Meeting Summary
Tony Killick
Tony Killick explained that his presentation
was based on a project he ran at ODI, work the IMF had done,
and on a DFID-IMF conference. Country case studies covered
in the presentation included Mauritania, Mozambique, Sierra
Leone, Tanzania, Ethiopia, Ghana and Uganda.
He began stating that even if the promises made at the Gleneagles
G8 summit in 2005 are not kept in full, many donors are increasing
their aid and many African countries are receiving much higher
volumes of aid. Ghana, for example, has seen its aid inflows
more than double between 2002 and 2006.
He gave 2 reasons why increasing aid volumes are problematic:
1. More aid can lead to increased liquidity. If not properly
managed (i.e. spent on increased imports, not domestic goods
or labour), inflation may rise.
2. High pre-existing aid dependency. Aid is a high proportion
of GNI, Gross Capital Formation and imports in the countries
studied.
These two factors mean that a doubling of aid will have serious
ramifications.
He turned to macro management issues and the distinction
between 'absorption' and 'spending'. 'Absorb and spend' is
the textbook solution. Thinking of aid in terms of achieving
higher imports and increasing government spending, he explored
the consequences of inducing an economy to import more. He
pointed out the risk to private producers of tradeables. An
appreciating exchange rate means exporters earnings are worth
less. The alternative, allowing the government to sterilise
by raising interest rates, creates a squeeze on credit. He
argued exports are vital to the long term development of Africa
so the pressures on the private sector are a crucial issue.
He pointed out that no country in the study had fully absorbed
and fully spent the aid received. Ghana, for example neither
spent nor absorbed aid. They built up international reserves
and paid off government domestic debt. He said there are substantial
constraints on the absorption of aid. He said aid flows are
highly unreliable and highly unstable. Countries do not assume
short term gains in aid will continue. Ghana made a responsible
choice.
He went on to discuss neutralising the problems from the
supply side. To induce a positive supply side response aid
could be used to improve infrastructure (reducing the costs
of private sector), invest in human capital to raise productivity
and to reduce the perceived risks of investment.
However, there are limitations, which include:
- an absence of strong evidence on aid and growth
- a mixed past record on aid for infrastructure (which led
the World Bank and DFID to move away from that type of aid)
- a danger that doubling aid is likely to result in diminishing
returns
- a risk that aid can undermine institutional development
- a risk that spending will be poor quality
- a risk that problems will be aggravated by changes in the
end-uses of aid. Aid has the potential to improve productivity
and profitability of private sector but this is not automatic
He outlined some policy implications for recipients:
- Be careful, depending on initial situation
- Much hangs on nature of political system
- Need for conscious, joined-up management policy, including
for tradeables
- Need for a long-term planning horizon
And for donors:
- Predictable gradual increases easier to manage than large
discontinuous jumps
- Work with recipients on management & spending plans.
Don't rely on conditionality
- Re-examine balance between social and directly productive
applications
- Improve predictability of aid flows
He concluded by comparing a big increase in aid to winning
the lottery - it comes with pros and cons.
John Burton
John Burton responded by returning to the reasons
why doubling aid what seen as a good idea in the first place:
the MDGs are off target.
On scaling up, he said that it is not necessary to double
aid to every country in order to double aid globally. Therefore
not every country would face the absorption problems Tony
Killick outlined. He talked of 'scaling up smartly' by giving
more aid to countries currently underaided. This could include
countries in Asia and countries emerging from conflict.
On the relationship between aid and growth, he said that
although aid may not be a driving factor of growth it does
help countries where growth is at very low levels and sectors
which are growth-related. He acknowledged promoting growth
is an important issue.
On good uses of aid he mentioned building reserves, importing
HIV/AIDS drugs and liberalising trade to bring in more imports.
He said that the evidence from case study countries shows
countries have not suffered Dutch disease effects yet.
He disagreed that countries should start saying no to aid,
but does recognise that aid does need to be good quality.
He concluded that Tony Killick's argument does not lead to
the conclusion that aid should not be doubled, only that it
must be well managed.
Discussion
The discussion covered the following points:
- The political case and the implications of doubling aid
- Rural and urban disparities and income distribution
- The increase in private demand as a knock-on effect of aid
spending
- The impact of increased spending on the productive sectors
- The effects of importing producer goods
- Increasing demand via cash transfers in rural areas
- A comparison of Dutch disease effects from aid and from
commodity booms
- The importance of institutions
- Pro-poor recipient country policies towards receiving aid
- The importance of managing the exchange rate for long term
growth
- The IMF's approach to inflation
- Investment in infrastructure
- Under-aid countries
- Budget support and aid for operation and maintenance
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