Speaker:

Nancy Birdsall, President, Center for Global Development

Discussant:

Verena Fritz, ODI

Chair:

Simon Maxwell, ODI

1. Aid without autonomous sustained growth in Sub-Saharan Africa (SSA): an Institutional Poverty Trap (IPT)?

2. The IPT and the aid-institutions paradox: aid is not helping and may even be hurting

3. What donors can and cannot do about poverty and state failure in SSA

Birdsall opened the discussion in Part 1 by attempting to define the concept of an IPT. She did so by first describing three things that do NOT constitute an IPT:

1. An IPT is NOT a traditional Sachs-type poverty trap (defined as "persistent low-level equilibrium").
   
   To demonstrate this point, Birdsall referred to a list of countries in which 20% or more of the population are living below the World Bank poverty line of $1 a day. Of these countries, those dependent on high levels of aid (> 10% GDP) are almost all in SSA, with the exception of Cambodia, Lao PDR, Mongolia and Nicaragua (see PPT slides 1 and 2). According to Birdsall, such countries have not experienced persistently low growth consistent with the Sachs-type poverty trap model, nor have there been autonomous sustained growth "take-offs". Rather growth has tended to vary and fluctuate. The following three facts support this:
   
   a. Poor countries are not a consistently well-defined group (Berg et al. 2006)
   b. Growth rates are not statistically lower in poor countries; income levels are not stationary (Easterly, 2005)
   c. There is lots of movement across quintiles of countries, including growth successes and growth disasters.
   
   Birdsall did, however, acknowledge the possibility of a "poverty trap" for a subset of countries, for example tropical landlocked countries: Burkina Faso, Congo, Guinea Bissau, Mali and Tanzania. However, she noted that, even in these countries, there is evidence of some growth and of growth reversals. It is therefore hard to find the poverty trap. Birdsall suggested that the main problem is the duration of growth spells in countries in SSA rather than the conventional low "savings" poverty trap. This led her to argue that low levels of growth in SSA are the result of an institutional poverty trap (IPT).

2. The IPT is NOT a debt trap:
   
   Birdsall claimed that aid transfers to countries in SSA have financed debt payments.

3. The IPT is NOT a problem of "corruption" or a lack of democracy:
   
   Corruption and a lack of democracy have characterised many countries that have experienced growth for over a decade or more. Examples given included the East Asian tigers in the 1960s and 1970s; Indonesia from 1970s - 1997; Vietnam and China from 1990s - 2005.

Birdsall then turned to a discussion of what the IPT actually IS and provided some definitions that she herself claimed are "inadequate":

• Vicious circle in which poor institutions impede sustainable growth which undermines building of sound institutions

• The absence of a "developmental state" a la Leftwich (meeting 1): Lack of effective state institutions that generate predictable, credible and clear rules of the game that enable markets to operate and support investment, invention, efficiency and thus economic growth

• The absence of at least one of two characteristics: an "autonomous state" (from interest groups; East Asia) with capable civil service, or sufficient direct "accountability" (India, free press, democratic institutions).

Birdsall stated that donors' ex ante efforts at "measuring" institutions have not been successful. Despite scoring better as a group on the ICRG measure of institutional quality in 1985 than other low-income countries, many SSA countries' indices have begun to fall and their low "bureaucratic quality" is not improving. Other scores such as MCA eligibility, CPIA and Freedom House for SSA countries are also inconsistent with each other and with other measures of "capacity" and "legitimacy". Birdsall concluded that such institutional quality measures are not good ex ante predictors of growth and do not seem to be associated with subsequent growth acceleration. According to Birdsall, it is more likely to be the other way around: growth in SSA raises institutional quality (see PPT slides 21 - 28).

Birdsall then moved to an analysis of the characteristics that make a country more likely to be in an IPT. These include:

• Natural resources (exception: Botswana) - leads to low school enrollment and literacy rates (see PPT slide 30).

• Low natural openness (landlocked, non-trading neighbors).

• Primary commodity dependent - subject to terms of trade shocks.

• Historically high inequality; and small non-state/SOE-dependent middle class.

• High levels of prebendalism - this is worse for growth than clientelism as it creates more uncertainty (see PPT slide 37).

• Low civil service pay (compared to median GDP per capita).

• Low non-trade tax revenue.

6. In conclusion to Part 1, Birdsall stated that:

• Many low-income SSA countries may be in an IPT, even those that are now growing.

• An ex post definition and multiple symptoms make it hard to identify the IPT ex ante, let alone pin down its underlying causes.

• We do not yet know how to help countries escape this trap, since it is at least about ever-shifting local politics and power-sharing.

In Part 2, Birdsall asked the question: is country-based aid hurting rather than helping?

She proposed that the answer was probably 'yes' and listed the following reasons why:

• Dutch disease and "competitiveness".

• Government revenue - SSA still relies heavily on trade taxes.

• Accountability.

• Donor fragmentation - the more fragmented the donor aid, the lower the bureaucratic quality (see PPT slide 47).

• The NGO "bypass" issue - it is tempting for donors to bypass weak government institutions but this reduces country ownership and undermines government authority and capacity. Currently, approximately 75% of aid is channeled outside Afghanistan's government budget to NGOs.

• Technical assistance - expatriate personnel working for aid agencies and NGOs are rarely required to pay local income taxes.

• The Washington Consensus, a.k.a. policy autonomy and missed opportunities (see citings on PPT slide 50).

• The "exit" issue - donors have a hard time leaving/pulling out when things get bad (e.g. Uganda with Museveni).

• Volatility of aid flows.

In Part 3, Birdsall turned her attention to what donors can do to move beyond country-based aid. She suggested that they move beyond the Paris Declaration and set specific, measurable, time-bound goals for donor reform of country-based aid such as:

• eliminating debt within 6 months in Liberia;

• providing aid in grant form to SSA countries until per capita income exceeds $500 but only through either government budgets or as direct payments to households, and only with matching funds from government revenue;

• put an end to technical assistance as we know it;

• increase share of aid going through multilaterals;

• end policy and process conditionality;

• finance health and education only on the basis of pre-agreed achievement of results;

• finance much more impact evaluation (random assignment trials);

• exit countries where head of state stays in office beyond 10-12 years.

In conclusion, Birdsall identified incentives, bureaucracy, politics and leadership as four major obstacles to donor structural reform. She was pessimistic and stated that donor "humility and regret" are the order of the day. She provided the following list of recommendations for donor change:

• reduce the supply of corruption (beyond EITI);

• create "endowment" for SSA and other poor countries to adjust to global warming;

• fix global agriculture regime and drop TRIPS;

• advocate and support via international monitoring the direct distribution of proceeds of natural resources (Nigeria/Bolivia/Chad);

• support SSA regional institutions and issue-focused aid;

• make markets for vaccines;

• include international migration in "policy coherence".

In response, Verena Fritz picked up several themes:

• Fritz began by asking the questions: What is it that really matters: structural factors (geography, natural resource wealth) or institutions? She suggested that factors such as geography, endowments and disease all matter in "setting the scene" but societies and the institutions they develop can make different things of these given factors.
  

• On the topic of structural constraints to development, Fritz raised the issue of coastal countries and stated that, while in principle they should enjoy better opportunities for growth than landlocked countries, the reality has not shown this to be the case. Quite a few coastal countries in SSA have seen a complete break-down of governance: Liberia, Sierra Leone, Ivory Coast, Somalia, Angola, and Mozambique are all examples.
  

• In response to Birdsall's recommendations about what donors should do, Fritz argued that donors need to continue to provide country-based aid and to focus on building the state capacity. The role that states should play in the development of their countries is still under debate; but there is little doubt that growth in SSA will not occur unless states improve. She described how politics are at the heart of why some states operate better than others and argued that committed leadership can make a big difference.
  

• Regarding donor/aid reform, Fritz suggested that donor engagement with politics and the promotion of politics which are more conducive to state-development over time - rather than ad hoc interventions - is essential. This could include: promoting the institutionalisation of leadership changes and supporting the development of a wider pool of potential leaders. It could also include more intensive political analysis related to sectoral work - e.g. in the health sector, PFM and procurement reforms, etc. According to Fritz, targeting aid at specific countries that have been identified using a political rationale could be one way forward. Prompted by the Chair, Simon Maxwell, Fritz stated that donors should "get in" rather than "get out" of states.

Simon Maxwell then proposed the following questions for discussion:

• Does aid make the IPT worse?

• Should donors get in or get out?

• Is aid part of the problem?

Points/questions raised in the discussion included:

1. Donors are damaging the development of institutions.

2. The Paris Declaration is not being delivered on in the field.

3. If the central problem is poor institutions, why will regionalism help? Won't it cause more institutional problems?

4. The concept of ex post conditionality is not new. The World Bank has been doing that a lot. But isn't ex post conditionality just simply conditionality one year in advance? How is that any different?

5. Prebendalism is not necessarily bad for growth. For example, it promoted growth in Thailand.

6. The issue of conflict has not been addressed.

7. There is (some) econometric literature that demonstrates a positive link between aid and growth.

8. How do you engage with states that don't meet all your criteria?

9. Trying to get people into schools in SSA (Nigeria) is not about money, it's about building a public system.

10. What about inequities? What use is growth if it doesn't benefit the majority of the population?

Birdsall responded with the following remarks:

• Aid isn't helping and it may often be making things worse. There are too many actors in the international aid system and the competition and the impatience of donors has increased. When the US launched the Marshall Plan, it provided 90% of all international aid. Today the US continues to be the largest donor in the world in absolute terms but only makes up 20% of all aid. The US is currently doing a poor job of coordinating aid even internally - US assistance is fragmented into different government institutions with different purposes. The UK has shown tremendous leadership in this regard, acting much more coherently and cohesively. But in general, the international aid system is missing a hegemon.

• Africa needs to get regionally integrated as the individual economies of each country are too small

• Policy conditionality has been more or less abandoned, which is a good thing, but process conditionality should be abandoned as well. Donors will never be able to tell if a policy process has been participatory or inclusive enough, if the civil society groups incorporated into the process are representative enough, etc.

• Results-based aid and ex post conditionality are the way forward - and the World Bank model is NOT ex post conditionality, because it is still telling countries what to deliver by when - and how to do it.

• We still don't know how to do structural adjustment of donors. We only know how to do minor fixes.

• Democratization matters. The more democracy you have, the more chance you have to improve inequities and institutions.

• People may look to East Asia for success in building institutions but what we may find is that those countries never suffered from an IPT.