Financing Innovation and Sustainable Development in Africa [1 ed.] 9781527509658, 9781527505568

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Financing Innovation and Sustainable Development in Africa

Muna Ndulo

Series Editor Professor of Law; Elizabeth and Arthur Reich Director, Leo and Arvilla Berger International Legal Studies Program; Director, Institute for African Development, Cornell University

Christopher Barrett

Stephen B. and Janice G. Ashley Professor of Applied Economics and Management, International Professor of Agriculture, Charles H. Dyson School of Applied Economics and Management, Cornell University

Sandra E. Greene

Professor of History, Cornell University

Margaret Grieco

Professor of Transport and Society, Napier University

David R. Lee

International Professor, Charles H. Dyson School of Applied Economics and Management, Cornell University

Alice Pell

Professor of Animal Science, Cornell University

Rebecca Stoltzfus

Professor of Nutritional Science, Cornell University

Erik Thorbecke

H.E. Babcock Professor of Economics and Food Economics, Emeritus; Graduate School Professor, Cornell University

Nicolas van de Walle

Maxwell M. Upson Professor of Government, Cornell University

Financing Innovation and Sustainable Development in Africa Edited by

Muna Ndulo and Steve Kayizzi-Mugerwa

Financing Innovation and Sustainable Development in Africa Series: Cornell Institute for African Development Series Edited by Muna Ndulo and Steve Kayizzi-Mugerwa This book first published 2018 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2018 by Muna Ndulo, Steve Kayizzi-Mugerwa and contributors All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-5275-0556-1 ISBN (13): 978-1-5275-0556-8

TABLE OF CONTENTS

List of Tables ........................................................................................... viii List of Figures.............................................................................................. x Contributors ............................................................................................... xii Acronyms ................................................................................................. xix Section 1: Financing Modalities at National and Regional Levels for Poverty Reduction and Sustainable Development Chapter One ................................................................................................. 2 Financing Innovation and Sustainable Development in Africa: An Introduction Muna Ndulo and Steve Kayizzi-Mugerwa Chapter Two .............................................................................................. 13 Financing Development in sub-Saharan Africa through Structural Transformation: The Importance of Inter-sectoral Resource Flows Eric Thorbecke Chapter Three ............................................................................................ 29 Assessing Results-based Aid for Financing Development in sub-Saharan Africa Heiner Janus and Stephan Klingebiel Chapter Four .............................................................................................. 51 The Future of Aid as a Financing Mechanism in Africa: A Social Protection Perspective George Letlhokwa Mpedi Chapter Five .............................................................................................. 74 Evaluating the New Partnership for Africa’s Development (NEPAD) Resource Mobilization Strategy Landry Signé

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Section 2: Institutional and Policy Prerequisites for Innovative Financing Chapter Six .............................................................................................. 120 Interest Rate Caps around the World: Still Popular, but a Blunt Instrument? Samuel Munzele Maimbo and Claudia Alejandra Henriques Chapter Seven.......................................................................................... 150 Balancing Multiple Central Bank Objectives: Lessons from Kenya, Nigeria, and Uganda Florence Dafe Chapter Eight ........................................................................................... 181 Financing the Real Economy: Sectoral Credit Concentration and Bank Performance in Zambia Anthony Simpasa and Lauréline Pla Chapter Nine............................................................................................ 207 The Development of Kenya’s Overnight Interbank Market Christopher Green, Victor Murinde, Ye Bai, Kethi Ngoka, Isaya Maana, and Samuel Tiriongo Chapter Ten ............................................................................................. 235 The Political Economy of a Proposed Sovereign Wealth Fund in South Africa: Lessons from Singapore and the GCC Ozlem Arconian Section 3: Responding to Challenges from the Global Arena Chapter Eleven ........................................................................................ 268 Trade, Law, and Economic Development Muna Ndulo Chapter Twelve ....................................................................................... 282 The BRICS Partnership from a South African Perspective: Sustainable Development in a New Global Governance? Oliver Ruppel and Tina Borgmeyer

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Chapter Thirteen ...................................................................................... 307 Competition and Innovation Behavior of Firms in sub-Saharan Africa Jonathan Munemo and Eugene Bempong Nyantakyi Chapter Fourteen ..................................................................................... 335 Contagious Capitalism: Locally Relevant Networks and the Recruitment of New Investors in Kenya Christopher B. Yenkey Index ........................................................................................................ 367

LIST OF TABLES

Table 4.1. Social Protection: Social (Income) Security and Social Services ................................................................................................ 53 Table 4.2. Public Social Protection Expenditure by Guarantee, Latest Available Year (Percentage of GDP) ........................................ 56 Table 5.2. NEPAD Ambiguity–Conflict Matrix: Policy Implementation Process ................................................................................................. 80 Table 5.3. The Capital Flows Initiative ..................................................... 82 Table 5.4. African GDP Growth 2001–2015 (%) ...................................... 98 Table 5.5. Flow of FDI to Africa, 2005–2010 (2012 USD, billions)....... 104 Table 5.6. External Financial Flows to Africa 2000–2014 (USD, billions) .............................................................................................. 106 Table 6.1. Countries with Interest Rate Caps, by Region ........................ 124 Table A-6.1. Classification of Countries according to Source of Authority for the Cap ..................................................................... 144 Table A-6.2. Sample of Countries Using a Legal Instrument to Set Interest Caps ...................................................................................... 145 Table A-6.3. Classification of Countries according to Absolute and Relative Ceilings ......................................................................... 146 Table A-6.4. Classification of Countries That Use Relative Ceilings according to Benchmark Rate Criteria ............................................... 147 Table A-6.5. Type of Regulator in Countries with Interest Rate Caps .... 148 Table A-6.6. Consumer Protection Structure in Countries with Interest Rate Caps ........................................................................................... 148 Table A-6.7. Financial Sector Indicators of Countries That Use Interest Rate Caps ........................................................................................... 149 Table 8.1. GDP Distribution by Sector (Percent of GDP) ....................... 183 Table 8.2. Composition of Banking Sector Assets and Credit to Private Sector ................................................................................................. 184 Table 8.3. Sectoral Share of Credit to the Private Sector (%, end period) ..... 189 Table 8.4. Bank Size Cluster and Sectoral Credit Concentration (2001–2014) ....................................................................................... 193 Table 8.5. Banks’ Lending to SMEs in Zambia, end 2015 ...................... 195 Table 8.6. Mean Sectoral Credit Concentration and Risk (2005–2014) ..... 196 Table 8.8. Bank Size–Concentration–Risk Differential Effects .............. 202 Table 9.1. Kenya: Reforms to Open Market Operation ........................... 213

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Table 9.2. Daily Timetable for Interbank Market and Related Money Market Transactions........................................................................... 217 Table 9.3. Interbank Rate and Market Turnover ..................................... 226 Table 9.4. Liquidity Shocks and the Interbank Market: Dummy Variable Regressions, 1/2/2007–5/5/2011 ......................................... 231 Table 10.1. Temasek 2012 Investment Profile by Region ....................... 246 Table 10.2. Temasek 2012 Investment Profile by Sector ........................ 246 Table 10.3. South Africa: SWF Breakdown ............................................ 253 Table A-10.1. Sovereign Wealth Funds by Assets Under Management.. 263 Table 13.1. Number of Unique Firms by Country and Industry .............. 316 Table 13.2. Benchmark Results ............................................................... 323 Table 13.3. Results for HI ....................................................................... 325 Table 13.4. Results for Kenya ................................................................. 326 Table 13.5. Results for Ghana ................................................................. 327 Table 13.6. Results for Tanzania ............................................................. 327 Table 13.7. Results Using 3 Period Lags for Competition Variables ...... 328 Table 14.1. Descriptive Statistics and Correlation Matrix ...................... 363 Table 14.2. Negative Binomial Estimates of New Investor Recruitment in Each Town in Each IPO................................................................. 365

LIST OF FIGURES

Figure 2.1. Cross-section of the “Normal” Pattern of Structural Transformation..................................................................................... 17 Figure 2.2a. Structural transformation in Asia, Panel A ............................ 18 Figure 2.2b. Structural transformation in Asia, Panel B .............................18 Figure 2.3a. Structural transformation in Africa, Panel A … .................... 19 Figure 2.3b. Structural transformation in Africa, Panel B. ........................ 19 Figure 2.4. Recent Structural Transformation in Selective SSA Countries .............................................................................................. 21 Figure 3.1. Results-based Aid—Impact Chain .......................................... 34 Figure 5.1. Value-added Sectoral Growth Rate for Developing Countries in Sub-Saharan Africa 1990–2013 (%) ................................................ 90 Figure 5.2. Trade Flow in Africa with Selected Partners 2000–2010 (USD, billions) ..................................................................................... 90 Figure 5.3. GDP Growth in Africa 2001–2015 (%)................................... 99 Figure 5.4. Average Tax Mix of Countries in Africa, 1996–2012........... 101 Figure 5.5. Net ODA Disbursements to Africa, 1996–2012 (USD, 2011 billions) ..................................................................................... 102 Figure 5.6. Flow of FDI to Africa, 2005–2010........................................ 105 Figure 5.7. External Financial Flows to Africa, 2000–2014 (USD, billions) .............................................................................................. 107 Figure 7.1. Inflation Rates, 1980–2012 ................................................... 153 Figure 7.2. Incidence of Systemic Banking Crises in SSA, 1980–2010 .. 154 Figure 7.3. Share of Private Credit (%), 1980–2012 ............................... 155 Figure 8.1. Share of Credit by Type of Borrower .................................... 186 Figure 8.2. Interest Rates and Inflation (% p.a) ....................................... 187 Figure 9.1. Kenya: Daily Interest Rates, 2003–2011............................... 221 Figure 9.2. Interbank Rate and CBK Support Operations, 2003–11 ....... 223 Figure 9.3. Interbank Market: Interest Rate and Turnover, 2007–11 ...... 225 Figure 10.1. SWFs by Region ................................................................. 237 Figure 10.2. SWFs Wealth by Region ..................................................... 237 Figure 10.3. Evolution of Singapore SWFs ............................................. 237 Figure 10.4. GCC SWFs by Value in 2012 ............................................. 250 Figure 10.5. South Africa Mineral Sales, 1994–2012 ............................. 255 Figure 10.6. Unemployment Rates by Racial Group ............................... 256 Figure 13.1. Scatter Plot of Innovation on Competition (1-Lerner) ........ 320

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Figure 13.2. Scatter Plot of Innovation on Competition (HI) .................. 320 Figure 13.3. Nonlinear Association between Innovation and Competition (1- Lerner) ..................................................................... 321 Figure 13.4. Nonlinear Association between Innovation and Competition (HI)................................................................................ 322 Figure 14.1. Share Price Performance at the Start of the Next IPO ......... 347 Figure 14.2. Declining Geographic Peer Influence in Stronger Ethnic Enclaves ............................................................................................. 354

CONTRIBUTORS

Ozlem Arpac Arconian is a visiting scholar at the Orfalea Center for Global and International Studies, University of California, Santa Barbara. She has served as Associate Professor of Economics at the University of London, SOAS. Previously she was an economist at the Dresdner Kleinwort Investment Bank in London and at the International Monetary Fund in Washington D.C. She holds a PhD in Economics from the University of Surrey, England, and BA in Management from Bogazici University, Istanbul. She has been an external reviewer for Department for International Development, UK, and for the International Initiative for Impact Evaluation. Her articles have appeared in academic journals including World Development, Review of International Organizations, and Middle East Policy. Ye Bai is Assistant Professor of Finance at Nottingham University Business School. She has a PhD in finance from the Department of Economics, Loughborough University, UK. Her research interest focuses on emerging markets, financial integration and interbank market. She has published in high quality finance journals including Journal of Banking and Finance, International Review of Financial Analysis, Journal of International Financial Markets, and Institutions & Money, among others. Tina Borgmeyer is an Attorney at Law in Hamburg, Germany. She completed her Master of Laws degree (LL.M.) at the Faculty of Law, Stellenbosch University, South Africa, in 2014. Florence Dafe is a Fellow in International Political Economy at the Department of International Relations, London School of Economics and Political Science (LSE), and a researcher at the German Development Institute. She holds a Masters in Development Studies from LSE and a PhD in Development Studies from the Institute of Development Studies, University of Sussex. Her research focuses on the political economy of finance and development, and she has written on the drivers, opportunities and risks of widening central bank mandates in developing countries and the development of local currency bond markets in Africa.

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Christopher J. Green is Professor of Economics and Finance at Loughborough University, UK. He has a B.A. and B.Phil. from Oxford University and M.Sc., M.Phil. and PhD. from Yale University. He has worked in the African Department of the IMF, at Manchester University and at the Bank of England. He was previously the Sir Julian Hodge Professor of Banking and Finance at The University of Wales, Cardiff. He has also held visiting appointments at Yale University and with the African Economic Research Consortium. His research interests are in portfolio analysis, financial markets, and company finance in industrial and developing countries, and he has published more than one hundred refereed journal articles and books in these areas. He has also acted as consultant to many different bodies including the UN Food and Agriculture Organisation, the African Development Bank, and the African Economic Research Consortium. .

Claudia Henríquez is a Senior Economist in the Sectoral Accounts Department at the Central Bank of Chile. Previously, she worked as a consultant in the Finance and Markets Global Practice at the World Bank. Her work there related to financial inclusion as well as finance and the private sector for Europe and Central Asia. She has a Master’s degree in Financial Economics from the Universidad de Santiago de Chile. Heiner Janus is a researcher at the German Development Institute (Deutsches Institut für Entwicklungspolitik/DIE) in the Department of Biand Multilateral Development Cooperation. He is also a PhD researcher at the University of Manchester’s Global Development Institute. His research focuses on aid and development effectiveness, results-based approaches, and the role of rising powers in development cooperation Steve Kayizzi-Mugerwa is Advisor at the Independent Evaluation Office of the International Monetary Fund in Washington, DC. Previously he was Acting Chief Economist and Vice-President at the African Development Bank, where he also directed research, strategy and policy, as well as country and regional operations. He has a PhD from the University of Gothenburg, where he gained extensive experience in economic and development research and later became Associate Professor. He has undertaken research collaboration at universities including Makerere, Nairobi, Zambia, Helsinki, and Cornell. He was a Senior Economist at the International Monetary Fund and a Fellow and Project Director at the World Institute of Development Economics Research of the UN University. He has been a visiting fellow at Cornell and visiting scholar at New York University. He was part of an invited team facilitating

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improved development cooperation between the government of Tanzania and its development partners. In addition, he was Senior Policy Adviser to the Ministry of Economic Development and Planning of Swaziland. He is co-editor of a recently published volume on inclusive growth in Africa. Stephan Klingebiel is Department Head of Bilateral and Multilateral Development Policy at the German Development Institute (Deutsches Institut für Entwicklungspolitik/DIE). Prior to joining DIE he was a researcher at the University of Duisburg, where he also obtained his PhD (1998). From 2007 to 2011 he was director of KfW Development Bank office in Kigali, Rwanda, dealing with development cooperation issues. Since 2011 he has also been a regular Visiting Professor at Stanford University (Bing Overseas Studies Program, Cape Town) and since 2014 a visiting lecturer at Philipps University (Marburg). Isaya Maana is head of the Monetary Policy Committee Secretariat at the Central Bank of Kenya. He has wide experience in the Bank’s operations spanning twenty years, has undertaken technical research, and has published on monetary and financial sector issues, public debt, and on Central Bank communications. Samuel Munzele Maimbo is currently Practice Manager in the Finance and Markets Global Practice at the World Bank. He is also an Hon. Senior Research Fellow at the University of Manchester. Within the World Bank Group he has worked in the Regions of South Asia, Africa and Europe, and Central Asia. Before 2001, he worked at the Bank of Zambia and Price Waterhouse. He has a PhD in Public Administration and Management (Manchester), an MBA (Nottingham), and a Bachelors in Accounting (Zambia). He is a Fellow of the Association of Chartered Certified Accountants (FCCA) and the Zambia Institute of Accountants (FZICA). Letlhokwa George Mpedi is Executive Dean of the Faculty of Law, University of Johannesburg, where he previously served as Head of Department of Practical Business Law, Vice-Dean, and Director of the Centre for International and Comparative Labour and Social Security Law. Professor Mpedi completed his B Juris degree (1996) and LLB degree (1998) at Vista University. He has an LLM in Labour Law from Rand Afrikaans University (now University of Johannesburg) and an LLD in Mercantile Law from the University of Johannesburg. He publishes on labour law and social security.

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Jonathan Munemo is an Associate Professor of Economics at Salisbury University, Salisbury, Maryland. He received his PhD in Economics from West Virginia University. Prior to joining Salisbury, he worked at other academic institutions and was a consultant at the World Bank for several years. His main areas of research interest include international trade, development finance, business regulations, and entrepreneurship. Currently, he is a consultant for a World Bank project focusing on human capital projection in selected African countries. He recently worked with the Mercatus Center at George Mason University on research that examines the impact of regulations and institutional quality on entrepreneurship. Victor Murinde is AXA Professor in Global Finance at the School of Finance & Management, SOAS, University of London. He has contributed over 100 research papers to the financial economics literature, mainly in the areas of banking and finance, development finance, and financial markets. His research on shaping bank regulatory reforms in Africa received recognition for exceptional impact from the UK Research Excellence Framework (REF2014). Currently he is Principal Investigator of a Department for International Development (UK)-Economic and Social Research Council Grant on “Inclusive Finance” for 2016–2020, leading a consortium of ten universities from across the globe—in the U.S., Canada, Europe, Asia, and Africa—along with the African Economic Research Consortium (AERC). He is Chair of the Econometric Society Africa Regional Standing Committee; Chair of Group C (Finance & Resource Mobilization) for the AERC; and Board Member of New Rules for Global Finance, a policy forum based in Washington, DC. Muna Ndulo (LLB, Zambia, LLM, Harvard; D. Phil, Oxford), Professor of Law; Elizabeth and Arthur Reich Director of the Leo and Arvilla Berger International Legal Studies Program; and Director of the Institute for African Development at Cornell University, is an internationally recognized scholar in the fields of constitution-making, governance, human rights, and foreign direct investment. He is Honorary Professor of Law at the University of Cape Town and Extra Ordinary Professor of Law at the Free State University, South Africa. Early in his career he was a Professor of Law and later Dean of the Law School at the University of Zambia. In 1986 he joined the UN as Legal Officer for the Commission on International Trade Law and subsequently served in many capacities, including as Political and Legal Adviser with the UN Observer Mission in South Africa, and Legal Adviser on UN Missions to East Timor, Kosovo, and Afghanistan. He has consulted on constitution-making in Kenya,

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Sudan, Zimbabwe and Somalia; he has also been a consultant for international organizations including the African Development Bank and the the ECA, among others. He is founder of the Southern African Institute for Public Policy and Research and a member of the Advisory Committee, Human Rights Watch. He has published over one hundred journal articles and fourteen books. Kethi Ngoka-Kisinguh is an economist at the Central Bank of Kenya in Nairobi. Formerly an economist at the IMF office in Nairobi, she is also the recipient of a MEFMI Fellowship—the Fellows Development Programme of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa, which aims to developing a cadre of regional experts in financial and macroeconomic management. Her research interests are in macroeconomics, monetary policy, and banking, and she has published several papers in these areas. A PhD Candidate in Economics at the University of Nairobi, she has an MA from the University of Leeds and a BA from University of Nairobi (both in Economics). Eugene Bempong Nyantakyi is a Private Sector Development Specialist at the World Bank Group (WBG). He holds a PhD in Economics from West Virginia University. Prior to joining the WBG in July 2016, he worked as an Economist at the African Development Bank and before that was an Assistant Professor of economics at Whitworth University in Spokane, Washington. His work mainly focuses on issues related to trade and trade finance, innovation and entrepreneurship and business startup regulations in developing and emerging markets. Lauréline Pla is Senior Officer in the Sovereign Division, Resource Mobilization and Partnerships, the African Development Bank. Previously she was Coordinator of the African Development Fund Policy Innovation Lab, created under the Bill & Melinda Gates Fund to support efforts of the AfDB Group. She has also worked as an Economist in AfDB’s Chief Economist Complex. Prior to joining the AfDB, she worked for the Trade, Finance, and Economic Development Division of UNECA, Addis Ababa. She holds a MSc in economics from the Université Pierre Mendès France, Grenoble, and is currently a PhD Candidate in Economics with the Center of Studies and Research on International Development, Université d’Auvergne (France). Oliver C. Ruppel (LLM, University of Stellenbosch; LLD, University of Pressburg, Slovakia) is a Professor of Law at Stellenbosch University,

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where he established the Development and Rule of Law Programme. He also serves as Director of the Konrad Adenauer Foundation’s Climate Change Policy and Energy Security Programme for Sub-Saharan Africa. He is a non-resident Fellow at the Fraunhofer Center for International Management and Knowledge Economy in Leipzig, Germany. In 2009 he established one of fourteen worldwide academic chairs of the World Trade Organization at the University of Namibia, Windhoek, where he had previously served as Director of the Human Rights and Documentation Centre under the Namibian Ministry of Justice. Landry Signé is a David M. Rubenstein Fellow in the Global Economy and Development Program, Brookings Institution; a Distinguished Fellow at Stanford University’s Center for African Studies; founding Chairman of the Global Network for Africa’s Prosperity; and Professor of Political Science and Senior Advisor to the Provost of International Affairs at the University of Alaska, Anchorage. He is the author of numerous publications on the political economy of development with a focus on Africa. He has been honored as a World Economic Forum Young Global Leader, Desmond Tutu Fellow, and Andrew Carnegie Fellow. His work has appeared in the New York Times, the Washington Post, and the Harvard International Review, among others. Anthony Simpasa is Chief Research Economist and acting Manager for the Macroeconomic Policy, Debt Sustainability and Forecasting Division, the African Development Bank, Abidjan, Cote d’Ivoire. He holds a PhD in Economics from the University of Cape Town, a Master’s in Economics from the University of Botswana, and a BA from the University of Zambia. He is a member of the African Economic Research Consortium Network, the Global Development Network, and African Finance and Economic Association and has been twice a visiting scholar at the International Monetary Fund. At the AfDB, he has led the production of the African Economic Outlook Report for five years. He has published several working papers and articles in peer reviewed journals. Prior to joining the AfDB, he was a senior economist at the Bank of Zambia. Erik Thorbecke is the H.E. Babcock Professor of Economics Emeritus and former Director of the Program on Comparative Economic Development at Cornell University. He has also held positions at Iowa State University and the Agency for International Development. He has made contributions in the areas of economic and agricultural development, the measurement and analysis of poverty and malnutrition, the Social Accounting Matrix and general equilibrium modeling, and international economic policy. His

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Foster-Greer-Thorbecke poverty measure (Econometrica, 1984) has been adopted as the standard poverty measure by the World Bank and practically all UN agencies and is used almost universally by researchers doing empirical work on poverty. He is the author or co-author of more than twenty-three books and over one hundred and fifty articles. Samuel Tiriongo is an economist at the Central Bank of Kenya in Nairobi. He has a BA and MA from Kenyatta University and a PhD from the University of Dar es Salaam. Previously he worked at the Kenya Institute for Public Policy Research and Analysis. His research interests are in the design and implementation of monetary policy and the efficient transmission of monetary policy signals and decisions. He has published papers in several recognized journals, particularly on monetary policy and the operations of the banking sector in Kenya. Christopher B. Yenkey is an assistant professor of International Business at the University of South Carolina Darla Moore School of International Business. He received a PhD in Sociology from Cornell University in 2011, where he served as associate director of the Center for the Study of Economy and Society. Yenkey’s research extends sociological theories of social diversity, segregation, and inter-group trust into the analysis of market development. His research has won several awards including the 2017 Granovetter Prize for Best Article in Economic Sociology from the American Sociological Association and the 2011 William H. Newman Best Dissertation Paper Award from the Academy of Management.

ACRONYMS

ADIA AfDB AFI AGOA ANC AOCC APR APRM ASTII BoU BRIC BRICS CAADP CBK CBN CBR CDSF CECA CEMAC CFI CGAP CGAP-MIX COHRED COMESA COSATU

Abu Dhabi Investment Authority African Development Bank Alliance for Financial Inclusion African Growth and Opportunity Act African National Congress Africa Orphaned Crops Consortium Annual Percentage Rate African Peer Review Mechanism African Science, Technology, and Innovation Indicator Bank of Uganda Brazil, Russian Federation, India, and China Brazil, Russia, India, China, and South Africa Comprehensive African Agriculture Development Program Central Bank of Kenya Central Bank of Nigeria Central Bank Rate Capacity Development Strategic Framework (AUNEPAD) Commission for East and Central Africa Economic and Monetary Community of Central Africa Capital Flow Initiative Consultative Group to Assist the Poorest Consultative Group to Assist the Poorest–Microfinance Information Exchange Council on Health Research for Development Common Market for East, Central, and Southern Africa Congress of South African Trade Unions

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CRA CRR CSAE DAC DDF EAC EAP ECA ECE ECF ECOWAS EMDCs ERS ESF EU FDI FEDUSA FIDIC FOCAC GCC GDP GIC GLC GNI GSA HHI HIPC IAD ICC ICRAF ICT

Acronyms

Contingency Reserve Arrangement Cash Reserve Ratio Center for the Study of African Economies Development Assistance Committee District Development Facility (Ghana) East African Community East Asia and the Pacific Europe and Central Asia Economic Commission for Europe Extended Credit Facility (Kenya) Economic Community of West African States Emerging Markets and Developing Countries Economic Recovery Strategy Exogenous Shock Facility (Kenya) European Union Foreign Direct Investment Federation of Unions of South Africa Federation Internationale des Ingenieurs Conseils Forum on China-Africa Cooperation Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) Gross Domestic Product Government of Singapore Investment Corporation Government-Linked Companies Gross National Income General Social Assistance Hirschman-Herfindahl Index Heavily Indebted Poor Countries Institute for African Development International Chamber of Commerce World Agroforestry Centre Information and Communication Technology

Financing Innovation and Sustainable Development in Africa

IDG IFF ILF ILO IMF IPFF IPO JICA KenGen KEPSS KIA LAC MAI MCC MDGs MDRI MENA MFI MPAC MPC MPOC NACTU NAFSIP NAM NDA NDB NEPAD NFA NGOs NGP

International Development Goal Illicit Financial Flows Intraday Loan Facility International Labour Organization International Monetary Fund Infrastructure Project Preparation Facility (NEPAD) Initial Public Offering Japan International Cooperation Agency Kenya Electric Generating Company Kenya Payments and Settlement System Kuwait Investment Authority Latin America and the Caribbean Market Access Initiative Millennium Challenge Corporation United Nations Millennium Development Goals Multilateral Debt Relief Initiative Middle East and North Africa Microfinance Institution Monetary Policy Advisory Committee (Kenya) Monetary Policy Committee Monetary Policy Operations Committee National Council of Trade Unions National Agriculture and Food Security Investment Plan Non-Aligned Movement Net Domestic Assets New Development Bank New Partnership For Africa’s Development Net Foreign Assets Non-Governmental Organizations New Growth Path (South Africa) also called National Growth Plan

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NPCA NPL NPoA NSE ODA OECD OFID OHADA OSAA PALMS PAYE PHCE PIDA PPP PRGF PRSP PSI PSPEA PSPEC QIA RBA REC RRT RTGS SADC SBPA SDGs SGRF

Acronyms

NEPAD Planning and Coordinating Agency Non-Performing Loan National Plan of Action Nairobi Securities Exchange, Nairobi Stock Exchange Overseas Development Assistance Organisation for Economic Cooperation and Development OPEC Fund for International Development Organization for the Harmonization of Business Law in Africa Office of the Special Adviser on Africa Public Administration Leadership and Management Academy Pay as You Earn Public Health Care Expenditure Programme for Infrastructure Development in Africa (NEPAD) Public-Private Partnership Poverty Reduction and Growth Facility (Kenya) Poverty Reduction Strategy Paper Learning Group Policy Support Instrument (IMF) Public Social Protection Expenditure of Persons of Active Age Public Social Protection Expenditure for Children Qatar Investment Authority Results-Based Aid Regional Economic Community Resource Rent Tax Real-Time Gross Settlement System Southern African Development Community Social Benefits For Persons Of Active Age Sustainable Development Goals State General Reserve Fund (Oman)

Financing Innovation and Sustainable Development in Africa

SIG SIMS SME SPF SSA STAP SWF TAD TSPE UAE ULGSP UN UNCITRAL UNCTAD UNDP UNECA UNFCCC UN-NADAF VAT WAEMU WTO

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Special Interest Group State Intervention in the Minerals Sector Small- and Medium-Sized Enterprises Social Protection Floor Sub-Saharan Africa Infrastructure Short-Term Action Plan (NEPAD) Sovereign Wealth Fund Term Auction Deposit Facility Total Social Protection Expenditure United Arab Emirates Urban Local Government Strengthening Program United Nations UN Commission on International Trade Law United Nations Conference on Trade and Development United Nations Development Programme United Nations Economic Commission for Africa Nations Framework Convention on Climate Change UN New Agenda for the Development of Africa Value Added Tax West African Economic and Monetary Union World Trade Organization

SECTION 1: FINANCING MODALITIES AT NATIONAL AND REGIONAL LEVELS FOR POVERTY REDUCTION AND SUSTAINABLE DEVELOPMENT

CHAPTER ONE FINANCING INNOVATION AND SUSTAINABLE DEVELOPMENT IN AFRICA: AN INTRODUCTION MUNA B. NDULO AND STEVE KAYIZZI-MUGERWA Introduction In April 2014, a group of economists, political scientists, policy analysts, experts in international law, and various practitioners met at Cornell University for a symposium on the topic Financing Innovation and Sustainable Development in Africa. Sponsored by the Cornell Institute for African Development (IAD) and the African Development Bank, the conference attracted participants from many parts of the world and from areas including academia, think tanks, and development cooperation institutions, all gathered to discuss how best to capitalize on the recent, multi-faceted innovations and developments in the financial sector to help propel Africa’s development forward. The conference took a broad sweep of the issues, allowing a number of development finance challenges to come to the fore, including those of political economy, globalization, and geopolitics. Africa’s recent high growth numbers—at about 6 percent on average since the early 2000s—and their implications for the continent and indeed the world have elicited accolades and headlines in equal measure in the international media and among investment consultants, with a number of accompanying catchphrases: “Africa rising,” “African lions,” “the world’s last development frontier,” “continent of promise,” etc. Indeed, the sense of regime shift is reminiscent of the 1960s post-independence era, when African growth numbers were high and populations were optimistic about the future. The difference is that Africa today is a much changed place, with a large and rapidly growing population that is also shifting rapidly toward urbanization; within the next two decades, a majority of the population will live mainly in urban centers.

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Africa’s high growth has been happening during a time when the global economy is experiencing unprecedented changes, both in structure and in the sources and quality of that growth. The continent as a whole continues to be a notable recipient of overseas development assistance (ODA), but the amounts are dwindling, as donor countries experience tightened fiscal conditions and economic convulsions of their own; and aid flows have in any case been surpassed on an annual basis by foreign direct investment and even remittances from Africans living abroad. In the past decades, the global growth pendulum has shifted markedly toward countries in Asia, notably India and China, with important implications for Africa and the world. In the media and in many academic debates, the rise of China has been ascribed a large role in the shaping of Africa’s recent fortunes. Although China’s resurgence has been important, however, Africa is only a small player in China’s global trade links. In terms of African exports to China, the focus is on oil, natural gas, and other natural resources drawn from a handful of countries. On the other hand, China’s finished products reach many African countries, with some deals based on barter trade. Ironically, the European Union, an area troubled by anemic growth and near deflation in the past decade, is still Africa’s largest trade partner. In explaining Africa’s recent growth and its overall resilience in the face of external shocks, it is important to underline the role that good domestic policies have played, including the provision of better infrastructure, a more attractive business environment, and notably, much improved performance of the financial sector. Policies have become more predictable, the cost of doing business has fallen in some countries, and the attraction of foreign investors has not been at the expense of domestic ones. The decade and a half of high growth has begun to have real impacts on the ground: the average incomes of African households have risen, and in many countries the size of the middle class is growing, with implications for the provision of goods and modern services. Indeed, growing domestic consumer demand has become a major spur toward growth in many countries. Even as Africa’s unprecedentedly long growth period has become the source of much optimism, with many observers seeing the beginning of economic transformation, there are still a number of impediments to sustainable development on the continent to which attention must turn. These constraints are in some ways not Africa-specific, as the seventeen goals (and 169 targets) of the newly launched Sustainable Development Goals (SDGs)—covering issues of poverty, hunger, gender inequality, and environmental degradation—would testify. However, given the starting condi-

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tions in most of Africa, the climb is steeper there. Indeed it can be noted that if the SDGs fail in Africa, they will not have succeeded at all, given that they are squarely targeted on Africa’s needs and challenges. This volume takes the view that while the SDGs provide a powerful statement on what needs to be done to eliminate poverty and put developing regions of the world, notably Africa, on the path of sustainable development, financing will be a key constraint. The Financing for Development Conference, held in Addis in July 2015, concluded that the global development agenda required trillions of dollars of financing to be implemented. The international development community was prepared to play its part, but would certainly not be the major source of the funds. The discussions converged on two sources: the domestic and foreign private sectors, and domestic resource mobilization. These two sources would also create further synergies through private–public partnerships. Even here, though, the presumption was that a well-functioning financial sector must be in place to mediate effectively among parties. A secure financial sector would enable the financing of new interventions to ensure that Africa’s development was sustainable and led to economic transformation. In discussing the global arena, the volume also touches on Africa’s perennial “urge to merge” and the obstacles—legal and physical—to its regional integration and trade. The rest of this chapter provides summaries of the presentations in this volume, which are grouped into three sections: The first set of papers discusses financial modalities at national and regional levels for poverty reduction and sustainable development; the second set looks at institutional and policy prerequisites for innovative financing; and the third set discusses responses to challenges from the global arena.

Financing Modalities at National and Regional Levels for Poverty Reduction and Sustainable Development The first set of papers looks at various forms of aid delivery and how best to assess whether the assistance is having an impact on the ground. Although development financing is often conceived at the national level, a number of development projects in Africa require a multinational approach, with implications for financing and project implementation. Chapter 2 by Eric Thorbecke, on structural transformation and intersectoral flows in Africa’s development, is a rendition of his plenary address. He stated at the outset that he had been rather pessimistic about Africa’s prospects, having worked on the region for some twenty-five years. Thorbecke argues that intersectoral flows, particularly between agriculture

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and other sectors, are the main sources of finance, capital, and labor at an early stage of economic development. In his view, at least until the beginning of the new millennium, Africa’s structural transformation was flawed. Only in recent years are we beginning to see some structural transformation on the continent, although, according to Thorbecke, it is still too early to know whether this is sustainable. Still, it is now more the case of the glass being half full than half empty. In Chapter 3, Stephan Klingebiel and Heiner Janus discuss how the assessment of results-based aid for financing development in sub-Saharan Africa could become an effective tool for assessing the impact of aid. The emphasis on technical rather than political conditionality is thought to be more attractive to recipients and donors alike. As stated repeatedly within the donor community, results are the raison d’être of development financing. In conceptual terms, results-based aid links to several academic debates on aid and can clearly contribute to discussions on aid impact, allocation and conditionality, and aid modalities. However, identifying explicit results from aid financing at the output or outcome level that can be measured and directly linked to development activities is cumbersome. Moreover, there are many factors in a modern economy that could weigh in on the final results. There are, therefore, serious issues of causality and attribution when attempting to determine results. Still, Klingebiel and Janus argue that results-based aid can, with appropriate methodology, be used to advance donor interest in influencing domestic policies. The difference would be that “technical triggers,” i.e., devoid of politics, would be the drivers. They provide two case studies: Ghana and Tanzania, chosen because they are “donor darlings.” They argue that it is important to ensure that there is domestic ownership to ensure sustainability, and that the thrust is not entirely from the donor side. This requires in turn a high degree of alignment and harmonization among the donor community. They warn, however, that even technical triggers could become political in the absence of sufficient domestic ownership of the process. In Chapter 4, Letlhokwa Mpendi discusses the future of aid as a financing mechanism for social protection in Africa. Social protection is a vast subject, but Mpendi focuses on the following features: unemployment, sickness and disability, family cohesion, health, education, housing, and food provision. He argues that not enough attention has been paid to these areas with respect to social security and the provision of social services that are so crucial for human welfare in each African country. He shows clearly that without much needed aid, many destitute individuals and their families would be worse off. However, donors and governments must address a number of challenges before aid is able to contribute suffi-

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ciently to social protection in Africa. These challenges include the need to ensure aid predictability and sustainability; lack of alignment of donor approaches with those of the government; and closely related absence of harmonization of aid policies and programs to reduce the administrative burdens on governments. On the part of governments, social protection institutions are fragmented and often compete for the same pool of funds from the donor community, who then exercise a divide-and-rule approach. Moreover, poor macro and sector policies do not make matters easier. In looking ahead, governments should not leave the task of funding the implementation of social protection programs entirely to donors. Enhancing domestic resources through tax reforms will greatly boost the capacity for financing social protection when drawing up national budgets. Mpendi argues that the financing of social protection is a long-term project to which donors and governments should contribute progressively. In Chapter 5, Landry Signé switches the discussion to the financing of The New Partnership for Africa's Development (NEPAD), which is the flagship example of African integration ambitions and also a central pillar of Africa’s development blueprint, “Africa 2063,” launched by the African Union in 2014. Since its creation, NEPAD’s biggest accomplishments have been its recognition as a development partner by African regional institutions and international organizations, and its integration as a program of the African Union. The partnership aims to integrate Africa within a globalized world, close the gap between developing and developed countries, eradicate poverty, and put the continent on the path of sustainable growth and development. The program has identified a number of infrastructure corridors to be prioritized throughout the continent, including rails, roads, and seaports. Despite notable efforts that have contributed to increasing financial flows to Africa, NEPAD has not been able to reach its financial targets of some U$64 billion per year. The chapter concludes that NEPAD was unable to fully implement its resource mobilization strategy, given the complex political–economic context and the behavior of selfinterested actors. The failure can be attributed further to the difficulty of establishing strong coalitions to address the high level of policy ambiguity associated with such multinational efforts. The latter is exacerbated by insufficient ownership at national and subregional levels. Moreover, the international community sometimes prefers to support a clearly national rather than multinational agenda. Under these circumstances, lowering the degree of ambiguity and conflict while refining the resource mobilization strategy in the post-2015 development context appears to be the best strategy to result in an improved implementation process and ultimately, success.

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Institutional and Policy Prerequisites for Innovative Financing It is often assumed in discussions of reform measures that the financial sector will always rise to the moment, given the “right policy environment.” While this is partly true, the amount of work that underlies the achievement of the right policy environment should not be underestimated in both its technical complexity and difficulty of implementation, owing to domestic political economy considerations. Having said that, African countries will not be able to avoid the adoption of modern templates to push their economies forward. In Chapter 6, which the authors refer to as a “stock-taking exercise,” Samuel Maimbo and Claudia Henriques discuss the issue of interest rate caps around the world, examining why they are still popular and the policy pitfalls they might engender if adopted wholesale. In a comprehensive review of the literature and the evidence, they argue that although interest rates caps went out of vogue during earlier episodes of financial liberalization in the world and the expansion of the financial sector with active private sector participation, recent global shocks and the apparent stickiness of rates in many countries has forced the hand of governments. In Africa, some parliaments have debated whether to put caps back on interest rates in the face of their escalation, while global rates have been low for a decade. At the level of political economy, interest rate caps could be beneficial for some sectors or policies, notably, industrialization, as indeed happened in Korea during that country’s industrialization. However, in an environment of weak institutions and absence of adequate regulation, interest rate caps often lead to adverse selection, the withdrawal of credit supplies, and hence, ultimately to “financial repression.” Among their policy recommendations, Maimbo and Henriques underline the importance of competition for healthy financial markets. They also advocate for stronger forms of financial consumer protection, coupled with a higher degree of financial consumer literacy, and better credit information. The latter requires both the establishment of credit bureaus and standardized identification modalities. In Chapter 7, Florence Dafe continues the discussion of the institutional environment of Africa’s financial sector. The literature on economic policy reform suggests that political economy factors often critically influence the pace of reforms and the extent to which they are sustained. A major reform undertaken by African countries during the era of financial liberalization was to proffer financial independence on their central banks. However, many central banks in sub-Saharan Africa have had difficulties

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in striking a balance between their mandates for price stability, financial stability, and financial development. Often financial development has been pursued at the expense of price and financial stability. Focusing on the role of central banks in Kenya, Nigeria, and Uganda, Dafe argues that although many African central banks enjoy statutory independence today, the effectiveness of individual central banks is seemingly tied with how much power the incumbent governor wields within the country’s economic structure, and not necessarily a result of specific statutory provisions. However, since the early 2000s, African central banks have made significant progress in balancing the objectives of price stability, financial stability, and financial development. The chapter discusses how this balance has been achieved, what political economy factors have influenced the management of the central banks’ multiple objectives, and what the implications are for the future. However, given that political economy factors weigh heavily in what can be achieved, the prospects for sustaining the progress that central banks have made in striking a balance between their multiple objectives in these three countries remains somewhat ambiguous. This suggests the need for further central bank policy reforms rather than complacency. Chapter 8, by Anthony Simpasa and Lauréline Pla, assesses the effect of credit concentration and risk in Zambia using bank-level data. Banks’ choice regarding credit portfolio composition is a rational strategy to manage risk and enhance performance. Thus, sectoral credit concentration has implications on the banks’ risk-taking behaviour and profitability. Zambia’s reform has been widely acclaimed, but there are visible contradictions between expectations of these reforms and actual outcome in terms of banks’ conduct. The authors characterize evolution of sectoral credit concentration and risk conditioned on bank size clusters. Their analysis shows that small banks have less diversified credit portfolios than medium and large sized banks. This may be explained by the lock-in effects created by relationship lending and acquisition of soft information. The chapter notes that banks’ credit concentration is inversely related to risk, a result which appears theoretically implausible. By concentrating lending in only a few sectors, banks are able to reduce the costs of monitoring and hence risk, which in turn improves overall profitability. From a policy perspective then, rather than restricting exposure to given sectors, the authors argue, regulatory authorities should explore alternative measures featuring minimal concentration-risk impact to mitigate risk. Chapter 9 was written by a collaborative team comprised of Christopher Green, Victor Murinde, Ye Bai, Kethi Ngoka, Isaya Maana, and Samuel Tiriongo, with the latter three being from the Central Bank of

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Kenya, and hence, have hands-on experience with financial market regulation. The chapter traces the evolution of Kenya’s overnight interbank market, which is central to the development of that country’s increasingly sophisticated financial sector, and its relationship to the monetary policy operations of the Central Bank of Kenya (CBK). The analysis uses a range of standard metrics to measure market liquidity and depth and considers how well the market has responded to external shocks to the payments system. This is accomplished with the help of a unique daily dataset provided by Kenya’s central bank, consisting of all the daily transactions and interest rates in the Kenya interbank market, covering some eight years since June 16, 2003, to May 5, 2011. The data also include details of the CBK’s operations, including: daily aggregate transactions in repurchase agreements (repos) and reverse repos; discount window borrowing by banks and other measures of bank liquidity and policy, including excess reserves; and reserve money targets and outcomes. Green et al. argue that the analysis of Kenya’s interbank market suggests that it went through an early stage at which it was relatively illiquid, as variations in the daily volume of transactions tended to affect the volatility and dispersion of interest rates in the market. Subsequently, especially since the establishment of the Monetary Policy Committee (MPC), the market has matured and has become a relatively deep and liquid market. It appears able to absorb changes in the volume of transactions without increasing price volatility or dispersion. Overall, Kenya’s interbank market offers an interesting model for other countries at earlier stages of financial development. The CBK has actively fostered the development of the market, and this policy appears to have produced positive results in terms of the increased liquidity and efficiency of the organized financial markets in Kenya. In Chapter 10, Ozlem Arconian provides a political economy analysis of the establishment of a sovereign wealth fund (SWF) in South Africa. SWFs are on the policy agendas of most mineral resource-rich countries in Africa—seen as a good means of protecting countries against shocks and for ensuring that the mineral rents also benefit future generations. However, the encashment of mineral resources has always had political economy considerations. Arconian analyzes how the SWF can be strategically used to promote economic development. However, owing to the serious resource gaps in developing economies, this is hardly a smooth process. The theoretical basis for the analysis is tailored around a common agency problem that arises between the government, as the agent of its citizens, and the citizens, as the principals who own the resources from which the SWF is created. The implied “credible threat” to the government is the citizen’s ability to vote the government out of power. Case studies of Sin-

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gapore and the Gulf Cooperation Council (GCC) countries confirm that SWFs can have significant development impact, but are also prone to political influence. The case of South Africa is unique, given its complex political history. The proposal to set up an SWF will create another avenue by which economic development can be promoted. However, given political exigencies in that country, outcomes will be heavily influenced by the political party in power. This could make implementation of the SWF relatively rapid, but could also potentially undermine the efficient use of the revenues for the benefit of current and future generations. The SWF must be carefully managed to ensure that it meets its stated objectives and has substantial impact on economic development.

Responding to Challenges from the Global Arena Due to globalization, Africa’s development in the past several decades has been characterized by impulses from beyond the continent itself. Africa has increasingly become an arena for the expression of geopolitical interests of emerging global powers, notably China. Looking ahead, African countries must be competitive in a world where productivity and innovation, especially in manufacturing, provide the basis for sustainable development. Africa’s economic integration, once regarded as mere political theatre, is today needed more than ever to boost scale economies on the continent through trade and investment. Chapter 11, by Muna Ndulo, is an insightful discussion of the links between trade, law, and development in Africa. It observes that although trade has been a powerful engine for growth in many parts of the world, providing countries with capital for the transition from agriculture and raw commodity production to manufacturing and skilled labor requiring enhanced human capital, Africa’s trade record has been dismal. Some fiftyfive years after independence, the continent’s economies remain inwardlooking, with relatively little manufacturing. In recent decades, Africa’s share of world trade fell to 2 percent, from 6 percent in 1980. While Ndulo acknowledges that the Multilateral Trading System has impeded Africa’s specialization in areas of its comparative advantage, such as food manufacturing, he believes that supply-side obstructions must be addressed urgently, noting that any small improvement in the continent’s share of global trade will make a big difference. He argues that trade in Africa is hindered by the diversity of national laws and complexity of rules for determining which system applies to a particular transaction. This absence of uniformity raises both the risk and cost of regional trade, as the outcomes of litigation are comparatively unpredictable. There is thus a strong case

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for harmonization of trade laws, although Ndulo cautions against wholesale adoption of legal transplants and notes that high-level expertise will be required to accomplish this important task. In Chapter 12, Oliver Ruppel and Tina Borgmeyer discuss the new economic and political constellation known by the acronym BRICS— which stands for Brazil, Russia, India, China and South Africa—and its relevance to Africa’s development. South Africa was a latecomer to the BRICS constellation. The original four members sought to be inclusive, with at least one member from Africa. Today, BRICS is mostly an expression of the emergence of the Asian powers, China and India. Russia, a former global military power, was attracted by the prospect of projecting economic and political power outside the traditional configurations of global geopolitical competition. Brazil, an economic giant in its own right, was a natural choice to represent Latin America. However, the most intriguing issue is the extent to which Africa, as a continent, could benefit from BRICS as a new force in the global arena, and what role South Africa would play. Ruppel and Borgmeyer note that BRICS regards South Africa as a gateway to Africa, and the body itself as a platform for dialogue and cooperation. If the BRICS nations can be champions for Africa in the global arena, it would be filling a lacuna. In Chapter 13, Jonathan Munemo and Eugene Nyantakyi discuss the relationship between product market competition and innovation using panel data gathered in Ghana, Kenya, and Tanzania since the early 1990s. The three countries provide interesting histories of the growth of their enterprise sectors during the past decades. Importantly, the data was collected under a regional enterprise development project financed by the World Bank. Munemo and Nyantakyi argue that their results suggest that competition-enhancing measures will foster more product innovation by incumbent firms in the sample countries. These measures include granting local firms greater opportunities to participate in global business activities through importing, exporting, and the entry of foreign firms. Reforms in regulatory barriers can also have a positive impact on innovation when market competition and productivity are stimulated by the increase in the entry rate of domestic firms. Some studies have also highlighted the importance of product market competition in fostering innovation-driven inclusive growth, which is currently lacking in African economies. In Chapter 14, Christopher Yenkey takes a look at the social dynamics of the propagation of local capitalism, notably recruitment of new investors on the local stock exchange, using Kenya as a case study. Kenya’s frontier stock market, the Nairobi Securities Exchange (NSE), experienced a ten-fold increase in the number of domestic retail investors between

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2006 and 2008, despite low average incomes, little prior experience with formal financial markets, and weak legal protections. New investors were recruited within communities characterized by geographic clusters of diverse tribal groups. The chapter discusses how the material information about this new financial opportunity is shared. Of interest is whether information is increasingly transmitted within social groups in areas of ethnic clustering and whether external sources of information (advertising) can counteract this social segmentation. Results suggest that profitable earlier investments by investors in both geographic and ethnic peer communities positively and simultaneously influence adoption of shareholding, but the influence of geographically proximate communities is approximately double that of ethnically similar towns. Yenkey concludes that Kenya and similar countries provide fertile natural laboratories for revising and extending social theories of economic action.

CHAPTER TWO FINANCING DEVELOPMENT IN SUB-SAHARAN AFRICA THROUGH STRUCTURAL TRANSFORMATION: THE IMPORTANCE OF INTERSECTORAL RESOURCE FLOWS ERIK THORBECKE Introduction In this chapter we will look at intersectoral flows, particularly between agriculture and other sectors at an early stage of economic development. From the start, agriculture has really been the main source of capital and labor for development—and thus for financing—in Africa. We will quickly examine the main features of poor sub-Saharan countries (SSA) and then talk about structural transformation, which is the form that these intersectoral movements have taken. At least up to the beginning of the new millennium, that is, until 2000, structural transformation in SSA was flawed. It has only been in recent years that we have begun to see some form of successful structural transformation on the continent, although it is still too early to know whether this is sustainable. However, for someone who has been rather pessimistic about Africa during the more than twenty-five years I have worked on economic issues particular to the continent, I now see the glass as half full rather than half empty. Following this discussion, we will look at the impact of the ongoing structural transformation on “inclusive growth”—the new darling phrase for the development community—while also trying to define the meaning of the term. We will look at the interrelationship among growth, inequality, and poverty, and examine the concept of pro-poor growth and what I prefer to call pro-growth poverty reduction.

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Financing Development: Stylized Facts The term “finance” has many meanings and dimensions. It might relate to personal and corporate finance; or it could refer to Wall Street, as well as to global finance more generally. It definitely refers to financial intermediation and the institutions, mostly banks, that make financing possible. The term also refers to financial instruments, including derivatives, credit default swaps, etc. Importantly, finance allows intersectoral resource flows and transfers from less- to more-productive sectors and activities, fueled by structural transformation. I have therefore chosen to adopt a general definition of financial development and economic growth. Long-term sustainable economic growth depends on the ability to raise the accumulation rates for physical and human capital, to use the resulting productive assets more efficiently, and to ensure the whole population has access to these assets. Financial intermediation supports this investment process by mobilizing household and foreign savings for investment by firms; ensuring that these funds are allocated to the most productive use; and spreading risk and providing liquidity so that firms can operate the new capacity efficiently (FitzGerald 2006, 1). What the definition says in short is that development requires the accumulation of resources. Sustainability requires that the whole population, both rich and poor, benefit from the use of these resources. We begin by exploring the relationship between finance and development within the typical setting of poor SSA countries at early stages of development, when agriculture is still the dominant sector in terms of output or employment. Here the bulk of households are small-scale subsistence farmers or are involved in the informal sector. This description captures the main features of some of SSA’s largest countries by population: Nigeria, Democratic Republic of the Congo, Ethiopia, Tanzania, Kenya, and Uganda. Between 2005 and 2010, the share of the labor force in agriculture fell from 68 to 54 percent in resource-rich SSA; from 52 to 47 percent in low middle-income SSA; and from 68 to 63 percent in low-income countries of SSA. In a rather short period of time, there was a significant fall in the share of employment in agriculture. However, many rural dwellers still depend on the production of domestic food crops and informal goods and services that are nontradable. They generally use traditional and rudimentary techniques—for example, very little fertilizer use in agriculture—and are too poor to save. Governments, both central and subnational, are weak, implying an institutional vacuum at several levels. The impact of foreign

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trade is not very significant, and foreign investment does not play a major role. The question then is, where do these countries get the resources they need for takeoff? Obviously, in one way or another, the resources have to come from within. The major mechanism is through intersectoral transfer out of agriculture, fueled by structural transformation. A first component consists of the resources that tend to flow out of agriculture automatically via the market mechanism whenever the rate of return on resources is higher in agriculture than in non-agriculture (typically in the incipient industrial sector). Japanese economists have done a lot of work on structural transformation; among others, Teranishi (1998, 281) has called this flow a “market-based resource shift.” I prefer to call it the “invisible financial hand.” In addition, there are resource flows that are policy-induced through direct intervention of the government. Therefore, it is useful to make a distinction, as Teranishi does, between 1) market-based resource flow and 2) policy resource flow, further broken down into a) net direct taxation, b) net indirect taxation, and c) infrastructure investment in agriculture. When comparing intersectoral resource flows among countries and regions, Teranishi (1998) found no significant difference in the (high) degree of direct and indirect taxation on agriculture among the four regions: East Asia, South Asia, Latin America, and sub-Saharan Africa—until the 1990s. However, the regional differences in infrastructure investment in agriculture were enormous, pointing to the significant role that infrastructure plays in facilitating the transfer of resources from rural to urban sectors. It should be noted that the process of capturing agricultural surplus is quite delicate. The goal should be to generate a reliable and continuous flow of net resources from agriculture to the rest of the economy through structural transformation. A lesson that has been learned from countries like Taiwan and South Korea, which were most successful in achieving both growth and equity during their development history, is that a continuing gross flow of resources should be provided to agriculture in the form of elements such as irrigation and inputs including fertilizer, with the addition also of research and credit combined with appropriate institutions and price policies to increase agricultural productivity and the potential capacity to contribute an even larger reverse flow. It is easier to capture a surplus from increasing growth than from stagnating growth. Let me now highlight, as an aside, the important contributions of T.H. Lee and Cornell University to the analysis of intersectoral flows in development. In the 1960s, we had here at Cornell a very distinguished agricul-

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tural economist, John Mellow. He had a Taiwanese student by the name of T.H. Lee, who wrote, as part of his dissertation, what is considered the classic book on intersectoral transfers in the process of development; his work was based on the experience of Taiwan. T.H. Lee became the first mayor of Taipei and then president of the country, and there is a distinguished chair in World Affairs at Cornell named after him. The point here is that Cornell played an important role in the doctrine of intersectoral transfers. When we look back to the past, developing countries taxed their agricultural sectors heavily, both directly via interventions such as artificially controlled prices for food and the marketing boards, and indirectly via an overvalued exchange rate on agricultural tradables. Notably, in many Asian countries, starting around the 1980s, a shift occurred from taxing to protecting agriculture, while in SSA the exploitation of agriculture continued until around 2000 before a gradual shift occurred.

Toward Structural Transformation Structural transformation is the most important source of internally generated finance throughout the secular process of development. As countries grow, the share of the labor force in agriculture falls, as does the share of agricultural output in GDP, with the latter declining faster than the former. So it can be underlined that structural transformation is the most fundamental regularity, but not a theory, in the development process. This regularity is shown in Figure 2.1. The vertical axes show, respectively, the share of the labor force in agriculture and the share of agriculture in GDP, while the horizontal axis is the log of GDP per capita in constant 2000 US$. For example, in Ethiopia (ETH) the share of labor in agriculture around 2000 was some 82 percent and that of agriculture in GDP was just below 50 percent. Tanzania (TZA) shows a similar pattern. In contrast, Mexico (MEX) had a labor share in agriculture of some 24 percent and a share of agriculture in GDP of below 10 percent. The wide differences between the agricultural labor and GDP shares reflect the spatial inequality in resource distribution generally found in these developing countries. In this cross-sectional illustration, covering about one hundred countries, you see this enormous regularity across countries: as per capita income increases among countries, the share of agriculture in labor and GDP decreases.

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Figure 2.1. Cross-section of the “Normal” Pattern of Structural Transformation Source: de Janvry and Sadoulet (2008), Figure 1 left panel.

Let us now look at it from the standpoint of the time path in different countries, beginning with Asia, as shown in panels a and b of Figure 2.2 on the following pages. Each one of these lines or curves represents a time path for a given country. In the first panel on the top you see what is typical of Asia, between 1960 and 2000. The structural transformation that took place in Asia tended to correspond to what we can call a normal transformation. As workers moved out of agriculture, they moved into more productive jobs and family income increased. Now let’s look at Africa up to early 2000s (Figure 2.3, panels a and b). How can we interpret the many meandering but essentially vertical lines? We can say that they indicate that workers were forced out of agriculture, perhaps into the informal sector, but not into more productive sectors of the economy. In some places, it was even worse than that. Workers were forced into sectors that were even less productive than agriculture. This is thus the equivalent of a migration of misery. So that as the share of agriculture in the labor force declines, per capita incomes also decline. This is what I would call flawed structural transformation, and that was typical of sub-Saharan Africa until the early 2000s.

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Figure 2.2a (top) and 2.2b (bottom). Structural transformation in Asia (key, page 20)

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Figure 2.3a (top) and 2.3b (bottom). Structural transformation in Africa (key, page 20)

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Figure 2.2a. Structural transformation in Asia, Panel A BD=Bangladesh, CN=China, IN=India, ID=Indonesia, KH=Cambodia, KR=Korea, MM=Myanmar, MY=Malaysia, PG=Papua New Guinea, PH=Philippines, PK=Pakistan, TH=Thailand Source: de Janvry and Sadoulet (2010), Figure 2. Figure 2.2b. Structural transformation in Asia, Panel B CN=China, LA=Lao People’s Democratic Republic, LK=Sri Lanka, NP=Nepal, VN=Viet Nam Figure 2.3a. Structural transformation in Africa, Panel A BJ=Benin, CD=Democratic Republic of the Congo, CI=Cote d’Ivoire, CM=Cameroon, NG=Nigeria, SN=Senegal, TD=Chad, TG=Togo, ZA=South Africa Figure 2.3b. Structural transformation Africa, Panel B. BF=Burkina Faso, BI=Burundi, G=Guinea, GH=Ghana, M=Malawi, ML=Mali, SD=Sudan

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The figures in this chapter are based on the World Bank’s World Development Report 2008, which was devoted to the role of agriculture in the process of development. While I have tried to update this information, it was difficult to find data on more than fourteen or fifteen countries (Figure 2.4). My tentative conclusion is that if one looks at the structural transformation, which took place between roughly 2000 and 2011 in those African countries, it corresponds much more with the structural transformation that we saw in Asia, with people being pulled out of agriculture to find more productive jobs elsewhere. Botswana, Mali, Ghana, and Liberia reveal rising shares of agriculture in total employment combined with higher per capita incomes, which is likely to reflect increasing productivity within the agricultural sector.

Figure 2.4. Recent Structural Transformation in Selective SSA Countries Source: Thorbecke (2014), based on World Bank (2013).

Additional evidence at the meso- and micro-levels provides some insight into the process of structural transformation in Africa. Based on a sample of over ninety demographic and health surveys between 1993 and 2011 covering twenty-four African countries, as well as other sources, McMillan (2014); McMillan and Harttgren (2015); and de Vries et al. (2015) explored structural transformation among occupational and sector groups. They derived the following conclusions:

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1) Structural transformation was a drag on economy-wide productivity during 1990–99, but contributed about half of the labor productivity growth during 2000–2011, with the other half coming from sector productivity growth. Moreover, there was remarkably high productivity growth in the most recent period. 2) Hence, the recent pattern of structural transformation fits the stylized facts of other successful regions (notably Asia), but contrasts with Latin America. 3) It was also found that countries with higher shares of employment in agriculture experienced more rapid declines in the share of employment in agriculture and more rapid increases in the share of employment in manufacturing (typically unskilled) and services. These trends being more pronounced for women. 4) Finally, over the last decade, young rural males were almost 10 percentage points more likely to report working in agriculture, and 12 percent more likely to report being in school. So what are the proximate causes of the apparently more successful turnaround of structural transformation during 2000s? The first reason was the spike in commodity prices, including agriculture. Second, governments have become more developmental, particularly in their treatment of the agricultural sector, which was the Achilles’ heel of sub-Saharan African in the past. There has been renewed commitment to agriculture—the cash cow to be milked to starvation by greedy politicians is now being gradually fattened. Examples include the African Union-supported Comprehensive African Agriculture Development Program (CAADP), which urges countries to devote at least 10 percent of their national budgets to agriculture and to ensure that agricultural output grows at least at 6 percent per year. Other correlates of the more successful structural transformation include some reduction in regional conflicts; larger flows of foreign direct investment; and above all, improved governance. It has been shown (Mo Ibrahim Foundation) that there is a significant correlation between the extent of structural transformation and the index of governance. This index shows that at least since 2000, the average polity score for SSA’s quality of governance has improved. Other correlates worth mentioning are improved instruments and institutions for financial intermediation, such as stock markets and commodity markets including the pioneering one in Ethiopia, rural formal banks and mobile banks, microcredit, cellphones, and the improved transmission of price information.

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Inclusive Growth Inclusive growth is the new paradigm of the development community. It is the climax of a long evolution. I think of it as emanating from the basic-needs doctrine. Although it has many definitions, perhaps the most comprehensive definition of inclusive growth is that of the Indian Planning Commission: “growth that reduces poverty and creates employment opportunities; access to essential services in health and education, especially for the poor; equality of opportunity; empowerment through education and skill development; environmental sustainability; recognition of women’s agency; and good governance” (Planning Commission, Government of India 2008, 2). The essence of inclusive growth is rapid and sustained poverty reduction, allowing all segments of the population to contribute to and benefit from growth. Moreover, inclusive growth refers to the pace and pattern of growth, which are interlinked. You might for example have 8 percent growth that does very little for the poor, or 5 percent growth that helps the poor much more. In the long term, focusing on productive employment is the main policy instrument. With respect to inequality, there is no firm agreement. The World Bank takes the view that growth that reduces poverty—however, marginally—is pro-poor. At the limit, a very high growth rate of GDP (say 10 percent) that only brings one household out of poverty is considered propoor; thus a reduction in inequality is not necessarily part of inclusive growth in the World Bank’s definition. On the other hand, the African Development Bank argues that reducing Africa’s high rate of inequality is absolutely essential and should be part of inclusive growth-—a view that I share—not only because reducing inequality is a moral imperative, but rather because increased inequality can lead to social and political conflicts, and may retard growth. So if one wants to accelerate growth, one should put more emphasis on reducing inequality. What is the macroeconomic evidence for inclusiveness? First, there is the quantum jump in per capita GDP growth in Africa, from an average of 0 percent during 1960–2000 to 2.5–3.0 percent during 2000–2010, with some spectacular cases. For example, between the two periods Angola’s annual growth changed from -2 percent to 10.4 percent; Ethiopia from -0.5 percent to 7 percent; Nigeria from 0.2 percent to 4.3 percent; and Tanzania from 0.1 percent to 5 percent. Second, headcount poverty fell from 58 percent to 48 percent during 1996–2010, still high but with notable improvement. However, the number of poor people in Africa increased from

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349 million to 414 million during the latter period, as a result of high population growth. As we all know, monetary income is only one of the many dimensions of human development, so let me give some evidence in support of other dimensions of human development. According to the UNDP’s Human Development Report 2014, of the fourteen best performers in terms of annual growth rate of the Human Development Index (2000–2013), eleven were from sub-Saharan Africa (UNDP 2014). Yet, as already noted, income inequality remains very high. Only about 28 percent of the labor force has stable (formal) jobs, while some 63 percent have vulnerable (informal) jobs. Moreover, social benefits are also unequally distributed. However, overall, we can conjecture that at the macro level, Africa’s recent growth has been more inclusive than in the past.

Some Strategic Issues to Make Structural Transformation More Inclusive The first strategic issue relates to how to define an appropriate agricultural strategy. Much depends on the initial conditions. In those countries where agriculture is still the “only game in town,” there is no other way than to continue to nurture agriculture. In other countries, where agriculture is no longer the dominant sector, emphasis could very well be on large-scale farms. The issue here is to what extent one continues to support small farms, as opposed to large farms. There have been improvements in non-traditional agricultural exports across Africa—for example the so-called “Blue Skies” (prepared fresh fruits and juices) in Ghana and South Africa; cut flowers in Ethiopia and Kenya; and fresh vegetables in Madagascar. Related to this is what form and extent large-scale commercial farming in Africa should take (Ali and Deininger 2014). Many richer countries have bought large tracts of land, for example in Ethiopia, to embark on commercial farming. What is the risk of it? In countries where rapid employment creation is crucial, when you start land consolidation, you substitute capital for labor. It makes it difficult for the poorer groups to move into more productive employment. However, rural infrastructure is key to the facilitation and lubrication of structural transformation. It would enable orderly migration to urban areas and be a bridge between agriculture and other sectors of the economy, and rural and urban regions. However, it is important to ensure balanced growth by supporting sustainable industrialization in the urban sector to provide a market for rural produce. For all the jobs lost in agriculture, there must be new jobs created in other sectors.

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The second strategic consideration relates to the interrelationship between growth, inequality, and poverty that is crucial to the whole concept of inclusive growth. Some time ago, I studied the process of globalization and how it affected the poor in Africa, Asia, and Latin America (Nissanke and Thorbecke 2010). It is very clear that globalization is much like gravity, and there is very little a country can do to protect itself against some of its negative consequences. It is possible, to some extent, to moderate some of these negative effects, and enhance some of the positive effects, but only within a very limited scope. On the other hand, the choice of a development strategy is much more endogenous. It depends on the government and domestic institutions, and some governments have been much more pro-poor in their decisions than other governments. When it comes to inequality, the old view was that income inequality was necessary for economic growth because the rich save a higher proportion of their income, so this provided a higher flow of savings, which could be converted into investment, and, of course, investment was the key to economic growth. In a way, it was a cruel way of rationalizing an unequal society as a prerequisite for economic growth. What I would call the “New Political Economy of Development” has built a strong case for a totally different approach, arguing that high inequality, through a great number of pathways, including political and social conflicts, is bound to reduce future growth. There is also a recent paper by Ravallion (2012), which indicates that high initial poverty dampens subsequent growth. On the basis of this type of evidence, one could make a case for a strategy focusing on policies and interventions that could reduce poverty directly, as well as inequality, while at the same time enhancing productivity and thereby boosting growth. This is what I call the pro-growth poverty reduction strategy, which could supplement the more traditional pro-poor growth strategy, which runs from higher growth and lower inequality to lower poverty. In that case, the intervention point is on the pattern of growth itself. There are many institutions in Latin America that have been very successful in reducing poverty and increasing productivity, such as Opportunidades in Mexico and Bolsa Familia in Brazil. Over the last six or seven years, we have had similar institutions formed in some African countries, so I am becoming more sanguine about their impact on the sustainability of the ongoing growth spell in Africa.

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Conclusions The intersectoral resource flows generated by structural transformation provide the main source of financing development, particularly in its early stages. The transfer of capital (the so-called agricultural surplus) is often invisible. It operates through market forces. On the other hand, some of the capital required to fund the incipient industrial and service sectors is generated through taxation and turning the terms-of-trade against agriculture. A significant part of a successful structural transformation consists of labor movements (low productivity agricultural workers moving into more productive jobs in other sectors). While the prevailing, flawed structural transformation that sub-Saharan Africa underwent prior to 2000 could be equated to a “migration of misery,” the more recent structural transformation appears to have contributed to a more inclusive growth pattern, according to recent macro-, meso-, and micro-evidence. It is still too early to confirm that the present growth and development spell is sustainable. The Economist has talked about an African renaissance, and many authors have written about an African growth miracle. But while there are still many obstacles to overcome, there is some scope for optimism.

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References de Janvry, A., and E. Sadoulet. 2010. “Agriculture for Development in Africa: Business as Usual or New Departures?” Journal of African Economies 19(Suppl. 2): ii7௅ii39. de Vries, G. J., M. P. Timmer, and K. de Vries. 2015. “Structural Transformation in Africa: Static Gains, Dynamic Losses.” Journal of Development Studies 51(6): 674௅688. Ali, D.A., and Deininger, K. 2014. “Is there a Farm-size Productivity Relationship in African Agriculture? Evidence from Rwanda.” Policy Research working paper WPS 6770. Washington, DC: World Bank Group. FitzGerald, Valpy. 2006. “Financial Development and Economic Growth: A Critical View.” Background paper for World Economic and Social Survey 2006. McMillan, M., and K. Harttgen 2015. “Africa’s Quiet Revolution.” In The Oxford Handbook of Africa and Economics. Vol 2: Policies and Practices, ed. C. Monga and J. Y. Lin, 39௅61. New York: Oxford University Press. Nissanke, M., and E. Thorbecke. 2010. The Poor Under Globalization in Asia, Latin America, and Africa. Oxford: Oxford University Press. Planning Commission, Government of India. 2008. Eleventh Five-Year Plan (2007࣓2012). Volume 1: Inclusive Growth. New Delhi: Oxford University Press. Ravallion, M. 2012. “Why Don’t We See Poverty Convergence?” American Economic Review 102:1, 504௅523. Teranishi, J. 1998. “Sectoral Resource Transfer, Conflict, and Macro Stability in Economic Development: A Comparative Analysis.” In The Role of Government in East Asian Economic Development: Comparative Institutional Analysis, eds. M. Aoki, H.-K. Kim, and M. OkunoFujiwara, Chapter 10, 279–322. Oxford: Clarendon Press. Thorbecke, Erik. 2014. “The Structural Anatomy and Institutional Architecture of Inclusive Growth in Sub-Saharan Africa.” WIDER Working Paper 2014/041, United Nations University–World Institute for Development Economics Research (UNU–WIDER), Helsinki. UNDP (United National Development Programme). 2014. Human Development Report 2014— Sustaining Human Progress: Reducing Vulnerabilities and Building Resilience. New York: UNDP. http://hdr.undp. org/sites/default/files/hdr14-report-en-1.pdf. Accessed May 30, 2016.

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World Bank. 2013. World Development Indicators. Washington, DC: World Bank.

CHAPTER THREE ASSESSING RESULTS-BASED AID FOR FINANCING DEVELOPMENT IN SUB-SAHARAN AFRICA STEPHAN KLINGEBIEL AND HEINER JANUS Introduction In principle, all development cooperation approaches are aimed at achieving “results.” The international debate on results-based approaches differs from previous debates in that development cooperation in practice often focuses on inputs and processes. In many cases, aid resources are intended for investment (in the construction of schools, for example) or advisory services (for the education sector, for instance), but it is rarely possible to show “results” in terms of measurable improvements in the well-being of people (i.e., in the sense of outputs and, especially, outcomes). Instead, aid success is recorded through input and process indicators, showing, for example, whether expenditure on a country’s education sector is increasing or whether agreed reform documents (such as a sectoral strategy for education) have been approved. Although documenting reforms and expenditures indicates how development activities in a partner country can be assessed, the information content is limited for two reasons. First, it is often unclear whether the intended results have actually been achieved. For example, are more children being educated, and what is the quality of education that graduates have received? Second, what did development aid contribute exactly? If results have been achieved, are they causally linked to the development cooperation activity? Results-based approaches seek to identify quantifiable and measurable results that can be attributed, as directly as possible, to the effects of development cooperation. This makes them a promising approach for implementing development goals, where the link between aid intervention and development results needs to be documented. Results-based ap-

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proaches aim to establish a close link between aid disbursements and incentives to encourage development results. These results-based approaches are envisioned as overcoming several drawbacks of input-oriented aid, such as “no clear result evidence line,” heavy transaction costs, and the bypassing of partner countries’ national systems. Knowledge and understanding of conceptual underpinnings and actual experiences in implementing results-based approaches are, however, still limited (Klingebiel 2012; Perrin 2013; Janus 2014). This chapter therefore adopts an exploratory approach in order to better understand the concept of results-based approaches and to document initial experiences.

Overview: A Brief Literature Review Research on results-based approaches relates to several literature strands on foreign aid, including literature on the impact of foreign aid, aid allocation and conditionality, and aid modalities. The empirical literature on the impact of foreign aid often focuses on demonstrating either a positive (Radelet et al. 2004; Minoiu and Reddy 2010; Addison et al. 2013) or negative effect of aid on economic growth (Easterly et al. 2003; Rajan and Subramanian 2008). Evidence of aid’s overall impact on economic growth remains mixed. In addition, there is more nuanced analysis on whether aid promotes human development, especially in the areas of education and health. Here, substantive proof exists that aid can reach intended beneficiaries and can provide them with key services, which increases human welfare (Fielding et al. 2006; Morrissey 2010; Kenny 2011). Depending on the size and level of some results-based approaches, researching them can contribute to the debate regarding the macro-effects of aid, including effects on growth and human development. Literature on the impact of foreign aid also increasingly focuses on micro-level interventions that measure the effects of individual aid interventions within a confined environment. Especially rigorous microeconomic impact evaluations, often including the use of randomized control trials, have demonstrated the potential for well-designed project interventions to generate development results (Duflo and Banerjee 2011; Karlan and Appel 2011). Small-scale, results-based approaches, therefore, strongly relate to research that focuses on demonstrating and comparing the measurable effects of individual aid programs. Another strand of relevant literature analyzes aid allocation and conditionality. Donors have a history of making aid disbursements that are conditional on policy reforms in recipient countries. There are broadly two generations of conditionality found in the literature. First-generation con-

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ditionality was aimed at reform of economic policy, mainly market liberalization, as promoted by the World Bank and International Monetary Fund through structural adjustment programs (Stokke 2004). Second-generation conditionality, in contrast, is more closely related to political conditionality, often linked to accountability, transparency, and recognition of human rights (van de Walle 2005; Collier 2007). As part of second generation conditionality, scholars have argued that aid is more effective in the right policy environment (Burnside and Dollar 2000) and have therefore proposed “performance-based allocation” of aid (also called aid selectivity). Based on those findings, the U.S. introduced the Millennium Challenge Corporation (MCC) in 2004; research in this regard indicates that aid allocation can support the reform-mindedness of recipient countries and that an “MCC effect” exists (e.g., Öhler et al. 2010; Parks and Rice 2013). Yet, there are also indications that aid conditionality possesses only limited effectiveness (Collier and Dollar 2002; Killick 2004; Temple 2010), due at least in part to the inherent motivations of donors to disburse aid budgets, thereby undermining the effectiveness of their conditionality. In response to this challenge, donors attempted to move towards ex-post conditionality (Svensson 2003; Booth 2011)—meaning that donors should switch from disbursing according to prespecified menus of policy changes to allocating aid on the basis of periodic overall assessments of government results. This modification to second-generation conditionality might avoid issues such as moral hazard (e.g., interruption of reforms after the aid transfer has taken place); the model follows a disbursement logic in which the partner country is expected to deliver results first before resources are transferred. Research on the contract character of aid is devoted to these aspects (e.g., Azam and Laffont 2003). Such an approach promises to provide fiduciary assurances to donors but also requires a better understanding of the links between specific policy actions and expected medium-term outcomes (Koeberle et al. 2005). While the idea of ex-post conditionality has been debated in the academic literature for some time, it is only recently that aid programs have turned this thinking into practice in the form of results-based aid (RBA). One important distinction between second-generation conditionality and conditionality in the context of results-based aid is the nature of conditions. Second-generation conditionality focuses on political conditionality aspects, meaning conditions that are not directly related to the specific aid intervention. Aid is used to incentivize reforms of the broader political system beyond the scope of donor-funded interventions in specific sectors. Conditionality in the context of several results-based aid approaches, however, explicitly addresses technical triggers closely related to the outcome

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of a specific aid intervention. For example, disbursements for education and health programs would be based on the independent assessment of “school completers” or people vaccinated. The idea behind this more technical type of conditionality is to avoid politicized donor-recipient discussions and focus rather on implementation challenges. Whether this theoretical distinction between political conditionality and technical triggers is feasible in practice will be revisited in the final section of this chapter. Lastly, results-based approaches relate to literature and policy debates on the effectiveness of different aid modalities (Tilley and Tavakoli 2012). The debates on aid effectiveness—as presented in events in Paris, Accra, (Wood et al. 2011) and Busan—have established a set of standards and principles in order to make aid more results-oriented. Results-based aid is one major attempt to apply these aid effectiveness standards in a new modality for organizing aid relationships between development partners and partner countries. Yet, it is disputed whether results-based aid is able to overcome traditional weaknesses of other aid modalities and whether results-based aid creates additional challenges (see, for example, de Renzio and Woods 2008; Pereira and Villota 2012). Overall, there are open questions regarding whether results-based approaches can improve the impact of aid, including on the macro- and micro-levels; whether results-based approaches can set effective conditions for partner countries to reform; and whether results-based approaches represent a modality that conforms to principles of effective aid. These questions are pertinent to the overall discussion on the future of aid. In order to assess the potential and limits of results-based aid, this chapter proceeds in four steps. First, the concept of results-based aid is defined. Second, potential advantages and disadvantages are introduced. Third, the chapter presents initial practical experiences, including the case of results-based aid for fiscal decentralization in Ghana and Tanzania. Finally, the chapter draws conclusions.

The Concept Terminology Definitions are a challenge in the debate on results-based approaches since there is no common terminology. The key feature of these approaches is that payments are only made once a predefined result has been achieved. In this regard results-based approaches differ from other aid approaches, in which funds are used to finance specific inputs for achiev-

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ing results (e.g., schools to improve education, or medical equipment to improve the health situation of the population). Several competing terms and concepts are used in the discussion on results-based approaches (e.g., output-based aid, performance-based aid, results-based funding). Yet, there is a growing international consensus on definitions (see, for example, Birdsall et al. 2011; de Hennin and Rozema 2011; Pearson 2011). This chapter focuses on results-based aid (RBA) and provides the following definition: in general terms, results-based aid is a partnership between a development partner (donor) and a partner government (recipient). A main feature of results-based aid is based on the introduction of an ex-post conditionality concept: a contract between both partners that defines incentives to produce measurable results. Aid disbursements or non-disbursements are directly linked to these independently verified measures of results. If these results have been achieved, the aid disbursement will be released; if they have not, the aid disbursement will not take place. It is necessary to agree upon a “unit price” in advance (e.g., how much aid is provided per student passing the final exam). Donors are not involved in the implementation process (“hands off”).

Key Characteristic The main characteristic of results-based aid is the link between aid intervention and strong incentives to encourage results. The main underlying assumption is that, in the past, aid approaches focused mainly on inputs or processes, and only in some cases on outputs. Examples of aid interventions that are directly oriented towards results are rather rare. Typical aid interventions, for example in the education sector, focus on providing the necessary inputs for achieving a desired result. Inputs in this regard might include providing advice to the ministry of education in order to develop a new educational concept or a strategy for increasing school enrollment rates. On the investment side, an input-based intervention might consist of funding new primary school buildings or establishing a specific education budget target as a minimum share of the total national budget (e.g., in the context of sector budget support). However, providing inputs does not always lead to the desired results. For example, even with substantial amounts of consulting and investment in school buildings, school enrollment rates and individual educational achievements of children might not increase. Reasons for this apparent lack of results possibly include incentives at a household level to keep children at home, or a ministry in charge of education that has had no real political will to implement an effective

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sector policy to ensure that schools are staffed with adequately trained teachers and equipped with teaching materials. Furthermore, even if enrollment rates improve after the donor intervention, it may not be possible to determine whether this success can be attributed to the intervention or to some other cause. Results-based aid aims to address this challenge. At least on the conceptual level, the link between the donor intervention and the objective aspired to, in terms of measurable results, is a close one, since the donor intervention provides strong incentives for results. In the present chapter, results are defined as the direct and indirect effects of inputs and activities. We can distinguish between different levels of results. Outputs are normally technical results (for example, a newly constructed school). An output might lead to the next level: outcomes (for example, increase in enrollment rates because new school facilities are available). The most ambitious level of results is impact. Impacts are defined as wider developmental effects (for example, poverty reduction due to improved educational outcomes). It can be difficult to always make a clear distinction between different categories along an impact chain. For instance, depending on the point of view adopted, an increase of a sector budget share might be defined either as an input (e.g., to give more priority to a sector) or as a result if a larger budget is seen as an end in itself (Pearson 2011, 4).

Figure 3.1. Results-based Aid—Impact Chain Source: Author’s own representation

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Results orientation and results management in the framework of aid have many different forms. On a technical level, aid agencies have developed a number of tools for focusing on results (see, e.g., OECD-DAC and World Bank 2008; CoP-MfDR 2011; World Bank 2011, 35). Examples include results-focused strategies, results-oriented planning and operations tools, and monitoring and evaluation systems that focus on results. However, there is a distinction between results-based management that is a crosscutting tool for aid agencies to organize their work and results-based aid that refers to a specific financing modality.

Phasing of Results-Based Aid Results-based aid is organized in three phases, with a clear division of labor between the aid provider and the aid recipient. The first phase is the preparation and finalization of a contract between a development partner and the partner government. This step is crucial in several respects. Both contract partners have to identify an area, sector, or a specific objective that is important for the development process of the country and also suitable for results-based aid. The selection process presents several challenges. For example, social sectors such as education and health quite often receive more support from donors than do other sectors. If a high level of support in a given sector is available, it could be difficult to identify a relevant “result” since a number of other interventions are being funded already. In addition, a results-based aid program might even be in competition with other interventions in certain cases. For instance, a partner country that does not achieve the results agreed upon with one donor could try to substitute this financing gap with funding from another donor. Here, the incentives set by results-based aid would be diluted. Other important considerations in the preparation phase are related to the duration of the contract and the sustainability prospects of the supported area (e.g., the question of how the partner country is going to deal with the situation if and when donor support comes to an end). Also, contract partners have to agree on a measurable result and an appropriate indicator or set of indicators. A key task is to ensure that baseline data are available or can be collected. Further, the process for data collection and data analysis has to be discussed. Finally, a “price per unit of progress” has to be identified. The contract partners must discuss and agree upon a results performance level that is appropriate. (For example, at what level do we reward “additional” students passing the final exam? Is the level achieved last year an appropriate starting point, or should we use an average of the last few years?)

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The second phase of organizing results-based aid is characterized by implementation of the activities necessary to achieve the desired results. The nature of the activities could vary. One major bottleneck could be inadequate funding for a task, with a government unwilling or unable to provide additional resources. Perhaps insufficient capacity is a major obstacle, and the government might not agree to take specific remedial action (additional staff, training for staff, or implementation of a retention strategy, for example). Other possible obstacles could be related to an overall power game within the government. However, as aid disbursement now depends on results, this could impact internal decision-making processes. Most importantly, the partner country is in charge of the whole implementation process. The third phase is based on an assessment of the progress made. This assessment should generally be conducted by a third party in order to ensure high-quality, incontestable data. The data will serve as the basis for the calculation (price per unit of progress) of the aid disbursement, since incremental progress is to be rewarded. The progress assessment is to be carried out on a regular basis (e.g., annually).

Potential Advantages and Challenges Practical experience with results-based aid programs is limited (see Klingebiel 2012; Perrin 2013; Janus 2014). In the area of budget support, the European Union has been using a results-based aid-type instrument in the form of variable tranches, which are based on performance agreements. The result indicators used in this context relate in particular to the health, education, and water sectors. Experience with performance-based tranches in major budget support approaches has been positive, since an incremental payment procedure makes development aid inflows predictable to some extent and acts as a performance incentive. The U.S.’s Millennium Change Corpporation (MCC) program similarly adopts a resultsbased approach, in that aid allocations for different countries are based on meeting the requirements set out in a list of indicators. The UK’s Department for International Development is currently implementing several results-based aid pilots under the label of “payment by results.” In 2012, the World Bank added the Program for Results, a results-based approach, to its set of instruments. Against the background of ongoing aid debates, several general considerations can be discussed concerning results-based aid—some of which might be relevant to one specific results-based aid type, but not to another. Potential advantages of results-based aid include:

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x Action is directly aimed at providing incentives for results: The behavior of all actors (development partners and partner governments) is significantly influenced by the results. There are direct links between the aid interventions and incentives (which might lead to results); the benefits could be more immediate and quantifiable. x Incentives for performance: The input of aid creates incentives for the partner country to perform. This performance orientation can have a spillover effect into other sectors of the partner country. x Strengthened ownership on the part of the partners and partner government responsible for implementation: The task of achieving the goals lies with the partner government. The donors have no responsibility for implementation. This strengthens the partners’ political and administrative systems. At the same time, the approach might be supportive of more mutual accountability. x Better verification of the results of aid: Closing the “attribution gap” (proving a direct causality of aid measures and incentives that lead to results) could be more successful in specific cases. This can help donor countries to demonstrate the concrete benefits of aid (visibility of the development partner). However, there might be a risk of simplistic causal “attributions,” especially in those cases where results were achieved; results-based aid does not lead to an easy and automatic attribution of results to aid interventions. 1 Possible disadvantages and limits of results-based aid include: x Responsiveness of the partner’s political system to incentives: The results-based aid concept assumes that the partners are open for incentives to perform better. This applies to those partner countries that show a strong performance orientation (“good performers”), or at least where there are areas of access, such as in specific, viable institutions (“pockets of effectiveness,” see Roll 2011). However, the literature provides examples—especially regarding low-income and highly aid-dependent countries—where those favorable conditions are nonexistent or only partly assured. Particularly, research on political systems in a number of sub-Saharan African countries shows evidence for systemic nonperformance in core areas of service delivery (see, e.g., Chabal and Daloz 1999; van de Walle 2005). x Adverse incentives, unintended consequences, and nonsystemic strategies: Generally speaking, there is a danger of setting adverse

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x

x

x

x

x

x

incentives; a strong focus on a specific outcome could tend to result in nonsystemic analysis and strategy. The pressure to achieve certain goals can thus lead to the neglect of other priorities in the same sector. Indicators that might not be entirely suitable to this approach jeopardize the implementation of policies that are too heavily focused on quantitative goals.2 Capacity: The approach implies that the partner countries have the capacity to achieve results. If their capacities and their public financial management system are deficient, this does not seem realistic. Sectors and data: Results-based aid cannot be implemented equally well in all sectors. Social sectors, such as education and health, as well as sectors dealing with infrastructure services (transport, public water supply, etc.) that can be more easily measured are well suited to results-based aid. In other sectors it may be harder to measure results or to reach agreement on them with partner countries (such as with complicated agreements on good governance), and the direct effects cannot always be clearly shown as wider outcomes. This applies also, for example, to various areas of public financial management. Losing entry points for policy dialogue / delinking (some) resultsbased aid approaches and the political context: When results-based aid involves an automatic mechanism for payment following the achievement of certain goals, difficulties can arise if a development partner is forced to pay out, even in the face of an unfavorable political environment such as massive governance problems (including serious human rights abuses). Results-based aid is not an instrument for expanding opportunities for policy dialogue. Insufficient pre-financing capacities: In the context of this approach, pre-financing by the partner country is intended and may even be necessary. With tight budgets in a number of low-income countries, this could be a major obstacle.3 There is further risk that other aid resources in a country could be redirected to this end. Fiduciary risks: Results-based aid risks could be similar to program-based approaches (such as budget support or pooled funding mechanisms) in terms of fiduciary challenges (Leiderer 2012). Since aid disbursements are not tied to specific activities or procurement procedures, fiduciary risks might be a relevant challenge. Time horizon: Results-based aid can create a short-term perspective, because it may lead to a focus on results that can be achieved quickly. Results that can only be achieved in the medium or long

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term might clash with short-term political rationales (desire for reelection, for instance.) x Factors out of the government’s control: In those cases where results agreed upon are not reached because of factors beyond the control of the government, the effect of incentives for performance vanishes, because disbursement of results-based aid funds does not take place regardless of the development-orientation of the government. For example, if a partner government faces the strong need to cut a budget because of the overall economic situation (due to an international crisis or unfavorable terms of trade), there could also be the need to reduce the budget line for achieving results. x Danger of unambitious results: Whether results are realistic or unrealistic is often vague. Since partner countries and donor agencies have an interest in disbursing the rewards, there might be an implicit tendency to identify less ambitious results. Some of the limits and technical challenges mentioned above could be tackled. For example, in those cases where insufficient pre-funding capacity would not allow the use of results-based aid, an adjustment of the approach is reasonable. Several options might be considered: x The donor could set up a system where (partial) pre-funding is provided, for example, for the first expected cycle of results. However, this course of action might contribute to a significant reduction in the intended incentive and pose a challenge if results are not achieved. (How should reimbursement be organized in case of nonperformance? Is this procedure really enforceable?) x Another option might be to reimburse the interest paid in cases where the recipient borrows from the capital market to enable making the necessary investments. However, even if a reimbursement was agreed upon in advance, there could be other effects on the recipient’s budget (e.g., due to borrowing limits set by the International Monetary Fund). Further provisions could be included to specifically support the capacity aspects and reliability of data; regulations of this type are included, for example, in the new approach of the World Bank. An upfront investment, earmarked for building the capacities of the institutions concerned, could be integrated into results-based aid. This amount could be provided in advance and spent in line with an agreed-upon approach (such as tendering of capacity-building activities in the specific area). A similar approach might be used to improve the quality of data needed; for example, requir-

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ing an agreed-upon amount or share of aid to be used to ensure the regular provision of reliable data. Regarding results-based aid, there appears to be a rather high probability of low disbursement due to poor or non-performance (at least in those cases where ambitious targets have been set). On the one hand, the possibility of partial or non-disbursement is an important feature of resultsbased aid. It is the intention of the approach to establish a strong link between performance and the provision of aid. If the aid amount is finally made available to the partner country in some way, even in a case of nonperformance, there could be an adverse impact on the defining incentive structure. Partial or non-disbursement, however, is a crucial challenge for the partner country in terms of the predictability of aid.4 In addition, such a situation could lead to challenges for the donor (aid management) and to questions about the impact of the country strategy. For example, if the government of the partner country is not able to perform (i.e., to provide results in accordance with the results-based aid agreement) solely due to exceptionally unfavorable international conditions (reduced budget because of adverse international market prices for relevant commodities, for example), the donor could be pressured to disburse despite nonachievement of results. Typically, results-based aid is associated with interventions in social sectors (often education and health) and sometimes with interventions concerning other direct service delivery activities (such as access to sanitation). These intervention areas have some specific features: x Development results are easily identified. In many areas, international and national objectives (e.g., Millennium Development Goals or national poverty reduction strategies) and/or international standards can be used for reference. x Results are measurable. x Data and baseline information is often available, or easy to collect. High additional transaction costs can normally be avoided. x Intense disputes are not expected between the different parties over the definition of results, the indicators, the applied methods, and data. The application of results-based aid in other areas appears to be more challenging. For instance, applying results-based aid to governance presents the challenge of finding indicators that capture quantifiable results on the outcome or impact level. In addition, there are political sensitivities involved when donors and partner countries are required to mutually agree

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upon results related to politicized issues such as human rights or democracy promotion (Klingebiel 2012). Thus, within the governance sector, an area such as fiscal decentralization—where measurements are technically straightforward—is more suitable for results-based aid. The sector of fiscal decentralization is also characterized by good availability of baseline data for measuring progress in improving financial management performance. In fact, donors already have some experience with implementing performance-based grant systems in the area of fiscal decentralization (Steffensen 2010), and the World Bank has initiated several performancebased grant systems under their Program-for-Results Financing (PforR) (World Bank 2016). Therefore, experience with performance-based grant systems can offer valuable insights into current practices of donors in implementing results-based aid.

Initial Experiences with Results-Based Aid in Ghana and Tanzania There is only limited evidence of initial implementation experiences, as most results-based aid pilot projects are still at the conceptual stage or in their early years of implementation. Also, there are only a small number of pilot programs that conform to the “pure” definition of results-based aid as provided in this chapter. Despite these constraints on case selection, the two specific country cases, Ghana and Tanzania, illustrate some of the potentials and limits of results-based aid in practice (Janus 2014). Both countries are so-called “donor darling” countries that receive significant amounts of aid and in which donors are keen to invest in innovative aid modalities. The findings are tentative and only indicate specific initial experiences in the implementation of results-based aid in the sector of fiscal decentralization. Although the results cannot be generalized beyond the context studied, they do offer important insights into potential challenges for implementing results-based aid. The District Development Facility (DDF) in Ghana, supported by Canada, Denmark, France, and Germany (Ministry of Local Government and Rural Development 2012), and the Urban Local Government Strengthening Program (ULGSP) in Tanzania (World Bank 2012)—one of the World Bank’s first Program-for-Results projects—are results-based aid pilots in the area of fiscal decentralization. The DDF in Ghana has been running since 2008, and the ULGSP started in 2013. Both programs aim to improve the performance of local governments, provide decentralized infrastructure, and enhance public service delivery at the local level. They rely on annual independent assessments of local administrations against key

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public financial management indicators that form the basis for disbursements. Results of the annual assessments and the underlying contracts defining indicators and disbursements are public, and local administrations can use the funds in a discretionary manner. Both programs, therefore, largely comply with the criteria for defining results-based aid, with one exception. Results-based aid indicators in decentralization mostly target the input or output level—not the level of outcomes or impact as envisioned by the results-based aid model. Decentralization programs focus on resource management and adopt indicators that measure processes (reflecting planning, budgeting, financial management, etc.). These indicators are viewed as indicators of intermediate results or proxy results, which are important prerequisites for achieving service delivery outcomes. There is a tendency to predominantly rely on these process indicators, as local administrations are mostly responsible for intermediate activities that can then lead to beneficial development outcomes. A number of challenges related to the results-based aid modality can be observed. First, in both countries the adoption of the results-based aid modality was mostly driven by donors, and the design program was largely developed by donors. This is understandable, given that both programs are pilots, but it is important that partner countries take charge of choosing and designing results-based aid programs. Related to this question of ownership, both programs also show mixed records regarding adherence to other principles of aid effectiveness. For instance, there are signs of greater harmonization with other donors and use of the country’s national systems, but both programs also have required additional administrative structures that had to be created, thereby duplicating structures of other donors or the partner country. This undermines efforts towards alignment of aid interventions with partner countries’ own systems. A second challenge relates to the role of conditionality and setting coherent incentives in results-based aid programs. Although disbursements are based on technical triggers in both countries, there are also political debates on how to adjust conditions for disbursement. In Ghana, the public financial management of districts improved significantly in the first years of the program, but then a performance plateau was reached. In 2011, most districts qualified for grants and scored highly in the assessments (Ministry of Local Government and Rural Development 2012). While this is largely a positive development, it also means that program incentives and indicators lose relevance once a critical number of local governments meet all targets. Here, indicators need to be adjusted in order to make incentives more relevant again.

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These adjustments may be influenced by the converging interests of donor and partner countries. The donor often has an interest in disbursing, because aid agencies typically reward the actual disbursement of available aid commitments. The partner country, too, wants to mobilize the maximum available resources. Local politicians might further exert pressure on the ministry in charge to disburse funds, even when results have not been achieved by local governments. In order to avoid settling for unambitious results, partners and donors have to both ensure that indicators remain relevant and resist disbursement pressure. They need to work jointly to develop a coherent incentive mechanism that is able to enforce its own conditions. This is both a technical and a political challenge. Therefore, partners and donors should work together towards building a resultsoriented culture in which results-based aid can be an element of a broader toolbox of aid modalities. At the same time, this means that the aid allocation within one country should only be partly and not entirely resultsbased. Finally, in both countries the results-based aid programs only represent a small part of a larger set of decentralization activities. Thus, both cases clearly underscore the importance of understanding the local political context. There are no signs of adverse incentives set by the results-based aid programs, but both cases demonstrate the need to carefully adapt program incentives to the local political economy of decentralization. For example, in Ghana the continuous creation of new districts at the local level, partly financed through donor activities, presents the challenge of “recentralization” (Grossman and Lewis 2014). In Tanzania, donors in the decentralization sector also implicitly supported a system that seeks executive expansion and centralized government control without the decentralization of resources that would give localities real power (Tripp 2012). These broader structural features of the decentralization process need to be understood thoroughly in order to design meaningful incentive systems for improved performance of local governments. In sum, experiences from Ghana and Tanzania underscore the need for designing results-based aid modalities that adhere to aid effectiveness principles (such as ownership, harmonization, and alignment), the difficulty of creating coherent incentive mechanisms, and the challenge of adapting results-based aid programs to the local political context. Despite these challenges, both cases also clearly demonstrate the potential of resultsbased aid. Both programs are thoroughly designed to encourage increased levels of performance, and both programs have set effective incentives for achieving results. In Ghana, a number of potential benefits, such as improved financial management and greater interaction between local gov-

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ernments and local citizens, are already observable. District officials report that competition between districts has put local government “on their toes” to perform, and interaction between district administrations and local citizens has increased, thereby also strengthening local accountability structures. In terms of conditionality, experiences in both countries show that the dialogue between donors and recipients is mainly focused on more technical discussions of implementation challenges related to the resultsbased aid program.

Conclusions The potential benefits and limits of results-based aid strongly depend on the specific approach and design. The international debate is dealing with a variety of different approaches in the field of development aid. The spectrum ranges from a more results-oriented approach in the area of budget support (macro and sectoral levels) to new types of projects that are intended to push one specific result (subsectoral level or “one result”specific results-based aid). All approaches have one common feature: they create incentives for achieving results. The analysis shows that if resultsbased aid programs are properly designed, they can become an important aid modality. While results-based aid can become an important tool for developing countries overall, there may be limited scope for applying demanding results-based aid programs in fragile situations or countries with weak institutions. The discussion on the potential advantages and disadvantages of results-based aid reveals a number of key considerations that should be included in the design and implementation of results-based aid. For instance, there can be a significant risk of adverse incentives and nonsystematic strategies, if aid focuses too heavily on one measurable result and resultsbased aid is only donor-driven. In addition, there is a bias of results-based aid in favor of performing countries. The likelihood of “good performance” (achieving results) is more pronounced in cases in which countries have good leadership structures, planning and implementation capacity, and a functioning public financial management system. Opportunities for identifying measurable and quantifiable results are straightforward in social sectors and several (basic) infrastructure-related areas. The governance sector is, in general terms, less favorable in this regard. “Political governance” issues, such as political freedom or human rights, do not appear to be suitable for results-based aid approaches. However, other governance areas have the potential to be included; this applies especially to public financial management and fiscal decentralization. The

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cases of Ghana and Tanzania demonstrate how results-based aid can work in the area of fiscal decentralization. Further, results-based aid might be regarded as a potential alternative aid modality to budget support, especially in times of waning political support for the latter approach. Overall, donors face the challenge of designing results-based aid programs that introduce strong incentives for achieving results while retaining flexibility to operate in different policy environments. Currently, there are still knowledge gaps regarding the conceptual basis and implementation experience of results-based aid, and more research is needed. Against the background of the analysis provided above, the following conclusions are drawn. First, stand-alone approaches of results-based aid from single donors might be inappropriate, especially in challenging country settings. Frequent and close collaboration with other development partners might be essential. There is a strong need to work closely with other donors in order to have an influential and constructive dialogue with partner governments. Any attempt to focus on just a few specific issues might prove difficult in a complex situation; harmonized and sector-oriented strategies are also important in the context of results-based aid. Second, some countries might display a low level of responsiveness to results-based aid and limited opportunities for “pockets of effectiveness.” Results-based aid strongly relies on “driving forces” for reforms in the government structure, including at the highest level. If government structures are not receptive to performance orientation, the likelihood of failure (non-performance) is high. In principle, one could think about some niches of government where this approach might work and could have spillover effects, at best. However, since the governance situation dominates all public structures, the scope could be limited. Third, the process of selecting and designing results-based aid programs, which are adapted to local contexts, critically determines the future success of results-based aid. Therefore, open engagement between donors and partner countries is needed, and partner countries must be in charge of the overall process. Also, results-based aid programs are technically demanding, and sufficient investment in the design of such programs will likely outweigh adjustment costs that otherwise might occur as resultsbased aid programs are being implemented. In conceptual terms, results-based aid links to several academic debates on aid and can clearly contribute to discussions on aid impact, allocation and conditionality, and aid modalities. In particular, results-based aid has a strong potential to contribute to the debate on aid conditionality. Based on the conceptual design of results-based aid interventions and on

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initial country experiences, it has become clear that results-based aid is neither a pure case for “political conditionality” nor for “technical triggers” in the context of aid. Depending on the concrete arrangement, results-based aid can be used as an instrument to push a donor agenda linked to political conditionality. This is true, for example, with regard to the MCC. However, other results-based aid pilots, which are focused on a specific indicator in a given sector, concentrate on technical triggers rewarding independently verified results. Thus, results-based aid does not provide a clear-cut example for a second generation of political conditionality. Results-based aid rather represents a case of conditionality that relies more strongly on technical triggers than traditional aid modalities. This specific form of a more technical type of conditionality is the distinctive feature of results-based aid as an innovative aid modality. The examples of Ghana and Tanzania show how results-based aid there is focused on technical triggers. Still, experience in both countries also indicates that even technical triggers can easily become politicized in practice. Thus, a purely technical focus of results-based aid might be difficult to uphold once political interests come into play.

Notes 1

In general terms, accountability is the obligation of a person, group, or institution to justify decisions or actions taken. It is associated with sanctions in the event of compliance/non-compliance and is therefore based on incentives. Accountability is relevant in three respects: accountability on the part of the donor; accountability in partner countries (domestic accountability); and mutual accountability between partner and donor.The different levels of accountability do not automatically complement each other. In some cases, they may even compete. Mutual accountability might be costly, entail numerous compromises, and suffer from shortcomings. This is true, for example, for coordinated national development strategies and joint monitoring approaches and policy analyses. Results-based aid can, in principle, strengthen mutual and national (in the partner country) accountability, since both forms are based on the partners’ implementation of policies and their activities. 2 Whether incentives do good or harm depends on the specific setting in a country. For example, normally we assume that an increase in resources available at the local level can contribute significantly to development. Money can be spent in accordance with local needs and priorities. Decision-making processes developed in close cooperation with the people might improve participation. However, if an increase in resource transfers to the local level is considered by local or national elites as available “rents,” it could create conflicts over access to rents. If local structures are not prepared for—and experienced in—managing an increase in resource transfers, this approach might also fail because of limited capacities on the ground. If aid provides strong incentives for an increase in own resources (lo-

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cal taxes, etc.), this could also contribute to problems (for example, for small businesses) because inexperienced staff at the local level might push for local revenues that, for example, could affect farmers who sell their products. 3 In this case, it could be possible to develop schemes for start-up financing. 4 However, one could argue that the predictability risks can mainly be managed by the recipient government, since it is in charge of implementing those policies necessary for achieving the expected results.

References Addison, T., S. Singhal, and F. Tarp. 2013. “Aid to Africa. The Changing Context.” WIDER Working Paper No. 2013/144), United Nations University–World Institute for Development Economics Research (UNU–WIDER), Helsinki. Azam, J. P., and J. J. Laffont. 2003. “Contracting for Aid.” Journal of Development Economics 70:1, 25–58. Birdsall, N., W. D. Savedoff, A. Mahgoub, and K. Vyborny. 2011. Cash on Delivery: A New Approach to Foreign Aid, 2nd ed. Washington, DC: Center for Global Development. Booth, D. 2011. “Aid Effectiveness: Bringing Country Ownership (and Politics) Back In.” Working Paper 336, Overseas Development Institute, London Burnside, C., and D. Dollar. 2000. “Aid, Policies, and Growth.” American Economic Review 90:4, 847–868. Chabal, P., and J.-P. Daloz. 1999. Africa Works: Disorder as Political Instrument. Oxford: Oxford University Press. Collier, P. 2007. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done about It. Oxford: Oxford University Press. Collier, P., and D. Dollar. 2002. “Aid Allocation and Poverty Reduction.” European Economic Review 46:8, 1475–1500. CoP-MfDR (Community of Practice on Managing for Development Results). 2011. Framework for Results-based Public Sector Management and Country Cases. Manila: Asian Development Bank. de Hennin, C., and H. Rozema. 2011. Study on Results-based Programming and Financing, in Support of Sharing the Multi-annual Financial Framework after 2013. The European Union’s Development Cooperation Programmes, Final Report. de Renzio, P., and N. Woods. 2008. “The Trouble with Cash on Delivery Aid: A Note on Its Potential Effects on Recipient Country Institutions.” Note prepared for the CGD Initiative on “Cash on Delivery Aid,” Center for Global Development in Europe, London.

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Duflo, E., and A. Banerjee. 2011. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books. Easterly, W., R. Levine, and D. Roodman. 2003. “New Data, New Doubts: A Comment on Burnside and Dollar’s ‘Aid, Policies, and Growth’” (2000). NBER Working Paper 9846, National Bureau of Economic Research, Cambridge, MA. Fielding, D., M. McGillivray, and S. Torres. 2006. “A Wider Approach to Aid Effectiveness: Correlated Impacts on Health, Wealth, Fertility and Education.” WIDER Research Paper No. 2006/23, United Nations University–World Institute for Development Economics Research (UNU–WIDER), Helsinki. Grossman, G., and J. L. Lewis. 2014. “Administrative Unit Proliferation.” American Political Science Review 108:1, 196–217. Janus, H. 2014. “Real Innovation or Second-Best Solution? First Experiences from Results-based Aid for Fiscal Decentralisation in Ghana and Tanzania.” Discussion Paper 3/2014, Deutsches Institut für Entwicklungspolitik (DIE), Bonn. Karlan, D., and J. Appel. 2011. More than Good Intentions: How a New Economics is Helping to Solve Global Poverty. Boston: Dutton. Kenny, C. 2011. Getting Better: Why Global Development is Succeeding and How We Can Improve the World Even More. New York: Basic Books. Killick, T. 2004. “Politics, Evidence and the New Aid Agenda.” Development Policy Review 22:1, 5–29. Klingebiel, S. 2012. “Results-based Aid (RBA). New Aid Approaches, Limitations and the Application to Promote Good Governance.” Discussion Paper 14/2012, Deutsches Institut für Entwicklungspolitik (DIE), Bonn. Koeberle, S., H. Bedoya, P. Silarsky, and G. Verheyen, eds.. 2005. Conditionality Revisited. Concepts, Experiences, and Lessons. Washington, DC: World Bank. Leiderer, S. 2012. “Fungibility and the Choice of Aid Modalities.” WIDER Working Paper No. 2012/68, United Nations University–World Institute for Development Economics Research (UNU–WIDER), Helsinki. Ministry of Local Government and Rural Development. 2012. Operational Manual for the Implementation of the District Development Facility, Accra, Ghana, 2013: DDF & UDG, FOAT I-V (2006–2011), results and allocation.

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Minoiu, C., and S. G. Reddy. 2010. “Development Aid and Economic Growth: A Positive Long-Run Relation.” Quarterly Review of Economics and Finance 50:1, 27–39. Morrissey, O. 2010. “Aid and the Financing of Public Social Sector Spending.” In Financing Social Policy: Mobilizing Resources for Social Development, eds. K. Hujo and S. McClanahan, 141–162. Basingstoke: Palgrave/UNRISD. OECD–DAC (Organisation for Economic Cooperation and Development– Development Assistance Committee) and World Bank. 2008. Emerging Good Practice in Managing for Development Results, 3rd ed. Washington DC: OECD and World Bank. Öhler, H., P. Nunnenkamp, and A. Dreher. 2010. “Does Conditionality Work? A Test for an Innovative US Aid Scheme.” Working Paper No. 1630, Kiel Institute for the World Economy,Kiel, Germany. Parks, B. C., and Z. J. Rice. 2013. Measuring the Policy Influence of the Millennium Challenge Corporation: A Survey-based Approach. Williamsburg: The College of William and Mary. Pearson, M. 2011. “Results Based Aid and Results Based Financing: What are They? Have They Delivered Results?” HLSP Institute, London. Pereira, J., and C. Villota. 2012. Hitting the Target? Evaluating the Effectiveness of Results-based Approaches to Aid. Brussels: European Network on Debt and Development. Perrin, B. 2013. “Evaluation of Payment by Results (PBR): Current Approaches, Future Needs. Report of a Study Commissioned by the Department for International Development.” Working Paper 39, DFID, London. Radelet, S., M. Clemens, and R. Bhavnani. 2004. “Aid and Growth: The Current Debate and Some New Evidence.” Center for Global Development, Washington, DC. Rajan, R. G., and A. Subramanian. 2008. “Aid and Growth: What Does the Cross-Country Evidence Really Show?” Review of Economics and Statistics 90:4, 643–665. Roll, M. 2011. “The State that Works: Pockets of Effectiveness as a Perspective on Stateness in Developing Countries.” Working Paper No. 128, Institut für Ethnologie und Afrikastudien, Johannes Gutenberg Universität, Mainz. Steffensen, J. 2010. Performance-Based Grant Systems: Concept and International Experience. New York: United Nations Capital Development Fund.

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Stokke, O., ed. 2004. Aid and Political Conditionality. European Association of Development Research and Training Institutes (EADI) Book Series 16. London: Routledge. Svensson, J. 2003. “Why Conditional Aid Does Not Work and What Can Be Done About It?” Journal of Development Economics 70:2, 381– 402. Temple, J. R. W. 2010. “ Aid and Conditionality.” In Handbook of Development Economics, Vol. 5, eds. R. Dani and M. Rosenzweig, 4415– 4523. Amsterdam: Elsevier Tilley, H., and H. Tavakoli. 2012. “Better Aid Modalities: Are We Risking Real Results? Literature Review.” Overseas Development Institute, London. Tripp, A. M. 2012. “Donor Assistance and Political Reform in Tanzania.” Working Paper No. 2012/37, United Nations University–World Institute for Development Economics Research (UNU–WIDER), Helsinki. van de Walle, N. 2005. Overcoming Stagnation in Aid-Dependent Countries. Washington, DC: Center for Global Development. Wood, B., J. Betts, F. Etta, J. Gayfer, D. Kabell, N. Ngwira, F. Sagasti, and M. Samaranayake. 2011. The Evaluation of the Paris Declaration. Phase 2, Final Report. Danish Institute for International Studies, Copenhagen. World Bank. 2011. A New Instrument to Advance Development Effectivness: Program for Results Financing. Washington, DC: World Bank. —. 2012. Tanzania—Urban Local Government Strengthening Program Project. Project Appraisal Document. Washington, DC: World Bank. —. 2016. Program-for-Results Financing (PforR). http://www.worldbank.org/en/programs/program-for-results-financing. Accessed May 30, 2016.

CHAPTER FOUR THE FUTURE OF AID AS A FINANCING MECHANISM IN AFRICA: A SOCIAL PROTECTION PERSPECTIVE LETLHOKWA GEORGE MPEDI Introduction This chapter assesses the role of foreign aid1—with a particular focus on aid provided by multilateral and bilateral agencies—as a funding mechanism for social protection programs on the African continent. It commences by clarifying the concept of social protection, highlighting the importance of social protection programs and discussing the key challenges facing social protection in Africa. The chapter proceeds by examining the role and importance of aid as a tool to finance social protection in fostering development in Africa, describing the constraints generally associated with the use of aid as a means to funding social protection programs. Next, the chapter presents a discussion of the opportunities present in the use of aid as a social protection financing instrument in future, and ends with some concluding observations.

Social Protection Social Protection: A Cursory Conceptual Clarification Social protection has been explained in different ways by scholars,2 international and regional organizations (see, for example, Beales and Knox 2008, 2; UN 2001, 182, 188–189; AfDB et al. 2011, 100; and UN 2014, 8–9). This concept is regarded by most international and regional organizations as wider than social security.3 For example, Article 1.4 of the Code on Social Security in the Southern African Development Community (SADC) explains social protection as follows:

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Chapter Four Social protection is broader than social security. It encompasses social security and social services, as well as developmental social welfare. Social protection thus refers to public and private, or to mixed public and private measures designed to protect individuals against life-cycle crises that curtail their capacity to meet their needs. The objective is to enhance human welfare. Conceptually and for purposes of this Code social protection includes all forms of social security. However, social protection goes beyond the social security concept. It also covers social services and developmental social welfare, and is not restricted to protection against income insecurity caused by particular contingencies. Its objective, therefore, is to enhance human welfare (SADC 2008).

On the other hand, the International Labour Organization (ILO) states that: “The term ‘social protection’ is used in institutions across the world with a wider variety of meanings than ‘social security’. It is often interpreted as having a broader character than social security (including, in particular, protection provided between members of the family or members of a local community)” (ILO 2014, 162). The social (income) security and social services encompassed by social protection have been tabulated by Wouter van Ginneken as follows: Social risks and Social (income) security Social services basic capabilities Mitigating/relieving income shortfalls Strengthening employment capacity and social cohesion Un(der)employment Unemployment benefits; Labour market and employment guarantee; training policies cash and food for work Sickness and Contribution and taxSafety and health at disability financed pensions work; labour market (re)integration Old age and Care, homes, and survivors institutions Family cohesion Maternity, child, and Child care, family family benefits support Social assistance Tax-financed benefits Social work Guaranteeing basic security and building up basic capabilities Health Fee waivers; social Health policy; nahealth insurance; conditional health service tional cash transfers

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Education

Fee waivers; conditional cash transfers

Housing

Rent and energy subsidies Food stamps; consumer subsidies

Food provision

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Education policies, including school meals Social housing Food aid

Table 4.1. Social Protection: Social (Income) Security and Social Services Source: van Ginneken (2013, 73).

Why Is Social Protection Important—Particularly in Africa? The African continent is challenged by a number of social insecurities, which include poverty, high unemployment, and diseases (AfDB 2011, 102; Monchuk 2014, 17). According to the United Nations Development Programme (UNDP 2012), an estimated 48.5 percent of the sub-Saharan African population live in poverty, and Africa’s youth comprise an estimated 60 percent of total unemployment. African countries must address these challenges, as failure to do so could most likely yield undesirable consequences such as social and political strife. Social protection is one of the key measures that could and should be used to free vulnerable4 and impoverished persons on the continent from the threat of social risks5 (Barrientos 2008, 279; De Schutter and Sepúlveda 2012, 4).6 The preceding observations should be understood from the context that the central purpose of social protection is to avert or minimize social risks in order to prevent or minimize human damage7 by increasing capabilities and opportunities.8 Secondly, social protection is instrumental in ensuring human and economic development (UN 2001, 191; AfDB et al. 2011, 104; De Schutter and Sepúlveda 2012, 4; World Bank 2012b; Harris 2013, 113). Social protection has been accepted as one of the mechanisms through which African countries can accelerate progress toward the realization of their Millennium Development Goals (AfdB et al. 2011, 100– 121). Furthermore, during the 2008 financial crisis it became apparent that social protection is one of the important and effective crisis response mechanisms (see, for example, Mpedi 2009 and Bonnet et al. 2010). Ultimately, social protection is a fundamental right that should be enjoyed by everyone (see, for example, Perrin [1985, 239]; UN [2001, 189]; and Sepúlveda and Nyst [2012]).9

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What Are the Key Challenges Facing Social Protection? Notwithstanding its significance, access to social protection in Africa is limited (Tostensen 2008, 4).10 This situation can be attributed largely to the high incidence of informal sector employment and subsistence farming, which are not covered by formal social insurance schemes11 in most African countries (International Labour Office 2008, 276). Social insurance is invariably restricted to the fortunate few who are employed in the formal sector—particularly in civil service (Cunha et al. 2013, 10–11). The challenge facing a majority of African countries is how to extend the scope of coverage of social protection systems, particularly access to social assistance12 and social insurance schemes. Sub-Saharan Africa has experienced some sustained levels of economic growth in the past decade (UNDP 2012). Nonetheless, the economic growth recorded has not resulted in meaningful poverty reduction for many African people (Monchuk 2014, 17). It remains a fact that not all African countries can afford to provide (comprehensive) social protection programs to their needy citizens. Social protection schemes require resources that are not always readily available in most countries of the region. In fact, the low levels of economic development prevalent in a number of African countries are often cited as the reason for the underdeveloped and, in some instances, undeveloped state of social protection on the continent. To this end, the importance of foreign aid13 as a source of funding for the social protection programs in Africa cannot be emphasized enough.

Aid and Social Protection in Africa Role and Importance of Aid The cost of financing non-contributory social protection measures, such as cash transfers, is invariably borne by the state. However, not all African countries can afford or seem willing to finance social protection measures through general taxation. Even those countries with expansive social cash transfer programs, such as South Africa, are unable to cover all needy members of their populations (see Mpedi et al. 2013). This is, to some degree, understandable, given that a majority of African countries are listed as low human development countries14 on the Human Development Index (UNDP 2014, 162). Nonetheless, this should not be construed to mean that low human development countries are incapable of implementing social protection measures. The truth is that there are examples of

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low human development countries on the continent that have endeavored to introduce some, albeit modest, social protection measures for the vulnerable members of their populations. Lesotho, for instance, introduced a tax-financed social assistance program for the indigent, elderly members of its population (see, for example, Devereux and White 2007, 7–8). Thus, there is scope for improvement of social protection in Africa. African countries need to invest more in the development of comprehensive social protection systems. As shown in Table 4.2, the total social protection expenditure, as a percentage of the gross domestic product (GDP), in Africa is the lowest when compared with other regions of the world. This situation has been interpreted as reflective of the limited social protection coverage on the African continent (World Bank 2012a, 1). Furthermore, it is abundantly clear that African countries need all the assistance they can get, particularly foreign aid, in their quest to develop their social protection systems. In light of the relevance and importance of social protection discussed earlier, it is hardly surprising that some portion of (development) aid is committed to social protection on the African continent (see Holmqvist 2012, 5). Donor agencies, particularly multilateral and bilateral ones, fulfill a pivotal role of supporting endeavors to provide and expand social protection mechanisms in Africa. For instance, donors have been credited with playing a fundamental role in the expansion of anti-poverty transfers in sub-Saharan Africa (Barrientos and Villa 2013, 9). The donors’ involvement, with respect to social transfer programs, has been largely in the following areas: project initiation and design, funding, technical assistance, monitoring, and evaluation (Devereux and White 2012, 4). In addition, foreign aid in support of social protection programs mainly strives to achieve a three-pronged result for aid receiving countries: poverty alleviation, promotion of inclusive growth, and advancement of human rights (World Bank 2012b, 4). TSPE = Total social protection expenditure PHCE = Public health care expenditure (% of GDP) PSPEA = Public social protection expenditure of persons of active age (% of GDP) SBPA = Social benefits for persons of active age (excluding general social assistance) GSA = General social assistance (% of GDP) PSPEC = Public social protection expenditure for children (% of GDP)

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PSPEA (public, active age) SBPA GSA Latest available year (a)

Area, region, or country

TSPE (total)

PHCE (health care)

PSPEC (children)

Regional average (weighted by total population) Africa

4.3

2.6

0.4

0.2

0.2

North Africa

10

3.2

1.1

0.3

0.4

Sub-Saharan Africa

4.3

2.6

0.3

0.2

0.1

Asia and the Pacific

4.6

1.5

0.4

0.4

0.2

Western Europe

27.1

7.9

5

0.9

2.2

Central and Eastern Europe Latin America and the Caribbean North America

17.8

4.4

3

1.3

0.8

13.9

4

3

2.6

0.7

17

8.5

2.8

1.1

0.7

Middle East

11

2

1.5

3.4

0.8

World

8.8

2.8

1.5

0.7

0.4

Table 4.2. Public Social Protection Expenditure by Guarantee, Latest Available Year (Percentage of GDP) Source: Excerpted from International Labour Office (2014, 306).

Constraints and Challenges Notwithstanding the important role played by foreign aid in the social protection sphere on the African continent, there are a number of constraints and challenges that have emerged and require attention in order to make such aid more effective. These constraints and challenges include the following: x Predictability: Foreign aid, as a means to financing social protection, has its own advantages. For instance, it has the potential of relaxing pressure on limited domestic resources, particularly in poor countries (Harris 2013, 127). At the same time, donor aid has limitations. One major point of criticism that has been leveled against donor aid is that it is unpredictable (Harris 2013, 127) and, as a result, unsustainable (AfDB 2011, 119). Donor aid is influenced by a

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variety of factors, which include economic downturns. These factors make it imprudent for the donors to commit themselves permanently to social protection programs of the countries receiving aid. Thus, donor aid is invariably committed for a short term. As pointed out by Harris (2013, 127): “Most donors, however, have only limited ability to commit support over periods much longer than one to three years, making recipient governments reluctant to launch donor-financed social protection programmes whose future funding is so uncertain.” The point is that donors do experience budgetary constraints as well (Devereux and White 2007, 9). x Donor politics and competition: Donors active in the social protection sphere on the African continent come from diverse backgrounds. Inevitably, their activities, visions, and goals are founded on divergent ideologies. For instance, some donors prefer conditional cash transfers while others favor unconditional social grants. These ideologies clash at times to the detriment of the task at hand, i.e., the development of social protection.15 Donor politics and competition often create problems, not only among the donors but also between the donors and the countries receiving aid. Instances of competition and disagreements among donors and governments (particularly about program design) have occurred in a number of African countries (see for example Barrientos and Villa 2013, 11). This makes it difficult to establish who should drive social protection initiatives in countries receiving aid. x National conditions and issues: National circumstances and related challenges can be decisive in determining the success or failure of (aid-driven) social protection programs. It is not uncommon in most African countries to find that there are various government ministries and agencies involved in the design and implementation of social protection programs. As Jones and Shahrokh remarked: Multi-country evidence suggests that competing interests among government agencies is a common characteristic in social protection programming, with important implications for sustainability and ability to scale up. Programmes are often housed within social development ministries, which although offering a natural home, tend to lack political weight and budget influence. The resulting ‘departmentalism’ limits their ability to effectively integrate social protection within broader poverty reduction strategies as well as with related sector priorities” (Jones and Shahrokh 2013, 8).

This kind of situation requires proper coordination between the involved ministries and agencies (AfDB et al. 2011, 121). In addition, it

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underscores the importance of ensuring the necessary partnership and support from finance and planning ministries (2011). However, in reality, most social protection systems are characterized by lack of coordination and fragmentation (2011). This undermines the impact of the social protection systems and makes it difficult for the intended beneficiaries to access the benefits offered. In addition, it needlessly escalates the administrative costs of the system. x Mismatch of priorities and strategies: The misalignment of donor priorities and strategies with those of the countries receiving aid has emerged as one of the areas of concern. This invariably results in lack of ownership and accountability, which is essential for proper implementation of social protection programs. The success or failure of aid as a social protection financing mechanism largely depends on the ability and resolve of the donors and the countries receiving aid to address the aforementioned constraints and challenges. Possible solutions have been raised on a number of occasions, and some have been embodied in international documents such as the Paris Declaration on Aid Effectiveness in 2005 and the Accra Agenda for Action in 2008 (OECD 2016). These potential solutions and the future prospect of aid as a social protection financing mechanism in Africa are discussed in more detail in the following section.

Aid and Social Protection: The Way Forward Effectiveness. The need for and importance of aid effectiveness is well known. The question is—what does or should aid effectiveness mean in social protection terms? To put it differently, what should be regarded as an indication of effective aid in the social protection sphere? The answer to the question should in some ways be connected to the challenges facing social protection in Africa, as well as the intended outcomes or objectives of social protection. Therefore, aid geared toward social protection could be regarded as effective if, for instance, it managed to broaden the limited scope of coverage as well as the quality (in terms of the value and duration) of the current or future benefits offered by the social protection programs. Secondly, seeing meaningful progress made toward the realization of social protection outcomes, such as poverty eradication, should fit well with any conclusion that suggests that aid-driven social protection programs are effective. Working on the foregoing premise, there are a number of factors that appear to undermine aid effectiveness in the field of social protection.

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First, there are serious constraints on social protection implementation capacity on the African continent (Samson 2009, 53). Such constraints are consistently accentuated by weak administration and monitoring processes. This is problematic because the indigent and marginalized sectors of the society are often the most affected. Concomitant to the issue of capacity limitations is the lack of coordination and fragmentation of the social protection system. This has been identified as a problem in countries such as Namibia (UN 2013, 18), Rwanda, and Tunisia (Beales and Knox 2008, 3). The lack of coordination and fragmentation is problematic for three main reasons: (1) it undermines the impact of the system; (2) it prevents those most in need of the protection offered from accessing the system; and (3) it needlessly inflates the administration costs, which could be better used to broaden the reach of the system (UN 2013, 18). Thus, any serious attempts toward the meaningful implementation and extension of social protection in Africa will require a significant investment of resources in developing capacity, particularly “in structures, administration and technical issues” (Beales and Knox 2008, 3). Second, it is well known that civil society plays an important role in the implementation of social protection programs (see, for example, van Ginneken 2013, 69). This is particularly true for “supporting and informing policy processes, and in developing programmes which complement those of governments” (Beales and Knox 2008, 4). However, in practice, there is little coordination between the social protection (and related) activities undertaken by the civil society and those spearheaded by the state. Thus, there is a serious need for a partnership approach, whereby the activities of the two players are harmonized and coordinated (OECD 2016). For starters, states may involve civil society in the “design, implementation, and impact-monitoring of schemes” (Beales and Knox 2008, 6). The third factor concerns the non-alignment of aid with the priorities of the countries receiving aid. For example, in Lesotho, it has been noted that: Although Government has established mechanisms for aid coordination and management, there is still duplication of effort and some programmes do not necessarily address national development priorities. In addition, even though our main development partners support the principles of the Paris Declaration on Aid Effectiveness, there is poor reporting of donor activity as some programmes are implemented outside Government’s budgeting, accounting and monitoring systems (Government of Lesotho 2012, 159–160).

This situation can be attributed to three challenges, identified by Lancaster (1999, 493), that undermine the performance of the donor-designed

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and -implemented projects in Africa, namely: (1) lack of proven knowhow for the realization of project goals, (2) little knowledge by donors of the local environment, and (3) domestic and bureaucratic politics within aid agencies (see Box 4.1). Donors and partners should strive toward the realization of their commitment, as contained in Article 3(ii) of the Paris Declaration on Aid Effective, which calls for increasing “alignment of aid with partner countries’ priorities, systems and procedures and helping to strengthen their capacities” (OECD 2005). Ownership and accountability. The issue of ownership and accountability is dealt with in the Paris Declaration on Aid Effectiveness. Partner countries committed themselves in the Declaration to “exercise effective leadership over their development policies and strategies, and co-ordinate development actions.”16 Donors, on the other hand, committed themselves to “respect partner country leadership and help strengthen their capacity to exercise it.”17 Within the aid and social protection context, ownership should consist of a partner government’s leadership in setting and driving the pertinent social protection policy agenda. Sadly, this is not always the experience on the African continent. Weak (or lack of) government leadership, which invariably undermines the principles of ownership, has yielded situations in which social protection policies are driven by donors or donor-appointed consultants (who may not always appreciate the local needs and priorities), instead of partner governments in some African countries (see, for example, Chinsinga 2007, 13). At the core of this problem resides the fact that many African governments lack the capacity to develop the necessary social protection policies (2007). Donors could assist in the building of capacity for social protection policymaking in African countries. This is crucial since government-formulated social protection policies have a distinct advantage of, inter alia, signifying commitment on the part of the government (2007).

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Box 4.1: Three Key Elements that Affect the Performance of Donor Projects in Africa There seem to be three key elements that affect the performance of typical donor-designed and -implemented projects in Africa. Often a proven technology for achieving project goals is lacking. We know how to build roads; we know how to organise and help manage elections. Far less is known about improving the accountability of newly elected governments. Very little is known about how effectively to strengthen judiciaries, civil society organisations or the civil service. Yet much of what foreign aid tries to do at present is activities like these involving institutional and behavioural change. Second, donors tend to know relatively little about the societies or institutions in which they are trying to bring about change. Most aid officials spend a few years in any country. Few speak local languages and many spend their time in their offices rather than in the field where their projects are implemented. To help bring about behavioural or institutional change in foreign environments, it is imperative that the agents of change be deeply knowledgeable about that environment. This is seldom the case with the expatriate officials or consultants who typically manage aid interventions. The third problem involves the domestic and bureaucratic politics within aid agencies themselves. All of them, even the multilateral ones, operate within a political environment that constrains and at times drives their allocative and policy decisions. Those decisions are thus frequently taken with less reference to what works in a recipient country than to what is required by their own public, their legislature, or their bureaucracy. Ethnic and ideological factors, personal relationships, domestic political concerns, bureaucratic processes, and the ever-present imperative to spend available funds within given time periods all influence decisions on who gets the aid, how much they get, and how aid is used—making the flexible, locally-informed interventions needed today for aid-funded activities extremely difficult. Source: Lancaster 1999, 493.

With regard to accountability, donors and partners have committed themselves to mutual accountability in the Paris Declaration on Aid Effectiveness, as follows:

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Chapter Four A major priority for partner countries and donors is to enhance mutual accountability and transparency in the use of development resources. This also helps strengthen public support for national policies and development assistance. Partner countries commit to: (1) strengthen as appropriate the parliamentary role in national development strategies and/or budgets; and (2) reinforce participatory approaches by systematically involving a broad range of development partners when formulating and assessing progress in implementing national development strategies. Donors commit to: provide timely, transparent, and comprehensive information on aid flows so as to enable partner authorities to present comprehensive budget reports to their legislatures and citizens. Partner countries and donors commit to: jointly assess through existing and increasing objective country level mechanisms mutual progress in implementing agreed [upon] commitments on aid effectiveness, including the Partnership Commitments (OECD 2005, Articles 47–50).

The foregoing principles somewhat underscore the important fact that the issue of accountability within an aid framework arises in three spheres. Göran Holmqvist noted: Accountability arises as an issue at three different levels at least. First, there is an accountability issue within donor countries. Donors are ultimately accountable to taxpayers and need to show that the intended results are achieved. Results that are tangible and easy to communicate are often favoured, while any mismanagement of aid in partner countries tends to backfire. Second, there is an accountability issue in the relationship between donor and partner country, often portrayed as a principal–agent problem—‘incentive incompatibility’ and ‘asymmetric information’ being two of the main concerns. The aid contract needs to be formulated so that the right incentives are set, predictability is assured, and monitoring facilitated. Third, accountability is also an issue in the relationship between governments and citizens in partner countries: one frequent critique of aid relates to the risk that it will distort domestic accountability in favour of accountability towards external actors and by reducing policy space (Holmqvist 2012, 9-10).

With the foregoing pronouncements in mind, it should be stressed that donors and partner countries need to ensure that they abide by the Paris Declaration on Aid Effectiveness principles pertaining to ownership and accountability. This is particularly important for ensuring that donor priorities and strategies are aligned with those of the partner countries. Sustainability and continuity. Social protection measures, particularly those of a non-contributory nature, require predictable and continual funding. This is even more important in instances where non-contributory benefits are provided as a right and not a privilege. This method is often re-

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ferred to as a rights-based approach and is favoured largely by international agencies such as the International Labour Organization (ILO) and international non-governmental organizations18 (Jones and Shahrokh 2013, 8). Nonetheless, social protection programs have proven to be unsustainable in a number of countries (AfDB 2011, 119). The situation is even more challenging in cases where social protection measures are initiated and/or financed through donor aid. In some African countries, aid is used to support social protection pilot programs (Barrientos and Villa 2013, 10). Sometimes, irrespective of the donor’s intentions, these programs create expectations of permanence. Consequently, recipient governments are often hesitant to launch or adopt such programs out of fear of scaling-up expectations to an unsustainable level (see Harris 2013, 127–128). However, is this valid enough motivation for a country not to launch sustainable and continued social protection programs—even with external aid? The answer has to be no. Recent studies, particularly by the ILO, have shown that social protection is affordable (see, for example, International Labour Office 2010). All that is required is the political will19 to invest in social protection;20 political will is a key ingredient of sustainability (Samson 2009, 48) because politics play a crucial role in resource allocation (Keene-Mugerwa 2008, 324). The question is, can political will be built, and if so, how? Indications are that political will can be generated. For example, Samson (2009) argued that: The poor and the excluded often cannot mobilise effectively to their interests. Support to civil society organisations that represent the poor can strengthen political will for social cash transfers.... Likewise, the design of cash transfer programmes can broaden political support. More universal benefit programmes can ally the middle classes with the poor and build political will. Effective monitoring and evaluation systems can strengthen the evidence base policy-makers and voters rely on to justify political support (Samson 2009, 48).

With the foregoing in mind, it should be emphasized that donors also have a role to play in ensuring affordability of social protection, particularly in low human development countries, by avoiding unnecessary duplications.21 Furthermore, African countries need to realize that comprehensive social protection programs cannot be built overnight. Nonetheless, this is not a justification for inaction; countries need to strive toward the progressive realization of such programs (O’Cleirigh 2009, 121). External funding can be used fruitfully. As proposed by Elliott Harris (2013):

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Chapter Four Aid or other donor contributions could and should be used to cover startup costs of a social protection programme, such as the SPF [Social Protection Floor]—the assessment of needs and identification of the vulnerable populations; programme design; introducing new information, financial, and delivery systems; and strengthening the capacity to monitor and evaluate outcomes. External resources can also be used to finance social assistance programmes of a temporary or cyclical nature (such as public works programmes during economic downturns) that would supplement the more permanent SPF interventions (Harris 2013, 128). Moreover, aid dedicated to social protection programs should, in the spirit of the Paris Declaration on Aid Effectiveness, be sufficient, ongoing, and predictable (OECD 2009, 14). This is crucial in the sense that it assists countries receiving aid in creating environments conducive for politically and financially viable social protection programs (2009). Therefore, the funding of social protection, which has been rightly referred to as “the quintessential core of social protection systems” (UN 2001, 197), cannot be left completely to donors. African countries have to [play] their part and mobilize resources to complement aid. However, how do they achieve that? There are nonexhaustive measures that could and need to be thoroughly explored (see Box 4.2). For instance, some countries on the continent have weak tax collection systems that need to be strengthened (International Labour Office 2008, 277). Precarious tax collection systems have a negative impact on the available resources that could be used to bolster social protection systems. Although there are states with small tax bases, measures need to be put in place to broaden the tax bases of most African countries (2008). Such measures should include tax policy reforms, strengthening tax administration, and reinforcing anti-corruption measurers (Harris 2013, 118).

Box 4.2: Mobilizing the Resources for Financing Social Protection There are various options available for mobilising the resources for financing social protection: x Taxes. Extending the tax base and raising of extra resources by reducing tax avoidance and tax evasion; x Discrimination user fees. Improvement in social services so that the better-off pay for the services and the poorer sectors pay only nominal fees, particularly for primary education and primary health care; x Reallocating budgetary resources within sectors. Shifting expenditure from low priority to high priority uses, – say, from curative to preventive health, or from tertiary to primary education; x Distinctive effect. Reordering budgetary priorities across sectors, such as shifting expenditure from military to social sectors. Govern-

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ments can use a mix of these options, including reducing defence ex-penditure for financing social protection. Source: UN 2001, 199 (italics in original).

Conclusion Of all the social protection funding mechanisms, aid ranks high in many African countries. Without much-needed aid, many destitute individuals and their families would be worse off. As well intended as most of the aid may be, there are challenges that donors and partner states will need to overcome to ensure that this funding mechanism has a superior and meaningful impact, insofar as social protection in Africa is concerned. These challenges, examined in the chapter, include: unpredictability and sustainability of aid, competition and (unnecessary) disagreement among donors, lack of coordination and fragmentation of social protection institutions in partner countries, mismatch of priorities and strategies between donors and partner countries, and limited or absent policymaking capacity in partner countries. To address these challenges, donors and partner countries need to recall and work towards the meaningful realization of their commitments, as contained in the Paris Declaration on Aid Effectiveness and related documents. Secondly, partner countries need to realize that the task of funding implementation of social protection programs cannot be left entirely to the donors. Countries need to contribute their part by increasing the total social protection expenditure of their GDPs. Efforts should be made to mobilize more resources for social protection purposes by creating the necessary fiscal space through, among others, tax reforms and prioritization of social protection when preparing national budgets. After all, it has been demonstrated on a number of occasions that social protection is affordable, and even low human development countries such as Lesotho can implement (some of the) social protection programs. Finally, it should be emphasized that social protection systems are never (and cannot be) built instantaneously—particularly on a continent such as Africa, where the need for social protection is high in the midst of a serious shortage of resources. Thus, African countries must strive toward the progressive implementation of social protection systems. To this end, more and effective aid dedicated to the African social protection project is imperative. Most importantly, aid will remain a necessary component for

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some time to come for many African countries to, inter alia, develop and protect their citizenry from social risks.

Notes 1

What is foreign aid? According to Lancaster (1999, 490): “Foreign aid is a transfer of concessional resources, usually from a foreign government or international institution, to a government or non-governmental organisation in a recipient country. It may be provided for a variety of reasons, including diplomatic, commercial, cultural and developmental. It is typically used to fund expenditures that further development (or at least, it is usually justified in that way) in the country receiving aid.” 2 For example, Berry (2013, 28) defines social protection as “the set of policies and programmes designed to reduce poverty and vulnerability by promoting efficient labour markets, diminishing people’s exposure to risks, and enhancing their capacity to protect themselves against hazards and interruption/loss of income.” 3 Social security is defined as “the protection which society provides for its members, through a series of public measures, against economic and social distress that otherwise would be caused by the stoppage or substantial reduction of earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age, death, provision of medical care and provision of subsidies for families with children” (ILO 1984, 3). 4 Vulnerability, “the possibility of being thrown into a state of emergency or distress by some uncontrollable event,” is naturally related to poverty, “since poor people are more vulnerable to almost all types of crises” (Berry 2013, 5). 5 These include the so-called “nine classical social risks” (sickness, maternity, employment injury, unemployment, invalidity, old age, death, medical care, and family) embodied in the International Labour Organization Social Security (Minimum) Standards Convention 102 of 1952. 6 This view is supported by the AfDB et al. (2011, 102): “the [African] continent is still prone to a myriad of potential and recurring shocks requiring ex-ante and expost social responses. Some of these include: macroeconomic vulnerability (including the impact of volatile food and fuel prices); perennial situations of fragility and civil conflicts; HIV/AIDS epidemic and other diseases such as TB and malaria; and increased vulnerability to climate change impacts and food insecurity. The erosion of the extended family system (due largely to modernization and migration), which was once the bedrock of the social security system in Africa, has also made people vulnerable. All this required an institutionalized social protection mechanisms to handle the fallout from these shocks.” 7 This should be understood from the perspective that social protection policies strive to ensure that human beings enjoy a certain minimum level of existence (see, for example, van Ginneken 2013, 73). 8 As accurately acknowledged by the United Nations Commission (UN 2000, 6): “The ultimate purpose of social protection is to increase capabilities and opportunities and, thereby, human development. While by its very nature social protection

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aims at providing at least minimum standards of well-being to people in dire circumstances enabling them to live with dignity, one should not overlook that social protection should not simply be seen as a residual policy function of assuring the welfare of the poorest—but as a foundation at a societal level for promoting social justice and social cohesion, developing human capabilities and promoting economic dynamism and creativity.” 9 It is notable that there are African countries that have enshrined social protection or elements of it as a human right in their national constitutions (e.g., section 27 of the Constitution of the Republic of South Africa, 1996, and section 43 of the Constitution of Kenya, 2010). Social protection is also recognized as a human right in regional instruments (e.g., the Charter of Fundamental Rights in the Southern African Development Community (SADC), 2003, and Code on Social Security in SADC, 2008), and as international standards (e.g., Income Recommendation, 1944; Universal Declaration of Human Rights, 1948; and International Covenant on Economic, Social and Cultural Rights, 1966). 10 The International Labour Organization (ILO) estimates that only 5–10 percent of the working population enjoys some form of social security in sub-Saharan Africa. In addition, social security coverage in middle-income African countries ranges from 20–60 percent of the population (ILO n.d.). 11 A “social insurance scheme” refers to a “[c]ontributory social protection scheme that guarantees protection through an insurance mechanism, based on: (1) the priority payment of contributions, i.e. before the occurrence of the insured contingency; (2) risk- sharing or ‘pooling’; and (3) the notion of a guarantee. The contributions paid by (or for) insured persons are pooled together and the resulting fund is used to cover the expenses incurred exclusively by those persons affected by the occurrence of the relevant (clearly defined) contingency or contingencies. Contrary to commercial insurance, risk-pooling in social insurance is based on the principle of solidarity as opposed to individually calculated risk premiums” (ILO 2014, 162). 12 A “social assistance scheme or program” means “[a] scheme that provides benefits to vulnerable groups of the population, especially households living in poverty. Most social assistance schemes are means-tested” (ILO 2014, 162). 13 This concept refers to “a transfer of concessional resources, usually from a foreign government or international institution, to a government or non-governmental organisation in a recipient country. It may be provided for variety of reasons, including diplomatic, commercial, cultural and developmental. It is typically used to fund expenditures that further development (or at least, it is usually justified in that way) in the country receiving the aid” (Lancaster 1999, 490). 14 Such countries include the following: Kenya, Swaziland, Angola, Rwanda, Cameroon, Nigeria, Madagascar, Zimbabwe, Tanzania (United Republic of), Mauritania, Lesotho, Senegal, Uganda, Benin, Sudan, Togo, Djibouti, Cote d’Ivoire, Gambia, Ethiopia, Malawi, Liberia, Mali, Guinea-Bissau, Mozambique, Guinea, Burundi, Burkina Faso, Eritrea, Sierra Leone, Chad, Central African Republic, Congo (Democratic Republic of the) and Niger. 15 See, for example, Deacon (2013, 53–57). 16 Article 14 of the Paris Declaration on Aid Effectiveness (OECD 2005).

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Article 15 of the Paris Declaration on Aid Effectiveness (OECD 2005). The rights-based approach to social protection is an approach whereby “the right of citizens to receive the support, and the obligation of the government to provide social protection, are anchored in legislation, and in some cases in the Constitution. This has important implications for the funding model—it establishes an a priori claim of the social protection measure on the resources of the government. It also helps to ensure that these expenditures are protected and prioritized even when overall government revenues experience a downturn, and secures the claim of social protection to at least a part of any additional resources that become available” (Harris 2013, 133). 19 What is political will? The notion of political will has been explained as: “the universal power in every social human activity which develops the ethical and civic virtues as well as the moral values and political culture of society in a given area. It manifests itself through a number of ways and at different levels of polity. These are at the international scene, national, and community levels. At the [international] scene the barometer is the extent to which a nation subscribes to the internationally set standards, which is normally through ratification of relevant International Conventions. At the community level political will is said to exist when all citizens enjoy their rights—in this case the right to social security—and that duty bearers mainly state and service providers fulfil their obligations to their clients” (Keene-Mugerwa 2008, 324–325). 20 As pointed out by Economic Policy Research Institute: “The third common precondition that requires attention in most low- and middle-income countries is political will. Governments balance economic and social spending priorities, often perceiving an intensifying trade-off in times of economic downturn. The more policy-makers understand the linkages between crisis impacts on the poor and social protection and broader development priorities, the greater is political will to implement effective interventions” (EPRI 2011, 21). 21 The fact is that “in many countries donors and foreign NGOs have initiated social protection schemes as small stand-alone projects. In some case these are directly administered by the external partner using their own management structures and system. Where they are implemented through public sector bodies, special financing instruments are established and the financing partner frequently defines the policy objectives, the types and levels of transfers, the targeting strategies and the delivery mechanisms. With a number of donors involved in the area, the resulting proliferation of different approaches can result in inefficiencies due to the duplication of efforts because of the existence of separate and different targeting and delivery mechanisms for different projects—sometimes in the same Ministry and involving the same target group. Different policy objectives and levels of benefits between programmes can be a source of misunderstanding and conflict. By supporting the development of nationally defined social protection policies and programmes, and funding them through joint financing mechanisms, donors can reduce the financial and transaction costs of social protection while helping develop the capacities and institutions that will be essential if small-scale and locally-based initiatives are to be successfully scaled-up and replicated into national programmes” (O’Cleirigh 2009, 123). 18

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www.ohchr.org/Documents/Issues/Food/20121009_GFSP_en.pdf. Accessed May 26, 2016. Devereux. S., and P. White. 2007. “Pilots, Principles or Patronage: What makes Social Protection Succeed in Southern Africa?” Paper prepared for the workshop: Social Protection and Ideologies of Welfare in Southern Africa, University of Oxford, December 6, 2007. Devereux, S., and P. White. 2012. “Social Protection Policy in Africa.” In Social Protection in West Africa: The Status Quo, Lessons from other Regions, Implications for Research, ed. International Food Policy Research Institute (West and Central Africa Office). Washington, DC: International Food Policy Research Institute. EPRI (Economic Policy Research Institute). 2011. Strengthening Social Protection Responses to the Global Economic Downturn. A Policy Toolkit for Developing Countries. Commissioned by the UK Government Department for International Development (DFID). http://epri. org.za/wp-content/uploads/2011/03/PolicyToolkit.pdf. Accessed May 26, 2016. Government of Lesotho. 2012. National Strategic Development Plan 2012/2013- 2016/2017. Maseru: Ministry of Development and Planning. Harris, E. 2013. “Financing Social Protection Floors: Considerations of Fiscal Space.” International Social Security Review 66:3–4, 111–143. Holmqvist, G. 2012. “External Financing of Social Protection: Opportunities and Risks.” Development Policy Review 30:1, 5–27. ILO (International Labour Organization). n.d.“Facts on Social Security in Africa.” http://www.ilo.org/public/english/protection/socsec/pol/campagne/files /africafactsheet.pdf. Accessed May 26, 2016. —. 2014. World Social Protection Report 2014/15: Building Economic Recovery, Inclusive Development and Social Justice. Geneva: International Labour Organization. International Labour Office. 1984. Introduction to Social Security. Geneva: International Labour Organization (ILO). —. 2008. “Affordability of Basic Social Security in Africa: Can African Countries Afford Basic Social Security? Can they Afford not to have it?” In Social Protection for the Poorest in Africa. Compendium of Papers Presented During the International Conference on Social Protection, 8–10 September 2008, 268–278. —. 2010. Extending Social Security to All: A Guide through Challenges and Options. Geneva: International Labour Organization.

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—. 2014. World Social Protection Report 2014/15: Building Economic Recovery, Inclusive Development and Social Justice. Geneva: International Labour Office. Jones, N., and T. Shahrokh. 2013. Social Protection Pathways: Shaping Social Justice Outcomes for the most Marginalised, now and Post2015. London: Overseas Development Institute. Keene-Mugerwa, L. 2008. “Constraints and Opportunities in Developing Sustainable Political Support for Social Protection in Africa: The Case of Uganda.” In Social Protection for the Poorest in Africa. Compendium of Papers Presented During the International Conference on Social Protection, 8–10 September 2008, 324–334. Lancaster, C. 1999. “Aid Effectiveness in Africa: The Unfinished Agenda.” Journal of African Economies 8:4, 487–503. Monchuk, V. 2014. Reducing Poverty and Investing in People: The New Role of Safety Nets in Africa. Washington, DC: World Bank. Mpedi, L. G. 2009. “Impact of the Global Economic Crisis on Social Security Systems in Africa.” Journal of Social Development in Africa 24:2, 123–138. Mpedi, L. G., E. Kalula, and N. Smit. 2013. “Extending Social Security Coverage to the Excluded and Marginalized: Perspectives on Developments in South Africa.” In Social Security Coverage Extension in the BRICS: A Comparative Study of the Extension of Coverage in Brazil, the Russian Federation, India, China and South Africa, 135–151. Geneva: International Social Security Association. O’Cleirigh, E. 2009. “Affordability of Social Protection Measures in Poor Developing Countries.” In Promoting Pro-Poor Growth: Social Protection. Paris: Organisation for Economic Cooperation and Development (OECD). https://www.oecd.org/dac/povertyreduction/43280766.pdf. Accessed May 26, 2016. OECD (Organisation for Economic Cooperation and Development). 2005. Paris Declaration of Aid Effectiveness. http://acts.oecd.org/Instruments/ShowInstrumentView.aspx? InstrumentID=141&Lang=en. Accessed May 26, 2016. —. 2009. “Making Economic Growth More Pro-Poor: The Role of Employment and Social Protection.” In Promoting Pro-Poor Growth: Social Protection, 9–13. Paris: Organisation for Economic Cooperation and Development. https://www.oecd.org/dac/povertyreduction/43514582.pdf. Accessed May 26, 2016.

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—. 2016. Paris Declaration and Accra Agenda for Action. http://www. oecd.org/dac/effectiveness/parisdeclarationandaccraagendaforaction.htm. Accessed May 26, 2016. Perrin, G. 1985. “The Recognition of the Rights to Social Protection as a Human Right.” Labour and Society 10, 239–258. SADC (Southern African Development Community). 2008. Code on Social Security in the SADC. http://www.sadc.int/documents-publications/show/Code%20on%20 Social%20Security%20in%20SADC. Accessed May 26, 2016. Samson, S. 2009. “Social Cash Transfers and Pro-Poor Growth.” In Promoting Pro-Poor Growth: Social Protection, 43–59. Paris: Organisation for Economic Cooperation and Development (OECD). https:// www.oecd.org/dac/povertyreduction/43280571.pdf. Accessed May 26, 2016. Sepúlveda, M., and C. Nyst. 2012. The Human Rights Approach to Social Protection. Ministry for Foreign Affairs of Finland. http://www. ohchr.org/Documents/Issues/EPoverty/HumanRightsApproachToSocia lProtection.pdf. Accessed May 26, 2016. Tostensen, A. 2008. “Feasible Social Security Systems in Africa.” Development Issues 10:2, 4–6. UN. 2000. 39th Session of the Commission for Social Development. Enhancing Social Protection and Reducing Vulnerability in a Globalising World: Report of the Secretary-General, New York, February13–23. —. 2001. Report on the World Situation 2001. New York: United Nations. —. 2013. Report of the Special Rapporteur on Extreme Poverty and Human Rights, Ms. Magdalena Sepúlveda Carmona: Mission to Namibia (1 to 8 October 2012). May 28, 2013. http://www.ohchr.org/EN/News Events/Pages/DisplayNews.aspx?NewsID=13408&LangID=E. Accessed May 26, 2016. —. 2014. Report of the Special Rapporteur on Extreme Poverty and Human Rights. http://www.ohchr.org/EN/newyork/Pages/HRreportstothe 69thsessionGA.aspx. Accessed May 26, 2016. UNDP (United Nations Development Programme). 2012.About SubSaharan Africa. http://www.africa.undp.org/content/rba/en/home/ regioninfo.html. Accessed May 26, 2016.. —. 2014. Human Development Report 2014. Sustaining Human Progress: Reducing Vulnerabilities and Building Resilience. New York: UNDP. van Ginneken, W. 2013. “Civil Society and the Social Protection Floor.” International Social Security Review 66:3–4, 69–86. World Bank. 2012a. Affordability and Financing of Social Protection Systems. Africa Social Protection Policy Brief, World Bank, Washington,

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DC. http://documents.worldbank.org/curated/en/2012/12/17091994/ affordability-financing-social-protection-systems. Accessed May 26, 2014. —. 2012b. Managing Risk, Promoting Growth: Developing Systems for Social Protection in Africa. The Work Bank’s Africa Social Protection Strategy 2012–2022. http://siteresources.worldbank.org/INTAFRICA/ Resources/social-protection-full-report-EN-2012.pdf. Accessed May 26, 2016.

CHAPTER FIVE EVALUATING THE NEW PARTNERSHIP FOR AFRICA’S DEVELOPMENT (NEPAD) RESOURCE MOBILIZATION STRATEGY LANDRY SIGNÉ Introduction The New Partnership for Africa’s Development (NEPAD) is the most ambitious development initiative of the African continent in the early twenty-first century (Signé 2013a). Adopted in 2001, the partnership aims to integrate Africa within a globalized world, close the gap between developing and developed countries, eradicate poverty, and put the African continent on the path of sustainable growth and development (Signé 2013a). In order to achieve its growth target and poverty reduction goals between 2001 and 2015, NEPAD developed a resource mobilization strategy (estimated at US$64 billion per year), consisting of two main initiatives, the Capital Flow Initiative and the Market Access Initiative. The Capital Flow Initiative primarily focuses on increasing domestic resource mobilization, overseas development assistance (ODA), and private capital flows while seeking “the extension of debt relief beyond its current levels” (NEPAD 2001, 45). The Market Access Initiative focuses on the removal of non-tariff barriers, the diversification of production, and the promotion of the private sector, African exports, and specific sectorial activities. Despite notable efforts that have contributed to the increase of financial flows to Africa, NEPAD has not been able to reach its financial targets. As of 2015, although a framework recognized by international partners and accepted within Africa has been agreed upon (Signé 2011, 2013a,b; Signé and Gazibo 2010), NEPAD was still struggling to sufficiently mobilize the estimated US$64 billion per year needed to achieve its goals. Why did NEPAD fail to successfully implement its wellintended resource mobilization strategy and secure the initially anticipated outputs between 2001 and 2015? What can we learn from the NEPAD experience about financing innovation and development in Africa? The

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goals of this chapter are to: 1) understand how the NEPAD resource mobilization strategy evolved and was implemented; and 2) identify the critical differences between the initial strategy, its outputs, and the new strategic orientations. The chapter also aims to explain the barriers to and facilitators of the NEPAD resource mobilization strategy implementation in the complex African and international contexts, in order to contribute to the improvement of the implementation process and to inform future policy innovation and development. With analysis based on policy implementation theories—especially Matland’s (1995) ambiguity-conflict analytical and predictive model (presented in the next section)—along with international political economy perspectives, this chapter argues that, given the complex politicaleconomic context and the behavior of self-interested actors, NEPAD was unable to successfully implement its resource mobilization strategy (Bates 1981; Van de Walle 2001; Signé 2011). This failure can be attributed to the symbolic nature of the NEPAD resource mobilization strategy’s implementation, which required a strong coalition to address: 1) high levels of policy ambiguity, stemming from overly ambitious programs and weak causal theories underlying some of their assumptions; and 2) high levels of conflict, multilevel by nature and exacerbated by lack of ownership and appropriation at national, subregional, and—until recently—continental levels, as well as by divergent interests with some leaders of the international community. Under these circumstances, lowering the degree of ambiguity and conflict while refining the resource mobilization strategy in the post-2015 development context appears to be the best strategy to improve the implementation process and, ultimately, to succeed. The first three sections of this chapter present, respectively, the NEPAD framework and its top ten priorities, the analytical framework, and a broad presentation of the components, potentials, and limits of NEPAD’s initial resource mobilization strategy (Capital Flow Initiative and Market Access Initiative). The fourth section focuses on the implementation processes and inputs, identifying and discussing some of the key activities, actions, and programs that were developed or completed from 2001–2015, exploring whether they were implemented according to the initial strategy. The fifth section evaluates the implementation outcomes or outputs, assessing the evolution of domestic and external resource mobilization in Africa since the creation of NEPAD and analyzing differences between the initial intentions and the actual implementation and accomplishments. The goal is to better understand the factors influencing implementation and the reasons activities conducted under the NEPAD framework have not resulted in the anticipated outputs. The sixth

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section discusses NEPAD’s evolving resource mobilization strategy, highlighting the new orientation of the NEPAD leadership, before concluding with some remaining challenges and contributions to Africa’s development.

Initial Strategy of NEPAD and Its Top Ten Priorities In 2001, African leaders recognized that a new approach was needed to reverse the trend of African poverty. The extension of credit and foreign aid, both central to African development, had reached a point where they were no longer effective. Credit, for example, led to debt deadlock, as the continent reached the upper limit of public aid coupled with a substantial reduction in the amount of private aid. Leaders looked to change the relationship that Africa had with the rest of the world, envisioning that, with “bold and imaginative leadership that is genuinely committed to a sustained human development effort” (NEPAD 2001, 2), the trend could be reversed. The New Partnership for Africa’s Development (NEPAD) arose out of the urgent need for a new approach to African development. Intended as a pledge from African leaders to engage in a new form of development, based on a common vision, the partnership looked to make tangible efforts to resolve African poverty (Signé 2013a). In order to achieve the Millennium Development Goals by 2015, including universal primary education, halving the population of the hungry, and reduction by two-thirds of the under-five mortality rate, NEPAD sought to focus on narrow, achievable goals, such as obtaining and sustaining GDP growth of 7 percent per year. Contextually, half of Africans lived on less than USD $1 per day, just under half did not have access to safe water, and over 40 percent of those over age 15 were illiterate (Moyo 2002). NEPAD looked to utilize the continent’s resources as pillars of development. Beyond the extractible resources, such as minerals, oil, and gas, Africa would seek to benefit from the “ecological lung” provided by the continent’s rainforests, its paleontological and archaeological sites that contain evidence of origins of life, and the richness of pan-African culture. Although Africa’s domestic development narrative has not been particularly optimistic, NEPAD notes that improvements in the living standards of the marginalized offer massive potential for growth (NEPAD 2001, 8). NEPAD called on leaders to prevent intra-African and intra-state conflict by promoting democracy and human rights, restoring and maintaining macroeconomic stability and developing transparent regulatory frameworks for markets.

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NEPAD highlights two sets of initiatives to help achieve its goals. The focus of the Peace, Security, Democracy, and Political Governance initiatives was on producing the building blocks of development—namely, the initial conditions required for successful resource mobilization—including reforms to administrative, civil, and judicial services, the promotion of parliamentary oversight, participatory decision-making, and measures to combat corruption. The Economic and Corporate Governance initiative, based on the understanding of the importance of the state in developing institutions conducive to growth, proposed a special task force to be established to investigate existing practices across African states, producing recommendations and best practices to be presented to the “Heads of State Implementation Committee.” Ultimately, after recommendations were communicated to African states, the committee was to mobilize resources for capacity building. Achieving the goals outlined by NEPAD (Table 5.1) required that reforms bring dramatic change. To reduce poverty by half over fifteen years, NEPAD estimated that US$64 billion per year would be required. While domestic reforms are crucial, Moyo (2002) noted that the bulk of resources had to come from outside Africa. Policy Area

Goals

1. Good political governance

x Promote conditions for peace and security x Promote and strengthen democracy and public policy

2. Good economic governance

x Improve economic management and public finances x Improve corporate governance

3. Infrastructure

x Improve access to infrastructure, cooperation, and regional trade x Develop the expertise necessary to utilize networks and reduce the risks to attract foreign investments

4. Education

x Collaborate with donors to reach the international development goal for education x Reform curricula and form networks for higher education and research

5. Health

x Strengthen programs that fight transmissible diseases and establish a solid system of basic healthcare

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Goals x Ensure health education

6. New Information and Communication Technologies (NICT)

x Participate in growth and training x Double the density of telephone lines x Reduce costs and improve the reliability of telecommunications services

7. Agriculture

x Improve agricultural performance x Achieve food security

8. Energy

x Increase energy production as a domestic necessity and a factor in the production of goods and services x Reduce costs and develop new sources of energy

9. Market access and capital flows (Resource mobilization strategy)

x Encourage access to foreign markets for African products x Obtain the necessary capital (US$64 billion) for annual growth of 7 percent

10. Environment

x Fight against poverty and contribute to the socioeconomic development of the continent through a healthy environment

Table 5.1. NEPAD–Ten Priorities Source: NEPAD (2001); Signé (2013a).

The comprehensive framework used here is the Matland policy conflict and ambiguity model. Matland systematizes the policy implementation process by connecting the level of policy conflict and policy ambiguity. The policy “conflict” is based on a rational and self-interested conception of humans in decision-making, where such traits—self-interested behaviors—usually lead to conflicts, as interests regularly diverge. The policy “ambiguity” evolves when the goals or means to goals as related to a policy are overly ambiguous. When the levels of conflict and ambiguity are low, the implementation is administrative and will be successful if resources are available. When the levels conflict and ambiguity are high, the implementation is symbolic, and its success will depend on the strength of the coalition. When the conflict is high and the ambiguity low, the implementation is political, and political power is a prerequisite to successful

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implementation. Finally, when conflict is low and the ambiguity high, the implementation is experimental and will depend on contextual conditions.

Analytical Considerations Implementations theories, e.g. Matland’s comprehensive ambiguity– conflict model (1995), are used as an analytical framework. Top-down policy implementation models (Pressman and Wildavski 1984; Mazmanian and Sabatier 1989) take the authoritative decision as the starting point for identifying the traceability of the problem and structuring implementation, as well as the non-statutory variables affecting implementation. Such models advise clear and consistent goals, limit the extent of change necessary, place implementation responsibility in an agency sympathetic with the policy’s goals, and regularly neglect prior context and political aspects, as if the implementation process were only a matter of administrative implementation that was solely dependent on the availability of resources. Bottom-up policy implementation models (Maynard-Moody et al. 1990), on the other hand, view policy from the perspectives of the target population and service deliverers. The models tend to assert that the central decision is poorly adapted to local conditions and that flexibility is important to reach goals. Bottom-up approaches are usually criticized for overemphasizing local autonomy and the ability of policy leaders to structure local behaviors, favoring administrative rather than democratic accountability.

Low ambiguity

Low conflict

High conflict

Administrative implementation (Resources)

Political implementation (Power)

Infrastructures Education Health Agriculture Energy NICT

Political governance Economic governance

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High ambiguity

Low conflict

High conflict

Experimental implementation (Contextual conditions)

Symbolic implementation (Coalition strength)

NEPAD at national levels

Resource mobilization

Table 5.2. NEPAD Ambiguity–Conflict Matrix: Policy Implementation Process Source: Matrix from Matland (1995), adapted on NEPAD implementation by Signé.

Table 5.2 classifies the ten priorities of NEPAD using Matland’s analytical model. NEPAD’s resource mobilization strategy fits to the symbolic implementation model, which implies high levels of ambiguity and conflict. Under these circumstances, a successful implementation is highly contingent on the strength of the coalition. In order to reach the abovementioned research goal, we will examine both qualitative and quantitative data. Qualitative data comes from numerous sources, including 1) NEPAD founding documents, where we extract data related to the framework’s initial resource mobilization strategy, namely the Capital Flow Initiative and the Market Access Initiative, which are presented in the next section; and, 2) official NEPAD and African Union (AU) document explicating or laying the foundations of NEPAD’s sectorial programmes, namely the Comprehensive African Agricultural Development Programme (CAADP), NEPAD Infrastructure Short-Term Action Plan (STAP), NEPAD Programme for Infrastructure Development in Africa (PIDA), AU–NEPAD Capacity Development Strategic Framework (CDSF), Framework for Engendering NEPAD and Regional Economic Communities, and the AU– NEPAD Health Strategy. Qualitative data will be used to identify and understand the initial goals, clarity, consistency, anticipated inputs, variables affecting their successful implementation, and expected outcomes. Quantitative data comes from the African Development Bank (AfDB), the World Bank, NEPAD, the International Monetary Fund (IMF), the United Nations Economic Commission for Africa (UNECA), and the Organisation for the Economic Cooperation and Development (OECD). They include, but are not limited to, data on: 1) external financial flows, including foreign direct investment (FDI), portfolio investments, ODA,

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and remittances; and 2) domestic resource mobilization, including direct taxes, indirect taxes, trade flow, trade taxes, and other taxes; and 3) the Market Access Initiative, including value-added sectorial growth rate for manufacturing, services, industry, and agriculture; and 4) other indicators, such as GDP growth rate, data on debt relief, humanitarian aid, and bilateral debt relief. Methodologically speaking, the above-mentioned indicators—some of which were identified by NEPAD itself—enable us to quantify the level of implementation of NEPAD resource mobilization strategy, in contrast with NEPAD’s initial and evolving goals presented in qualitative documents. The presentation of the resource mobilization strategy will help understand the high level of ambiguity in the NEPAD strategic framework.

NEPAD Resource Mobilization Strategy: Market Access and Capital Flows NEPAD envisioned numerous avenues for resource mobilization to fill a US$64 billion (12 percent GDP) annual gap between 2000 and 2015 in order to achieve the 7 percent growth target required to meet the International Development Goals (IDGs): the Capital Flows Initiative (CFI) and the Market Access Initiative (MAI). Although both initiatives are presented below, this chapter focuses more closely on the CFI.

Capital Flows Initiative The Capital Flows Initiative (Table 5.3) can be subdivided into four areas: increasing domestic resource mobilization, obtaining debt relief, reforming official development assistance, and undertaking reforms to increase private capital flows. Domestic resource mobilization centers (NEPAD 2001, 44) on capturing untapped resources from within the continent, specifically looking towards more efficacious tax policies. In order to increase tax collection, governments should provide better rationale for their expenditures in tandem with reducing capital flight. NEPAD acknowledged that producing conditions that are conducive to encouraging private sector investment is necessary to reverse capital flight but prior to this acknowledgment noted that reforms to change investor perceptions are a “longer-term concern” (NEPAD 2001, 44). According to Hammouda and Osakwe (2006), Africa faces two additional challenges in mobilizing resources. First, dependence on the export of commodities with highly volatile prices causes instability

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and unpredictability in public budgeting. Second, though tax collection must be increased, it cannot come through further increases in trade taxes, upon which the continent is already heavily dependent. NEPAD also called for the expansion of debt relief, looking to ultimately tie fiscal-revenue-proportioned relief with costed poverty reduction outcomes. To these ends, the organization proposed an agreement to be signed by heads of state and negotiated with the international community to provide further debt relief to states that participate in the NEPAD Economic Governance Initiative. This conditional aid agreement would supplement existing channels of debt relief, such as that established through the Paris Club and Heavily Indebted Poor Countries Initiative (HIPC), only when necessary. Further, an intra-continent forum was established to discuss strategies for effective governance and qualification. Resources

Origin

Increasing Domestic Resources Mobilization

x x x x x

Debt Relief

x Systematic debt relief extension x Indexation with poverty reduction outcomes x Debt relief secured by NEPAD’s heads of state for participating countries

ODA Reforms

x x x x

Private Capital Flow

x Change investors’ perception of Africa x Increase Public-Private Sectors Partnership

National savings Tax collection Rationalization of government expenditures Ending capital flight Creation of special drawing rights for Africa

Increase flow Improve the efficiency of ODA Support PRSP with IMF and World Bank Tools: Forum, ECA, assessment of donors and recipients, support multilateral initiatives

Table 5.3. The Capital Flows Initiative Source: NEPAD (2001).

A major component of NEPAD is the focus on creating a unified strategy for common goals. NEPAD sought to establish a forum to “develop a common African position on ODA reform” (NEPAD 2001, 46). Donors—

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the Development Assistance Committee (DAC) of the OECD, for instance—would come together to form a bilateral partnership with Africa. In order to effectively utilize ODA flows, NEPAD set up working groups, including the Poverty Reduction Strategy Paper (PRSP) Learning Group, with the assistance of organizations such as UNECA. To ensure best practices, NEPAD also recommended an “independent mechanism for assessing donor and recipient country performance” (NEPAD 2001, 46). According to Hammouda and Osakwe (2006), ODA flows have been crucial to development in Africa. In 2004, ODA to the sub-Saharan region totalled US$26 billion. As a long-term approach, NEPAD sought to increase private capital flows. While it acknowledged that time is necessary to achieve success, several priorities were listed, including the development of a publicprivate partnership (PPP)–capacity-building program through the African Development Bank (AfDB) and the establishment of a Financial Market Integration Task Force.

Market Access Initiative NEPAD couples the CFI with the Market Access Initiative, which seeks to increase the base of exports, diversify production, and develop greater opportunities for Africa to engage in value-adding processing. Emphasizing economic diversification, the intent of the MAI was to focus on assisting the informal sector, microenterprises, and small-and-medium sized businesses. Again, NEPAD calls upon governments to act, in this circumstance to “remove constraints on business activity and encourage the creative talents of African entrepreneurs” (NEPAD 2001, 48). The MAI established sectorial priorities in agriculture, mining, manufacturing, tourism, and services. For agriculture, increasing productivity was sought with greater support of small scale and women farmers (NEPAD 2001, 41). Additionally, greater investment in agriculture is a means to ensure food security. NEPAD’s vision for Africa included elevating its status as net exporter of agricultural products and a pioneer in the development of agriscience and technology. In order to achieve these goals, several elements of intra-continental reform are necessary: the supply of water must be enhanced through local water management or irrigation facilities; governments must reform the land tenure system; and access to credit needs to be expanded. Spending in urban areas must be reduced to permit increased spending in rural areas (NEPAD 2001, 42). Internationally, NEPAD reiterates the necessity to form partnerships, particularly for enabling access and transfer of technical skills and expertise, but

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also for learning from other developing countries and reducing donor fatigue. In the mining sector, NEPAD defines improving mineral resource information, developing a business-friendly regulatory framework, and establishing best practices as key objectives. At the intra-continental level, harmonizing commitments, policies, and regulations can ensure compliance with at least the minimum level of organizational practices while hopefully reducing investment risk. Collaboration is necessary to enforce principles of value-addition to natural resources (NEPAD 2001, 43). Manufacturing is closely tied to the mining and agricultural sectors, particularly when promoting value-addition. Necessary reforms include pursuing membership in international standards organizations and establishing national standards and testing facilities. International standards accreditation infrastructure should be developed regionally whenever possible, so that recognition of results can be shared and mutually validated by nations and their international trading partners. Internationally, NEPAD recommends adopting a framework to balance compliance between the World Trade Organization’s (WTO) Technical Barriers to Trade agreement and African needs. Facilitating partnerships is dependent on greater information sharing, particularly with non-African firms, which can be accomplished through the development of organizations such as joint business councils. The Market Access Initiative also identified long-term promotion of exports and the private sector as crucial to development. Again, NEPAD stresses that organizations such as chambers of commerce should be strengthened, along with the establishment of other entrepreneurial development programs. Crucial to all development is the assurance by heads of state for active participation in the international trading system under the regulatory helm of the WTO. Simultaneously, NEPAD called for renewed political action to reinvigorate stalled integration initiatives, focusing especially on consideration of a “discretionary preferential trade system” within the continent and the “alignment of domestic and regional trade and industrial policy objectives” (NEPAD 2001, 57).

Implementation Input and Process: NEPAD’s Mobilization and Facilitation Efforts In order to successfully implement its resource mobilization strategy, NEPAD has initiated a series of activities, actions, programs, and partnerships that are grouped here in two categories: 1) strategic activities and partnerships, and 2) development frameworks and sectorial programs.

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While the strategic activities create conditions for successful resource mobilization (both domestic and external), the development frameworks and sectorial programs are concrete solutions that require funding to be successfully implemented.

Strategic Activities and Partnerships Three key strategic activities aim to create conditions for better governance and trust of international partners likely to increase domestic resource mobilization are presented below: the African Peer Review Mechanism (APRM), mobilization of international support, and the development of partnerships with NGOs and with the private sector.

African Peer Review Mechanism (APRM) Creation of a Conducive Environment The African Peer Review Mechanism was established in 2003 by the AU as part of the NEPAD framework with the aim of ensuring adherence to political, economic, and corporate governance policies. Each member of the AU voluntarily chooses to participate in the APRM, which requires the nation to contribute US$100,000 annually to fund the program, as it does not rely on external partners (APRM and AU 2012, 23). As part of the initiative, periodic reviews are diligently conducted through a series of five review stages (NEPAD 2003a). In 2004, twenty-three countries were part of the APRM (NEPAD 2004, 37). By 2012, the number of member countries had increased to thirty of the fifty-four member-states part of the African Union (APRM and AU 2012, 2). In 2013, eighteen country-level reviews had been initiated with fifteen completions (Odeh and Mailafia 2013, 87). The APRM has been effective at producing change when certain preconditions are met. For example, in 2011, President Goodluck Jonathan of Nigeria presented the country’s first progress report at the 14th APR Summit, highlighting his country’s success at implementing its National Plan of Action (NPoA), including the rollout of mediation and arbitration programs to reduce the court backlog, dismantling roadblocks to facilitate trade, and establishment of legislation to protect the rights of children (APRM and AU 2012, 8–9). The purpose of APRM was not to solve development challenges, but to gather reliable information so that challenges can be addressed. APRM does not provide funding streams to solve issues, so countries must work to mobilize resources under other frameworks. For example, Nigeria succeeded at implementing its NPoA, because it has far

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more resources than Lesotho, who was unable to implement its NPoA (APRM and AU 2012, 8–9). Given the mission of the APRM, there are serious problems with several elements of the initiative. First, the process is not transparent. Country-level self-assessments are not necessarily public documents, so despite a participatory process for data collection, few citizens may ever know how their country framed their assessment. Even more problematic, groups like UNECA are not given access to all documents (Odeh and Mailafia 2013, 88). Moreover, NPoAs under APRM act as separate development strategic plans rather than as targeted lists of priorities, and APRM structures often disappear after a country presents itself for review (AfriMAP 2010). Within countries, the transparency of the procedure for peer review varies. In Rwanda, government-appointed officials dominate the APRM commission. Conversely, Benin’s APRM commission had one government official as vice-chair and was mostly comprised of leaders of civil society organizations (Tungwarara 2010, 10). In Algeria, the government appointed the technical review body, which was intended to be independent so as to provide an objective evaluation. There is little force behind the APRM, as countries can easily opt out of the process after signing up, and the AU lacks the ability to compel participation in a voluntary initiative (Ebegbulem, Adams, and Achu 2012, 275). Ultimately, after conducting a systemic review of nine country-specific meta-analyses by separate authors (in AfriMAP [2010]), Tungwarara (2010) concluded that APRM has generally been dominated by individual governments and needs substantial revision.

Mobilizing International Support According to the NEPAD Secretariat (NEPAD 2004), there was substantial initial progress in moving towards the goals outlined in the 2001 founding document. At first, the main priority was to promulgate the NEPAD framework as widely as possible to obtain institutional buy-in, particularly from international donors. The United Nations passed a resolution in November 2002 recognizing NEPAD as the “framework for engagement with Africa,” ending the era of the UN New Agenda for the Development of Africa (UN-NADAF) adopted in 1991. As a result, all UN agencies were required to realign and coordinate their programs with NEPAD. Within the UN and other intergovernmental organizations, there was evidence of a shift in policy. In April 2003, UN Secretary-General Kofi established the Office of the Special Adviser on Africa (OSAA),

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with the stated roles, including; “coordinates global advocacy in support of NEPAD” and “acts as the focal point for NEPAD within the United Nations Secretariat” (Annan 2003, 2). After presenting NEPAD at the 2001 G8 summit in Genoa, Italy, representatives of the G8 countries prepared the G8 Africa Action Plan, which was presented and accepted at the following year’s summit in Kananaskis, Canada. The renewed commitment to development by wealthy countries was backed by tangible increases in development assistance for the first time in decades. In 2002 at the Financing for Development conference, held in Monterrey, Mexico, a commitment was made to increase assistance by US$12 billion from 2006 (NEPAD 2004, 63). Later in Kananaskis, half of the increase was announced as designated for Africa. Moreover, despite a downward trend in external development assistance, from 2001 to 2002, there was an increase from US$16.2 billion to US$22.2 billion (NEPAD 2004, 63; AfDB–ADF 2005). Tangible commitments also appeared across a variety of sectors. The World Bank committed US$500 million towards agricultural research and technology development. African governments agreed to gradually increase investment in agriculture to 10 percent of their national budgets. As of mid-2004, nine infrastructure projects identified by the NEPAD Short Term Action Plan (STAP) received funding totalling US$580 million from the African Development Bank. More recently, the NEPAD initiative has provided countries with the connections to form more narrowly tailored partnerships. For example, South Africa’s leadership role in NEPAD led to collaboration between their Public Administration Leadership and Management Academy (PALMS) and Japan’s International Cooperation Agency (JICA) to offer management training programs as a form of South-South cooperation (Honda et al. 2013, 369). In addition, two other sources today may provide meaningful opportunities to Africa: The New Development Bank (NDB) of the BRICS nations and the OPEC Fund for International Development (OFID). These sources offer balanced alternatives and complements to other sources.

Developing Partnerships with the Private Sector, NGOs, and African Organizations NEPAD has partnered with numerous other entities to implement its development vision. Many of the projects associated with NEPAD actually originated elsewhere and have been co-opted. For example, the AfDB is a key NEPAD partner and has disproportionately contributed to almost all of NEPAD’s successes. In 2007, AfDB had already financed over 200

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multinational projects across Africa, including CAADP projects, STAP projects, and the Infrastructure Project Preparation Facility (IPFF). After evaluating the outcomes of financed projects, the AfDB found that guidelines and regional frameworks were lacking and this was the main reason why only 53 percent of financed projects were deemed satisfactory (Martin 2007, 480). NEPAD continues to promote the partnership concept as a means of development, yet most of the partnerships formed are not African-owned. Although numerous organized business associations exist in Africa, such as the African Business Roundtable, reviews of public–private partnerships (PPPs) in Africa have found a nearly universal external focus. In March 2005, a forum hosted in South Africa that examined the contributions of the private sector found that most PPPs were with foreign-owned firms. In November 2007, a group of experts organized by the OSAA met in New York to discuss concerns about the private sector’s response to NEPAD, reiterating similar concerns (OSAA 2008, 10). In 2012, the promotion of PPPs became central to the majority of initiatives led by NEPAD—even then, the majority of these initiatives allude to participation with global private partners (see NPCA [2012, 28, 56]). Case Study: African Orphaned Crops Consortium (AOCC) Underused and scientifically unimproved, orphaned crops are economically unimportant at the global level, but are vital intracontinental flora that are crucial to meeting Africa’s nutritional needs. According to Makinde 2014), the AOCC concept was originated at the Clinton Global Initiative 2011 meeting by Ibrahim Miyaki of NEPAD and Howard-Yana Shapiro of Mars, Inc. The goal was to sequence African crops to produce optimal breeds that are resilient to climate change, pests, and disease and are ideal for growing in rural areas (Mars, Inc. 2014). As of 2014, the AOCC has created partnerships with Mars, Inc., the World Agroforestry Centre (ICRAF), Beijing Genomics Institute, Life Technologies, the World Wildlife Fund, University of California–Davis, iPlant Collaborative, Biosciences Eastern, and the Central Africa International Livestock Research Institute, among others. Training of plant breeders was to take place at the ICRAF in Nairobi, at the newly set-up African Plant Breeding Academy (Makinde 2014). Intellectual property gathered (i.e., genetic material) was to be made public by NEPAD. In 2013, 57 plants were sequenced, with 158 expected to be sequenced by 2015 (Mars, Inc. 2014).

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The OSAA (2008) lays out serious challenges to private sector involvement in NEPAD. The NEPAD Planning and Coordinating Agency (NPCA) was called upon to reverse an “abysmal lack of awareness about NEPAD in organized business in South Africa”—which makes sense, given the external focus of the first eight years of NEPAD (OSAA 2008, 13). Moreover, in West Africa, no programs existed even among private sector associations to promote NEPAD, and in most regions, there was no promotion of NEPAD projects whatsoever (OSAA 2008, 13).

Development Frameworks and Sectorial Activities NEPAD has developed various frameworks and programs to accelerate resource mobilization and successful implementation of its strategy in key development sectors: Market Access Initiative; Comprehensive African Agricultural Development Programme (CAADP); NEPAD Infrastructure Short-Term Action Plan (STAP); NEPAD Programme for Infrastructure Development in Africa (PIDA); AU–NEPAD Capacity Development Strategic Framework (CDSF); Framework for Engendering NEPAD and Regional Economic Communities; and AU–NEPAD Health Strategy. The contribution of these programs to NEPAD resource mobilization strategy is discussed further below.

Market Access Initiative NEPAD’s Market Access Initiative highlighted the importance of diversifying production and increasing value added to current production, as well as increasing levels of trade across the continent (NEPAD 2001, 40). Figure 5.1 shows the value-added per sector growth rate for developing countries in Africa, demonstrating a relatively low increase in growth rate when compared to the pre-NEPAD era. Figure 5.2 presents trade flows in Africa with selected partners from 2000 to 2010. Overall, NEPAD’s success can be considered marginal, at best.

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20% 15% 10% 5% 0% -5% -10%

Manufactu ring, value added (annual % growth) Services, etc., value added (annual % growth) Industry, value added (annual % growth)

Figure 5.1. Value-added Sectoral Growth Rate for Developing Countries in SubSaharan Africa 1990–2013 (%) Source: World Bank national accounts data and OECD National Accounts data files. Annual growth rate for sector value added based on constant local currency. Aggregate for developing countries in sub-Saharan Africa based on constant 2005 US Dollars.

Billion USD

400 350

EU27 China

300 250 200

IND+BRA+ KOR+TUR +RUS USA

150 100

Intra-African

50 0

Figure 5.2. Trade Flow in Africa with Selected Partners 2000–2010 (USD, billions) Source: UN ComTrade (2012) in AfDB et al. (2014).

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Comprehensive African Agricultural Development Programme (CAADP) The CAADP, designed to fulfill requirements of eliminating poverty, hunger, and malnutrition, aligns well with the NEPAD Market Access Initiative with regard to the agricultural sector. The CAADP aimed to accelerate the annual agricultural productivity growth rate to 6 percent by 2015 with technical support from NEPAD, and called upon country governments to allocate 10 percent of their budget to promoting agriculture. The CAADP had numerous procedural milestones for participant countries. Each was required to engage in preparation and signing of the CAADP compact, joint commitment by stakeholders, drafting and technical review of the National Agriculture and Food Security Investment Plans (NAFSIPs), a business meeting where stakeholders endorse and commit to funding and implementation, including monitoring and updating of the plan (Dufour et al. 2013). In 2012, ten countries had met or exceeded the 6 percent growth target, with eight reaching or exceeding the 10 percent budgetary allocation target (NPCA 2012). Although CAADP has generally proved moderately successful in terms of implementation, several priorities were left out of the program’s general goals. Despite the fact that 70 percent of Africans rely on agriculture for employment, NEPAD did not impose binding commitments or any substantive guidance on how to reform the underpinning problems related to development within the sector, such as land ownership and tenure rules (Chibundu 2008). Moreover, one should be careful to not to misconstrue success at metrics, such as agricultural sector growth, as producing change in line with the inclusivity of NEPAD. The metric allows for no nuanced distinction between commercial agribusiness and small-scale farmers. Ultimately, elements of CAADP, such as the promotion of new irrigation technologies, were more likely to produce partnerships between the state and foreign capital to increase export crops than to help rural farmers. For example, the Geriza irrigation project in Sudan, which received financial support from the AfDB, IMF, and World Bank, ended up turning indigenous farmers into paid laborers after the government expropriated their land (Omoweh 2004). Many recent studies show that small farmer cooperatives are as productive as large agribusinesses and much fairer to local communities. An unpublished report in 2011 found that most NAFSIPs lacked nutritional objectives and recommended actions to improve nutrition. As a result, the AU and NEPAD, with collaboration from Regional Economic Communities (RECs), launched the CAADP Nutrition Capacity Develop-

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ment Initiative. Between 2011 and 2013, three subregional workshops were organized to bring together participants from 14–18 countries. The goals of the workshop were to increase understanding of 1) the role of nutrition in the CAADP framework, 2) how to use existing tools and resources, 3) how to strengthen regional/country level frameworks, and 4) how to increase understanding of policy issues to better align with food and nutrition aims through multisectoral coordination. However, even as late as 2013, Dufour et al. (2013) reported that few agricultural programs were designed to improve nutrition.

NEPAD Infrastructure Short-Term Action Plan (STAP) NEPAD-STAP was launched to create regional infrastructure in the energy, information and communication technology (ICT), and water sectors. Approximately 120 projects fell under the STAP umbrella, but by 2009, the number had decreased to 103. The program was intended to work closely with regional communities. NEPAD specifically was tasked with facilitating the mobilization of resources for projects, including financial capital and political will (NEPAD 2010, 15). Much of STAP’s goals apparently overlap with those of PIDA, which aims toward a similar infrastructure development model, based on the same sectors and model of regional integration (NEPAD 2010, 22). Projects expected to be completed beyond 2012 should be merged into PIDA (NEPAD 2010, 154). The 2010–2015 NPCA business plan states that STAP has been successful at promoting the NEPAD brand, promoting greater understanding about NEPAD, and spurring some RECs to attempt to implement projects under NEPAD (NPCA 2010, 9). However, STAP has been unsuccessful at actually implementing projects. The 2010 review of STAP projects found that only sixteen projects had been completed since the launch of the program, which NEPAD identifies as “below expectations” (NEPAD 2010, 2). Some STAP projects were already under development prior to the initiative’s existence, thus “it would be a bit disingenuous to state that the private sector got involved in these initiatives because of the NEPAD process” (UNECA 2012, 52). The 2010 review committee noted that reasons for the slow progress range from “financing constraints, inadequate mechanisms in project monitoring, [and] projects not being sharply defined.” Many RECs had little knowledge of how the projects were developing, particularly with projects focused on facilitation and capacity building (NEPAD 2010, 19). An overview of projects shows that even though many projects obtained funding, relatively few progressed much further, particularly in the energy sector.

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The 2010 STAP review cited numerous challenges and explanations for the initiative’s underperformance. Lack of financing is noted nine times within the document, which is unsurprising considering there was a funding gap of US$23 billion per year (NEPAD 2010, 43). In particular, the NEPAD Secretariat has been unable to mobilize domestic financing, relying on donor support for successful projects (NEPAD 2010, 154). Of the issues with STAP energy projects, three of four “severe impact” constraints were at least partially attributable to the NEPAD Secretariat. The NEPAD Secretariat emerged throughout the review as an entity responsible for failing to prepare projects, mobilize political support, define roles and responsibilities, and define project frameworks (NEPAD 2010, 124– 125).

NEPAD Programme for Infrastructure Development in Africa (PIDA) PIDA emerged in 2009 as a project of the African Union Commission, NEPAD Secretariat, and AfDB to achieve three main goals: 1) establishing a framework to expand African infrastructure; 2) establishing an infrastructure investment program; and 3) preparing implementation strategies and processes (AfDB 2009, 4). PIDA aimed to address five main weaknesses in previous frameworks (i.e., STAP), including incomplete information, inadequate causal analysis, lack of politically accepted and technically justified priorities, poor implementation, and [lack of] regulatory frameworks and incentives (AfDB 2009, 4–5). In 2012, at the 16th summit of African Heads of State and Government, PIDA became ratified as a fully-fledged framework for infrastructure development. Implementing the PIDA Priority Action Plan (PAP), a collection of 51 backbone projects slated for completion prior to 2020, requires US$68 billion, with US$40.3 billion allocated to energy sector development. To implement all PIDA projects, a total of US$360 billion was required. The majority of sources were expected to be private by 2020, with up to twothirds expected to be private by 2013 (PIDA n.d.; NEPAD et al. 2012). In contrast, United Nations (2014a, 7) stated that portfolio flows are highly volatile, with few investors having the capacity to invest in long-term infrastructure projects. Instead, investment passes through financial intermediaries with short-term incentives. China’s investments in Africa’s infrastructure may represent much longer-term interests. Additional sources of financing are proposed by PIDA, such as loan guarantees which have been offered for other projects by the Development Bank of Southern Africa (DBSA); community levies, such as implemented by the Economic

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Community of West African States (ECOWAS), and partnerships with BRICS nations (the NDB) (PIDA n.d.; NEPAD et al. 2012). PIDA’s ability to meet its financing goals is uncertain. Many resources will have to be mobilized by individual countries, which were able to commit US$14 billion to infrastructure development in 2010 (NEPAD et al. 2012). Despite figures put forth by the initial PIDA report, Niggli and Osei-Lah (2014, 20, 23) quote substantially higher figures for the annual level of required investment—of between US$80 billion and US$93 billon. Moreover, they identify a US$30–40 billion annual funding gap. “These funding gaps, then threaten the overall viability, success and timely delivery of the programme, with adverse implications for reaching the critical ‘tipping points’ of infrastructure and services needed for Africa's economic transformation,” remarked Niggli and Osei-Lah (2014, 23–24). Achievement of the PAP alone requires filling a financing gap of US$37 billion, almost equivalent to the entirety of the energy sector development projects (Niggli and Osei-Lah 2014, 23). PIDA relies on Regional Economic Communities (RECs) to take responsibility for monitoring and implementation of projects, just as with STAP (NEPAD et al. 2012, 8). However, PIDA is different insofar as it strongly places responsibility on leadership increasing at the national level. For example, PIDA calls upon Heads of State and Government to take on the role of integration as part of the encouragement of actual local ownership (NEPAD et al. 2012).

AU–NEPAD Capacity Development Strategic Framework (CDSF) The AU–NEPAD CDSF was launched in 2010 to attempt to integrate capacity development goals across sectors, countries, and regions within Africa. In particular, the CDSF sought to encourage a “culture of responsibility” and awareness about the varying elements of capacity building, such as incentives needed to succeed at creating “constituencies of expertise within…Africa” (NPCA and AU 2012, 10). To date, the CDSF has been the launchpad for several sub-initiatives, such as the Africa Platform for Development Effectiveness. The CDSF also contributed to facilitating a common African position for the 2011 Busan Aid Effectiveness Conference and generating a series of best practices for engaging in South–South cooperation (NPCA and AU 2012, 18–19). The CDSF was instrumental to the development of sub-regional activities including a series of dialogues in partnership with Regional Economic Communities (RECs) (such as ECOWAS), World Bank Institute (WBI),

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and the United Nations Development Programme (UNDP) on topics such as trade integration best practices for institutional development between RECs (NPCA 2012, 19). Some countries have established mechanisms by which to incorporate NEPAD. Nonetheless, it is unclear how the CDSF fits into other capacity building initiatives, particularly those that are continent-wide, such as those promoted by the AfDB (Kedir 2011, 331).

Framework for Engendering NEPAD and Regional Economic Communities NEPAD has been a strong proponent of RECs, but did not pioneer the concept in Africa. The Lagos Plan of Action (1980) and the Abuja Declaration (1991) laid the foundation for the numerous economic communities that exist today. The NEPAD framework built on these initiatives, including “regionalization of development” as a precondition for sustainable development (Martin 2007, 465). RECs have thrived in Africa, at least in name and number. Examples include the East African Community (EAC) of Kenya, Uganda, and Tanzania; the South African Development Community (SADC); the Commission for East and Central Africa (CECA); and ECOWAS, the sixteen-state community established in 1975 (Chibundu 2008). Although high in number, the efficacy of RECs has been limited. For example, other than ECOWAS, “less progress has been registered.” The secretariats of the RECs in question “lack the capacity to promote and facilitate the preparation and implementation of multi-country projects” (NEPAD 2004). Even among funded projects, there is little oversight or monitoring by RECs. Ultimately, NEPAD’s implementation was poorly coordinated with few information-sharing mechanisms between countries, which likely contributed to the initial failure of REC integration (Mutangadura 2005, 18). RECs are key to the partnership model promoted by NEPAD, but their benefits are hard to identify. The UNECA criticizes the partnerships created by NEPAD thus far, noting that relationships between NEPAD components, RECs, and nations are “less than strong” making it difficult to implement the NEPAD framework (UNECA 2012, 11). Other authors have commented that the REC model may not necessarily produce benefits, even in principle. For example, RECs have created more bureaucracy, often acting as special interest groups that do not want to cede control to nimbler national entities nor defer to AU or NEPAD guidance. Moreover, the multiplicity of interests represented by RECs harm pan-African unity, a factor exacerbated by overlapping memberships that ultimately result in practically non-existent coordination between RECs themselves, and be-

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tween RECs and pan-African organizations (da Silva 2013). Basic development practices seem to be pushed aside; as RECs are adopted, for example, some political leaders have reneged on implementing free market policies and have adopted nationalist development ideologies (Mokone 2011, 11). Ultimately, there is little incentive for RECs and countries to implement NEPAD programs (UNECA 2012, 11). Even if there were, structural factors—such as access to financing—would prevent them from succeeding. The potential loss in tax revenues from establishing a customs union, though a declining revenue stream, is a disincentive to integrate (Martin 2007, 471). Variances in creditworthiness between member countries of RECs often prevent projects from securing financing. Overdependence on external aid creates numerous layers of bureaucracy, particularly when multiple external donors with different conditions are involved (NPCA 2010). Often, ability to contribute to a project is disproportionate among REC member states, leading to stalled projects—particularly, when memberships overlap (Martin 2007, 476). Despite the NEPAD initiative, levels of regional trade are still low. This is a result of failures of implementation by RECs and the methods utilized to measure trade. Only 12 percent of Africa’s exports are composed of trading intra-regional goods, less than half the rate within the Association of South East Asian Nations (ASEAN). This number is so low because as much as 90 percent of trade occurs through unregistered informal flows (Hanouz and Ko 2013, 41). Another factor in regional trade is the treatment of local indigenous communities. The national borders, drawn during the colonial centuries, ignored local language groups, often combining many within a “nation” and separating others between multiple nations. The UN Rights of Indigenous Peoples, signed by most NEPAD nations, gives land rights to cultural groups and allows cross-border migration and trade. Combined with the world demand for more agricultural land, these rights can be an important part of future fair and balanced development. Most underused land lies in these communities.

AU–NEPAD Health Strategy The AU–NEPAD Health Strategy was initially presented at a WHO meeting in Harare in 2002 before being subsequently revised in a peer review process at the 2003 African Expert Consultative Meeting in Pretoria. Section 7 of the strategy document (NEPAD 2003b) lists six priorities, including the creation of bodies to report on effectiveness of the strategy,

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combating of disease, empowerment of health literacy, reduction of pregnancy and childbirth mortality, and mobilization of resources. A development commitment goal was set of US$22 billion per year, presumably from external partners (NEPAD 2003b, 31). While African ownership is consistently highlighted in all NEPAD programs and initiatives, in practice it is either ignored or structurally impeded. In health, IJsselmuiden et al. (2012, 228) note that human resources for health research are missing, which leads to a lack of capacity when seeking to address country-specific problems. Moreover, the health research that does occur is often problem-specific, driven by external resource availability. Rather than NEPAD fill the role of providing frameworks, numerous other programs for health capacity development exist. For example, the Council on Health Research for Development (COHRED) developed a model for evaluating areas that need increased capacity, which ultimately turned into a partnership with NEPAD and will be utilized by NEPAD’s African Science, Technology, and Innovation Indicator (ASTII) project (IJsselmuiden et al. 2012, 231). The recent outbreak of Ebola has put the issue in focus. Though Ebola was detected years ago in isolated rural Africa, international attention was only raised when it finally spread to populated regions and to other nations. Now substantial international funds are developing vaccines and extending health resources to the affected areas.

Limited Institutional Funding for NEPAD NEPAD has faced serious limitations in operating, both as a standalone agency and subsequently as a part of the African Union. For example, in 2003, NEPAD received funding in the amount of US$3.4 million, increasing to US$7.6 million in 2004. NEPAD began fiscal year 2003 with a US$527,766.00 deficit and ended fiscal year 2004 with a deficit that had swelled to US$1.95 million (NEPAD 2004, 56). In 2011, NEPAD was again unable to balance its budget, facing a deficit of US$1.12 million after receiving US$13.8 million in payments (NEPAD 2012, 73). The deficit in contributions has been largely a result of African countries failing to meet their obligations. In 2004, African countries came up US$2.5 million short of what they were supposed to have provided (NEPAD 2004, 57). In an effort to explain its 2011 deficit, NEPAD remarked that its budget had a “heavy reliance on development partners” due to inadequate resources from African governments (NEPAD 2012).

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Implementation Outputs and Outcomes of the NEPAD Resource Mobilization Strategy: Capital Flows Initiative Generally speaking, some improvement in the Africa’s condition is visible, but there is limited evidence that the NEPAD framework was responsible. Analyzing the elements of the capital flow initiative demonstrates that although external financial flows have increased (Table 5.6 and Figure 5.7), the average rate of GDP growth (Table 5.4 and Figure 5.3) has only inclined modestly past levels in 2001, and has not yet increased past the growth rate two years after NEPAD was announced. In 2012, the NEPAD Agency evaluated its own performance. (UNECA 2012, 40), noting that though NEPAD has existed during periods of steady economic growth, improvements began after reforms in the 1980s. The UNECA goes on to state, “it is slightly disingenuous to attribute all of these gains [in improving the macroeconomic environment] exclusively to NEPAD” (UNECA 2012, 40). 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Africa Africa excl. Libya

2013 2014 2015 † † *

4.3 5.7 5.2 5.6 5.9 6.2 6.4 5.6 3.1 5.0 3.5 6.4 3.9 4.8 5.7 -

-

-

-

-

-

5.0 4.3 4.1 4.2 4.8 5.2

* Estimate; † Projection

Table 5.4. African GDP Growth 2001–2015 (%) Source: Statistics Department, African Development Bank (AfDB et al. 2014)

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7

Growth Rate (%)

6 5 4 3 2 1 0

Africa Figure 5.3. GDP Growth in Africa 2001–2015 (%) Source: Statistics Department, African Development Bank (AfDB et al. 2014, 22)

Domestic Resource Mobilization Numerous authors have remarked on the success that developing countries have had mobilizing domestic resources (Sachs and Schmidt-Traub 2013; Mubiru 2010; Bhushan 2013; Melamed and Sumner 2011). This has been especially observable in the form of tax reforms—developing countries’ tax ratio rose from 20 percent in 2000 to just under 29 percent in 2011 (Greenhill and Prizzon 2012). Bhushan (2013) notes that while the majority of development financing is mobilized domestically, the poorest countries—those that lack resources—have fragile state structures, or post-conflict, are unable to rely on domestic resource mobilization to close financing gaps. Trade taxes as a component of the tax mix (Figure 5.4) have generally declined since the mid-1990s, while direct taxes have increased and the change in indirect taxes has been flat. The majority of tax revenue increases have come from higher resource extraction taxes, which almost tripled as a share of domestic income between 1990–2008. Taxes on trade decreased just over 2 percent between 2004 and 2010 in an effort to meet WTO guidelines. Direct taxation grew the most, from 20.7 percent to 24.2 percent. In Sierra Leone, a single goods and services tax (GST) was adopted in 2010, simplifying tax collection and increasing the tax base. In two years, it increased the tax share of GDP from 11.7 percent to 14.9 percent (Elovainio and Evans 2013). While countries like Kenya and Mau-

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ritania have a relatively balanced mix of tax types, South Africa relies on direct taxation. The trend of average tax revenues as a share of GDP has been positive since 1990, from 22 percent of GDP in 1990 to 27 percent of GDP in 2007. Upper middle-income countries ($3,856