allocation and accountability by donor and recipient organs need to be improved.

Fourth, Africa has a young and increasing population to provide cheap labor and markets. It also has abundant natural resources that offer great opportunities for investment and trade.

Fifth, partnership between Americans and Africans must be based on the principle of equality. Donor interference in the domestic affairs of recipient countries, if any, should be eliminated.

Sixth, America and Africa should work together to create peaceful and inclusive societies because trade and investment have not and will not thrive in fragile and unstable environments.

Seventh, strengthening infrastructure, institutions and human capital is a pre-requisite for investment and trade. Effort should be made to reduce brain drain of trained and experienced Africans.

Eighth, private sector should include a foreign aid component in its investment programs.

Ninth, since the 1980s economic sectors like agriculture have been starved of resources that were disproportionately directed to other sectors. Agriculture and the rural sector where the majority of poor Africans live should receive a boost in foreign assistance to improve their welfare and reduce rural-urban migration.

Tenth, the public and private sectors in Africa should strengthen partnership in accordance with their comparative advantages while allowing the operation of market forces and laissez-faire practices.

Eleventh, US and Africa consultations at various levels should be held regularly to take stock of developments and make necessary adjustments on the long investment and trade path that the US and African leaders agreed upon at their historic Summit in Washington DC.

Not least, business plans to invest in Africa should as much as possible be fitted into the post-2015 development agenda from 2016 through 2030 as well as agreements reached at the US and African leaders Summit.     

Thank you for your kind attention.

Eric Kashambuzi is international consultant on development issues. He lives in New York.         

 

 

    

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