Impact of aid policies and economic conditions on the autonomy of African states

This essay was written in response to the below question, again as part of my course with the Open University.  Not the best marks in the world, but I did enjoy teasing the subject a little:

In what ways and to what extent have changes in aid policies and in world economic conditions in the first decade of the twenty-first century increased the autonomy of African states in macroeconomic policy formation?

In answering the above question, we must begin by explaining what we mean when we discuss the autonomy of African states in the development of macroeconomic policy.  We must then examine the changes that have occurred in relation to aid policies over the last decade.  In addition to this, we must explore the changes that have occurred in world economic conditions during the same period, and examine how they have impacted aid dependency.  During all of this, we will analyse how these changes have altered the autonomy of African states in relation to the formation of macroeconomic policy.  This will be done with particular regard to the national income accounting framework, and with a particular focus on the economy of Tanzania.

It is the assertion of this essay that when we examine the development of aid policies, it will become clear that they have served to limit the autonomy of African states in the development of macroeconomic policy.  However, it will become equally clear that the development of world economic conditions over the last ten years has served to greatly enhance the autonomy of African states in macroeconomic policy formation.

As stated above, we must begin by elaborating on what we mean by discussing the autonomy of African states in this context.  As the African states began to achieve independence, their first priority was to assert their sovereignty, by which we mean an assertion of a claim to right to rule their countries independently. With sovereignty asserted, we saw the rise of development economics in the 1960s, with African states beginning to focus on the development of macroeconomic policies.  This was achieved through the introduction of macroeconomic government departments.  These departments often focussed on the development of policies to encourage savings or investment, with an awareness of the extreme importance of these areas on the national income accounting framework.

Achieving autonomy, by which we mean not only an assertion of the right to rule, but also an assertion of the ability to rule their countries independently, has been restrained over the last 50 years in two primary ways – external political pressures, and economic constraints.  After the development of African countries in the 1960s (a natural result of their new-found independence), the 1970s and early 1980s saw a crisis period in the African states.  Instead of moving towards restructuring their economies to reduce dependence on declining trade of primary commodities, most African states (under pressure from the IMF and World Bank) engaged in a rapid period of ‘temporary’ external borrowing to fund this decline.  The withdrawal of such external borrowing facilities after the Mexican debt crisis in 1981, saw the African states become more dependent on funding from the BWI (Bretton Woods Institutions), increasing the political pressure these institutions could exert on Sub-Saharan Africa. 

The adjustment years (from 1982 to the mid-1990s), then saw a substantial diminution of the macroeconomic autonomy of African states, as the BWI institutions exerted their dramatically increased influence to force African countries to embark on wide-scale programmes of privatisation and stabilisation, moving further away from the developmentalist model which had proved so successful for African states in the 1960s.  Using the example of Tanzania, we can examine some practical impacts of this move away from the developmentalist model.  In 1987, Public consumption and Investment in relation to output accounted for 39% of GDP, but these sectors accounted for only 23.3% of GDP by 2001, showing a substantial reduction in the size of the institutions of the state.

The even more obvious result of the move away from the developmentalist model can be found in the failure of the structural adjustments in Tanzania to address the economic structures of the country.  In this regard, the Berg report was particularly damaging, pushing as it did an agriculture-led development, which failed to address the need for the Tanzanian economy to expand into other sectors.  To state that more explicitly, the aim of the Berg report was to rely on the improvements to the traditional agricultural export sector to raise entire economy, instead of recognising that diversifying and developing in non-traditional sectors could potentially realise significantly greater rewards.

The period since 1995 has recently been written about as the ‘recovery period’, though this label is often accompanied by a question mark.  While external institutions have grudgingly admitted that the state may have a larger role to play in the development of African states through the agreement of the ‘Millenium Development Goals’, the end of the 20^th Century saw a lot of questions about the willingness of external actors and economic pressures to allow African states return to a greater level of autonomy over their macroeconomic policy formation.

Having explained what we mean when we discuss autonomy in this context, we must next examine the changes to aid policies which have occurred over the last ten years.  There are two particularly significant developments which have altered the development of aid policies over that period.  Firslty, through the establishment of NEPAD (New Economic Partnership for African Development) in 2001, African states have begun to embrace liberalisation.  By agreeing to move towards democracy, and improve governance standards, the African states hoped to attract increased aid.

The second, and arguably more significant development was the G8 deal agreed in Gleneagles, Scotland in 2005.  This agreement recognised the steps towards liberalisation taken by the African states through the establishment of NEPAD, and saw the G8 (a group comprising the UK, USA, Russia, Canada, France, Germany, Japan and Italy, with representation from the EU) agree to cancel the debt of the 43 poorest countries in the world, dramatically increase aid to African states, and lift trading blocks (including export subsidies and import restrictions).

The net effect of these developments in aid policy was a substantial increase in aid pledges.  However, as figure 1 below shows, the G8 are currently substantially underperforming in relation to the commitments to increase aid to African states made at the Gleneagles summit.

Increases in ODA from G8 countries compared to Gleneagles commitments.

Despite this underperformance amongst the G8 countries, OECD aid to African states has certainly risen over the last ten years.  As figure 2 below shows, official aid flows had fallen during the 1990s, as countries such as Tanzania saw a rise in the % of GDP held in national savings, along with corresponding reductions in the size of their trade gaps.  However, as we can clearly see from figure 2, aid has grown erratically over the last decade, demanding a greater insight into the reasons for the continuing failure to narrow the trade gap in these developing countries.

Private Giving, Philanthropic and Remittance Flows from OECD Countries 1991-2007.

Arguably, the liberalisation of the economies of African states, intended to attract significantly greater aid donations, has not achieved this impact.  Instead, the adoption of these liberal economic policies have seen private investment rise substantially in African countries.  However, this argument will be explored in more depth in the next section of this essay.  It is in examining the aid flows to individual countries that we can draw a better understanding of the development of aid dependency.  Again, this is a point that will be returned to subsequently.

It is clear that aid policies over the last decade have been predicated on the willingness of African states, through institutions such as NEPAD, to continue the liberalisation of their economies.  While rhetorically, the developed world has been moving away from conditionality, it is clear that the only moves towards debt relief and increased aid come in the aftermath of African liberalisation.  Thus, we can clearly conclude that aid policies have served to limit the increased autonomy of African states on the development of their own macroeconomic policies.

Having elaborated on what we mean by autonomy in this context, and briefly explored the development of aid policies over the last decade, we must now turn our attentions to an examination of the development of world economic conditions over the last decade, and their effect on aid dependency.

The first decade of the 21^st Century has, generally speaking, been a decade of world economic growth.  The rise of China, India and other emerging markets such as Brazil as rapidly developing nations has led to a decade of prosperity.  However, within the last 24 months, it has become apparent that much of the growth of the last decade was unsustainable, and largely speculative.  That has led to a global recession, with developed countries such as Greece, Ireland, Spain and Portugal looking increasingly at risk of defaulting on national debt.

Africa has largely followed the growth trends of the rest of the world during that period.  This is indicated by the substantial increase in Foreign Direct Investment to Sub-Saharan Africa during the period 2000-2008.  However, despite the rapid growth of FDI into Africa during this period, it becomes clear through an examination of figure 3 below that the vast majority of this FDI was directed to oil-producing and middle-income countries.  This serves to highlight the income differentiation within African countries, a factor often ignored by examining general Sub-Saharan trends.

Foreign Direct Investment in Sub-Saharan Africa, 2000-2008

Using the Tanzanian model once more, it was only at the very end of the 1990s that the state finally moved away from their enormous dependence on the traditional agricultural sector, and this saw enormous growth in the value of mineral exports at the start of this decade, rising to 39% of all exports by 2002.  Equally, a focus on export of services (primarily tourism) saw that sector leap to approximately 45% of all exports by the millennium.  And yet, the terms of trade have weakened so significantly, the growth rates of the Tanzanian economy have been greatly restricted.  These developments have occurred at the very time at which FDI in Africa was beginning to rise.  While not conclusive, we can derive from this with some probability, that the rise in FDI led Tanzania to a position where it could more easily diversify it’s economy.

The impact of the global economic recession was also strongly felt in Africa, with FDI falling rapidly over the last two years, as remittances and aid remained rose only moderately during the same period.

Again, we can get a little more insight on developments over the last 30 years through an examination of one economy as an example of aid dependency.  Again, using the example of Tanzania, we can see that the trade gap rose from under 5% in 1975 to almost 15% in the late 1990s, before falling again to under 10% in 2001.  The implication from this is that the reliance on foreign aid (given the relatively modest size of domestic savings in the Tanzanian economy) rose dramatically between 1975 and the 1990s, before falling back a little towards the start of the 21^st Century.  Given the rise in Foreign Direct Investment in the first decade of this Century, we can assume that aid dependency has continued to reduce in the last decade, though the Tanzanian state will require a marked reduction in their trade gap, in order to reassert complete autonomy on their macroeconomic policy formulation.

The overall impact on Sub-Saharan Africa over the last decade was a reduction in the dependency on aid from the period 2000-2008, as the liberalisation of the African states under NEPAD drove increases in Foreign Direct Investment, without achieving the intended substantial increases in aid.  However, the last two years have marked a notable increase in aid dependency, as Foreign Direct Investment has actually fallen within Africa during this period.

This essay has set out quite clearly the development of macroeconomic policy autonomy over the last 50 years, noting that the African states retained most autonomy over their macroeconomic policy formulation during the development period of the late 1960s and early 1970s.  We also examined the impact of aid policies on this autonomy, showing that while the rhetoric of ending conditionality has implied greater autonomy for African states, this rhetoric has occurred at a time in which African states are still being coerced towards greater liberalisation of their markets in return for increases in aid or debt relief.  This liberalisation then appears to have been ‘rewarded’, through a dramatic increase in Foreign Direct Investment, reducing the aid dependency of the African states, but doing so without addressing the trade deficits of Sub-Saharan Africa.

It is clear from this analysis that aid policies have only served to limit the autonomy of African states in macroeconomic policy formation.  However, world economic conditions over the last ten years have benefitted African autonomy greatly, as substantially increased Foreign Direct Investment combined with marginally increased aid budgets and remittances have allowed countries such as Tanzania to diversify their exports, allowing them to tackle the structural issues which have historically prevented them from closing their trade gaps.  The most significant problem with this increase in autonomy is that it has only been achieved through a reduction in sovereignty in the hope of achieving increased aid.  It is only when African states can achieve increased aid and debt relief, without macroeconomic conditionality, that this autonomy will be able to grow to a point where Sub-Saharan Africa can genuinely asset their autonomy on the development of macreconomic policy.