Cash Aid for Africa

STOCKHOLM – Europe has made an ambitious commitment to scale up its aid to Africa, and Africa’s challenges call for that greater engagement. But boosting aid to countries that are already aid-dependent requires clearer delivery mechanisms and a degree of budgetary predictability. Something new is called for, and cash transfers directly to poor people could be an alternative − but only as a part of a longer-term vision of partner countries’ welfare systems.

The European Union has committed itself and its member states to increase aid flows to 0.56% of GDP by 2010 and 0.7% by 2015 − with a big focus on Africa. The combined aid commitments of OECD Development Assistance Committee member countries would mean a doubling of official development assistance to Africa between 2004 and 2010 – that is, if they are honored.

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It is, after all, fair to question whether donor countries will stick to these commitments and, indeed, whether conditions in partner countries will permit them to. But a theoretical doubling of African aid by 2010 − with the possibility of even more after that − offers a huge opportunity to combat poverty. So tackling any obstacles that could inhibit the effective application of these additional resources is a priority.

While Africa’s needs are relatively well known, there are challenges in scaling up aid to tackle them. This reflects such problems as macroeconomic management, aid-dependency syndromes, absorption capacity, transaction costs, and − related to all of it − the risk of decreasing returns as aid levels rise. Given the current aid-to-GDP ratios in sub-Saharan Africa − with approximately half of countries yielding ratios of above 10% even before future increases in aid are taken into account − these challenges must be taken seriously.

Donors and their partners agree on a way forward that could, in theory, tackle these challenges. The agreement is contained in the so-called Paris Agenda, which defines principles of ownership, alignment, and harmonization. It calls for the improved predictability of aid flows, with budget support and program-based aid as the preferred means of delivering support. It is an agenda for improved partnerships, reduced transaction costs, and increased efficiency.

It is when the Paris Agenda leaves theory and confronts reality that problems emerge. Budget support suffers from low credibility, not only among donor taxpayers, but also among citizens in recipient countries. While it assumes predictable financial flows, such predictability can be spurious. After all, neither donor countries nor their partners are exempt from such problems as corruption, political crises, armed conflicts, human rights abuses, vested interests, or international power politics.

As a result, placing so many eggs in one basket leaves the business of aid provision looking increasingly risky. Furthermore, budget support that’s linked to national poverty-reduction strategies also rests on the questionable assumption that the political economy of a partner country works to the benefit of the poorest.

Politics on the donor side is no less complicated, with growing aid budgets often viewed by taxpayers as excessive at a time when the anti-aid lobby is becoming more vocal. When donors finance 50% or more of a country's national budget, they may sometimes find intervention unavoidable − donors certainly have the power to intervene. That could mean more conditions being placed on aid, not fewer − even if the rhetoric sometimes appears to suggest the opposite.

Would dispensing aid by making cash transfers directly to the poorest work better?

Experimental schemes have been implemented in Latin America in which child allowances are conditional on school attendance and vaccination. Cash aid has sometimes replaced food aid in humanitarian crisis situations, and there have been targeted social protection schemes in Zambia, as well as incipient welfare schemes for the elderly in India, South Africa, and Lesotho. The results so far are very promising.

Poor people spend money reasonably effectively on investment as well as on consumption. Food and other basic goods are bought – benefiting the local economy – nutrition improves, and kids attend school for longer. An unconditional child grant scheme in South Africa − with mothers as recipients − even demonstrated the impact in centimeters, because the height-for-age index among children improved in relation to control groups.

Affordability does not appear to be a big hurdle. Assume, for example, that an annual universal grant of $50 is given to all children below 10 years of age in Mozambique, Malawi, and Zambia − covering roughly 10 million children. These are three low-income countries with HIV prevalence rates of roughly 15%. Further assuming a relatively generous 20% administration overhead, the total cost of the scheme would be approximately $600 million – equivalent to a fifth of the reported aid flow to these countries in 2004 and to 3.5-4% of their combined GDP. It would certainly be costly, but not out of reach if African aid is doubled.

For cash-transfer schemes to work, they must be regular, predictable, and long term. But, while donors and their taxpayers might be willing to make long-term commitments for such a purpose, there is likely to be rather less appetite for making commitments which would seem to be never-ending. A formula for burden sharing would be needed that gradually increases domestic financing.

But under no circumstances should these schemes be established as purely donor-driven mechanisms that bypass local budgets and institutions. Partner countries must be ready to invest in their institutions and develop their own vision of how they want to organize their welfare systems.

Would African partners want this? Maybe. In any case, the cash-transfer debate is no longer limited to those in northern development circles. It has now reached the agenda of some African governments and the African Union.