Aid to Africa was currently one of the best investments other countries could make and the Group of 20 (G20) developing nations should be challenged to seize the opportunity and make financial commitments to Africa, World Bank Africa region chief economist Shantayanan Devarajan said on Tuesday.

The policy environment on the continent was never better to generate growth and reduce poverty with additional resources, he highlighted during a cohosted South African Institute of International Affairs and World Bank lecture, held in Johannesburg.

However, the need for additional resources in Africa was “extraordinarily” high, not only in the short term to get the continent back on track after the global financial crisis, but also owing to the fact that the continent still had a huge development agenda, he said.

The Group of Eight developed nations had, in 2005, pledged to double aid to Africa by 2010 to accelerate progress towards reaching the Millennium Development Goals.

However, this commitment was currently $20-billion short, said Devarajan.

The economist noted that the global economic crisis could not have come at a worse time for Africa, given that the continent had been growing at the same rates as other developing countries, excluding China and India, for the first time in two decades.

This growth was widespread and not only limited to the oil exporting countries, he added.

Further, many countries on the continent had also made significant improvements in macroeconomic policy reforms, which led to inflation in many countries dropping by one-half by the middle of the 2000s compared with the mid-1990s, highlighted Devarajan.

However, with the onset of the global economic crisis, private capital flows and foreign direct investment had slowed down, remittances had slowed down and commodity prices fell.

Devarajan stated that it was ironic that Africa, which was probably the least integrated with the global economy, was the region that was most affected by the economic crisis.

Meanwhile, uncertainties over foreign aid remained, as there was pressure in donor countries in the West, where the economic crisis had started, to rather use these donor funds domestically to improve their own economic conditions, said Devarajan.

While this was concerning, many bilateral donors had pledged to maintain their commitments in terms of a percentage of gross domestic product (GDP).

However, as GDP figures have dropped, this also meant a smaller amount of aid.

Africa’s GDP growth was expected to slow to 1,7% this year, down from 4,8% in 2008, and while this was not too severe in comparison with the Organisation for Economic Cooperation and Development countries, this could have severe consequences for low-income African countries.

Devarajan warned that this could lead to a human crisis with between eight-million and ten-million more people thrown into poverty and the death of an additional 30 000 infants to 50 000 infants, mostly girls.

Further, the continent could also experience a reversal in the macroeconomic reforms that it had implemented in recent years.

Countries in Africa could follow the lead of several developed countries that were running large fiscal deficits and nationalising banks, said Devarajan.

However, this has not yet happened, he added, noting that many African countries had continued with prudent macroeconomic policies, maintaining modest fiscal deficits or ensuring fiscal contraction in countries with large macroeconomic imbalances.

Further, some countries, like Tanzania, had implemented time-bound emergency rescue programme limits on government guarantees and loans to two years, while a country like Nigeria had accelerated its reform programme, deregulating its downstream petroleum sector and reducing costly and regressive subsidies.

The region had responded to the crisis in the most responsible way, asserted Devarajan.

He added that the macroeconomic policy agenda in Africa was no longer only being driven by external financing constraints or safety net constraints, but also by a “fundamental shift” in the public opinion on economic reforms.

The reforms had delivered results in terms of growth and poverty reduction and have enabled countries to run modest, countercyclical policies.

African Finance Ministers and central bank governors in November last year pledged to “continue and deepen reforms”, despite the crisis, as this was the best way to retain resilience, said Devarajan.

These reforms had remained important for a number of reasons, one of which was a shift in Africa’s approach to gaining donor funding in the past decade.

Countries on the continent now decided what they believed to be in the best interest of their countries, as well as what was politically feasible, and then approached donors for funding.

This was different from the traditional approach where foreign donors prescribed conditions and would only disperse money if these conditions were met.

One of the World Bank’s funds, for instance, now monitored the outcomes of funding to countries following prudent macroeconomic policies rather than imposing conditions, which was helping to drive the reform process, said Devarajan.

In comparison, countries that were following egregious economic policies would not qualify for funding, he added.

Devarajan, however, noted that donors might need to rethink their aid strategy with regard to Africa’s “fragile” States.

These States remained in a poverty trap, with aid being increased if there was a slight improvement in macroeconomic policy and implementation and reduced if these worsened.

These countries, subsequently, continued to make either little progress or perform a little worse, but never to significantly improve economic conditions.

Devarajan proposed that an aid strategy should perhaps be based on a venture capital approach where a lot of money is pushed into the economy, which might lead these countries to excel, but could also be risky.

MICROECONOMIC POLICY

Meanwhile, Devarajan conceded that Africa still had a huge task to improve its microeconomic and other policies.

He noted that the World Bank was not seeing countries on the continent improve in terms of aspects like governance and service delivery as fast as it should.

These governments were failing poor people all over Africa, he noted.

Further, he highlighted that the debate around industrial policy on the continent has not yet been resolved and that there has, historically, been a number of well-intentioned policies that have backfired, as governments, for example, focused on the wrong sectors.

Countries had to try to find a balance between the benefits of government intervention in certain sectors versus the potential cost of government failure, he stated.

COMMITMENTS AND TRADE

Devarajan, meanwhile, said that while there was pressure for donors, and the G20, to rather spend aid in their own countries, there should be a sense of proportion.

Many of these countries would require trillions of dollars to improve their own economic conditions, while $20-billion in funding would make a significant impact on Africa’s economic development.

Another way in which donors could improve their commitment to Africa could be through broadening and extending the African Growth and Opportunity Act, which gave preferential treatment to low-income countries to access US markets with certain products.

This agreement could be opened up to the European markets, with a number of products, Devarajan suggested.

He noted that this would come at little or no capital cost for the US or European countries and would be of huge benefit to Africa. It could also be politically beneficial for these countries.

Meanwhile, Devarajan emphasised that Africa should not necessarily focus its trade activities solely on China, India and Asia, but should trade with whichever countries or regions it could.

There were also still many constraints to intra-Africa trade, an aspect the continent should work on the medium term, he said.