Foreign aid and economic growth in the developing countries - a  (Page 16/21)

The policy implication here is that for Africa, the money aid is necessary but the idea aid is even moreimportant. It would be more sustainable if aid supports the policymakers training or education and then nurtures institutionalreforms initiated by these well-trained policymakers. Put it another way, aid better be “the midwife of a good policy”. Theremay be an urgent need of a special mechanism for Africa focusing on education reforms based on successful cases of some countries.Leaders in African countries should play an active role in initiating and sustaining anti-corruption campaigns, publicadministration and legal system reforms. From the experience of Indonesia, where overseas educated bureaucrats ignite and sustainthe institutional reform process, aid could be more effective to finance the overseas education of young and potential leaders.However, as mentioned earlier, this is a very long-term human capital investment, of which the outcomes are still ambiguous.Therefore, it is unlikely that donors have any interest in these types of programs, unless they really think strategically andforego their short-term incentives. Additionally, better conditionality is certainly important, in the sense that it shouldbe persistent and strict, rewarding good performers and strictly penalizing bad ones.

By and large, there are many things that need to be improved by both donors and recipients. For recipients, thepolicy and institutional environment must be improved with willingness and a strong commitment to reform. For donors, betterassessment criteria and conditionality must be applied, i.e. better designed programs, more efficient coordination and cooperation andlast but not least, the reforms of aid agencies.

5.4.ii. Experience of inland countries andSouth Asian nations during the period 1992 to 2000

Based on the results that foreign aid to the studied inland countries and South Asian nations during the periodof 1992-2000 has positive impacts on growth, it is interesting to review the experience of those countries recently.

Let’s look at the recent experience of inland countries first. Among 7 inland countries in the study, there are 2Latin American countries, i.e. Bolivia and Paraguay, 4 African countries namely Benin, Botswana, Mali and Rwanda and 1 countryfrom Middle East, Jordan. Most of these countries have undergone successful institutional and financial reforms, macroeconomicstabilization, private sector encouragement, trade promotion, and intensive investments in human capital recently. Therefore, despitethe unfavorable natural conditions of the landlocked location, many of them have achieved tremendous economic performance. Botswana isone of the fastest growing countries in the developing world with a GDP growth rate of 7% over the past two decades. Benin achieves a4.9% average annual growth rate from 1991 to 2001. Rwanda has grown at between 6 to 9% during the period 1994 to present. Jordan andMali attain 4.38% and 2.5% growth rates respectively. Bolivia and Paraguay are recovering from recession. With the exception ofdiamond trade in Botswana, other countries, such as Jordan and Mali, are endowed with very scare natural resources anddisadvantages in climate and international sea transportation access. However, each of them has their own approach to economicimprovement. Jordan has been investing intensively in education and trade promotion. Mali concentrates on macroeconomic stabilizationand economic liberalization. Rwanda focuses on policy and institutional reforms for instance rationalizing the tax system,introducing VAT, improving expenditure management, removing ghost workers from public service payrolls, launching privatizationprogram, granting independence to the Central Bank, liberalizing exchange rates and prices, implementing financial reform andreducing tariffs. Benin has been strengthening economic management since 1990s. The government of Botswana has managed the country’sresources prudently, controlled expenditure and invested in human and physical capital. Bolivia, after a time of difficulty anduncertainty, has paid much attention to improving its critical infrastructure, expanding the basic services and strengtheningpublic institutions. The donor and NGO community plays an important role in the reform process in most of these countries, especiallyin Rwanda, Mali, Benin and Botswana.