Earlier in this GEG blog series on The (Dead) Aid Debate, I reviewed the contributions of Dambisa Moyo, Bill Easterly and Yash Tandon. While all raise important issues, they do not raise what I consider to be the real issues. They do not put on the table the most pressing and important issues regarding economic development, aid and Africa: the economics, the politics and the aid system. I will address each in coming days, beginning here with the economics.
Economic development is described variously as moving from a predominantly agrarian economy to one dominated by manufacturing, and as a process of moving from a set of assets based on primary products exploited by unskilled labor to a set of assets based on knowledge exploited by skilled labor. In both cases, the economic transformation involves attracting human and physical capital out of rent seeking, commerce and subsistence agriculture and into more productive enterprises, especially manufacturing which is at the heart of modern economic growth and rising wages.
No country has been able to sustain a rapid transition out of poverty without raising productivity in its agricultural sector, unless it did not have one to start with, such as Hong Kong and Singapore. And history has repeatedly shown that the single most important thing distinguishing rich countries from poor is their higher capabilities in manufacturing (see the recent work of Ha Joon Chang and Erik Reinert; both are founding members of The Other Canon).
Africa is poor because African countries generally have had little or limited success in raising agricultural productivity and increasing manufacturing as a share of the economy. Thus, the key to long term poverty reduction and higher standards of living in Africa is to spur on the twin processes of agricultural transformation and increasing the share of manufacturing.
Why is it that we do not talk about this any more in international debates of ending world poverty? Instead, we only talk about providing potable water, health care and primary education. Sure, these things are important for increasing people’s standards of living. But with more income, people could pay for these things and government could provide them itself, instead of relying on aid to subsidize the provision in a short-term, unsustainable way. We have to shift the discussion about poverty and Africa, back to one about production and industrialization. Once we do that, then the debate can focus on what is necessary to increase productivity and what part foreign aid can reasonably play in achieving productivity objectives.
All the recent talk about pro-poor growth and recognition by mainstream economists that it is the pattern of growth that matters, and not growth per se, is almost completely divorced from arguments about transforming the structure of the economy (I have reviewed this literature in a DIIS paper). This is partly understandable because economists like to make broad sweeping generalizations about developing countries and the poor, when in reality countries across (and within) Africa, Asia and Latin America have very different economic structures and thus the sources of poverty are different, as are the economic challenges they face.
The idea that economic transformation was key to raising per capita income in ‘developing countries’ reigned in the 1960s and 1970s. The swing of the pendulum in development economics away from the structuralist development economists and their conceptions of the role of the state in late industrialization unfortunately also resulted in ignoring the key truths in their work about industrialization and structural constraints to transforming agrarian economies and industrializing in a global economy dominated by those already industrialized. Everything about the early structuralists were discredited because their ideas about state planning were seen to have been the source of economic decline. This is an unfair assessment, and has also brought negative consequences for Africa.
The single most important policy mistake made by African countries in the 1960s and 1970s was the neglect of agriculture, which received inadequate investment, research and development, infrastructure and prices in most countries. Collectivization of agriculture or state farms along the socialist model were attempted in some countries and failed, but land reforms that redistributed land and control over it were not attempted. Structural adjustment increased prices paid to farmers, thus incentivizing production, but since then not much has been done. It is only recently (I mean really in the last year or so) that attention has turned back to agriculture in Africa.
The experience of Asia shows that public investment in rural roads, research and development, agricultural financial services, irrigation and access to land are all crucial to increasing productivity in agriculture. In each of these areas (roads, irrigation, finance, modern technology), African countries are currently in a position similar to that of some East Asian countries in the 1950s. In fact, some African countries are worse off, for example with fewer rural roads and irrigated land now than East Asian countries had in the 1950s. One of Africa’s biggest challenges to both agriculture and industrialization is infrastructure: roads, ports, railways, electricity and water.
African countries can borrow on the international capital market or use Chinese money to invest in infrastructure (Ghana is doing both), but there is no reason why they should not also use concessional loans from the World Bank or bilateral aid agencies. Private capital is simply more expensive. The reason why Ghana chose to access the sovereign bond market is to get away from the conditionalities and intrusiveness of the World Bank and IMF.
Another form of foreign aid–balance of payments support– is also still crucial for African countries. A recent article by Andrew Fischer makes this point. In fact, Fischer argues that this was seen as the main purpose of aid by structural development economists. The argument is that countries going through late industrialization and rapid urban growth necessarily incur chronic trade deficits, shortages of foreign exchange and persistent balance of payments disequilibria. The positive potential of aid was understood to be in its ability to mediate these imbalances in the context of national industrialization strategies. The issue, as Fischer states, is not about export orientation versus import substitution, but about exports keeping up with the financial and capital requirements of industrialization. Aid was a means to avoid choking the capital and infrastructure needs of poor countries in their attempts to industrialize.
The problem with structural adjustment lending (and current balance of payments lending—whatever we call this era) is that it is used to plug trade and current account deficits, but these deficits are not largely due to productive investment and accumulation but rather due to terms of trade or other external shocks.
I agree with Andrew Fischer that ‘there is no sense discussing whether aid is good or bad for development, or whether more or less aid is required for development, outside of a much broader understanding of what is required for development to happen, namely industrialization and large sunk investments in infrastructure’. The role of aid and aid agencies should be assessed in this light.
Lindsay Whitfield is Project Senior Researcher at the Danish Institute for International Studies and editor of The Politics of Aid: African Strategies for Dealing with Donors (2009). This blog was published as a Danish Institute for International Studies working paper. For more on the (dead) aid debate, visit GEG’s resource page.