Unlocking Growth in Africa

• Author: Kenneth S. Rogoff
• Position: Economic Counsellor and Director of the IMF's Research Department
• Pages: 56-57

Aid for humanitarian purposes is desperately needed, but it cannot be the engine of growth

Page 56

If the world's rich countries really honor recent aid pledges to sharply increase aid for Africa, the results could be dramatic. We may see aid flows increasing threefold, with many countries receiving transfers equivalent to 20 percent of their GDP and more, every year. If sustained for 10 to 15 years, such flows might go a long way toward helping Africans achieve basic living standards, as set out in the UN's Millennium Development Goals (MDGs). The MDGs, widely accepted benchmarks for core human welfare, span issues ranging from health and education to the welfare of women.

We all fundamentally applaud the strategy, but I would like to voice a couple of concerns. First, it is vital that massive aid increases come mainly in the form of grants, not loans. Burdening countries with massive debts won't help and will likely hurt. If we have learned nothing else from the last 40 years, we should have learned that donors have tended to be too sanguine about the growth-inducing power of aid flows. Growth will come mainly from improving institutions and governance and from reducing corruption and conflict-not from aid. Second, achieving the MDGs shouldn't be viewed as a final goal for Africa. Most Africans want to know that future generations are moving toward achieving the living standards enjoyed by their industrial country counterparts. Growth and macroeconomic strategies need to help people move beyond just achieving the MDGs. The "M" in MDGs should stand for "minimum."

Grants or loans?

Why is it so important that the bulk of aid flows to Africa come in the form of outright grants, not loans? Here, both theory and practice have led to a sea change in thinking. In the 1970s and 1980s, it was argued that Africa was teeming with investments offering ultra-high returns, so that loans could easily be serviced out of the growth the investments would generate. But, over the past decade, economists have realized that accelerating growth is a much more complex process than simply accumulating physical capital (plant, equipment, roads, and bridges). Nowadays, it is recognized that "soft factors"-such as institutions and governance-matter just as much and probably a lot more. No matter how much capital is poured into an economy, strong growth is impossible if individuals...