On the G8 Summit
The most important achievement of the G8 summit is that it has directed resources to the poorest and most disempowered countries. While the number of people living in extreme poverty in the developing world has fallen significantly over the past two decades, sub-Saharan Africa has grown poorer on average. Almost half of the population in Africa continues to live on $1 a day or less, the same proportion as in 1990. Indeed, sub-Saharan Africa is unlikely to meet any of the MDGs without additional resources. From a humanitarian perspective this is unacceptable. It is also unfavourable to the global economy.
The G8 Summit in Gleneagles succeeded in bringing Africa's development within the framework of the global priorities to be addressed by the world's most powerful nations. Critically, these countries have committed to providing additional resources to support efforts to accelerate progress towards the MDGs, through debt relief and a doubling of aid.
While these initiatives are laudable, their impact will depend on the manner in which they are implemented, and what they mean in real terms to recipient countries. Ultimately, their impact will depend on the extent to which additional resources are available for poverty reducing expenditure.
On the G8 and economic progress
The impact of these initiatives must be seen against the backdrop of the positive economic reforms that have swept the African continent over the past decade. This is evidenced in the steps taken by African governments to enhance their economic management and absorptive capacities. As a result, the continent has achieved unprecedented macroeconomic stability, contributing to the best economic growth rates in decades. The average growth rate for sub-Saharan Africa is expected to exceed 5% in 2005. Inflation is at a historical low, despite pressure from high oil prices. Underpinning these improved inflation figures are shrinking fiscal deficits, which declined from an average of 5.2% of GDP in 1994, to an average of 0.9% in 2005.
The G8 countries recognize that this is a critical moment to increase support to Africa, as it will ensure that these reforms are consolidated. The Commission for Africa estimates that economic growth rates in HIPC [Heavily Indebted Poor Countries] could increase by a percentage point if their multilateral debt is cancelled. It is also estimated that another four percentage points could be added to Africa's annual growth rate over time through investments in education (1.47 percentage points), health (1.25 percentage points) and undoing the adverse effects of geography and institutions (1.21 percentage points).
The pledge to double aid to Africa is a necessary and natural extension of the G8's commitment in Kananaskis that "no countries genuinely committed to good governance and investing in their people should be prevented from meeting the MDGs because of lack of resources".
The proposal to provide 100% debt stock cancellation both relieves the debt crisis of many HIPCs and unlocks additional resources that are critical to consolidate and deepen political and economic reform. While the HIPC initiative has significantly improved the debt situations of all completion point countries, it has been slow and has not had the desired impact on growth and poverty reduction. The new debt cancellation proposal is bolder and provides greater clarity on Africa's external debt position.
The impact on Africa's economic progress will depend on a number of factors, including the extent to which additional resources are made available, the amount of fiscal space that is created by debt relief, the areas to which additional resources are allocated, and the impact on the stock and flow of resources for development over the medium to long term.
On one size fits all
The G8 proposal is not a one-size-fits-all approach to debt relief, as HIPCs have to meet stringent country-specific conditionalities to reach completion point and receive debt relief. Linking debt relief and additional aid to the policies of individual countries in this way ensures that recipients have the necessary capacities and policies to make the best use of the additional resources, which is why this selective approach to debt relief is preferred. Benefiting post-completion point HIPC countries recognizes the quality and soundness of the HIPC-PRSP [Poverty Reduction Strategy Paper] process, and avoids introducing additional conditionalities.
Additional resources will be provided to all IDA [Individual Development Accounts] and ADF [Application Development Facility] countries ensuring that all low-income countries benefit from the proposal, in shares consistent with their current Performance Based Allocation. A commitment to fully financing the debt relief proposal is essential if we are to ensure that it does not impact negatively on those well performing countries without an unsustainable debt burden, also facing challenges in ensuring social upliftment. Without additional resources there is a risk that the proposal may result in reduced access to/higher cost of funds from the MDBs for those countries.
It is important to ensure that as many countries as possible benefit from this proposal, which provides an exit from unsustainable debt burdens. The requirements for remaining HIPCs to qualify for completion point must not be unnecessarily slow or onerous.
On G8 promises
Over the last four years, the G8 has developed a special working relationship with Nepad (New Partnership for Africa's Development] and the AU [African Union], meeting with African leaders to discuss the continent's particular challenges. This has deepened the G8's understanding of the challenges facing African leaders and the substantial progress they have made over the past decade. It has also fostered a relationship of trust between the G8 and African leaders, which is the foundation for a partnership to place the continent on a path to sustainable economic development. The commitments that emerged from the Gleneagles Summit demonstrate that this partnership is leading to ever increasing engagement and delivery on promises.
The creation of new institutions – in particular Nepad, the African Union and the African Peer Review Mechanism – has created enhanced conditions for achieving development in Africa. More than ever before, Africa is able to utilize resource transfers for purposes of development and the eradication of extreme poverty.
On Foreign Direct Investment (FDI)
Over the past two decades, African economies have frequently been encouraged to promote inward investment through a bewildering array of investment incentives. In some cases, such incentives have diminished government revenue, shrinking the resources available for driving economic development. More critically, much of the investment attracted in this way has been "footloose" – relocating to other countries in response to bigger incentives – and is therefore unsustainable. Finally, it must be acknowledged that much of the FDI that has flowed into Africa over the past decade is destined for resource extraction, i.e. into industries with limited spill over effects into growth and development.
Given the shortage of financial resources to drive development, FDI remains an important source of finance for development. It also plays a critical role in technology and skill transfer, if appropriately implemented. The increasingly positive attitude of international investors towards African economies, and a growing recognition of the opportunities in these economies is therefore welcomed. Investors are adjusting their high-risk perception of Africa, as the business climate in these economies improves. It is expected that the African Peer Review Mechanism will play a key role in supporting the development of improved policy and business practices in Africa.
It must, however, be acknowledged that the primary constraint to further inward investment in Africa is the continent's poor infrastructure. This is widely recognized and highlighted by almost every Investment Climate Assessment conducted in Africa by the World Bank, Unctad [UN Conference on Trade and Development], World Economic Forum and other research institutions over the last five years. African policy-makers recognize that this is a core constraint. Efforts to increase investment in infrastructure are central to pan-African policy to promote growth and development, including Nepad.
On aid absorption
Each country, and each sector in each country, is likely to have its own problems with regard to absorptive capacity, but it is unlikely that this is uniformly so, and capacity constraints will ease over time. Perceived lack of capacity should not become an excuse for decelerating actions in support of Africa's development.
While the effectiveness of aid depends on the quality of policies and institutions of recipient countries, the form such aid takes is of equal importance. Budget support, investments in infrastructure and directing aid to productive sectors have a stronger positive impact on growth than aid as a whole, and donors must be more efficient in focussing their country support.
Although there is increasing consensus on the importance of better quality aid, the political will to implement this as been lagging. Too many resources continue to be lost in the administration of aid, and too few end up as untied and liquid resources that developing countries can utilize to carry out national development strategies. Donor efforts are diffuse and remain driven by national political interests, rather than the needs of recipients. Hence, economies of scale in donor support are not realized, efforts lack focus, and the concrete outputs and benefits are frequently lost in the scale of the problems in recipient countries.
Some of these problems can be addressed by greater selectivity in aid allocations. However, getting to the point where discrete projects and programmes can be linked to measurable results requires far closer alignment of donor assistance with national development strategies and priorities. Harmonizing donor policies and practices with those of the recipient countries, and providing more predictable and longer-term aid commitments are essential to building enhanced partnerships.
The Paris Declaration for Aid Effectiveness (March 2005), provides clear indicators of progress in this regard, setting targets for 2010. To improve the efficacy of aid requires continued high-level political support, peer pressure and coordinated actions at all levels.
On the most pressing challenges
The challenges facing Africa are multiple and interrelated. The Commission for Africa Report synthesized the best current thinking on how to stimulate Africa's development including proposals to increase peace and security, public expenditure, spending on infrastructure, ways of making trade more fair, raising the capacity of Africa to trade, and ensuring that efforts to develop a new partnership with developed countries continues.
Continued and sustained efforts to address all these issues will underpin the achievement of the high and sustainable economic growth that Africa needs if it is to meet the MDGs by 2015.