It is commonplace to hear African leaders say that their country needs to end its dependency on foreign aid. The latest call comes from Zimbabwe’s President Robert Mugabe. One of the longest serving leaders on the continent urged his neighboring countries to turn away from aid and towards creating their own wealth via natural resources.
“Our continued over-reliance on the goodwill of our co-operation partners compromises our ownership of [Southern African Development Community (SADC)],” said Mugabe at the opening of the two-day SADC summit in Zimbabwe. “Our region has abundant resources which instead of being sold in raw form at very low prices must be exploited … to add value to the products which we export.”
Mugabe was once a shining light on the continent. The nation’s economy grew by more than 10% following its independence in 1979. Things soured later in the 1980’s and grew worse. The past few years saw the country experience hyperinflation as it wrangled with privatization and made moves to enforce that businesses are owned by natives. Things have improved recently, but political turmoil and human rights concerns loom over a country with a president who is now 90 years old.
He and some of his fellow leaders are not the only people critical of foreign aid. Views and research, for that matter, are mixed as to whether aid actually helps countries improve. The usual measure is economic growth, one that is fraught with its own controversy. At its core is the idea that people are doing better when they have higher incomes, therefore they are able to pay for the things that they need in life.
Some new research shows evidence that aid helps economic growth. By looking at countries that graduated out of aid eligibility according to the World Bank’s International Development Association (IDA), a team of researchers from the University of Maryland and the World Bank find that aid provides some modest help for GDP growth. Real per capital GDP grows by roughly one-third of a percent (0.35%) for every percentage point change in the ratio between aid and a country’s gross national income (GNI).
Aid alone is not the whole story. Investments also matter a lot.
“Rendering further support to the positive causal effect of aid, we provide evidence that aid also increases the investment rate significantly in our sample,” conclude Sebastian Galiani, Stephen Knack, Colin Xu and Ben Zou Indeed, a back of the envelope calculation suggests that the increase in physical investment is the main channel through which aid operates in the short-run.”
While the findings are useful for aid advocates, they are also important for the IDA graduation process. Rather than suddenly cut aid from countries that pass the average income line of $1,205 per person, donors could gradually ween off aid disbursements to countries.
A total of 35 countries made the transition between 1987 and 2010. More will soon join their ranks as countries continue to improve and a world without extreme poverty slowly becomes a reality. Both sides of the aid debate can and will seize to the findings in the recent study. The findings show that foreign aid can have some benefits, but it is eventually the investments that will support countries in their efforts to improve.
Now it is a matter of striking the right balance.
HT Chris Blattman for the study
Additional Reading: The Economist reported on the study last week, too.