Oliver Twist: Foreign Aid Alone is Not Enough

Over the years, the aid-growth debate has transcended several dimensions, with myriad of scholars and policy institutions examining mechanisms for aid effectiveness across regional and country contexts. The contributions of development aid proponents such as Professor Jeffrey Sachs and the cases against aid put forth by William Easterly and  Dambisa Moyo amongst others are due to be acknowledged. Traditionally, the case for aid to developing countries dates its motivation to the effectiveness of the Marshallian plan in reviving the economy of Europe. 

Notwithstanding the volume of aid flows to Africa over the years, its state of social welfare leaves much to be desired; this has prompted a rethink on the future of development assistance. As African countries map out national frameworks for the achievement of the Sustainable Development Goals post-2015 and the AU Agenda 2063, there is a need to answer the aid-effectiveness question.

Hitherto, little attention has been paid to the decomposition of aid components with a view to analysing their respective impact on the macroeconomic environment and social welfare. In a recent paper we examined the relationship between seven disaggregated aid components (agriculture, communication, industrial, engineering, education, health and food security aid) and economic development in West Africa. 

The paper analysed the impact of macroeconomic policy, institutional frameworks and a commitment to infrastructural development on the aid-economic development relationship. It also provides insight on what kinds of aid has been more beneficial to social welfare in Western Africa.

Even though the major justification for foreign aid is its potential to accentuate the level of economic and human development, the findings of the study indicate that in most cases, while aid is effective in favourable macroeconomic policy environments, institutional quality and infrastructural development has contributed little to the aid-development relationship. 

The findings also show decreasing returns to aid over time, with negligible effects on income per capita. Besides, trade structures and financial depth has not contributed meaningfully to economic development in the West African sub-region, these point to limited intra-regional interaction and financial exclusion.

While we recognise that donors have grown wiser in dealing with corrupt African countries, better frameworks can be set up to ensure aid is administered based on its comparative advantage. In a bid to ensure effective delivery of development assistance in Africa, an institutional arrangement that checks elite capture of economic resources is long overdue. 

Furthermore, official development assistance should be systematically designed to improve local macroeconomic policies, intra-regional trade structures and promote an inclusive financial system that fosters the development of product markets and expenditure smoothening. Going forward, the study argues in support of micro-level impact evaluation studies of disaggregated aid components in recipient countries.

The discussion continues…