Monday, 1 April 2013

The African Enigma: Aid (Part 1)

Africa is a perplexing case study for even the most seasoned economist.  Home to over a billion people, and tremendous growth in recent years (Ethiopia posted GDP growth upwards of 11% in 2012),the continent is also home to its fair share of troubles.  The birthplace of humanity is now it's laggard, subjected to centuries of harsh colonialism that has left the continent drenched in blood to this very day.  There is, however, change afoot.  Opportunities abundant, in this multiple-part series, we'll delve into just what Africa presents investors with.

Take a look at global GDP growth in 2012, and you may notice that the biggest movers were African. (Not always in the good way, South Sudan's infantile economy contracted a whopping 55%)  Libya's recovering economy, subjected to a damaging civil war in 2011, experienced 121.9% growth last year, and war-torn Sierra Leone posted a 21.3% increase in GDP.  Now just what do these numbers mean?

  Observing, and ultimately forecasting economic data about Africa is an exercise in economics, but one must also take into account various geo-political factors, history, and tribal allegiances that still play such an important role in day-to-day African life today.  It's mainly been a lack of understanding of this (as well as the lingering traumatic aftermath of colonial rule) that has caused Africa to remain "the final frontier" of economic development.  Why has African development over the last 60 years generally been sluggish at best?

From the establishment of JFK's Peace Corps in the early 60s, most Western attempts at development of Africa revolved around a smaller, grassroots humanitarian effort.  This is great when faced with sudden disasters, (man made or otherwise) such as wars, famine or floods, where immediate short term help is required.  The problem arises when either 1) this short term aid becomes extended into an annual event which donor countries end up budgeting for, or 2) the projects become so large/unsustainable that they turn into "white elephants", accomplishing nothing while just wasting everyone's money.  For a great example of this we turn to 1970s Tanzania.

In 1976, President Julius Nyerere, despite horrible stewardship of the economy (By the time he left office in 1985, Tanzania was one of the largest recipients of foreign aid in the world, and a substantial portion of it's budget was funded by foreign donor states), he made significant strides in healthcare and education, mostly by way of his pledges to make both accessible to every Tanzanian.  In a bid to help Nyerere out with his education plan, the World Bank thought they could kill two birds with one stone by building a pulp refinery that could create paper upon which textbooks could then be printed, in essence creating a new industry, and making the education reforms instituted by the government beneficial in the short term as well.  All fine and well on paper, but the reality was much different in that the suits back in Washington chose to overlook one key detail; The Tanzanians had no idea whatsoever about how to run such a plant.  The one thing that might have provided the greatest long term benefit, funding for training and education programs, was not even budgeted for in the project, for fear of the project being deemed too costly by executives across the Atlantic.  To make a long story short, the project blew up in their faces, and Tanzania was left paying the bills for this disastrous exercise in aid that for some reason it seems nobody (except maybe the Chinese) learnt from.

So just what needs to be done?  In Canada, when the CIDA, the Canadian government's aid agency, was rolled into the Foreign Affairs department, people were outraged, with German media conglomerate Deutsche Wells bemoaning the "top down control" the Harper government maintained on just about every aspect of Canadian domestic and foreign policy, and how it would negatively impact people desperately in need of aid.  Despite the perceived negative reaction by certain news outlets, this may have been the smartest thing done by a developed country when it comes to foreign development in decades.  By tying foreign aid to Canada's foreign affairs and trade department, it'll ensure that Canadian aid dollars are spent more effectively, where they can do the most good.   In announcing the move, the government touted aligning our aid and foreign development policy with trade and foreign policy goals would slash bureaucracy, reduce administrative costs and mean that the agency would now be better placed to provide long term development assistance to places that require it, more so than continued food aid, or large sums of cash that often end up unaccounted for.  Countries such as Myanmar, Afghanistan, Nigeria, Egypt and Indonesia are countries that require help, whether through expanded guest worker programs, loans, grants or training.  Coincidentally these countries that Canada has determined present potential trade partners, with explosive growth opportunities.  Some people say that this signals the onset of a new type of foreign aid policy, one where the government is motivated by profit.  To those people, I propose a question; Is there anything inherently wrong with making a profit, so long as it doesn't overtake administering aid as the primary goal?  Now of course these same people will clamour that commercial interests would surely do just that, but a legislative framework, something lacking before, is soon to be put in place, which should allay those fears.  

800 million people have been lifted out of poverty globally since 1990.  The amount of people without access to clean drinking water halved.  Great progress has been made in the fight to eradicate global poverty.  What is interesting to note about these statistics, however, is that very little, if any, of this can attributed to the billions of dollars poured into countries over the same period.  rather, trade liberalization, wider proliferation of development loans, and greater availability of productivity-enhancing technologies.  Government aid agencies must retool and refocus on ensuring that these enablers of progress are within reach of countries that need them.  It is only then when the world can once and for all end rampant poverty, and move toward a new era of shared, sustainable prosperity.