Friday, January 18, 2008

Follow the money: How does Kenya earn so much foreign aid?

What to do with Kenya? In an attempt to force the legally questionable Mwai Kibaki government to the negotiation table, opposition leader Raila Odinga called for donor countries to withhold the country’s foreign aid. The European Parliament followed suit, unanimously adopting a non-binding resolution that called for the government to suspend its five-year €400 million aid package.

There are development cynics who argue that canceling these funds would be the best thing that ever happened to Kenya.

Foreign aid has always been the problem, argues Kenyan economist James Shikwati. In a 2005 interview with Spiegel, he called for donor nations to stop giving aid:

SPIEGEL: Stop? The industrialized nations of the West want to eliminate hunger and poverty.

Shikwati: Such intentions have been damaging our continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured in to Africa, the continent remains poor.

With this, he has a point. According to a little hand book from Economist called A Pocket World in Figures, Nigeria receives $6.4 billion in bilateral and multilateral aid, the second highest amount in the world (but three times less than first-place Iraq). Ethiopia, the world’s fifth leading beneficiary and Africa’s second, receives $1.9 billion. Sudan ranks next, as the world’s seventh highest, at $1.8 billion, right ahead of Congo-Kinshasa. A few “prosperous” Asian countries – China, India and then less well-to-do Pakistan – follow before Tanzania ($1.5 billion), Congo ($1.4 billion), Mozambique ($1.2 billion) and Uganda ($1.19).

Kenya itself lies at the world’s 24th largest aid recipient at $768 million.

Vote with money
This brings up an interesting point. Most of these African countries are admittedly more “politically important” than their neighbors, but a good portion of them are also relatively more prosperous. Yes, Congo-Kinshasa, Ethiopia and Mozambique score poorly on human development scale, but Sudan, Congo, Tanzania, Nigeria, Uganda and Kenya are all considered Middle Income Countries. (OK, Tanzania and Nigeria are not, but they are close and both represent labor magnets in their regions.)

The world’s poorest countries – Sierra Leone, Burkina Faso, Mali, Niger – all fall well below Kenya in the amount of aid they receive. The money headed towards West Africa is more important, however. Aid for these countries languishing at the bottom of the Human Development Index comprises a greater part of government revenues. (In Niger’s case, the U.S. State dept. estimates aid makes up 40 percent of government spending.)

Aid and development budgets show how donors weigh each country’s significance. The fact that Kenya receives more money says something about its perceived “importance” and the fact it is viewed as a “strategic ally” that has long been hailed as the future of Africa. No matter how bloody its past.

But increased aid budgets targeting this set of countries may say something about the real cost of development. Perhaps raising the standard of living in a medium income country like Kenya is more expensive than increasing human development in statistically lowly Burkina Faso.

Population may play a part – Kenya’s 36 million people far outweighs Burkina’s 13 million. Certainly Kenya is richer on paper than Burkina Faso. Its people are educated. The country benefits from more developed manufacturing and agricultural sectors, and it receives an ungodly amount of foreign currency from its tourist industry. Yet, a large share of Kenyans barely scrape buy.

Donors must calculate the cost to raise the income of this entrenched poor. A better question may be how does one raise the standard of living? Do you target the business class and pray jobs trickle down to Kenya’s poor? (One could do this through better roads, which apparently are awful, or by improving infrastructure.) Or, do you tackle the healthcare and education and sanitation needs of this underclass directly? (Someone suggested the European Union would better spend its money by giving each Kenyan €10 million over then next five years.)

Skikwati, and others like him, have long argued that trade and foreign investment are the only methods that will help countries like Kenya boost its standard of living. As the country remains politically unstable, however, these business prospects dampen. This crisis will most likely delay investment in Kenya by up to a year, predicted the head of the Corporate Council on Africa in the East African. And failure to staunch the bloodshed soon "could kill new investment in Kenya altogether," he warned.

Wards of the state?
Because all arguments lead back to Burkina Faso, let’s talk about aid to the Sahel. A friend who runs a large development organization elsewhere wondered aloud whether governments like Burkina Faso, Mali and Niger would always be too poor and too undeveloped to appropriately care for their own people. Populations in the Sahel are increasing and fertile land is decreasing. This makes it nearly impossible to sustain poverty-defeating economic growth. Will aid always be necessary for these governments to function?

Perhaps it is the goal of aid donors to target countries that stand a better chance of success. Hedge your bets and go with the sure thing. If places like Kenya can get its political house in order, perhaps it can be an oasis of wealth neighboring countries can benefit from. Jobs created. Regional trade increased. Investment possibilities. Providing examples to other governments. (Open speculation: Isn’t this how development has worked in South America and Asia?)

Of course, aid skeptics would say you are throwing money down a hole. Kenya has never been that well run. Better governed countries, however, like Mozambique or Tanzania may prove this theory true.

Boring personal anecdote: In the early 1990s, I spent two years in the former Czechoslovakia. When I returned to Slovakia in 2004, I was astounded at the level of development that had taken place throughout the country since I left a decade before. I could point out a lot of reasons for this new prosperity: education levels, a good infrastructure, blah, blah. I had already been living in Ouagadougou for a few years when I took that trip, and I quickly understood that Burkina may be relatively better developed if it only counted Austria as a neighbor.

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