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Aid and State Formation in Africa: What the Rich World Cannot Do ODI, London, May 22, 2006. Nancy Birdsall President Center for Global Development Washington, D.C. Outline. Part I: The donors’ dilemma: three decades of massive aid to still-poor countries, mostly in SSA

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Aid and State Formation in Africa: What the Rich World Cannot Do ODI, London, May 22, 2006


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    1. Aid and State Formation in Africa: What the Rich World Cannot DoODI, London, May 22, 2006 Nancy Birdsall President Center for Global Development Washington, D.C.

    2. Outline • Part I: The donors’ dilemma: three decades of massive aid to still-poor countries, mostly in SSA • Part II: The IPT and the aid-institutions paradox: aid is not helping and may even by hurting • Part III: What donors can and cannot do about poverty and state failure in SSA

    3. Part I: The donors’ dilemma • A large set of countries remains poor (20% of more of the population living on a $1 a day or less) • And have received massive amounts of aid (10% of GDP or more) • Aid intensity varies among these poor countries,but most are in Sub-Saharan Africa O An “institutional poverty” trap?

    4. Aid dependency varies among these poor countries,but most are in Sub-Saharan Africa

    5. Defining the institutional poverty trap: What an institutional poverty trap is not • Not a Sachs-type poverty trap

    6. Convergence and divergence

    7. The best and worst 10-year average growth rates within countries Source: Reproduced from Jones and Olker (2005).

    8. Growth spurts are not pure recoveryincome after best 10 year growth episode relative to prior GDP peak Source: Reproduced from Jones and Olker (2005).

    9. Basic facts of growth and poverty do not support notion of poverty trap defined as a “persistent low-level equilibrium” • (Berg et. al.) Poor countries are not a persistently well-defined group • Easterly (2005): growth rates are not statistically lower in poor countries; income levels are not stationary • There is lots of movement across quintiles of countries, including growth successes and growth disasters

    10. Growth Successes... Source: Reproduced from Berg and Leite (2006).

    11. Growth Successes... Source: Reproduced from Berg and Leite (2006).

    12. Maybe there are traps for a subset of countries, e.g. tropical landlocked countries Source: Reproduced from Berg and Leite (2006).

    13. But even tropical landlocked countries in SSA have had growth accelerations (adapted from Berg et. al.)

    14. The real problem: Growth accelerations in SSA have not led to autonomous sustained growth (“take-offs”) • Africa’s problem is more duration of growth spells (Berg et. al.) There are growth reversals • Sounds more like an institutional poverty trap than a conventional low “savings” poverty trap

    15. Some growth reversals ... Source: Reproduced from Berg and Leite (2006).

    16. Defining the institutional poverty trap: What an institutional poverty trap is not • Not a debt trap: aid transfers have financed debt payments Source: Birdsall, Claessens, and Diwan (2003).

    17. Defining the institutional poverty trap: What an institutional poverty trap is not • Not a simple “corruption” problem, or lack of democracy (East Asian tigers in the 1960s and 1970s; Indonesia 1970s through 1997; Vietnam and China 1990s to 2005. All these have had decade-long or more growth)

    18. Defining the institutional poverty trap: What an institutional poverty trap is not • Not a Sachs-type poverty trap • Not a debt trap per se • Not a simple “corruption” problem, or lack of democracy

    19. What the institutional poverty trap is: some inadequate definitions • Vicious circle in which poor institutions impede sustainable growth which undermines building of sound institutions • The absence of a “developmental state” a la Leftwich): Lack of effective state institutions that generate predictable, credible and clear rules of the game that enable markets to operate and support investment, invention, efficiency and thus economic growth • The absence of at least one of two characteristics: an “autonomous state” (from interest groups; East Asia) with capable civil service, or sufficient direct “accountability” (India, free press, democratic institutions)

    20. Ex ante efforts at “measuring” institutions have not (yet) been particularly successful • Sub-Saharan African low-income countries as a group scored better on the ICRG measure of institutional quality in 1985 than other low-income countries, but have fared worse on growth • Good “institutions” are by definition stable and credible, but some countries’ ICRG indices fell more than 44 percent between 1985 and 1997 • MCA eligibility and CPIA scores are not consistent, nor are Freedom House, ICRG and CPIA scores with other measures of “capacity”, “legitimacy” etc.

    21. Sub-Saharan African countries as a group scored better on the ICRG in 1985 than other low-income countries

    22. Sub-Saharan African countries as a group scored better on the ICRG in 1985 than other low-income countries

    23. Though some countries’ ICRG indices rose between 1985 and 1997…

    24. “Bureaucratic quality” increased little over the same period

    25. MCA eligibility and CPIA scores are not consistent,

    26. …nor are CPIA scores with other measures of “capacity”, “legitimacy” etc.

    27. Institutional quality ex ante does not seem to be associated with a subsequent growth acceleration; if anything growth in SSA raises (the measure of) institutional quality Institutional quality before and after growth accelerations by region, 1970s-1990s

    28. What characteristics makes a country more likely to be in an institutional poverty trap? • Natural resources (exception: Botswana) • Low natural openness (landlocked, non-trading neighbors) • Primary commodity dependent – subject to terms of trade shocks • Historically high inequality; and small non-state/SOE-dependent middle class • High levels of prebendalism • Civil service pay low

    29. Natural resource rich countries have lower enrollment and literacy rates

    30. The wrong asset: Open, globalizing countries dependent on commodity prices have not grown

    31. Source: Reproduced from Berg and Leite (2006).

    32. Source: Reproduced from Berg and Leite (2006).

    33. Inequality is high in all developing countries

    34. But in Africa, the middle strata get a smaller piece of the pie …

    35. But in Africa, the middle strata get a smaller piece of the pie

    36. Prevalent prebendalism (which is worse for growth than clientelism) Prebendalism “refers to the handing out of prebends, in which individuals are given public offices in order for them to benefit from personal access to state resources.” (van de Walle, 2005, p. 20) “President Mobuto Sese Seko of Zaire famously commanded his ministers to enrich themselves but ‘not to steal too much’.” (van de Walle, 2005, p. 21)

    37. Civil service pay is low • In many Sub-Saharan African countries the real value of civil servant wages has declined by 50-70% since the 1970s (Lindauer and Nunberg, 1994). • In the late 1990s a mid-level economist in Kenya could make $250 per month working for the goverment, compared to $3,000-$6,000 if working for an NGO or a donor program (Brautigan, 2000).

    38. What characteristics are associated with our intuition that a country is in an institutional poverty trap?

    39. Conclusion Part I • Many low-income countries are probably suffering from the institutional poverty trap, even when they are growing • But the ex post definition and multiple symptoms make it hard to identify the institutional poverty trap ex ante, let alone pin down its causes • And we do not know how to help countries escape this trap since it is mainly about politics and power-sharing • Next: Are we making things worse when we try to help?

    40. Part I: The donors’ dilemma • Part II: Country-based aid is not helping and is probably hurting • Part III: What donors can and cannot do

    41. Part II: Country-based aid is not helping and is probably hurting: • Dutch disease and “competitiveness” • Government revenue • Accountability • Donor fragmentation and poaching • The NGO “bypass” issue • Technical assistance • The Washington Consensus, a.k.a. Policy autonomy and missed opportunities • The “exit” issue • Volatility

    42. Dutch disease

    43. Government revenueSub-Saharan Africa still relies on trade taxes

    44. Government revenue: Many low-income and lower middle-income countries could increase tax revenue Source: Moss, Pettersson, and van de Walle (2005).

    45. Accountability

    46. Donor Fragmentation and Bureaucratic Qualityin Sub-Saharan Africa Source: Reproduced from Knack and Rahman (2004).

    47. The NGO “bypass” issue

    48. Technical assistance “Expatriate personnel working for aid agencies and NGOs rarely are required to pay local income taxes. At one point in Tanzania, the total for government wages and salaries (which are taxed) was $100 million, while the salary bill for technical assistants supplied under aid programs (and not taxed) was $200 million.” (Berg, 1993 cited in Brautigam and Knack, 2004, p. 262)

    49. The Washington Consensus, a.k.a. Policy autonomy and missed opportunities