Bono Fide Aid
July 2005 Alex Black
The writing off of $40 billion in debt for 18 heavily indebted poor countries on June 11 has helped put the issue of African aid back on the international agenda. Thanks in large part to celebrity avatars of the developed world’s conscience, G8 leaders bound for Scotland seem poised to once again confront one of their biggest and most persistent headaches. Along with the rock stars, Gordon Brown, in particular, has taken the case of African debt relief and aid increases as his cause célèbre, no doubt keen to take advantage of all the press and international handshaking as he positions himself to become Britain’s next prime minister. Political aspirations aside, there are two main items on the agenda: debt forgiveness and aid increases.
Over the course of the last 40-odd years, developed countries, acting unilaterally or within the framework of such International Financial Institutions (IFIs) as the World Bank and International Monetary Fund (IMF), have given substantial amounts of aid to less developed countries. Hundreds of billions of dollars later, the poverty remains and many of the poorest countries are by now heavily indebted. What is the proposed solution? Forgive the debt and start over. The one minor snag is that the IFIs depend somewhat on the intricate system of debt servicing to make new commitments, which creates a vicious circle of borrowing and increasing debt. The fear (predominantly held by IMF and World Bank employees) is that by canceling debt, future IFI lending potential would be limited (budgets and jobs could be in jeopardy). It is on this issue that the majority of the persuading needs to be done.
To be fair, none of the G7 countries meet the 0.7 percent of GDP targets that one frequently hears touted in the media (in fact, the only countries that fulfill the 0.7 percent development goal are the Netherlands, Sweden, Luxembourg, and Denmark). In terms of percentages among the G7, France and England commit the most to aid while Italy and the U.S. bring up the rear. However, as any U.S. Fed spokesman will tell you, percentages aren’t everything. With fiscal deficits running strong in all G7 countries, minus Canada, and with President Bush having already increased his aid budget many times over, one wonders how much more will be squeezed out of the G8 summit. In a clear sign of climate change, celebrity activists have of late taken to praising the U.S. president, with Live 8 organizer Bob Geldof defending Mr. Bush against French criticism by saying, “he has actually done more than any American president for Africa”. Egos are being gently stroked.
As a background to the present debate, William Easterly, himself an ex-World Bank economist, provides a comprehensive yet readable analysis of the development debacle in his The Elusive Quest for Growth. He debunks many of the perceived “panaceas of growth” that development economists have been touting for decades. For Easterly, the famous economics quip, ‘people respond to incentives, the rest is commentary’ has been too often overlooked. What follows is a brief survey of development aid history that attempts to outline some of the larger issues involved.
Statistics on global poverty over the past 20 years reveal some rather surprising (and not always negative) numbers:
TABLE THIS DATA
198119902001China 63.83316.6India54.442.134.7Africa41.644.646.9Latin America9.711.39.5Eastern Europe0.70.53.7198119902001China 88.172.646.7India89.686.179.9Africa73.37576.6Latin America26.928.424.5Eastern Europe4.74.919.7% below $1-a-day% below $2-a-day
The real story here is China and India; both have made tremendous progress in coping with rampant poverty. Latin America as a whole has largely treaded water, as a result of the lost decade of the 80s (a result of the debt crises), while Africa has shown marked deterioration throughout the 20-year period. The sleeper story here is, of course, Eastern Europe, which has statistically undergone the most dramatic change even if it is still nominally better off than the other regions.
Africa has not deteriorated, however, for want of trying. A fascinating story in its own right (with origins dating back to the early explorations of Mungo Park), Ghana’s Volta River Project serves as a paradoxical microcosm for the morass that is development aid to the continent. The Akosombo Dam on the Volta River was built in the 1960s and funded largely by the World Bank with the help of the U.S. and the U.K. The dam flooded more land than any other dam in the world, around 4 percent of Ghana’s land mass or 8,500 square kilometers, resulting in the displacement and impoverishment of over 80,000 farmers and leading to an increase in the spread of waterborne diseases, namely malaria and schistosomiasis. The project was supposed to catalyze the nation’s economy, permitting the development of a national aluminum industry in partnership with the American aluminum giant Alcoa, which it did throughout the ‘70s until changing international economic conditions and severe drought forced the industry to grind to a halt. Alcoa and the Ghanaian government still operate the Valco aluminum company and the dam does still supply electricity to Ghana, Benin, and Togo. Ghana is, by most conventional measures, one of the exceptional success stories in sub-Saharan African development and the Volta River Project was Ghana’s largest industrializing effort to date.
At times, the sheer volume of cash maundering around in African aid projects defies belief. Primitive developmental economics suggested that lack of physical and human capital was holding back growth in poor countries. The ‘finance the gap’ remedy was obvious: aid would go toward investment, and investment would lead to growth. If this process worked, according to the World Bank’s own calculations, Zambian per capita income would currently be steamrolling past $20 000 per annum. In fact, it has languished at near $600, essentially unchanged from where it was 40 years ago. So where did all the money go? The most famous case is perhaps that of the former Zaire’s president, Mobutu Sésé Seko, who by 1984 had amassed a $4 billion personal fortune reputedly hidden away in Swiss bank accounts that was roughly equivalent to the country’s foreign debt. Sensational kleptocracies aside, there have been other less malignant factors at play. Foreign donors, including the World Bank, poured over $2 billion into developing Tanzania’s road network, only to watch the roads reverting back to nature, in some cases as fast as they were being created. The World Bank belatedly came to the realization that road maintenance was equally as important as road creation, though this would require a sound institutional and policy framework, which much of Africa does not have and which no amount of money is able to fix.
Incentives are often to blame, and nowhere are they as perverse as in the development game. As a leader of a poor country applying for World Bank aid, the incentive is to accept as much aid as possible and to not improve at all, so as to insure large donations in the future as well. This follows sound reasoning that countries with highly discounted borrowing rates will always over-borrow and under-invest. On the other side of the coin, the position of World Bank staff is relative to the size of their budgets, and as they must spend their money in order to keep receiving it, the incentive is to lend as much as possible regardless of the results. The perversions are endless and as a result of failures like those mentioned above, the World Bank has changed its development strategy. It now proposes a four-step approach to policy change. 1) Find a champion. 2) Promote systematic change. 3) Support knowledge creation. 4) Engage civil society. The rare and successful case of Vietnam provides an excellent example of what the World Bank means by these four points.
In the mid-1980s Vietnam was definitely a bad policy environment. The USSR was supplying as much as 10 percent of Vietnamese GNP in the form of aid, but no development occurred. The Vietnamese government changed course in 1986, partially motivated by the economic success of its neighbors. Vo Van Kiet, the deputy prime minister responsible for the economy, provided the internal stimulus for reform in Vietnam and contacted the World Bank in search of assistance. The World Bank organized meetings with Vietnam’s neighbors to plan Vietnam’s development strategy. On the research front, the World Bank organized the first household survey in 1992. Systematic change in the institutional and policy environment occurred and inflation consequently dropped from 400 to 70 percent by 1990. By 1998, with effective aid now flowing into the country, the poverty rate was cut nearly in half from 55 to 30 percent. It is interesting to note that the World Bank could only invest knowledge capital in Vietnam as its donor countries forbade direct economic aid. Forced to look for new ways to provide assistance, they ended up with a comparatively effective strategy. One must also realize that Vietnam is not Africa, and much of Vietnam’s success is due to its favorable geographic proximity to strengthening Asian economies.
The realization that institutional quality is key to determining the success of foreign aid poses something of an ethical problem for the IFIs, who are supposed to be politically impartial. The most common way to ‘improve’ institutions is by inserting clauses into aid agreements specifying conditions to which the recipient government must subject itself in order to receive aid. But these conditional requirements have often benefited the donor countries at the expense of the recipients. In the wake of the East Asian financial crisis, the IMF required Indonesia to eliminate agricultural subsidies, discontinue tax and credit privileges to its national car and aircraft industry, and most blatantly of all, to remove the 49 percent limit on foreign ownership in listed companies.
People have a hard time agreeing on what ‘institutions’ are absolutely necessary for development. Keep in mind that China has done phenomenally well over the past decades and isn’t even remotely democratic, to say nothing of its industrial subsidies. Current and past civil unrest in Central America, particularly Bolivia, is a poignant reminder of what can happen when powerful multinational corporations and foreign governments dictate conditions to impoverished and corrupt countries. Economic bullying and flagrant corporate plundering are realities in many parts of the world, and often access is granted through the IFIs. This road leads to increased involvement in foreign politics and high rates of program failures as recipient governments opt out before aid is fully dispersed. What is really meant by a good institutional environment is that incentive structures are sound and that resources are employed productively. This can obviously vary enormously from country to country. The fundamental paradox is that we want aid to go to those most in need although they are the ones least likely to benefit from it. In reality this means less to the Sudan and more to India, to give but two examples (in fact, it is no great secret that if you wanted to achieve maximum poverty alleviation, you would give every dollar to India). The problem is our consciences, be they Brown or Bono, won’t allow it and instead they leave us with the unappetizing choice of watching the money go to waste or deliberately interfering in the political and social character of the world’s poorest countries in an effort to foster transparency and sound policies — all in a region where we can’t even gather reliable statistics.
So while the writing off of $40 billion dollars may appease the consciences — if not the interests — of the donor nations, events in Bolivia are at the forefront of the current debate of how debt relief can benefit, or destroy, local communities. How these play out may well influence the future of debt relief around the world.