Botswana is a poster country for the Bretton Woods institutions (BWIs); it is hailed for its remarkable macroeconomic stability by authors such as Acemoglu and Robinson (e.g., Why Nations Fail: The Origins of Power, Prosperity and Poverty). Its high growth for more than two decades has been attributed to “good policies” that ensured macroeconomic stability characterized by low single-digit inflation and budget surplus. However, they fail to see what happened to Botswana’s social sector. According to the African Development Outlook 2014, “With a Gini coefficient of 0.61, Botswana portrays a relatively unequal distribution of wealth. The incidence of poverty is also high, with 18.4% of the population living below the poverty line. Other challenges include a high unemployment rate of 17.8%, and relatively low Human Development Index (HDI) ranking and score mainly due to the high HIV/AIDS prevalence of 23.4% that drags down life expectancy.” As a matter of fact, Botswana is the 3rd most unequal society in the world and its life expectancy declined by more than 16 years from 63.45 years (1988) to 46.99 years (2012). One wonders what value fiscal surplus has when the government is supposed to strengthen its public health system and ensure that its citizens have adequate access to essential medicines. Botswana’s budget surplus reached an all time high of 11.20% of GDP in 2007; went in to deficit during 2009-2011 in the wake of global financial and economic crisis; but turned into surplus again since 2012). It is clear that Botswana achieved macroeconomic stability at great social and human cost.
In fact, countries after countries, especially in Africa, were advised by BWIs to restrain public expenditure as a central element of the “one-size-fits-all” structural adjustment programme (SAP). Many countries even refused to use grant money offered from the Global Fund to Fight for Aids, Tuberculosis and Malaria (GFATM) because that would violate the expenditure ceiling imposed by IMF’s SAP. It was argued that large aid flows would cause so-called Dutch disease and joepardize macroeconomic stability. UNDP, which argued for a larger fiscal space (including foreign aid) to achieve MDGs, was baffled by the Dutch disease argument and refusal by countries to receive assistance from GFATM. In 2005, the UNDP through Terry McKinley hired me to evaluate the argument. The result was my paper (with Terry), “Gearing Macroeconomic Policies to Manage Large Inflows of ODA: The Implications for HIV/AIDS Programmes” (http://www.ipc-undp.org/pub/IPCWorkingPaper17.pdf).
After extensive review of literature, the paper contended that the evidence of Dutch disease due to large aid flows is not conclusive. It argued that because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread. The paper showed how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. It requires departure from “one-size-fits-all” mental and policy framework to carefully coordinate fiscal, monetary and exchange rate policies. Such coordination should enable governments to both ‘spend’ aid in order to finance larger government programmes and ‘absorb’ aid in order to import more real resources.
Often, governments that receive foreign aid neither ‘spend’ nor ‘absorb’ it fully, defeating the basic purpose of development assistance. Because governments fear inflation, they are reluctant to finance a significant increase in spending on HIV/AIDS programmes even when the funding is available. Central banks are reluctant to sell the foreign currency they receive from HIV/AID related aid because they fear that such an action might appreciate the domestic currency. However, if aid-induced spending on HIV/AIDS programmes minimizes the adverse impact of the epidemic on human capabilities, not only would it combat a grave human development crisis but also it could safeguard long-term economic growth. Instead of adhering to restrictive macroeconomic policies, governments could target their increased spending on productivity enhancing public investment and central banks could amplify the flow of low cost credit to stimulate private investment. If the real exchange rate does begin to appreciate, the central bank can implement means to manage its fluctuations in order to maintain competitiveness. Moreover, if a significant proportion of HIV/AIDS funds is used to directly finance the import of drugs and medical equipment that are not produced domestically (which is often the case), there is likely to be even less impact on inflation or appreciation of the exchange rate.
Anisuzzaman Chowdhury, PhD
United Nations ESCAP
Rajdamnern Nok Avenue
Bangkok 10200, Thailand
Tel: (662) 288-1486;