The Failure of Aid and Adjustment Policies in Sub-Saharan Africa: Counter-examples and Policy Proposals

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Abstract
In Africa, contrary to the experience of the rest of the developing world, aid flows as a share of GNP have increased enormously, but there is little evidence that this increase has been favourable to growth, or that the conditionality designed by donors in the 1980s to increase the effectiveness of aid has, in the aggregate, done so. This paper investigates why, using a game-theory model in which both donor and recipient seek to extract maximum advantage both from aid flows and from the policy conditions attached to them. Two important predictions of the model are that conditionality will in general be breached without penalty unless compensation is provided to losers and/or the implementation of conditions empirically proves itself effective. These predictions are confirmed in the African case. In Uganda, Mauritius and Ghana — the three countries where, as a result of compensation of losers and consistent investment and export development policies, donor policy recommendations proved credible — those recommendations were implemented and aid was effective. In all other adjusting African countries, conditionality was not credible in the sense of leading to a short-run increase in output, and aid flows were not effective.

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