Étiquette : economic development

Is financial aid helping Africa?

Posted on by Rubrique Analyse Economique

“Give a man a fish and you feed him for a day ; teach a man how to fish and you feed him for a lifetime”. In simple words this saying explains the complexity that lies behind financial aid. Back in 1970, the United Nations General Assembly adopted resolution 2626, it was agreed that: “Financial aid will, in principle, be untied […] Developed countries will provide, to the greatest extent possible, an increased flow of aid on a long-term and continuing basis.”

Half a century later, hundreds of billions of dollars have been transferred from rich countries to Africa, yet as the percentage of its population living under the poverty threshold ($1.90/day) has decreased, the total number of people living under this same threshold has increased ; a real paradox. An explanation alone will not do, there is a need to find a solution as well. The Organization for Economic Co-operation and Development (OECD) in its 2015 edition report recorded that $55 billion were given by its member to Africa. Contrary to popular belief, the biggest receivers are not African countries but Asian countries. Afghanistan, Myanmar and Vietnam are the top receivers of financial aid in the world, whereas in Africa the biggest receivers are Egypt ($5.5 billion), Ethiopia ($3.8 billion) and Tanzania ($3.4 billion).

 

Of the $55 billion given to the continent, the biggest donators are the United States ($8.9 billion), the International Development Association (IDA) ($6 billion) and the European Union ($5.9 billion). Almost half of these $55 billion were allocated to the social sector which includes education, health and water treatment. This choice is not random, focusing on such a crucial sector facilitates the development of a country through the expansion of its production function which is allowed by improving the available factors of production. Furthermore, it can be argued that the Millennium Development Goals (MDGs) were directly targeted through such policies. Surprisingly, the economic sector accounts for only one fifth of the $55 billion given. This raises many questions especially when considering that under this category fall transport, communications, energy and banking. By leaving aside such important components, economic growth is hindered and development is in harm’s way.

Usually, the receivers are blamed first when there is a lack of effectiveness from financial aid. Bad governance is pointed out; it is true that some leaders did not hesitate to embezzle financial aid. No one really knows how much wealth Mobutu Sese Seko gathered (even though some claim it to be $13 billion) while his country was running at the time with a debt of no less than $13 billion… Although, even when good intentions are present, mismanagement is another problem. Sadly, the white elephant (Expensive investments that serve no purpose) has become the most widely observed animal in Africa as financial aid is spent on non-essential sectors, due to a lack of expertise. Yet, this should not mean that the responsibility falls solely on the receivers.

The roles of the donators can also be questioned. 46 years ago it was agreed between the UN and the donating countries that each year, they would donate 0.7% of their gross national product (GNP) to developing countries. As of today, only five countries meet this criteria: Denmark, Luxembourg, Norway, Sweden and the United Kingdom… Then again, giving too much money can also be a problem as it causes a dependency on financial aid. Even more troubling is tied aid, its consequences are gruesome as entire populations are deprived because their governments do not satisfy the political criteria established by the community of donators.

Last but not least, the arrival of new donators should be welcomed cautiously. Even though most of the donators are western countries, new ones are emerging. The BRICS (Brazil, Russia, India, China and South Africa) as well as Turkey are more and more contributing. Furthermore, with economic downturns for the western economies, their donations has substantially decreased. This has allowed these new actors to rise, China for instance has pledged to donate $60 billion to Africa during the last China-Africa summit. However, the arrival of new donators does not necessarily lead to a more favorable situation for the receivers ; in the end good governance and inclusive growth are both the reactants and the products in this equation.  

 

Meanwhile, Africans living outside the continent send more and more money home to their families. It is only a question of time before remittances outweigh financial aid given to the continent… A strong reminder that Africans have the power to change Africa foremost.

 

Riad KAID SLIMANE

 

REFERENCES

OECD, Development Aid at A glance, Statistics by region, Africa, 2015 edition. http://www.oecd.org/dac/stats/documentupload/2%20Africa%20-%20Development%20Aid%20at%20a%20Glance%202015.pdf

MOYO Dambisa, Dead Aid: Why aid is not working and how there is a better way for Africa, 2009, p.208

Where PRSP efficient ?

Posted on by Rubrique Analyse Economique

img-8Since the 2000s, a few African countries have committed to strategies, initiated by the World Bank and then extended to the Millennium Development Goals (MDGs), to fight against poverty. These strategies, compiled in what are generally called Poverty Reduction Strategic Papers (PRSPs), are based on the dogma which considers that growth is enough to reduce poverty. Therefore, they highlight growth acceleration and identify measures to be implemented to improve the living conditions of the poorest.

Discussing the efficiency of these programs, with the birth of MDGs, the Bretton Woods institutions, in particular the IMF, indicated that these strategies constitute a break from other existing development programs, and offer a pool of measures which probably be able to reduce poverty. Although the MDGs have reached their completion point and data is available, it is possible to wonder whether these strategies have had the expected results. A tentative answer is given by Daouda Sembene[i], who analyses the impact of PRSP on growth, inequities and poverty in Sub-Saharan African countries. His analysis compares countries having adopted PRSP and countries which haven’t.

In his analysis, it appears that although the implementation of PRSPs has allowed a significant reduction of poverty elsewhere in the word, in the Sub-Saharan African countries which have adopted them (32 in total), it remains difficult to identify its impact on poverty and inequalities. Indeed, poverty is increasing at almost the same speed in all countries of the region, whether or not they have adopted PRSPs. The good news is that DSRPs have allowed countries which have adopted them to be more efficient and more resilient to economic shocks. For instance, the PRSPs countries recorded far more stable and substantial growth rates since the implementation of PRSPs (with an average of 2.13% during the 1990-1999 period against 5.12% between 2000 and 2012). On the contrary, economies which had not adopted the PRSPs have had more erratic performances (from 7.1% on average between 1990 and 1999, to 5.3% between 2000 and 2012). In addition, the 2008 financial and economic crisis had less impact on PRSPs counties than on non-PRSP countries: average growth of – 1.9% in 2009 for non PRSPs, when PRSPs countries demonstrated an average growth of 4%.

According to PRSPs, only public action can generate sustainable growth, able to reduce poverty. The actions to be implemented in the context of PSRPs in the concerned Sub-Saharan African countries were therefore in favour of growth. They involved in particular infrastructures and human capital (health and education), diversification and private sector development but also some transversal issues such as good governance promotion and rural development. For the growth created through these measures to be able to reduce poverty and inequalities, it was thus necessary to strengthen the redistribution channels. To attain this, the PSRPs planned to improve access to basic social services, to employment or to revenue-generating activities. Fund transfers and a priority access to public jobs for poor people, also constituted fundamental pillars of these strategy papers.

The failure of these strategies to reduce poverty and inequalities is mainly linked to the redistribution strategy used. For instance, social transfer programs are usually not conditional on results to be reached by the beneficiary household, in terms of health and education for the children. According to Kakwani and al. (2005) [1], in about 15 Sub-Saharan African countries, the implemented transfer programs depended on the registration and regular school attendance, and the amounts involved were not sufficient to take the beneficiaries out of their situation of poverty. Another form of redistribution is the implementation of subsidies (either in the agricultural, energy, or food sectors). It is the most common form of redistribution used on the continent; each African country benefits from subventions in one or more of those sectors: Nigeria and Ghana for instance have implemented subsidies in the agricultural and energy sectors. Others are more focused on the agricultural sector (Tanzania) or the energy sector (Niger, Senegal and Mali). These subsidies, supposed to be beneficial for the poorest and which mobilize a non-negligible part of budgetary resources, do not really produce the expected results [2]. They benefit mostly the richest, who consume an important part of the subsidized products and services.

Overall, the implementation of PSRPs has particularly allowed to improve economic governance in the countries which have adopted them, which translated into improved economic performances and a strong resilience to exogenous shocks. Regarding poverty and inequalities, these strategies have been less efficient. A failure which could be linked to the design strategy of PSRPs. Indeed, if the way PSRPs are designed, they provide conditions to reduce poverty with a focus on growth, their implementation is made difficult by the institutional capacity of the countries to identify precisely the targets of those policies. Policies aimed at reducing poverty and inequalities should not only take more into account local realities, but also integrate measures to be appropriated by local authorities, in order to design redistributive policies more adapted to the local context, and whose implementation would be linked to institutional capacities and competencies of the country. It is an approach that countries already try to have within their own development programs, which are then submitted to their partners for funding. Regional programs, or those initiated by international institutions, should therefore be reshaped according to a same model, to strengthen redistributive mechanisms. 

An original article by Foly Ananou, translated by M.C. 

[1] Kakwani, Nanak, Fábio V. Soares, and Hyun H. Son (2005). Conditional Cash Transfers in African Countries. UNPD International Poverty Centre, Working Paper n° 9, Brasilia.

[2] See Faut-il supprimer les subventions à l’énergie en Afrique ? for the case of energy.

[i] Daouda Sembene (2015). Poverty Growth and Inequality in Sub-Saharan Africa : Did the Walk Match the Talk under the PRSP Approach ? IMF Working Paper, WP/15/122.

Access to housing in Africa

Posted on by Kouassivi Teico KADADJI

The current demographic boom in Africa has caused a rapid and dysfunctional urbanisation. Finding decent housing has become a serious problem. The continent has the fastest-growing urbanisation in the world. According to UN-Habitat, the urban population growth rate has reached 3 % per year. As a matter of fact, the urban population represented 40 % in 2009 and will reach 60 % in 2050 if the situation progresses at this constant rate. This uncontrolled urban growth has favoured the development and extension of precarious, unsanitary and unsafe slums. The population living in slums in Sub-saharan Africa has doubled between 1990 and 2012, from 102 million to 213 million (UNCHS data). Simon Walley[1] expects that the demand for housing will increase from 4 million in 2012 to 5 million in 2020. The public authorities have carried out many actions to make housing more accessible to disadvantaged people. Nevertheless, the problem persists and slums are expanding increasingly. Thus, only higher classes of the society can afford to live in decent houses. This situation deepens the gap between the rich and poor and requires a number of actions to guarantee housing for all. In this article, we shall look closely at the obstacles hindering the emergence of a real estate-market favouring poor people in Africa.

In an effort to counter the expansion of slums, public authorities, in South Africa and Ivory Coast, have chosen to build free or low rent social housing. However, these policies did not favour the targetted poorer population and civil servants took advantage of these measures. Due to a growing demand and lack of public financial ressources, these types of programs were not sustainable. So, the government decided to turn to the private sector for the construction of housing at a low cost. The State, in Angola for example, supported the private sector by giving a massive amount of subsidies. These programs were not very successful because they only took into account cost reduction and were not planned out and conceived for regional development. Most of the houses were built far from the main infrastructures such health centres, transportation and schools.

In theory, the demand for housing is almost unlimited. People who have a decent house wish for a bigger and more confortable one while those who do not have a decent house want one. However, this demand is not met in reality especially for financial reasons. According to the World Bank, in 2011, less than 5 % of the Sub-saharan African population took a loan to buy a house whereas in the USA or in Canada, this rate reaches 25 % to 35 %. These figures show us that the low-income households are excluded from the financial system because they represent a higher risk for credit institutions. The lack of financial culture can also explain why they do not have the sufficient ressources to be elligible for the acquisition of a house.

On the other hand, private real estate developers face many bureaucratic, regulatory and financial hurdles. Economic development is hindered by the slowness of administrative procedures in Africa, specially in the present case. Many social real estate development projects are blocked by regulatory constraints to access to property (which are rare and expensive in the urban areas). Furthermore, it is difficult for real estate developers to obtain long-term funds because credit institutions are quite reticent to finance social construction projects. In addition to these difficulties, the construction costs can be very high and qualified labor force and basic infrasctructures (such as roads, electricity, sanitation, etc) might not be available.

The failure of the attempts to solve the housing crisis in Africa reveals the importance of a better analysis of the needs of the population and a better consideration of the environment of the houses. We need a paradigm shift to implement sustainable housing policies on a larger scale. A policy that will involve all the operators in the sectors in different fields and take into consideration key-factors, such as real estate availability, types of leases authorised, funding of the sector and construction of infrastructures. Many experts will have to be consulted : demographs, land planning specialists, economists, insurrance providers, civil engineers, road specialists, etc.

Moreover, given that public ressources will not be sufficient to fund the housing needs, a collaboration with the private sector is necessary. Superficial subisidies to the private sector will not be efficient. The solution here is to implement incentive measures which will have a leverage effect. Public authorities should develop a positive environment for private investors and set specific rules and regulations to garantee the stability of the system.

The first step would be to secure and develop property. In fact, the property regulations are highly insufficient in Africa because they are made up of a combination of customary and state norms. Thus, the issuance of property titles are undoubtedly very difficult and property law lacks clarity. In some countries (such as South Africa, Uganda and Ghana), reforms shall be carried out to integrate customary norms in the national regulatory framework. Other regulatory measures including land parcelling following a cadastre model, simplification of registration procedures, and establishment of collective rights can be implemented. Once the legal framework is set up, the State should reorganise the land planning. Due to the lack of infrastructures, property developers often have to bear additional costs which affect the price per unit of the housing facilities. Morocco ideally dealt with this issue by creating a parapublic body specialised in accomodation and land planning.

The other major issue is the funding of the sector. On one hand, the private land developers need to invest large sums of money to start their projects. On the other hand, householders have to borrow on a long-term basis to fund the acquisition of the land. As far as mortgages are concerned, the African market is worth a trillion dollars (CSAE 2012)[2]. The State should encourage access to long-term financial ressources and implement risk-sharing instruments, in order to promote the developement of the market. Banks specialised in housing finance would be a good solution as this would enable traditional banks to have access to long-term ressources with higher risk guarantees. The traditional banks would then issue real estate securities on the market which would be guaranteed by mortgage loans and finance traditional banks. Thus they would then, in turn, refinance the households. Another solution would be to implement a public-private partnership by entrusting the management of the construction project to a private company. The State would secure the property market with the required authorisations, the donors would invest the first necessary funds and the property developers would implement their project on behalf of the company managing the project. To attract the remaining fundings, the private investors would be requested to fund the project as senior debt[3] with a guarantee from the promotors of the project, the State and the donors.

The State should also take interest in the informal solutions implememented by the citizens. For instance, many households rent their houses with no regulatory framework. Land owners can rent their unsanitary accomodation for a high price, or demand the payment of 2 years rent in advance (Nigeria), thus creating high distorsions on the rental market. However, the regulation of the rental sector will meet the needs of all social classes (especially the lower classes) and generate tax revenues for communities. Self-building is another example of informal initiative that started from the bottom. Households earning informal revenues buy plots and build their own houses, often of lower quality, thus favouring the emergence of informal settlements. The State should not stop these types of initiatives but set up a framework and regulate the sector with the collaboration of private investors.

It is very crucial for African states to rethink their housing policies in order to counter the current housing crisis in the continent. These policies should create a positive framework for private initiatives because pro-active public policies have shown their limits in other parts of the world. Public authorities should focus their efforts on securing operations, risk-sharing and implementing targetted incentives.

Translated by Bushra Kadir


 

[1] Mobiliser le secteur privé pour un meilleur accès au logement. Secteur Privé & Développement n°19 : relever le défis du logement avec le secteur privé. Proparco.

[2] CSAE. 2012. Research on Urban Mass Housing workshop. St Catherine’s College, Oxford, 26-27 mars 2012. Available on http://www.oxiged.ox.ac.uk/index.php/events/ urban-mass-housing

[3] A « senior debt » has specific guarantees and its repayment is a priority unlike other debts.