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Abstract
The implicit assumption of the donor community is that Africa is trapped by its poverty, and that aid is necessary if Africa is to escape the trap. In this note I suggest an alternative assumption: that Africa is caught in an institutional trap, signaled and reinforced by the small share of income of its independent middle-income population. Theory and historical experience elsewhere suggest that a robust middle-income group contributes critically to the creation and sustenance of healthy institutions, particularly healthy institutions of the state. I propose that if external aid is to be helpful for institution-building in Africa’s weak and fragile states, donors need to emphasize not providing more aid but minimizing the risks more aid poses for this group in Africa.
Most middle-income households in Africa are actually poor by international standards, or at risk of becoming poor. While maintaining their concern for the “poor” as conventionally defined, donors need also to avoid harm to the fragile “middle”. Of special concern should be the implications of high and unpredictable aid inflows for small entrepreneurial activity and job creation in the private sector. In the more than 20 countries already highly dependent on aid (where aid constitutes 10 percent or more of GDP and as much as 50 percent of total government spending), donors (in collaboration with recipient governments) should monitoring more closely than has been the case the effects of aid and of planned aid increases on the labor market, particularly for skilled workers; on interest rates and other macroeconomic variables; on domestic investor confidence (given the volatility of past aid); and on incentives for domestic revenue generation.
Footnote:
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President, Center for Global Development, Washington D.C. (). I am grateful to Christine Park for excellent help with data, to participants in seminars at the Overseas Development Institute in London and the Center for Global Development and to many colleagues for their generosity with comments on an earlier draft: Kim Elliott, Todd Moss, Richard Auty, Arvind Subramanian, and Verena Fritz. This paper originated in the form of remarks at a seminar of the Overseas Development Institute, London, in June 2006. I am grateful to Verena Fritz and Alina Rocha Menocal for their invitation to participate in the seminar series, (Re)building Developmental States: From Theory to Practice.
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