UNCTAD: African Countries Should Use Official Development Assistance To Diversify Their Economies

A key recommendation of a recent report by the United Nations Conference on Trade and Development (UNCTAD), which deals with trade, investment, and development issues, is for official development assistance to Least Developed Countries (LDCs) to be channeled to the productive sector.

In an interview with Africa Renewal’s Kingsley Ighobor, Paul Akiwumi, UNCTAD’s Director, Division for Africa, LDCs and Special Programmes, discusses the report as well as other issues. These are excerpts.

Let’s begin with COVID-19. What impact do you think the pandemic will have on ODA flows to LDCs?

The pandemic highlights the vulnerability of LDCs to external shocks. Although it is too early to know its full impact on ODA [Overseas Development Assistance] disbursements to LDCs, we hope that the health and wellbeing of the 1.1 billion people living in the world’s most vulnerable countries is not severely affected. UNCTAD recommends that LDCs adopt policies that improve the coordination, allocation and accountability of the ODA received. Priority should be given to structural transformation-inducing activities to develop individual countries’ productive capacities.

What message do you have for donors regarding the potentially precarious situation of LDCs post-COVID-19?

The international community should aim to meet commitments made by many developed countries to achieve 0.7% of GNI [Gross National Income] for ODA and between 0.15% and 0.20% of GNI for ODA to LDCs. Among other interventions, donors should offer more grants than loans, so as not to worsen the LDCs’ debt levels.

One of UNCTAD’s latest reports on LDCs focuses on the management of ODA. What are the key takeaways from the report?

The most important takeaway is that most of the ODA coming to LDCs focuses on a limited number of countries. In addition, about 70% of ODA goes to the social sector, and about 20-25% goes to the productive sector. And the last takeaway, I would say, is that ODA is becoming more loans than grants. That means countries are borrowing more—the debt stock is increasing rapidly. This is a concern because many of the LDCs are now heavily in debt.

What difference could it make were more ODA to go to the productive sector?

The point is that we have spent a lot of time and resources on the social sector. Without a solid productive sector, all the investments in the social sector— health, education, etc., — people graduating from universities will have no jobs. Investment in the productive sector means diversifying the economy, ensuring that value is added to what is being produced.

Isn't it the case that donor countries usually tie ODA to specific sectors? If so, how do you influence the rechanneling of such assistance to production?

Well, our report has asked for a new way of looking at ODA. We ask that recipient countries decide priority sectors for ODA deployment, which enables control over implementation as well as becoming a part of the accountability framework. Also, when ODA goes only to the social sector, project-based activities, there is domestic brain drain—people are moving from government institutions to better-paying jobs in these projects.

Can the donors be influenced to change the current paradigm?

I think the important thing is for everybody to recognize that what we're trying to do is put the facts on the table. And I think we must recognize that over the last 40-50 years, only very few LDCs have graduated out of that status. This means we must try something different; you cannot continue with business as usual and expect different results. Donors and governments need to see a need to change the way ODA is delivered.

ODA for LDCs has increased by only 2% since the start in 2011 of the Istanbul Programme of Action, far below the 7% increase during the prior period of the Brussels Programme of Action (2001-2010). Is the current trend worrisome?

I would say that countries need to focus on where ODA will have more impact. Developing countries have done tremendous work in domestic resource mobilization, in tax collection, for example. But unless you have a vibrant productive sector, you can only squeeze so much out of tax. The important thing is to make sure that donor assistance goes to the right sectors, as identified by countries in their national development plans, as opposed to as desired by donors. Regarding the action agenda, we have new players and actors involved, particularly the private sector. We have to be careful that we are supporting the national firms as opposed to multinationals.

Your report also mentions that Africa cannot mobilize adequate domestic resources for development because of its weak productive base. How do you counter those who argue that there are enough domestic resources that, if efficiently mobilized, could diminish the need for aid?

The thing is, like I mentioned earlier, LDCs have spent a lot of time improving tax collection. But there is a point you reach that, if you do not produce things, and you don't have the industry, and you do not have the services, there's only so much you can tax out of an economy. So it's important that economies grow. If an economy grows, you become self-sufficient. It's a process. Therefore, the ODA must support diversification of an economy, so that the productive sector can build itself up. And then countries can increase their domestic resources.

What should African countries do in view of the fact donor support is dwindling?

For Africa, the implementation of the African Continental Free Trade Agreement (AfCFTA) will be key. Intra-African trade is only approximately 17%. In Europe, it's about 70%. If you go to Asia, it's about 59%. So there's a need for African countries to trade amongst themselves and to add value to what they trade in. That will help build productive capacity and diversify the economy.

How hopeful are you regarding AfCFTA?

I am very optimistic. I think the free trade area will give Africa a real chance to break away from this yoke of commodity-driven economies because we've seen that it doesn’t often succeed. You know the common stories about the cocoa industry and chocolates: the fact that 80% of Africa’s cocoa is exported without adding value to it. But even the chocolate that is manufactured within Africa, primarily in South Africa and Egypt, the tariffs within Africa are much higher than those for chocolate exported from Switzerland to the UK, for instance. The AfCFTA should reduce and eventually get rid of the tariffs on African products within Africa.

Your report seems to prefer ODA as opposed to private sector-led development financing. Why is that?

First, the private sector needs to make a profit. Second, when we're talking about LDCs, the private sector we are talking about are the multinational companies. And they are competing actors—they have different interests. As a result, there's a fragmentation of interests of the donors who provide the money, the private sector that is involved in it, and the government itself. So the government is often left out of the accountability framework, because the private sector is more accountable to the donor than the government.

I think this is a critical area to be examined. We're not saying the private sector should not be involved; what we're saying is that governments need to be involved in the accountability framework, and that ODA must be aligned with national development plans and structures.

While you are canvassing for more ODA to LDCs, many African leaders and development experts are saying ‘we need more trade than aid.’ Is that a contradiction?

It's not a contradiction. Countries need aid to be able to develop the productive sector, to be able to trade more things. Unless you produce something, you can't trade in goods and services. We use ODA to diversify economies and build productive sectors.

Does it make sense to advocate for debt cancellation for African countries to free up debt repayment funds for development?

Well, this discussion has been going on even as debt is increasing. The international community and LDCs will have to sit down to discuss how to move toward debt cancellation or restructuring of the debt payment. A growing number of countries that are getting a lot of funding from non-traditional donors are in serious debt, and they can't pay back the monies that they borrowed.