It takes two to tango in accessing development aid.

Before and after the recent G-8 meeting in L’Aquila, Italy, stinging criticism was levelled by NGOs and developing country politicians at the rich countries for tending not to meet their aid commitments. While such criticism is fully justified the question arises whether aid recipients are without blame in this aid failure, a failure which in many cases threatens the growth potential and even survival of some developing countries, notably in Africa.

No fewer than 34 of the 49 countries classified by the United Nations as least developed countries (LDCs) are in Sub-Saharan Africa. These countries by and large do not have the capacity to generate savings in sufficient quantities to fund growth-facilitating investment. Poverty reduces household saving, the corporate sector is weak and generates little saving, while a poorly developed and narrow tax base does not permit government saving.

In order to grow investment in physical and human capital (the latter through increased public spending on health, education and training) LDCs, and often other developing countries as well, have to access foreign savings. For many LDCs, especially those without significant mineral resources, foreign investment and commercial borrowing cannot fill the savings gap, which means that these economies are absolutely dependent on foreign aid to make ends meet as far as public spending and investment is concerned.

However, as the saying goes, it takes two to tango, and in channelling aid to these economies more than a mere commitment on the part of donor countries to provide the resources is required. The aid-receiving countries must have the capacity, institutions and structures in place to use aid productively. No self-respecting sovereign country would like to see aid donors effectively replacing functions of government.

While it should be recognised that good governance often requires scarce resources, there is much that the governments of even the poorest countries can do with existing meagre resources and without reverting to expensive consultants to improve the quality of governance, a requirement that President Obama forcefully conveyed during his post-L’Quila visit to Ghana. The ubiquitous problem of corruption comes to mind, as do improving administrative systems, easing the regulatory environment, committing to growth-enhancing policies, developing institutions such as security of property rights, and actively reforming systems of land tenure that prevent the productive use land.

The absence of an aid-friendly environment, while not absolving donor countries from their aid commitments (neither does it explain why some countries do much better than others in honouring their commitments), can be an obstacle in the flow of aid. Not only does it reduce the size of aid flows but it could also perversely encourage more aid for less deserving recipients who have the capacity to absorb aid effectively.

Colin McCarthy, a tralac Associate, comments that it takes two to tango in accessing development aid. http://www.tralac.org/cgi-bin/giga.cgi?c=1694


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