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2019 | OriginalPaper | Buchkapitel

15. Critical Reappraisal of the Aid-Debt-Growth Debate: Retrospect and Prospects for Low-Income Countries

verfasst von : Machiko Nissanke

Erschienen in: The Palgrave Handbook of Development Economics

Verlag: Springer International Publishing

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Abstract

The chapter traces the evolution of the academic and policy debates on the ‘aid-debt-growth’ nexus, and evaluates the extent to which these debates conducted in macroeconomic terms reveal dynamic interactions in the aid-debt-growth triad and their effects on development. Throughout the chapter, we endeavour to bring ‘aid’ and ‘debt’ literature together to highlight the importance of an integrated treatment of developmental effects of aid and debt in developing countries which have access to concessional windows as part of aid packages. We show that (a) despite abundant micro-level evidences that aid’s contribution to development is context specific, an answer to the question on whether “aid works” has been sought through an investigation of macroeconomic relationships, often with cross-country regression analyses; and (b) how research outputs have been selectively used to rationalise donors’ positions prevailed at times with profound implications for development outcomes of ‘recipient’ countries. It argues that policy conditionality attached to aid and debt relief as practiced through Washington and post-Washington consensus has created an unproductive environment for nurturing mutual trusts necessary for building institutional foundations and technical capacity for making governments truly accountable to domestic stakeholders in policy making and governance. It calls for an overhaul of ‘conditionality’, so that it is based on adherence to universally accepted codes of conduct and norms to basic human rights and governments’ efforts to achieve collectively agreed targets such as the SDGs. It should be acknowledged that successful development depends on long-term processes of institutional development, to which all parties could contribute as an equal partner through development cooperation. The chapter further presents the ways forward to make debt sustainable and aid work for development by designing efficient aid and debt contracts and move away from the austerity-dominated management of debt crisis to the investment-centred management for preventing debt crises from emerging.

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Vorheriges Kapitel Development Finance: Theory and Practice

Nächstes Kapitel Labour Institutions and Development Under Globalization

Nur mit Berechtigung zugänglich

Foreign aid can be through humanitarian assistance provided at times of natural- and man-made disasters as well as through development aid. This chapter covers the debates concerning development aid only.

Though the debates on effects of aid on development cover wide-ranging issues beyond aggregate relationships, this chapter is limited to dealing with macroeconomic aspects only.

UN, the IFIs and other agencies use their own definitions to classify countries into different categories. As countries’ income levels and characteristics evolve over time, their classifications change accordingly. This chapter uses generic terms of low-income countries, which have been historically recipients of foreign aid provided through grants and concessional windows.

See Chaps. 20 and 23 of this Handbook as well as Ocampo (2017, Chapter 5) for the debt crises leading to restructuring and workouts experienced by emerging countries.

See Chenery and Strout (1966).

The assumption of the fixed relationships between parameters is a widely recognised drawback of the earlier aggregate growth models such as the Harrod-Domar model.

Chenery and Strout (1966) provide a definition of self-sustaining growth as growth at a given rate with capital inflow limited to a specified ratio to gross national product (GNP), which can be sustained without concessional aid.

See Avramovic (1964) for the debt cycle model.

While the first two conditions are discussed in the growth-cum-debt models of the 1960s, the two other conditions are derived in the models developed in the 1980s such as models by McDonald (1982) and Hernandez-Cata (1988).

Hansen and Tarp (2000) classifyempirical studies on aggregate impacts of aid to mid-1990s as the first- and second-generation work, distinguishing those associated with the ‘aid effectiveness debate’ since the mid-1990s discussed in Sect. 3.2.

In fact, as shown in Sect. 3, the inter-temporal borrowing model illustrates that increased consumption due to aid flows would be a natural outcome of inter-temporal utility maximisation.

The focus of second-generation empirical studies moved onto the aid-investment link from the effects of aid on saving.

How this solvency condition is derived is found in Nissanke and Ferrarini (2004).

Analyses of time-series data affecting HIPCs’ debt dynamics of the 1980s and 1990s are in Nissanke and Ferrarini (2004).

See Sachs (1989) for an analysis on how a coordination failure takes place among creditors.

See Nissanke (2010a, b). For a brief history of various high-profile initiatives of debt restructuring and forgiveness for the HIPCs, see Nissanke and Ferrarini (2004).

In parallel, the donor community had steadily reduced aid to economic infrastructure projects relative to overall aid as well as social infrastructures in SSA in the 1980s and 1990s. For the main reasons behind this trend that has resulted in a significant infrastructure deficit in the region, see Nissanke and Shimomura (2013).

See Nissanke and Kuleshov (2013) for a discussion on the negative feedback mechanism of commodity dependence as a persistent macroeconomic condition.

The CPIA is a set of subjective scores assigned by World Bank staff. Furthermore, the CPIA scores overlap largely with those included in the extended policy conditionality list under the Washington and post-Washington Consensus.

The importance of ownership and partnership was underscored both in the Paris Declaration and in the Accra Agenda for Action Plan, adopted at the high-level Forum of Aid Effectiveness in 2005 and 2008.

The group of researchers at UNU-WIDER spearheaded recent efforts in verifying the opposing claims on the macroeconomic impacts of aid. Following the classification made by Hansen and Tarp (2000), Arndt et al. (2010) refer to those studies published up to 2008, inclusive of RS08, as the fourth-generation work, and most recent ones since 2008 as the fifth-generation work, distinguishing from the third-generation work associated with the aid effectiveness debate reviewed above.

See Nissanke (2019).

See Nissanke (2010c) for discussions on Dutch Disease effects and macroeconomic management to attenuate the effects in the context of commodity booms. Therein references to a large body of literature on the subject are found.

For example, see Boone (1994) or Moyo (2009).

See Arndt et al. (2015a, b) and Addison et al. (2017) for up-to-date reference lists of empirical studies on the aid-growth relationships.

See Nissanke (2010a).

See Kraay and Nehru (2006).

See Guillaumont (2009) and Guillaumont et al. (2010) for these alternative performance indicators.

See Berg et al. (2012) and Buffie et al. (2012).

DSAs for LICs are now supposed to cover total debt, inclusive domestic and external private debt, as LICs have started issuing domestic debt instruments as well as accessing international capital markets on non-concessional terms.

The conclusions drawn from the IMF study are contingent upon the assumptions of the key parameters as well as the construct of the model itself. Further, they are based on the results from the calibration to the historical data series of average figures in SSA over the past 10–20 years.

Data requirements for applying a sophisticated model or forecasting technique are overwhelming for many LICs, where the reliability of macroeconomic data is often doubted, and high-frequency data required for forecasting are unavailable.

See Wyplosz (2007).

The concept of debt-stabilising primary balance was earlier explored in Buiter (1985) and Blanchard et al. (1990).

See Chap. 23 by Ocampo of this Handbook and Ocampo (2017) for further discussions.

See Chap. 5 by FitzGerald for detailed discussions on public finance management, including the question of the optimal size of the public sector and public debt in an open-economy context.

See Nissanke (2019) for our definition of structural transformation of low-income countries.

See Nissanke (2010a) and Nissanke and Shimomura (2013) for discussions on institutional spillovers from project aid.

See Nissanke and Shimomura (2013) for discussions on how the concept of endogenous institutions and institutional change (Greif 2006 and Aoki 2001, 2007) can be used for understanding aid’s contribution to institutional development.

The non-concessional borrowing policy (NCBP) was enacted in 2006 by the IFIs in fear of ‘free riding’ on the part of non-traditional sovereign lenders such as China. Yet, there were not much concerns openly voiced when LICs and LMICs turned to international capital markets for sovereign bond issues.

Ghana, Senegal and Zambia—low-middle-income countries (LMICs)—issued bonds for financing infrastructure in the energy and transport sectors since 2007 and several others, including LICs such as Mozambique, Tanzania and Rwanda, have followed suit.

According to an estimate available in October 2018, the African government’s external debt payments doubled just in two years from an average of 5.9% of their revenue in 2015 to 11.8% in 2017 (https://jubileedebt.org.uk/wp/wp-content/uploads/2018/09/Briefing_09.18.pdf). It is estimated that by the end of 2017 African governments’ total external debt was US $417 billion, of which 32% was owed to private creditors, 24% to China and 35% to multilateral institutions and other countries, including Paris Club members. It is worth noting that as of December 2017, 55% and 17% of their external interest payments were made to private creditors and to China respectively.

Lending terms of the African Development Fund are a 50-/10-year maturity and grace period with no interest payments, making concessionality at 66%, whilst African Development Bank (AfDB’s) facility offered to blend/gap countries involves a package with a 30-/8-year maturity/grace periods and interest rates of 1%, making concessionality at 41%.

See Chap. 23 by Ocampo, and Ocampo (2017).

See OECD DAC (2018) on its position on blended finance. Chapter 24 by Kaul provides further discussions.

Though detailed information is often lacking, Chinese preferential loans are said to charge on average an interest rate of 3.6%, with a grace period of 4 years and a maturity of 14 years, which amounts to a grant element of less than 25% and hence not classified as official aid according to the OECD-DAC definition. However, the degree of concessional elements is known to be not uniform, with some variations observed across projects.

A series of global facilities established at IMF are not well designed to meet the need facing LICs/CDDCs and they have become highly conditional upon accepting pro-cyclical demand management over time. See Maizels (1992) and Nissanke and Kuleshov (2013) for a history of these facilities for CDDCs. Ocampo (2017) also offers a useful history of the IMF’s facilities.

Detailed discussions of the second proposal are found in Nissanke and Kuleshov (2013).

See Bulow and Rogoff (1989).

See Chap. 24 by Inge Kaul on issues related to global public goods provision.

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Titel: Critical Reappraisal of the Aid-Debt-Growth Debate: Retrospect and Prospects for Low-Income Countries
verfasst von: Machiko Nissanke
Verlag: Springer International Publishing
Buch: The Palgrave Handbook of Development Economics
Print ISBN: 978-3-030-13999-5

Electronic ISBN: 978-3-030-14000-7

Copyright-Jahr: 2019
DOI: https://doi.org/10.1007/978-3-030-14000-7_15

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