Spotlight on the development aid debate – after the G8 Summit

June 12, 2007

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The G8 Summit hosted by Germany in the Eastern German resort Heiligendamm achieved a few interesting things. It patched up rifts between the EU and the US on climate change, and between Russia and the US on missile defence; but not on Kosovo. The rising powers – “the +5” China, India, Brazil, South Africa and Mexico, with yet-blurred power-line contours – were not to be bullied into binding commitments on climate change [Read this and this]. That’s the world of hard politics such as practised by the world’s Powerful.

All this is far away from the Western Antigones – who prefer to “die” than to abide by the raison d’Etat – who held alternative meetings or sit-ins or demonstrated in the fields and streets of Heiligendamm against the Evils of Power. Some were put in cages by a police that learnt to be efficient after violent outbreaks in nearby Rostock the week-end before. Pop stars like Bob Geldorf of course needn’t fear cages. They are calling for more aid to poor countries. They are furious with the G8’s plain committment to finally provide the sums pledged back in 2005 at the Gleaneagles G8 Summit – which they haven’t so far. Only the budget allocated to the fight against AIDS is being increased. All these aid-apostles lost their pacifistic battle at the Dyke of the Saints (literal translation of the word Heiligendamm). In the meantime, Russian President Vladimir Putin turned the world upside down claiming he is the only “true democrat”, along with Mahatma Ghandi. Note: Ghandi was very much influenced by Russian literary-philosophic giant Leo Tolstoy. So Putin is playing two games here – nationalism for domestic use and preudo-identification with the world’s Oppressed for international audiences. Yet Putin needs to upgrade his credentials on non-violence. Also it is the ruthless Chinese who are currently doing the job of providing massive aid to Africa… Africa, conspicuously absent in the whole G8 show.

Development aid. Behind the refusal of the G8 countries to increase the sums dedicated to aid at the G8 not only lies the egoism of the rich and powerful; this refusal represents a different vision on the matter, showing how the ongoing policy debate on aid spills over into political decisions.

For those who have no time to start a degree in development studies, Shalendra D. Sharma in a review written for the journal World Economics this spring (walled for non-subscribers, unfortunately) provides an admirable synthesis of the aid debate at the moment. The title of this review is “Can Massive Foreign Aid Eliminate Extreme Poverty? The Sachs Easterly-Debate”.

Indeed two important economist figures dominate the current debate. On the one hand Jeffrey Sachs, Director of the Earth Institute, who initially made himself known by prescribing “shock therapy” market reforms in former Soviet bloc countries in the early 1990s. On the other, William Easterly, from New York University, a staunch free marketeer who does not believe in development aid. Sachs published a book in 2005 entitled The End of Poverty: Economic Possibilities for our Time. Easterly’s book was published a few months later, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done so much Ill and So Little Good.

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What is the problem?

Easterly says that $2.3 trillion were spent in foreign aid in the last five decades. With meagre results. Africa alone has received $568 bn, and has the highest aid per capita levels (although they are puny, at and average stock of $12 per capita). One can add that recent and less recent history shows that that those countries who have climbed the ladder of economic development have done so without significant foreign aid. This is the case of the United States in the 19th century, for instance. Nowadays, China and India are doing so thanks to domestic economic reforms. In Africa, despite aid, not much is happening in terms of economic development.
Sachs on the contrary argues that rich countries should inject massive flows of aid into Africa, and double their foreign aid from the current $65bn to $130bn by 2015.

The dividing lines between the two rest on two radically different approaches to economic development. Sachs revived the old tradition of the first development economists like Rosentstein-Rodan or Rostow. These economist’s assumptions were that poor countries were trapped in poverty. Not having enough domestic savings, there is no capital available for investment in growth-generating activities. Capital must therefore be injected from outside, and a “big push” initiated by massive aid flows. Another fundamental assumption is that this investment must somehow be “planned” by policy-makers. Finally, Sachs defends a geographical economics point of view on Africa: geographical isolation and climate, compounded by the lack of appropriate infrastructure to plug those countries into the world economy are what puts Africa down.

Easterly for his part comes from the libertarian tradition of those who argue that Markets! is what you need. Planners with their top-down approach and their belief that they know better will only fail. Development is a grass-roots phenomenon coming from entrepreneurs on the ground who, for their part, do know what works. Furthermore, there is no such thing as a “poverty trap”. The free deployment of human activity and free exchange through markets is enough. The real problem of development is predatory and corrupt government. It stops these entrepreneurial energies from flourishing.

Both have a point. And Sharma highlights this in his article.

In Sub-Saharan Africa, there are countries with good governments. But thyer remain miserable. Some Southern African countries in particular come to mind. Furthermore, history shows that high levels of corruption do not necessary stop development from happening. The textbook case is East and South-East Asia’s “crony capitalism” until it was denounced after the Asian crisis. But despite the crisis and an overhaul of policies since then, countries like South Korea are now in the rich-country-league.

Sharma also says that Easterly criticises aid as a whole. There are so many different forms of aid that making a sweeping, broad, statement on Aid is not very honest. What aid to you speak of? Loans? Grants? Money for projects? Or to pay civil servants’ salaries? Is debt relief aid? (It is, in OECD member countries’ views. This considerably alters otherwise rather declining aid figures). What is the effectiveness of project-based aid, like that that leads an NGO to build a well in a remote village? How do you measure the effectiveness of projects dedicated to the provision of healthcare and their impact on economic development? On the other hand yes, money is mostly spent on administration and salaries of international organizations, government or NGO staff, rather than on the object itself. For many years, military aid was counted as “development” assistance.

Furthermore, how to effectively administrate and co-ordinate aid? (or how to “plan” aid well…?) Sachs proposes a big UN-administered body. Sharma, and I agree with him, says the proposal is naïve and a “non-starter”. There is finally the issue of many local administrations not being able to professionally handle the immense sums of money given to them – due to lack of personnel, of skills, of supervisory capabilities, etc. That’s the problem of “aid absorption capacity”.

Who is right? Sharma makes a final verdict in favour of Sachs. His reasons: 1) “altruism”, 2) Sachs at least “has a plan”, 3) doubling the amount of aid (which would still only represent 0.5% of rich OECD-country GDP, less than the 0.7% UN-set target) will “not break the bank”. He is a good man. And broadly right.

I will gain a reputations as “heartless” person since I tend to favour Easterly, although I believe that targeted project aid can help. Why? Governments in most countries tend to be a burden rather than a help. Not only in Africa – in every Continent. Nothing will change this until pressure from within is exercised on them. And this can only happen if the population becomes richer, self-confident and less dependent on clientelistic relations prevailing in most developing and transition countries. Better governance from above is difficult to impose. 1990s IMF-World Bank-style conditionality, its criticised cruelty and its ultimate failure, has shown this. Therefore I am , in line with Easterly, more in favour of lowering barriers to the entrepreneurial activities of the local populations. I assume them to be simply cleverer than the distorted governments that rule them (My developing country experience reinforces this conviction).

Here the rich world can do a lot. Despite preferential access to rich-country markets that looks generous at a first glance, like the EU’s Everything-But-Arms initiative, substantial barriers to the trade that would help saddle them onto the world market – i.e. the source of money, and therefore capital – remain. This is the case of agriculture – where the EU and the US, the world’s biggest markets, have substantial carve-outs (see Oxfam’s views). Tariff escalation hinders the development of raw-material and food processing industries in the countries in which they are initially produced, substantially hampering the process of climbing the economic value-added chain. Subsidies distort world market prices to the favour of rich-country producers. An old but still dramatically significant story. The best favour rich countries could do to poor countries is putting an end to this protection. Another chanel could be more liberal immigration policies. These would increase the flow of money and acquired skills from North to South. Withouht raising development aid budgets. This would also have a positive externality such as aiding ailing rich societies’ pensions systems…

Nothing replaces a government that does its job to develop a country. A government that provides for education, health, infrastructure, basic services and fair rules for its citizens in all spheres of social life including the economic. But such a process takes a long time. Aid has its role to play. The problem with aid is that it is not impartial. Political agendas of donors, recipients, administrations so often distort the final result. This was the case of Western aid to Africa and other poor countries during the Cold War. Even the UN is not impartial; it is not really accountable either. Today aid is less of a political instrument for Western Countries – therefore its post Cold War decline if one discounts recent debt relief. China in its thirst for commodities, and archaic way of dealing with it, is now stepping in and filling the vacuum left by the West. The way China is behaving can have catastrophic long-term consequences, including a new future debt crisis – although indeed it does pour money into the Black Continent. It pledged US$20bn at the African Development Bank meeting in Shanghai last month. It is pursuing all but altruistic goals there and reintroducing all the evils the OECD and the World Bank have painfully tried to root out, like “tied aid” [forcing aid recipients to give contracts to your home country’s businesses] or blindly giving aid to governments who will probably ship the money away to Swiss and other offshore back accounts.

Offering an enabling international environment for developing country economic activities internationally, i.e. an open international market, can provide a bit of a credible alternative to the likes of China. The West can’t compete right now. It would also be a credible alternative to the oh-so moralistic and pious attitudes displayed at glitzy fund-raising shows with the world’s indecenlty rich rock and film stars. But for this the West is still not prepared. – – And talking “open markets” is neither good for the charity business nor for Bono’s sex appeal.

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6 Responses to “Spotlight on the development aid debate – after the G8 Summit”

  1. BRE Says:

    I have just discovered Global Conditions today while searching for blog posts about the G8 Summit 2007 at Google Blog Search. This is one of the best articles explaining the Jeffrey Sachs vs. William Easterly debate that I have read to date. Comprehensive in scope and very understandable for non-economists like myself and others. As a matter of fact it is so good that I will “lift it up into the Sphere” over at my place ASAP. Thanks for the enlightenment and be sure to checkout what economist Dr. George Ayittey and others had to say about aid & development in Africa during the recent TED Global 2007 conference in Arusha, Tanzania.

    Vielen dank und auf wiedersehen… bald. Honduran French German female political scientist based in London at the Financial Times… what a combination!

    Bill @ Jewels in the Jungle
    Germany


  2. Danke, Bill! Good luck with Jewels in the Jungle.

  3. Bernard Romanycia Says:

    The world’s population continues to grow and those responsible are not accountable for their own actions. I haven’t seen any peaceful solutions in my lifetime and I doubt the human race can find any way out of not destroying this planet.

    Dear Bernard: Malthusianism and pessimism have fortunately so far been proven wrong. Apart where population is among the least dense (e.g. in Africa), life tends to become better, and the planet has been coping so far, as we learn to deal with pollution and other ills. The greatest environmental catastrophe have tended to happen in places like the former Soviet Union (not the most densley populated area, and now even declining). Why not look into 2008 with greater optimism?

  4. Ann Says:

    hey Iana,
    do you have the article “Can Massive Foreign Aid Eliminate Extreme Poverty? The Sachs Easterly-Debate” by Shalendra d Sharma?? Could you send it to me if you do? needs it desperately for a paper I’m writing at the moment.
    thanks a million
    Ann

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