In the debate about the meaning of development aid, US President Trump is creating facts. He wants to largely stop it and shrink USAID to insignificance. Will the world really be a better place if rich countries stop providing development aid?
We at Africa Partners are not sure. Our fundamental conviction, which led us to found Africa Partners, was that private investments from Europe bring African entrepreneurs not only capital. International capital provides entrepreneurs with market access, know-how and useful networking too. We all know that development aid has in many cases done more harm than good. However, we do not think that abandoning official development assistance (ODA) will help the developing world out of the aid trap.
Private investments can only be beneficial where entrepreneurs believe there is a chance of a market-based return on the capital invested. This field is huge in Africa and is not even close to being cultivated yet.
Benefits of private investment are limited
But the constraints imposed on private investment limit it. Many areas that do not and never can yield returns are left out. Primary schools for children in remote areas, health clinics in rural areas, drinking water treatment or wastewater disposal are completely underinvested. We are convinced that there are many areas in which development aid can make a useful contribution.
But development aid has another problem, especially when the rich countries provide direct budget support to African governments. This is money paid directly to the state to enable the government to finance its spending. We understand the motivation behind this. Many governments receive too little tax revenue.
In our view, this represents a serious governance problem. As the American poet Carl Sandburg put it: “Money is power, freedom, a cushion, the root of all evil, the sum of blessings.” In German, there is the saying: “Wer zahlt, schafft an” –or in English: “He who pays the piper, calls the tune.”
Dependence on the West
The major disadvantage of official development assistance (ODA) is that it creates dependence on wealthy donors outside Africa. Yet elected governments should be accountable first and foremost to their voters. Development aid undermines democracy in the countries that receive development aid.
In 2023, the biggest ODA donor was, according to OECD figures, the USA with USD 64.7 billion, an amount US President Donald Trump wants to significantly reduce. The following places are occupied by: Germany (USD 37.9 billion), the EU institutions (USD 26.9 billion), Japan (USD 19.6 billion) and the UK (USD 19.1 billion).
However, replacing development aid with loans would achieve nothing. This would just replace one dependency by another.
Capital markets should be developed
In our view, the solution lies in supporting African countries in developing efficient, liquid and high-performing capital markets. But the donor countries are hardly interested in this topic at all. There is some technical cooperation between central banks and now and then a meeting between stock exchange officials. However, there is no real development aid in the area of capital markets and the promotion of national savings in Africa. Is it not strange that the rich countries of Africa are denying the very aid that could make the continent less dependent on international development aid?
At Africa Partners, we see the development of local capital markets as the key to Africa’s development. Local capital directly helps African companies that want to invest and expand, it flows directly into the most promising projects. And it creates the opportunity for African savers to invest their savings in Africa for the benefit of the continent.
Information creates transparency in the capital markets. That is why information is the key to the success of strong financial markets in Africa. Africa Partners wants to help create this transparency.
