FOREIGN AID AND POVERTY DYNAMICS IN AFRICA

ABSTRACT

The study focuses on foreign aid and poverty dynamics in Africa. Specifically, the study addressed two objectives ;(1) the relationship between poverty and aid and (2) the relationship between mortality rate and aid. Following these objectives, the study used fixed effects estimation techniques for the two objectives, the choice of which was determined empirically using Hausman test. Based on this technique, the following results were arrived at:(1) that the coefficient of official development assistance was significantly positive, suggesting that higher poverty attracts more official development assistance, (2) that the coefficient of expenditure on education is positive, hence high rate of poverty attracts more expenditure on education,(3) that official development assistance rises as a result of increase in the mortality rate ,(4) that higher mortality rate attracts more expenditure on education and(5)that expenditure on health appears not significant in the two models and this implies that expenditure on health does not respond to changes in both the poverty level and the mortality rate. The study therefore recommends for the scaling up of aid to African countries in accordance to the agreements of Monterrey of 2002 and Gleneagles of 2005.

CHAPTER ONE

INTRODUCTION

In Nigeria, the problem of poverty has for a long time been a cause for concern to the government. Initial attention focused on rural development and town and country planning as a practical means of dealing with the problem. Thus, the second and fourth national development plans contain both direct and indirect allusions  to,  as  well  as  objectives  of,  policies  and  programmes  aimed  at minimizing the causes of poverty. These various causes of poverty, which include low   productivity,   market   imperfections,   structural   shifts   in   the   economy, inadequate commitment to programme implementation, political instability, etc., are   complex   and   the   consequences   often   reinforce   the   causes,   further impoverishing the people. In a fairly recent survey, Nigeria’s festering poverty profile was described as “widespread and severe” CBN. (1999). The report of comparative analysis of welfare ranked Nigeria below Kenya, Ghana and Zambia and expressed concern over the dwindling purchasing power of the people and the

increasing income inequality in Nigeria, which have made life unbearable for the

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citizenry despite improved inflation rates. Whether measured in absolute or relative

terms, poverty is generally more prevalent in the rural communities of Nigeria. Although the population of urban dwellers in the total population has increased from 19.0% in 1963 to about 25.0% in 1990, both urban and rural areas share similar poverty characteristics even as certain peculiar features arise from either the  relative  intensity  of  socioeconomic  deprivation  in  the  rural  areas  or  the problems of rapid urbanization Aigbokhan, B.E. (1998). The sluggish growth and the low level of income coupled with inequality in income distribution as well as lack of access to basic social amenities have accentuated poverty levels across economic  groupings  and  geo-political  divisions.  When  the  benchmark  for  the

poverty line was estimated by the World Bank on the basis of two thirds of the mean per capita household expenditure for 1985 (i.e., N395.00), about 43.0% of the entire population was considered poor. Using the same benchmark, 31.7% of urban population and 50.0% of the rural population lived below the poverty line. In most urban centre’s, poor wage incomes and high unemployment rates, in the absence of social security benefits, have reduced the capacity of most people to provide the basic needs of human existence. Similarly, the intensity of poverty among the rural dwellers is  manifested not only in very low incomes  (which provide barely half the nutritional requirements for healthy living), but also in poor living conditions with little or no access to potable water, electricity and modern health care facilities Obadan, M.I. (1997). Indeed, in terms  of quality of life, deterioration in income, unemployment and poor social infrastructures, the poor have become poorer between 1985 and 1997. Although skill acquisition is a prerequisite  for  gainful  employment,  the  high  incidence  of  poverty  among educated Nigerians reflects problems of unemployment and low wage levels. Even among people in regular or self-employment, those living below the poverty line account for about 30.0% and 25.0%, respectively. Another significant development is  the  redistribution  of  poverty  among  occupational  categories.  Even  though poverty is more  prevalent in the  rural  areas, the proportion of farmers  in the population of those who live below poverty line has declined progressively from

86.6% in 1985 to 67.4% and 33.3% in 1992 and 1997, respectively. But the civil service, corporate establishment and trading (or informal) sector, which accounted for about 11.1 % and 26.3% of the poor in 1985 and 1992 respectively. This reflects the impact of falling real wages and inaccessibility of social services on the living standard of the people. With an adult literacy rate of 57% in 1997, education indexes show that about 43% of Nigerians are illiterates. The consequences are

poor income, inadequate skilled manpower and low productivity – and hence the persisting high level of poverty in the country Ogwumike and Ekpenyong (1995).

1.1.1 Poverty profile in Nigeria

The Nigerian economy is characterized by a large rural, mostly agriculture based, traditional sector, which is home to about three-fourths of the poor, and by a smaller  urban  capital  intensive  sector,  which  has  benefited  most  from  the exploitation of the country’s resources and from the provision of services that successive governments have provided. This duality arose in large measures from domestic   policies   that   steered   most   investment   –   physical,   human   and technological – into a few already capital intensive sectors of the economy. A fundamental problem with Nigeria’s past pattern of development has been that the incentive regimes that prevailed for most of the last two decades have tended to favour the urban modern sector to the detriment of the traditional rural sector, consistently worsening the domestic terms of trade of the latter. Nevertheless, the poor in Nigeria are not a homogeneous group. They can be found among several social/occupational groups and can be distinguished by the nature of their poverty. For example, evidence from the World Bank poverty assessment on Nigeria using

1992/93 household survey data, shows that the nature of those in poverty can be Distinguish by the following characteristics: sector, education, age, gender and employment status of the head of household FOS (1999). Other characteristics include household size and the share of food in total expenditure. Table 1 presents the percentage of persons and households below the poverty line in 1996/97 by some of these characteristics. The table shows that 67.1 million Nigerians were in poverty in 1996/97, out of which 23.3 million and 43.8 million were located in urban and rural areas, respectively FOS (1999). Thus about 65% of the poor live in the rural areas, indicating that poverty in Nigeria is largely a rural phenomenon.

For example, in 1992, 46.4 million Nigerians were said to be living in absolute poverty, out of which 80.2% or 37.7 million are in the rural areas Ogwumike (1996). The marginalization of the rural areas through urban-biased development policies is largely responsible for the high poverty incidence in the rural areas.

Table 1: Poverty incidence by socioeconomic group, 1996/97

Socioeconomic   groups	Extreme poor	Moderate poor	Non poor
Urban	25.2	33.0	41.8
Rural	31.6	38.2	30.7
Male-headed	29.8	36.7	33.6
Female-headed	25.0	33.5	41.5
Age of head
15–24	16.2	21.2	62.6
25–34	20.2	32.5	47.3
35–44	27.9	36.7	35.4
45–54	32.7	38.6	28.7
55–64	32.6	37.3	30.1
65 and above	33.5	34.6	32.0
Education          of   head
Non	34.3	38.3	27.4
Primary	24.3	35.1	40.6
Secondary	21.2	30.8	48.0
Post-secondary	15.3	32.9	51.8

Source: FOS (1999).

In examining the issues of poverty reduction through foreign aids, some studies focused on Nigeria considering either income or non-income determinants Olowomomi, (1997); UNDP, (1999); Akinkinbola and Saibu, (2004). There is no doubt that a combination of both determinants may produce better results. Also, in examining foreign aid in relation to poverty level, most studies regress poverty on total aid. We like to argue that different types of foreign aid will likely produce different results and it will be reasonable to investigate African scenario. In this study  we  use  both  the  income  and  non-income  determinants  of  poverty  and account for the effects of different types of aid on poverty indicators. Furthermore, studies  have  examined  the  importance  of  foreign  aid  in  poverty  reduction especially in regions where poverty crisis is prevalent notably the low income regions in Nigeria. However, not much has been done in the areas of investigating the relationships among the three concepts: foreign aid, poverty reduction and mortality rate in Africa. In this regard, some questions have been probing the intellectual   curiosity   of   some   observers.   Does   availability   of   foreign   aid discourages or encourages poverty reduction and mortality rate in Africa.

One of the development challenges facing Africa today is how to reduce the high poverty level prevailing among her population. While poverty is seen as a phenomenon in both developed and developing countries alike, its presence and rapid growth in Africa is more alarming when one considers the fact that more than half the population still live in poverty. Opinions differ about the efficacy of foreign aid in fast tracking the process of development. It is noted that a prominent argument for foreign aid is that it tends to promote reduction of poverty. The importance of the development challenge of poverty reduction and hunger is aptly demonstrated as the number one goal of the eight Millennium Development Goals (MDGs).   Foreign aid is a significant source of income to developing countries,

especially in Africa, where it averages 12.5 percent of gross domestic product and establishes  by  far  the  important  source  of  foreign  capital  (Pallage  and  Robe (2001)). In such an environment, foreign aid has a potential to play a key role in promoting developing countries’ economic growth and poverty reduction.

Most Sub-Saharan African states still depend largely on external aid to manage their budgets. According to the Africa Network for Environment and Economic Justice Secretariat in Nigeria, the percentages of aid as a share of government expenditure are: Nigeria 5%, Ghana 60%, Mali 73%, Sierra Leone 60% (recurrent)

90% (capital development), Senegal 70%, Burkina Faso 85%. Nevertheless, the budgets do not address poverty reduction. Even Nigeria, considered an oil rich nation, budgeted only US$8 billion for its services in the 2004 fiscal year. This is a far cry from what the country needs to meet its development needs as reported in Atakpu (2004).

In the context of development in Africa, foreign aid is an important component of the resource set that is available for service delivery. Aid intensity in Sub-Saharan Africa (SSA) has long been the highest of any major developing region in every

category of indicators and remains so today. When aid is measured relative to

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Gross National Products (GNP) or its spending sub-aggregates, African countries

tend to cluster in the upper quartile of the aid intensity rankings. Africa’s median aid was already high by historical standards in the 1970s but it still doubled over the subsequent decades. In the post 2002 period the volume of aid has shown a rising trend partly in response to the Monterrey consensus.

Though aid fell from the peak of 0.5% of developed country GNP to 0.21% at the time when the MDGs were being approved, it has recovered to 0.33% in 2005. In

spite of this positive trend, projections for the period 2006-2010 still fall below what is required to meet the MDGs by 2015. The developed countries have been urged to raise Official development Assistance (ODA) to reach 0.7% of their GNP by 2015 with an intermediate target of 0.5% by 2009. Currently only Denmark, Luxemburg, the Netherlands, Norway and Sweden meet or exceed the 0.7% target. In  this  context,  the  United  Nation  (UN)  Millennium  Project  Report  (2005) proposed that high-income countries should increase ODA from 0.25% of GNP in

2003, to 0.44% in 2006 and 0.54% in 2015 to support MDGs with improved aid quality (harmonized, predictable and grant-based budget support). Each donor should reach 0.7% of GNP before 2015 and debt relief should be more extensive and generous. In 2005 the 15 pre-enlargement members of the European Union (EU) targeted to reach 0.7% of their GNI by 2015  and 0.51% by 2010. The countries that joined the EU after 2002 agreed on a target of 0.17% of their Gross National Income (GNI) by 2010 and 0.33% by 2015.

The main objective of the ODA is to reduce poverty and to promote economic development of the recipient countries. As Killick (1991) argues “ aid that comes in a form of technical cooperation would affect the quality of a nation’s labor force through the provision of training and imported skills which is essentially for economic growth and poverty reduction, if an enabling environment is allowed to exist”(Quoted in Ijaiya and Ijaiya, 2004).  However, it is the question as to whether aid has been able to reduce poverty using poverty indicators that the study intends to unravel.

1.2 Problem Statement

Despite a rich natural resource endowment and receiving large amounts of foreign aid, most African countries failed to prosper. The countries perform very poorly in comparison to other continents for many indicators of well-being. Life expectancy

is low and only a little over half of the adult population is literate. In the crucial area of health, some indicators have deteriorated during the last decade. The UNDP’s Human Development Report (UNDP, 2002) reported that most African countries are ‘far behind’ in achieving its Millennium Goals by 2015.Even the UN and World Bank have recently admitted that in Africa, the region receiving the most aid will not meet its development benchmarks by 2015. Following this condition, Jeffrey Sachs  (2005) opted  that there  is  the  need  for more  capital, physical, human, natural resources to Africa to achieve its Millennium Goals.

The volume of official development aid to Africa have shown an increase apart from early 1990s to 2002 when there was a slight fall of aid to some African countries. Foreign aid is supposed to boost and fast track economic development in the Africa. However, poverty indicators such as: headcount index, life expectancy, GDP  per  capita  etc,  seem to  be  deteriorating  and  thus  posing  a  very  serious problem on the importance of foreign aid on poverty reduction.

Several studies have tried to capture the effectiveness of aid on economic growth and poverty reduction in Africa. Some of these results found positive link between aid and economic growth while some others found a negative correlation between aid and economic growth. Common among these studies is that growth is often viewed as the primary driver of poverty reduction and therefore inferences on the impact of aid on poverty are commonly drawn from the impact of aid on growth. However, foreign aid can reduce poverty via other channels than growth. For example, foreign aid can finance projects which directly benefit the poor. Alternatively, aid can have an indirect effect by financing areas of government spending which are likely to benefit the poor.

In the last 15 years, international aid donors to Africa have shifted their focus dramatically toward health and education; the share of social sector support in total aid rose from 33% to 60% from 1990-94 to 2000-04 alone. Yélé Maweki (Bata,

2009).This is because aid effectiveness or otherwise, is unlikely to be captured in GDP or income poverty figures. It is possible for a country’s GDP to rise significantly while the welfare of the citizens may remain unchanged. Thus using the impact of aid on GDP as a measure of poverty reduction may be misleading. However, this  led  foreign  donors  to  redirect  aid  to  Africa  mainly toward  the education and health sectors since the 90s.

In order to determine the effectiveness of aid on poverty reduction, this study intends to look at the impact of aid on education and health. A question that may arise therefore is whether this policy had the desired effect on the well-being and poverty reduction. The question becomes more acute since, in a recent book, Moyo (2009) argues that aid is ineffective, thus reviving the debate on that issue. Our study then aims to analyze whether changes in welfare in some SSA countries reflect the efforts of donors.

1.3 Research Questions

•      What is the relationship between aid flows and poverty in Africa?

•      Are these changes attributable to aid?

1.4 Objectives of Study

The broad objective of this study is to estimate the impacts of aid on poverty in

Africa countries.

The specific objectives are;

•       To determine poverty affects the flow of official development assistance

•        To determine how mortality rate affects the flow of official development assistance

1.5 Statement of hypotheses

The hypothesis of the study is formally stated in its null form while the alternative is implied.

H1:    The  level  of  poverty  does  not  affect  the  flow  of  official  development assistance

H2: Mortality rate does not affect the flow of official development assistance

1.6 Policy Relevance of the Study

Though  foreign  aid  has  continued  to  play  an  important  role  in  developing countries, especially sub-Sahara Africa, it is interesting to note that after half a century of channelling resources to the Third World, little development has taken place. In almost all of sub-Saharan Africa, there is a high degree of indebtedness, high  unemployment,  absolute  poverty and poor  economic  performance  among others.This study will be quite useful especially in tracking the progress of the African countries in the attainment of the millenium Development Goals. It will help to determine the impact of ODA in poverty reduction (the number one goal of MDGs). It will help clarify issues on whether, there is need to scale-up or reduce the amount of ODA that flows into Africa in respect to the MDGs.

1.7 Scope of the Study The study is an evaluation of the dynamics of poverty in African countries. We used a panel of 50 countries from 2008 to 2009.

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