The typical African economy is small and poor: the whole region (excluding South Africa) has an economy the size of Belgium, divided into nearly 50 countries. If East Timor wishes to learn from others' experience of being small and poor, Africa is the place to look. While African experience serves as a warning, the region also has some successful economies: Botswana, Mauritius and Eritrea. East Timor can learn from Africa's successes as well as its failures.

Three of Africa's characteristics stand out. First, aid flows are large: Africa receives more aid per capita than any other region. There is a pronounced small- country bias in aid allocations, so East Timor can expect to receive large amounts of aid. Second, Africa is shock-prone because its small, poor economies are concentrated in a few export commodities with fluctuating prices. Third, Africa is highly open to the world economy. Each of these features has created problems pertinent for East Timor.

BIG AID IN SMALL ECONOMIES

Aid is money, but donors do not simply send cheques. Aid comes with people, and it comes either as projects or linked to negotiated policy programs. The people and the projects embody knowledge. Potentially, this knowledge makes the financial transfer more valuable. Similarly, the opportunity to negotiate and commit to a policy program can help a government to set priorities and to communicate and lock into the resulting strategy. However, knowledge transfer and negotiation can also go wrong. Many African governments have not harnessed the potential of the aid relationship for learning, and the attempt to link aid to strategy has been seen as intrusive. Aid can sometimes be less effective than writing cheques.

Aid as a Resource Transfer

How Should Aid Be Treated in the Budget?

The question of how aid should be treated in the budget has been contentious in Africa, and practice has recently changed. The value of aid is not straightforward: much aid comes in the form of loans at below-market interest rates.