Saturday, April 28, 2007

Money For Nothing!


A 2-pager by Ajit Chaudhuri
April 2007

“Those who forget the past are doomed to repeat it!”[1]

It was just a little while back that the word ‘aid fatigue’ had crept into our lexicon – the result of the perception that all that money and effort for so long was not doing very much. The starving children and crying women were still there and in numbers, their leaders were living better and better and fighting each other more and more, and NGOs and the Swiss banking system were flourishing. ‘Screw the whole bloody lot of them!’ the givers seemed to be saying, ‘They’re not getting any more of our money!’

And then, quite suddenly, the scenario changed – and aid became fashionable again. There appear to have been three drivers. The first was Afghanistan, where first-world living rooms saw the consequences to them of a failed state. The second was Mrs. and Mr. Gates jumping a stage in Maslow’s hierarchy of needs[2]. And the third was the Millennium Declaration – a desperate effort by the UN to sex aid up and reduce problems down into easily understandable goals, targets and indicators.

Are things going to be different this time around, I wonder, and will we see real change? Or is it going to be more of the same – the bloody conflicts, pathetic women and children, and that tired but pretty blonde lady from some INGO or the other telling us on TV that ‘there is so much more to be done’ – you know the scenario – with more hot air in conferences on trade vs. aid, teaching people to fish and that %*# EU agriculture subsidy.

It was therefore a pleasant surprise to read an insightful paper questioning the holy cows of trade and aid and looking at how to really help poor countries. This is by Nancy Birdsall, Dani Rodrik and Arvind Subramanian, was published in the Journal of Foreign Affairs of July/August 2005, and is imaginatively entitled ‘How to Help Poor Countries’.

The paper begins by saying that the key areas of thrust in the current international development scenario – the MDGs, the focus on increasing rich countries’ aid outflows to 0.7 percent of GDP, and the attempts in global trade circles to open first-world markets to exports from developing countries – make two implicit assumptions. First, that rich countries can shape development in poor countries. Second, that the key requirements for this are money and trading opportunities. These assumptions, the paper says, ignore some key lessons of the past four decades; that poor countries themselves largely determine their development status, and that financial aid and opening of rich countries’ markets have a limited ability to trigger growth, especially in the poorest countries. And therefore, that energy and political capital concentrated on these efforts should not draw attention away from other methods by which ‘rich countries can do less harm’.

Lets have a look at some examples –
· The two current darlings of development are India and China. Both have prospered and reduced poverty without benefit from trade preferences and without much aid[3]. Sub-Saharan Africa, on the other hand, received on average 12 percent of GDP in aid in the 1990s, a period when per capita growth declined by 0.6 percent every year.
· Nicaragua and Vietnam are poor countries with primarily agricultural economies, and both have benefited from substantial foreign aid. Yet, only Vietnam has experienced steady growth and poverty reduction, despite not being a member of WTO and Nicaragua having loans written off and having preferential access to US markets.

Global Trade: There is little doubt that the international trade system is iniquitous.
· Rich countries place highest tariffs on imports that are important to developing countries, such as garments and agricultural produce.
· Tariffs escalate as the level of processing increases, discouraging industrialization.
· Trade negotiations lack transparency and exclude poor countries.
· Using WTO procedures require money and technical expertise.
And yet, there are remarkable success stories; China and Vietnam in manufactured goods, India in services, Chile in wines, and many more. It is therefore useful to understand the effect of tariffs, subsidies and barriers in rich countries on poverty in poor countries.

Suppose, for example, the much-reviled agricultural subsidy in the EU was reduced and there was a rise in world agricultural prices. The big gainers would be large agricultural exporting nations such as the US, Canada and Argentina, and possibly EU citizens (less taxes but increased food prices). Poor countries, however, are usually net importers of food, and their urban poor will be hugely negatively affected. Net poverty may reduce because of gains to local farmers, but this is complicated to ascertain[4]. Agricultural liberalization may or may not reduce poverty, but its net impact either way is limited. And a reduction in trade barriers in rich countries may well leave poor countries worse off – many enjoy favorable conditions of access under preferential trade arrangements.

More Aid: International aid has done many things – eradicated small pox, reduced infant mortality rates, restored peace and order after conflict, etc. – more so when it has been targeted at specific objectives and when recipient countries have had leadership and capacity and done the right things. But aid has not been associated with sustained growth.

There are many reasons for this! Primarily, on the donors’ side, there has been a multiplicity of donors pursuing many, often inconsistent, objectives, disbursing to innumerable projects and imposing onerous conditions. On the recipients’ side, those that are most in need have been least able to use aid well due to institutional deficiencies.

The paper goes on into how rich countries can do less harm – interesting, maybe useful, and also easily accessible on the net via a google search on ‘birdsall help poor countries’.

To conclude: Many of us already know that aid money is not a driver of economic growth and poverty alleviation – certainly not in India. But we do tend to adhere to mantras on the benefits of freer trade and the evils of first-world protectionism. I have myself had arguments with European counterparts along the lines of ‘if you were serious about ending poverty and hunger you would dismantle your common agricultural policy instead of creating the problems first and then throwing a few lollipops around’[5]. The viewpoint expressed here, not ‘trade or aid’ or ‘trade and aid’ but ‘neither trade nor aid’, does provide food for thought. I am not sure if I subscribe completely as yet and, if I did, what invective would be thrown at me. Neo-liberal? Neo-conservative? Neo-classical?

Acronyms / Jargon Watch
DFID Department for International Development, the Government of UK
EU European Union
GDP Gross Domestic Product
INGO International NGO
MDG Millennium Development Goal
NGO Non-governmental Organization
TRIPS Trade related aspects of intellectual property rights
UN United Nations
WTO World Trade Organization
[1] This is credited to the Spanish-American intellectual George Santayana, though various versions have appeared in different places including in William Shirer’s ‘Rise and Fall of the Third Reich’.
[2] Management students would remember Maslow and the movement from basic needs to self-actualization.
[3] According to DFID, assistance to India stands at about 0.2 percent of GDP. China’s would be even less.
[4] Factors such as the extent of skew in landholdings, the effect of higher prices on agricultural wages, the ability of the agricultural sector to drive the economy, inter alia, would be critical here.
[5] One of these, incidentally, at the WTO headquarters in Geneva, where I had spent a day in 2001 as part of the Chevening Gurukul scholarship.

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