Friday, July 01, 2005

Aid will not lift growth in Africa, warns IMF :: FT

And contrary to what I would like to believe, good governance isn't the silver bullet:
Days before the Live-8 concerts around the world, and next week's Group of Eight countries summit in Scotland, the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction.

“We need to be careful given the chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering,” the fund said.

The research, which took into account duration, type of donor and governance record of recipient, found aid did not boost growth.

This conflicts with the findings of an influential World Bank study five years ago that found aid boosted growth in countries with good policy environments.
. . .
Economists call the impact of large windfall gains on an economy’s exchange rate and export competitiveness the “Dutch disease”, referring to the process whereby the discovery of Dutch natural gas reserves in the 1960s led to an appreciation of the country’s currency and a decline in its export sectors.

But good governance does enhance growth:
Separately, the World Bank highlighted improving recent economic performance in Africa. The bank's African Development Indicators showed that since 1995 growth in sub-Saharan Africa has averaged 3.3 per cent per year, compared with 1.7 per cent in the previous decade. . . . The spread of democracy, the willingness of African governments to take responsibility for promoting growth and development, and reduced impediments to private-sector led growth, and some evidence of better natural resource management has supported growth, the bank said.
The IMF and World Bank studies are not contradictory. The IMF study is saying that aid has not promoted long term growth even in the presence of good governance. Aid can relieve immediate suffering, but it does not spur growth. And it is economic growth that has been a lasting solution to poverty.

UPDATE: On the same subject see Mahalanobis who quotes Easterly:
If Zambia had converted all the aid it received since 1960 to investment and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500.


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