How Donors Should Cap Aid in Africa

Adrian Wood (Financial Times)--Ministers from developed and developing countries are gathered this week in Accra, Ghana’s capital, for the latest high-level forum on aid effectiveness. Learning from past successes and failures, reformers are pressing for more ownership by developing countries of aid relationships, more predictability of aid flows and less fragment­ation of aid delivery.

This agenda is important. If implemented, these reforms would give the taxpayers of rich countries better value for money and increase the benefits of aid to people in poor ones. Aid cannot on its own cause development, but if properly delivered and well used it can be enormously beneficial.

However, one can have too much of a good thing. Some developing countries, most of them in Africa, have had high levels of aid dependence - in excess of 10 per cent of gross domestic product, or half of government spending - for decades. It is questionable whether this has been helpful.

There are various reasons to be concerned about high aid dependence, but the most worrying is the undermining of good governance by distortion of political accountability. Governments that are highly dependent on aid pay too much attention to donors and too little to their citizens. This might not matter if the interests of citizens and donors were identical. But all donors have some non-developmental motives and, even when they seek to promote development, they have their own priorities. The result is confused and shifting policies, volatile aid and spending and, as a result, slower growth.

I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals.

This would keep the governments of non-mineral countries dependent for revenue mainly on their citizens, and thus give them incentives to pay attention mainly to what citizens want, not donors. It would also encourage governments to raise more taxes from their citizens, since every extra dollar of tax raised would attract a matching increase of 50 cents of aid.

Higher taxes would help because there is strong evidence that the tax relationship is vital for accountable government. ‘No taxation without representation,’ said the early Americans, and the converse also applies. Budget legislation is central to the political process, forcing governments to justify their actions in open debate. At the micro level, tax collection obliges governments to be in direct contact with most of their citizens and companies.

The limit should perhaps be below 50 per cent and certainly not higher. Operating such a limit would raise many technical questions. How should aid and taxes be defined for the purposes of calculating this percentage? Who would monitor and validate the data? Who would determine whether taxes were non-coercive? But practical details of this kind could be sorted out with a bit of effort and ingenuity.

More challenging would be how to phase in this limit. About 30 countries with populations over 1m, of which more than 20 are in Africa, now get aid above this limit and in about half of them aid is more than 100 per cent of taxes. Instant cuts in aid or increases in taxes to get down to the limit of 50 per cent would be damaging, so implementation would need to be gradual, over a period of anything up to a decade. Much further ahead would be the issue of how to phase out the aid, as countries ceased to be poor.

Perhaps the biggest challenge, though, is whether donors, even if most of them agreed on a limit, would be able to act collectively to implement it. There are many donors with different motives, separate delivery mechanisms and no set of common rules - these being among the problems that the Accra meeting is trying to tackle. To get donors to act collectively to cap the amount of aid that they gave to a particular country would not be easy.

Yet the idea is worth exploring. A lot of countries, including some in Africa, still get too little aid - well below my 50 per cent limit and below what they could put to good use - so part of the agenda should still be to increase aid. But the dangers to development of too much aid for too long are sufficiently serious that donors also need to think strategically about upper limits.

*The author is professor of international development at the University of Oxford and in 2000-05 was chief economist of the UK’s Department for International Development

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