Foreign aid and the challenges in Kenya
Category: Foreign aid
By: Chiara Müller,
By Chiara Müller – She is a intern at the IEA-Kenya.
Globally, foreign aid is one of the largest components of foreign capital flows to low-income countries. Over the past four decades, sub-Saharan African countries, including Kenya, have received foreign aid to alleviate poverty and address underdevelopment. In 2020, global foreign aid amounted to $194.1 billion, of which Kenya received over $ 3 billion. Over the past decade, however, there has been a radical critique of foreign aid. This has been driven by the perception that foreign aid has not produced the desired or expected results. This perception is based on two premises. The first is that foreign aid can only increase growth in a good policy environment. Foreign aid can therefore be a double-edged sword. If the economic and policy environment is appropriate, it can be very useful in supporting economic and social progress (Lancaster, 1999). If not, it will have no positive effect and at best will be wasted. At worst, it may delay development because of the potential negative economic and political impacts it may have.
But what types of foreign aid does Kenya receive and what are the main challenges for its effectiveness?
The types of foreign aid and the donors
Kenya has received aid from countries and institutions since independence due to its foreign policy of ratifying the United Nations Charter in line with its adherence to globalization and multilateralism.
The aid that Kenya receives can be differentiated into: development aid, military aid and emergency aid. It was found that a large portion of donor aid is for development projects. Second place in the ranking was occupied by emergency aid for budget support and borrowing to meet fiscal shortfalls, as well as aid to support emergencies related to disasters such as floods, fires, locust invasions, biological hazards, and health management as in the case of Novel Corona COVID-19 virus. Third in the ranking was military aid to support training equipment and law and order governance collaboration. [2]
Some donor states have motives stemming from colonial history with Kenya, such as the United Kingdom giving independence to the colony of Kenya in 1963 and Germany colonizing a neighboring country. This relationship is variously explained through modernization theory. This assumes that developed countries are forever linked to their former colonial partners and who offer additional aid according to their interests, but this theory has its limitations.
Younas (2008) followed the line of reasoning where donors can also use foreign aid to promote trade with the recipient country. If aid to a recipient country is used by a developing country to purchase the donor country’s exports, it can act as an export promotion strategy for the developed country. Potential benefits to the donor include benefits in terms of terms of trade and higher real incomes for factors used intensively in the export good.
Other donors include the United States, Sweden, Norway, China, Japan and Brazil, while institutions include the United Nations, the African Development Bank, the EU, the World Bank and the IMF. [3]
However, it has been noted that funding sources are insufficient for the needs felt due to high ethnic diversity (Cohen 2006) and low effectiveness, as few donors are willing to work with Kenya due to governance problems in relevant ministries.
Challenges to foreign aid effectiveness
Several studies have analyzed three issues that mainly affect foreign aid effectiveness of all three types of aid, but especially development projects.: aid volatility, aid fragmentation and aid coordination and harmonization.
Foreign aid to Kenya, has been very volatile. Based on OECD-DAC data, the volatility of total aid was 24.1 percent compared to 17.2 percent for Africa and 13.9 percent for all developing countries during 1980-2006. This shows that volatility is higher in Kenya than in the rest of Africa and other developing countries.
One reaction to the volatility of aid has been the government’s reluctance to include program aid in the budget. In the recent past, the government has excluded donor budget support from its annual budget strategy and strengthened local resource mobilization measures. [4]
Mwega (2004) studied in detail four large aid-supported infrastructure projects, discovering that the cost of volatility is reflected in deviations from actual plans, disruption of projects, and underproduction of services.
Secondly, fragmentation in Kenya, as measured by the Hirschmann Herfindahl Index, was 0.1 compared to 0.3 for all developing countries and 0.22 for sub-Saharan Africa in 2006. Thus, aid fragmentation is much higher in Kenya than in Africa and developing countries in general. This is due to an increase in the number of bilateral and multilateral donors listed in the OECD-DAC database, from an average of 17 in the 1980s to 19 in the 1990s and to 27 in 2000-2006. The actual number of public and private donors is now assumed to be higher, which poses a major challenge for aid coordination. [5]
McCormick et al. (2007) analyzed that there has also been a multiplication of projects, partly due to an increase in the number of donors and partly due to an increase in the number of projects supported by individual donors. Projects thus multiplied faster than donors.
According to several studies, the proliferation of donors and projects had all the expected effects: multiple meetings involving high-level officials, high levels of administrative commitment, pressure on funds and administrative commitment agencies and pressure on financial systems.
Lastly, aid coordination in Kenya involves the government and donors. The World Bank organized an Advisory Group (CG) in the country in the early 1970s to support the coordination.
At the 2005 CG meeting, the government highlighted challenges to harmonization, including the disconnection between central and line ministries, the use of financial management agencies, the lack of decentralized donor missions, excessive donor involvement in some sectors, and low disbursement rates of some donor-funded projects. [6]
Cohen (2006) introduced a practice-based study on the relationship between ethnic diversity and foreign aid effectiveness in Kenya. He concludes that ethnic diversity has unforeseen influences on the coordination and implementation of development interventions under development programs. Cohen sees that both government officials and foreign donor experts agreed to divide projects to ensure that ethnic groups received a fair share of foreign aid. Coalition members in Kenya, however, have other incentives regarding local resources and how to use them in economic projects in tribal regions that will ensure their loyalty, thus following their own interests.
Conclusion
To add up, bad governance has a negative effect on the nation’s development due to the mismanagement of donated funds. According to the study by Gitaru (2015), in order for foreign aid to have a positive impact on Kenya’s economic growth, it has to be used productively in development projects and issues, where the effect can be reflected in the country’s gross domestic product after a previous year of investment. 1 percent foreign aid in previous years could lead to an increase of more than 4 percent in the current year’s GDP growth rate. [7]
The role of exports in promoting economic growth has been widely recognized. Using the linkages created by foreign aid, it is necessary for Kenya to renew its export-led growth strategy by improving export competitiveness, increasing value addition, diversifying exports, and leveraging regional and global value chains. Kenya could so enable increased employment for the local population, and work on the strengthening of structures to support South-to-South cooperation in trading blocs such as the East African Community (EAC), COMESA and the African Union (AU).
References
[1] Awino C. (2021). Foreign Aid and the Political Economy in Kenya. Maseno University Institutional Repository.
[2] Dolan, L. R. (2020). Rethinking foreign aid and legitimacy: views from aid recipients in Kenya. Studies in Comparative International Development, 55(2), 143-159.
[3] Amuhaya, C., & Degterev, D. (2019). Foreign aid as foreign policy tool: competition of projects aid allocation to Kenya between Japan and China. Asia and Africa Today, (12), 68-74.
[4] M’amanja, D., & Morrissey, O. (2006). Foreign aid, investment and economic growth in Kenya: a time series approach (No. 06/05). CREDIT research paper.
[5] Blumel, C. M. (2002). Foreign aid, donor coordination and the pursuit of good governance (Kenya).
[6] Njoroge, A. W. (2014). The role of foreign aid in sub-Saharan Africa: a case study of Kenya (Doctoral dissertation, University of Nairobi).
[7] Gitaru, K. (2015). Impact of foreign aid on economic growth.
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Foreign aid and the challenges in Kenya
| Post date: Tue, Aug 16, 2022 |
| Category: Foreign aid |
| By: Chiara Müller, |
By Chiara Müller – She is a intern at the IEA-Kenya.
Globally, foreign aid is one of the largest components of foreign capital flows to low-income countries. Over the past four decades, sub-Saharan African countries, including Kenya, have received foreign aid to alleviate poverty and address underdevelopment. In 2020, global foreign aid amounted to $194.1 billion, of which Kenya received over $ 3 billion. Over the past decade, however, there has been a radical critique of foreign aid. This has been driven by the perception that foreign aid has not produced the desired or expected results. This perception is based on two premises. The first is that foreign aid can only increase growth in a good policy environment. Foreign aid can therefore be a double-edged sword. If the economic and policy environment is appropriate, it can be very useful in supporting economic and social progress (Lancaster, 1999). If not, it will have no positive effect and at best will be wasted. At worst, it may delay development because of the potential negative economic and political impacts it may have.
But what types of foreign aid does Kenya receive and what are the main challenges for its effectiveness?
The types of foreign aid and the donors
Kenya has received aid from countries and institutions since independence due to its foreign policy of ratifying the United Nations Charter in line with its adherence to globalization and multilateralism.
The aid that Kenya receives can be differentiated into: development aid, military aid and emergency aid. It was found that a large portion of donor aid is for development projects. Second place in the ranking was occupied by emergency aid for budget support and borrowing to meet fiscal shortfalls, as well as aid to support emergencies related to disasters such as floods, fires, locust invasions, biological hazards, and health management as in the case of Novel Corona COVID-19 virus. Third in the ranking was military aid to support training equipment and law and order governance collaboration. [2]
Some donor states have motives stemming from colonial history with Kenya, such as the United Kingdom giving independence to the colony of Kenya in 1963 and Germany colonizing a neighboring country. This relationship is variously explained through modernization theory. This assumes that developed countries are forever linked to their former colonial partners and who offer additional aid according to their interests, but this theory has its limitations.
Younas (2008) followed the line of reasoning where donors can also use foreign aid to promote trade with the recipient country. If aid to a recipient country is used by a developing country to purchase the donor country’s exports, it can act as an export promotion strategy for the developed country. Potential benefits to the donor include benefits in terms of terms of trade and higher real incomes for factors used intensively in the export good.
Other donors include the United States, Sweden, Norway, China, Japan and Brazil, while institutions include the United Nations, the African Development Bank, the EU, the World Bank and the IMF. [3]
However, it has been noted that funding sources are insufficient for the needs felt due to high ethnic diversity (Cohen 2006) and low effectiveness, as few donors are willing to work with Kenya due to governance problems in relevant ministries.
Challenges to foreign aid effectiveness
Several studies have analyzed three issues that mainly affect foreign aid effectiveness of all three types of aid, but especially development projects.: aid volatility, aid fragmentation and aid coordination and harmonization.
Foreign aid to Kenya, has been very volatile. Based on OECD-DAC data, the volatility of total aid was 24.1 percent compared to 17.2 percent for Africa and 13.9 percent for all developing countries during 1980-2006. This shows that volatility is higher in Kenya than in the rest of Africa and other developing countries.
One reaction to the volatility of aid has been the government’s reluctance to include program aid in the budget. In the recent past, the government has excluded donor budget support from its annual budget strategy and strengthened local resource mobilization measures. [4]
Mwega (2004) studied in detail four large aid-supported infrastructure projects, discovering that the cost of volatility is reflected in deviations from actual plans, disruption of projects, and underproduction of services.
Secondly, fragmentation in Kenya, as measured by the Hirschmann Herfindahl Index, was 0.1 compared to 0.3 for all developing countries and 0.22 for sub-Saharan Africa in 2006. Thus, aid fragmentation is much higher in Kenya than in Africa and developing countries in general. This is due to an increase in the number of bilateral and multilateral donors listed in the OECD-DAC database, from an average of 17 in the 1980s to 19 in the 1990s and to 27 in 2000-2006. The actual number of public and private donors is now assumed to be higher, which poses a major challenge for aid coordination. [5]
McCormick et al. (2007) analyzed that there has also been a multiplication of projects, partly due to an increase in the number of donors and partly due to an increase in the number of projects supported by individual donors. Projects thus multiplied faster than donors.
According to several studies, the proliferation of donors and projects had all the expected effects: multiple meetings involving high-level officials, high levels of administrative commitment, pressure on funds and administrative commitment agencies and pressure on financial systems.
Lastly, aid coordination in Kenya involves the government and donors. The World Bank organized an Advisory Group (CG) in the country in the early 1970s to support the coordination.
At the 2005 CG meeting, the government highlighted challenges to harmonization, including the disconnection between central and line ministries, the use of financial management agencies, the lack of decentralized donor missions, excessive donor involvement in some sectors, and low disbursement rates of some donor-funded projects. [6]
Cohen (2006) introduced a practice-based study on the relationship between ethnic diversity and foreign aid effectiveness in Kenya. He concludes that ethnic diversity has unforeseen influences on the coordination and implementation of development interventions under development programs. Cohen sees that both government officials and foreign donor experts agreed to divide projects to ensure that ethnic groups received a fair share of foreign aid. Coalition members in Kenya, however, have other incentives regarding local resources and how to use them in economic projects in tribal regions that will ensure their loyalty, thus following their own interests.
Conclusion
To add up, bad governance has a negative effect on the nation’s development due to the mismanagement of donated funds. According to the study by Gitaru (2015), in order for foreign aid to have a positive impact on Kenya’s economic growth, it has to be used productively in development projects and issues, where the effect can be reflected in the country’s gross domestic product after a previous year of investment. 1 percent foreign aid in previous years could lead to an increase of more than 4 percent in the current year’s GDP growth rate. [7]
The role of exports in promoting economic growth has been widely recognized. Using the linkages created by foreign aid, it is necessary for Kenya to renew its export-led growth strategy by improving export competitiveness, increasing value addition, diversifying exports, and leveraging regional and global value chains. Kenya could so enable increased employment for the local population, and work on the strengthening of structures to support South-to-South cooperation in trading blocs such as the East African Community (EAC), COMESA and the African Union (AU).
References
[1] Awino C. (2021). Foreign Aid and the Political Economy in Kenya. Maseno University Institutional Repository.
[2] Dolan, L. R. (2020). Rethinking foreign aid and legitimacy: views from aid recipients in Kenya. Studies in Comparative International Development, 55(2), 143-159.
[3] Amuhaya, C., & Degterev, D. (2019). Foreign aid as foreign policy tool: competition of projects aid allocation to Kenya between Japan and China. Asia and Africa Today, (12), 68-74.
[4] M’amanja, D., & Morrissey, O. (2006). Foreign aid, investment and economic growth in Kenya: a time series approach (No. 06/05). CREDIT research paper.
[5] Blumel, C. M. (2002). Foreign aid, donor coordination and the pursuit of good governance (Kenya).
[6] Njoroge, A. W. (2014). The role of foreign aid in sub-Saharan Africa: a case study of Kenya (Doctoral dissertation, University of Nairobi).
[7] Gitaru, K. (2015). Impact of foreign aid on economic growth.
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