Diane Coyle: Developing countries need stability more than handouts

The trouble with aid is that is it highly politicised and a lot has gone to countries with bad policies

Are we any closer to knowing what makes some economies grow and others languish? It's the question at the heart of economics and it seems particularly timely to raise it again amid all the attention focussed on economic development thanks to this week's summit jamboree in Johannesburg.

The United Nations fact sheets on growth and trade prepared for the summit imply that there's a straightforward answer. Item one on its development agenda is more official aid from the donor countries. The total has fallen from nearly $60bn (£39.4bn) in 1990 to $43bn in 2000, declining as a share of donors' GDP from 0.33 per cent to 0.22 per cent – compared with a supposed target of 0.7 per cent of GDP. Research by the World Bank has found that development aid can be effective in increasing growth and reducing poverty if it goes to countries with good economic policies. The trouble with aid is that it is highly politicised and a lot has gone to countries with bad policies, where it does no good at all.

What's more, aid is now dwarfed by the scale of private investment in developing countries. Foreign direct investment (FDI), the useful kind involving new businesses and jobs, into developing countries has climbed from $36bn in 1991 to $178bn in 2000. The UN would like to see the FDI total grow. Out of a global annual total of more than $1 trillion, little of the investment favours developing countries at all, and, it points out, four-fifths of the FDI into the developing world has gone to only 10 countries, mainly in East Asia. US direct investment in China and Hong Kong combined, two of these 10 winners in attracting inward investment, was last year lower than the amount American businesses invested in Ireland.

So on to the third big focus of the UN's attention, external trade. Although severely dented by the current slowdown, world trade has grown much faster than world GDP over an extended period. The value of world trade in goods and services has doubled over the past decade, and the developing country share of the total is now nearly a third. There is no doubt that increased trade is tremendously important for growth. Again, though, not all countries have benefited. Africa in particular has lagged behind.

The message from this development shopping list – aid, foreign direct investment, exports – is therefore not encouraging. While all can help boost growth, in theory and practice alike, they have worked in the past for only some countries. They are certainly among the ingredients for successful development, but do not amount to the full recipe. Nor do they help understand why some East Asian countries have, despite the setback of 1997-98, experienced a complete transformation in fortunes within a generation while sub-Saharan Africa has seen scarcely any growth for a decade. Is stagnation in Africa a consequence or a cause of the lack of foreign investment, for example? If the latter, simply exhorting the business participants in Johannesburg to invest more in Africa will have no effect.

Better clues come from looking at the great diversity of economic trends within Africa, a diversity which is almost always ignored. Some problems are indeed widely shared – HIV/Aids and dependence on commodities in particular. Yet, according to the invaluable African Economic Outlook published by the OECD's Development Centre and the African Development Bank, GDP per capita in sub-Saharan Africa ranged between $4,085 in Gabon in 2000 and $100 in Ethiopia. Average annual growth rates from 1995-2000 varied between Equatorial Guinea's 31.6 per cent (turning it into one of the continent's richer nations within half a decade) and 1.3 per cent in Zimbabwe.

Equatorial Guinea is a special case because its new wealth has been due to oil discoveries, which pose big challenges. The report notes it even lacks the organisational capacity to measure its oil revenues, never mind use them wisely to reduce poverty or improve health and literacy.

However, number two in the league table, Mauritius, is a genuine success story. Its GDP growth has averaged nearly 6 per cent for two decades. It has diversified its economy away from agriculture and commodities, and exports have grown faster than GDP. Its problems in the near future will be those of (relative) success: for example, continuing to thrive in international markets as rising real wages push up costs, and as its duty-free access to European markets expires. It is now looking to expand its tourism and financial services industries.

Turning to the countries which have not been growing, one thing stands out. All have experienced conflict or serious political tension and tend to have repressive governments. Zimbabwe's slow growth since 1997, for instance, could be analysed in terms of its large government budget deficit and 56 per cent inflation, weaker commodity prices in the wake of the global financial crisis and a reduction in overseas loans. But the implosion of its agriculture and manufacturing can, like the macroeconomic failures, obviously be blamed on the increasingly severe political crisis.

So in fact the answer to the basic growth question for these extremely poor African countries is indeed pretty straightforward, although it is not the one set out by the UN. Rather, it is: deliver political stability, run broadly sensible macroeconomic policies and then build up the capacities of the population through improved healthcare and education. During the Cold War the malign attention of the great powers could be blamed for political turmoil and conflict. The imperial legacy in terms of the uneven distribution of land, the lack of administrative capability, and in some cases also the unhelpfully arbitrary location of national borders, also remains a serious obstacle.

However, the developed countries have no direct interests of their own at stake in the continent's future now. The responsibility for achieving political stability lies with each African country's own government, not its aid donors or potential investors or even UN summits. Compared with the past, that may well be an improvement; but accepting the responsibility seems to be the hard part.

Diane Coyle runs the consultancy Enlightenment Economics.

Diane@enlightenmenteconomics.com