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Foreign Aid in Equatorial Guinea: Macroeconomic Features and Future Challenges

Larrú, José María (2010): Foreign Aid in Equatorial Guinea: Macroeconomic Features and Future Challenges.

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Abstract

The paper carries out a deep case study of the international aid that Equatorial Guinea receives. This is an extremely interesting country because, not being a failed state, it presents very low indexes in institutional quality. Its oil richness, which began to be exploited by foreign investors in 1996, has meant a structural change of extraordinary interest without the traditional effects of Dutch disease. While in 1989 the country financed 54% of its GDP with ODA, in 1996 this ratio represented only 22% and nowadays barely reaches 0.5% thanks to the enormous growth of foreign investment. The article analyses empirically the predictability of the ODA flows -mainly composed of Spanish funds-, their stability, cyclical behaviour and stabilizing effect on the GDP. The main findings of the study are that the ODA has been a hardly predictable, relatively stable, counter-cyclical flow and that it does have a stabilizing effect on its product. The FDI (Direct Foreign Investment), on the other hand is much more volatile and pro-cyclical, although it shares the stabilizing effect of the ODA. For every million dollars of the FDI, GDP grew 0.1%. Development aid, on the contrary, doesn’t have a statistically significant impact if we consider the time period 1985-2006. But it does in 1985-1995. Every additional million dollars of ODA made the GDP grow 1.3%. The sectoral analysis of ODA revealed that more than 80% of Spanish aid has been invested in social services, especially education (46%) and healthcare (26%), carried out by two NGOs that somehow became accomplices of the social underdevelopment that the Guinean government maintains since its independence. The article concludes with some ideas on how to improve the quality of Spanish ODA, especially proposing a deadline for the aid and a result-based conditionality, like the Aid Efficiency Agenda of Accra suggests.

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