Aid, taxation and development: analytical perspectives on aid effectiveness in sub-Saharan Africa

Sub-Saharan Africa is the poorest and most aid-dependent region in the world. It was also the slowest-growing region in the period from 1960 to 1990, contrary to what might reasonably have been expected given the high returns to investment associated with capital scarcity. While achievements on social indicators are somewhat less unfavourable than those on economic growth, the overall contribution of aid to African economic development is now widely viewed as having been low. Responding to economic stagnation and then to crisis beginning in the late 1970s, Africa's aid donors shifted from a 'capital shortage' diagnosis of the African development problem to one that located capital scarcity in specific policy failures. Aid flows correspondingly shifted from low-conditionality project support to high-conditionality programme assistance. The structural adjustment programmes of the 1980s focused primarily on redressing policy biases against agriculture and exports. By the late 1980s, however, the 'policy failures' diagnosis had given way to deeper concerns about the adequacy of African political and economic institutions. Economic stagnation and low aid effectiveness came to be viewed as reflections of a more fundamental failure of the African state, particularly in relation to its own private sector. Consistent with this 'institutional failures' diagnosis, the aid relationship in the 1990s has involved increasingly detailed economic and political monitoring and institutional intervention. Each diagnosis of the African development problem has encompassed the preceding diagnosis and in the process invalidated the set of donor strategies that previously represented best practice. It is too early to tell what the next diagnosis will be. One way to get ahead of donor perceptions, however, is to develop analytical models that are true to these perceptions and therefore capable of subjecting them to rigorous scrutiny. In this paper we make a beginning by sketching out some empirical and analytical underpinnings of the evolving aid diagnosis in Africa. We begin by summarising stylised facts about economic performance and the policy environment in Africa. Synthesising these observations with basic insights from the growth theory and political economy literatures, we lay out the formal mechanisms of an argument familiar from the literature on African political economy: that African governments have, for a variety of reasons, sacrificed broad-based economic development for more venal objectives. We focus in particular on tax and tax-like interventions, subsuming under this heading a wide range of the most important distortions identified in the literature. We then draw on Boone (1996) and Olson and McGuire (1996) to construct an economy in which capital shortages are driven by policy failures which are in turn embedded in the recipient's political economy. The model is designed to capture the main features of the earlier discussion and therefore to provide an effective vehicle for examining the effects of external aid and the role and limitations of conditionality. The analysis lends concreteness to the 'institutional failures' diagnosis and a surface plausibility to the increasing use of political and institutional interventions by donors. Its limitations are important, however. In part they reflect those of the broader literatures on political and economic institutions and particularly institutional change. In part, however, they reflect weaknesses or 'vain hopes' in donor perceptions and practice. In a concluding section we discuss the implications of the analysis for conditionality and suggest directions for further research. It is important to acknowledge at the outset that we do not attempt any sophisticated modelling of donors in this paper. We treat donors as a single entity whose motivation is to enhance economic growth in the recipient country.' While the evidence does not suggest a dominant role for pure altruism, donors may be led to a concern for economic development on purely selfish grounds, if there are negative spillovers to economic distress. More importantly, our main purpose is to examine the rather unanimous critique of recipient country political economy by the donor community.