The Impact of the Crisis on Aid from DAC and non DAC Countries SIMONE BERTOLI Robert Schuman Centre, European University Institute MARCO SANFILIPPO Robert Schuman Centre, European University Institute and Dept. Of Economics, University of Florence ERD Conference Accra, 21-23 May 2009
Outline Up to now: scaling up aid to Africa The current economic crisis Determinants of OECD DAC aid effort The predicted effects of the crisis Can China fill the gap? Bertoli and Sanfilippo DAC and non DAC aid to Africa 2
Scaling up aid to Africa The final report of the Commission for Africa, published in March 2005, called for an increased donors effort towards African. The commitment to scale up aid to Africa was endorsed by the Gleneagles G8 Summit, in July 2005 The commitments of the G8 and other donors will lead to an increase in official development assistance to Africa of $25 billion a year by 2010, more than doubling aid to Africa compared to 2004. The OECD DAC recently celebrated 2008 as a record year for aid, as aid reached an unprecedented level. Bertoli and Sanfilippo DAC and non DAC aid to Africa 3
Scaling up aid to Africa (2) The OECD Development Assistance Committee recently celebrated 2008 as a record year for aid, as the total resources allocated by its member countries to development aid reached an unprecedented level. 30 25 Flows of aid from DAC to SSA, 1990 to 2007 20 15 total ODA to S SA 10 1 99 0 1995 2000 2005 20 10 year Bertoli and Sanfilippo DAC and non DAC aid to Africa 4
Scaling up and the crisis Will the commitments to increase aid flows to Africa survive the the current crisis? At $100 billion a year, the amount spent on overseas aid is a drop in the ocean compared to the trillions of dollars that are now being spent on financial rescues in the developed world (Robert Zoellick) Still, historical experiences are not reassuring - reaction of the Nordic countries in the face of the recession of the early 1990s (David Roodman). And early signals are even less so Bertoli and Sanfilippo DAC and non DAC aid to Africa 5
Early signals - Italy February 2009 - the analysis of the Italian budget law by ActionAid Europe suggests that Italy could halve its aid budget in 2009, thus hitting a historical low, with aid falling close to if not event below 0.10 percent of GNP. Bertoli and Sanfilippo DAC and non DAC aid to Africa 6
Early signals - Ireland February 3, 2009 - The Government has taken the difficult decision to reduce the total budget provided for Ireland s Overseas Development Assistance in 2009 from 891million to 796 million. The size of our aid programme is linked to our own economy, and specifically to GNP growth. April 7, 2009 - The Irish government announced that the aid budget is to be cut by another 100 million, the fourth cut in just over 10 months. The total size of the cuts amount to 255 million, 22 percent of what initially budgeted for 2009. Bertoli and Sanfilippo DAC and non DAC aid to Africa 7
Early signals - United Kingdom The DFID stated in early 2009 that the UK the country which hosted the G8 summit in Gleneagles will honour its previous commitments to scale up aid. dollar per pound Jan. 2007 to May 2009 2.2 Share - Commitments are expressed as a ratio to GNP. Exchange rate depreciation of the pound against the US dollar since mid- 2008; the dollar per pound exchange rate is currently 19 percent below its 2008 average. dollar per pound 2 1.8 1.6 1.4 July 2008 Keeping earlier commitments may not prevent a sizeable reduction in the dollar value of actual disbursements Bertoli and Sanfilippo DAC and non DAC aid to Africa 8
Estimating the impact of the crisis on DAC countries aid efforts As the Irish case (4 budget cuts in less than 10 months) suggests, keeping track of official statements might fail to convey an accurate picture of the impact of the crisis on aid budgets. We estimate the determinants of OECD DAC member countries aid to GNP ratio, extending a paper by Bertoli, Cornia and Manaresi (2007). The otherwise broad literature on aid is surprisingly limited in this respect: exceptions include Round and Odedokun (2004), Faini (2006) and Chong and Gradstein (2008). Bertoli and Sanfilippo DAC and non DAC aid to Africa 9
Estimating the impact of the crisis on DAC countries aid efforts (2) We estimate the determinants of aid budgets over the 1970-2008 period for the 22 OECD DAC member countries, with a model that allows for both year- and country-specific shocks. Determinants include trade balance, fiscal deficit, debt burden, government revenues, existence of an independent aid agency, output gap. We include the cube of the output gap to capture possible nonlinearities in the relationship between the business cycle and aid efforts, i.e. large crises can lead to a more than proportional reduction in aid. Bertoli and Sanfilippo DAC and non DAC aid to Africa 10
Estimates are in line with Bertoli et al. (2007). Aid increases with government revenues, and falls with a larger debt overhang. Counterintuitive finding with respect to fiscal deficit, as in Round and Odedokun (2004). The existing evidence lends support to a rather agnostic interpretation of trends for aid budgets during the course of the current crisis (Mold et al., 2009). Major business cycle fluctations have a significant impact on aid effort. Bertoli and Sanfilippo DAC and non DAC aid to Africa 11
Predicting aid budgets for 2009 We use the OECD Economic Outlook projections to make out of the sample predictions for 2009. This exercise is subject to two distinct sources of uncertainty: (i) uncertainty about the true size of the estimated coefficients, (ii) changes in the underlying macroeconomic prediction. Still, we keep the point that these estimates can be informative about the size of possible variations in aid flows. Bertoli and Sanfilippo DAC and non DAC aid to Africa 12
Predicting aid budgets for 2009 Bertoli and Sanfilippo DAC and non DAC aid to Africa 13
Impact on African countries Assuming that OECD DAC countries allocate their predicted aid budgets for 2009 as they did on the 2003-2007 period, we can map the reductions on the side of African countries. Most countries will experience a reduction in aid inflows around 15-20 percent of what they received in 2008. Can China fill this gap? Bertoli and Sanfilippo DAC and non DAC aid to Africa 14
Chinese aid and the crisis There is thus little reason why aid should decrease in the context of the crisis. On the contrary, China is more likely to take such an opportunity to increase its influence in the region and secure its own long term interests. [...] China will almost certainly maintain or increase development assistance; as of February 2009 (Cook and Lam, 2009) Bertoli and Sanfilippo DAC and non DAC aid to Africa 15
Chinese aid and the crisis (2) Feb. 2009 March 2009 May 2009 China to maintain aid, investments to Africa regardless of the financial crisis Hu Jintao offers US$21 million aid to Tanzania Angola wins new billion-dollar loan from China China's overseas contractual projects up 24.8% in first 2 months Niger, China talks about cooperation China gives $10 million to Zimbabwe Bertoli and Sanfilippo DAC and non DAC aid to Africa 16 Source: CCS Weekly Briefing
Chinese Aid to Africa Aid can take the form of: Grants (in kind); zero interests Loans; concessional Loans; Debt Relief. Aid in kind (e.g. project-based aid) is preferred in order to avoid the transaction costs of aid provision China EXIM Bank manages the bulk of concessional loans in Africa (tying loans to the involvement of Chinese companies) Estimates vary widely: $5.6 billion by 2006 (Brautigam, 2008) $19 billion by 2006 (Jacoby, 2007) plus debt relief ($1.2-2.4 billion) Bertoli and Sanfilippo DAC and non DAC aid to Africa 17
Chinese aid to Africa (2) China s pragmatic approach to international cooperation has been widely criticized by traditional donors. China has signed in 2004 the Paris Declaration on aid effectiveness (Tjonneland et al., 2006). Nonetheless, China s principle of no interference in internal questions undermines the principle of aid harmonization among donors to reduce human rights abuses, corruption and to promote more democratic institutions, especially in fragile countries (OECD, 2008; Kaplinsky and Farooki, 2009). Bertoli and Sanfilippo DAC and non DAC aid to Africa 18
Chinese aid to Africa (2) Be cautious about interpretation of data Chinese figures do not represent pure ODA, but they put together aid and investments Nonetheless, they provide an excellent proxy to estimate the magnitude of the Chinese involvement abroad at the country level Bertoli and Sanfilippo DAC and non DAC aid to Africa 19
DAC ODA vs China s Economic Cooperation to fragile African countries $ m illio n 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 DAC China Bertoli and Sanfilippo DAC and non DAC aid to Africa 20
DAC ODA vs China s Economic Cooperation: Sudan 2500 2000 $ m illio n 1500 1000 500 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 DAC China Bertoli and Sanfilippo DAC and non DAC aid to Africa 21
DAC ODA vs China s Economic Cooperation: Angola $ m i l l i o n 1400 1200 1000 800 600 400 200 0-200 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 DAC China Bertoli and Sanfilippo DAC and non DAC aid to Africa 22
DAC ODA vs China s Economic Cooperation: Equatorial Guinea $ m illio n 350 300 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 DAC China Bertoli and Sanfilippo DAC and non DAC aid to Africa 23
Econometric analysis We want to test whether the recent increase in Chinese aid to Africa has been influenced by the variation in OECD DAC aid flows. Econometric methodology: we estimate the determinants of Chinese bilateral aid flows to African countries over the 2000-2006 period. Does China fill a void left by traditional donors? Does focusing on fragile countries alone make a difference? Bertoli and Sanfilippo DAC and non DAC aid to Africa 24
Econometric analysis (2000-2006) lec.cooperation - Africa - - SSA - - Fragile - ldac -0.535-0.655-0.831 (1.92)* (2.03)** (1.73)* lgni_pc 2.749 2.977 3.404 (2.47)** (2.48)** (1.71)* debt_gdp -2.766-2.736-3.589 (3.34)*** (3.15)*** (2.65)*** fuelex 12.144 12.019 11.926 (5.62)*** (5.27)*** (3.92)*** confintensity -1.043-1.003-1.259 (1.91)* (1.76)* (1.56) goveffectiveness -1.103-1.120-1.329 (0.71) (0.68) (0.54) Constant 9.085 10.290 12.492 (1.17) (1.23) (0.89) Observations 245 222 130 Number of 40 36 21 group(country) R-squared 0.30 0.31 0.34 Absolute value of t statistics in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% Bertoli and Sanfilippo DAC and non DAC aid to Africa 25
Conclusions The crisis will substantially reduce the aid budgets of OECD DAC countries. Such a reduction is likely to be matched to a corresponding increase in Chinese Economic Cooperation to Africa. This latter increase will fall short of filling the gap created by traditional donors, and it is driven by different priorities, and directed to different sectors. OECD DAC countries should adjust the allocations of their (reduced) budgets so to avoid fragile African countries from facing a marked decline in aid flows. Bertoli and Sanfilippo DAC and non DAC aid to Africa 26
Conclusions Like China, also some other emerging donors are increasing their foothold in Africa. Many advocate trilateral cooperation between the EU, China and Africa (GTZ, 2008; Tull, 2008) EU-China Summit (Helsinki, 2006): explore avenues for practical cooperation on the ground in partnership with the African side ; Tony Blair (2007): We can work with China to serve the development of Africa in a way which benefits us all ; Javier Solana (2007): The EU and China have both responsibility and interest in cooperating more closely [...] supporting peace, security and development. Comparative advantages can work to improve overall Aid effectiveness in Africa. Bertoli and Sanfilippo DAC and non DAC aid to Africa 27