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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 179-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE INTERNATIONAL DEVELOPMENT COMMITTEE
AID UNDER
PRESSURE: SUPPORT FOR DEVELOPMENT ASSISTANCE
Wednesday 4 March 2009 DR DAMBISA MOYO DR NEIL McCULLOCH, DR DAVID McNAIR and DR DIRK WILLEM de VELDE Evidence heard in Public Questions 44 - 114
USE OF THE TRANSCRIPT
Oral Evidence Taken before the International Development Committee on Members present Malcolm Bruce, in the Chair John Battle John Bercow Mr Mark Hendrick Mr Marsha Singh Andrew Stunell ________________ Witness: Dr Dambisa Moyo, gave evidence. Q44 Chairman: Good morning, Dr Moyo. Welcome to our Committee. Thank you for coming to give evidence. For the record, would you give us your name, please. Dr Moyo: Sure, it is Dr Dambisa Moyo. Q45 Chairman: You are an author and lots of other things. Dr Moyo: Yes, I am an economist and most recently I was an economist at Goldman Sachs for the past eight years. I have just published a book with Penguin press called Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. I am a full-time author for this year. I have another contract to complete a book called How the West Was Lost, which is looking at the financial crisis and how it is basically a harbinger for what I view as economic shifts longer term, global and political, going forward. Q46 Chairman: We shall look forward to seeing the outcome from that. I confess that I personally have not managed to read your book but I have read some fairly full reviews of it and I think one or two colleagues have read the entire book. I think it would be fair to say it is a challenging book and to some of us, perhaps, counterintuitive, but we are obviously very pleased that you are here to discuss your ideas with us. Very specifically you have called your book Dead Aid, and you have said that aid is harmful and you want it to end in a relatively short space of time. Could you perhaps give us an indication of in which ways you think aid has been actively harmful, perhaps with some specific examples from your own experience. Dr Moyo: Sure. Thank you again to the Committee for giving
me the opportunity to come and have this very important discussion. I should give you my disclaimer upfront,
which is that I am a very proud African but I am also a very concerned
African, which is why I have taken the time to write this book. Just to give you a little bit of the
motivation for the book and ultimately my thoughts in the book which I will be
very happy to share with you, a product of many years of academic and work
experience, including in British universities - I did my doctorate at
Oxford in economics - and having spent many years also in the United States,
working at the World Bank but also completing a Masters degree at Harvard: through
my work experience and my academic experience but also through the experience
growing up as an African girl, I have come to the view that aid is not working
and in fact it is being quite harmful in terms of delivering long-term economic
growth and poverty alleviation to the continent. I would like to start off by explaining what
I mean by aid in the context of this book.
Very simplistically, I define aid in three ways. There is what we call humanitarian aid, which
is the aid that we in the global community send to places that have been
affected by natural disasters. A good
example would be the tsunami in 2004, or, for example, Q47 Chairman: Nobody would argue with the basic facts you have presented. Obviously the Committee monitors what our government does, particularly in the context of budget support, and their argument is that they are trying to do it to build up the capacity of governments to run their own programmes rather than them to have them run for them, but you are saying that it encourages corruption. That is one of your arguments. We certainly would be very concerned if there were any evidence that our government's money was being misappropriated, because we are always looking to ensure that it is properly audited. Paul Collier, in his review of your book, says that what we need is more transparency and more accountability. Your argument is: "Aid does not work, therefore do not have it." His argument is: "Aid does not work if it is not properly directed and not properly accounted for." Do you feel there is any merit in that argument? Dr Moyo: Theoretically, yes, I believe there is merit in that. However, as a practical initiative over the 50-odd years that aid has been in play, we have as a global community and global policymakers tried to ensure that aid is delivered in a transparent and accountable way and that has failed. This is via the conditionality programmes. It seems to me - and I should have prefaced the conversation by saying that my book is meant to be a positive, constructive book, and, importantly, the second half of the book comes up with a list of alternatives. The reason why I think that is important is because I am offering the global debate a better way of delivering growth, given that we have tried to deliver and implement aid in many different fashions which has consistently failed. In theory I do agree. It would be nice if we could implement aid effectively, but we cannot. It is not possible, particularly in an environment where the political system is very weak and government is incentivised to take aid. Q48 Mr Singh: In your book Dr Moyo you mention seven negative effects that aid may have on a country, such as inflation, Dutch disease and the crowding out of foreign investment. Are these consequences inevitable or could policies be adapted to take account of those effects? Dr Moyo: Policy can be implemented to
take account of those effects. However,
it is very expensive to do that. I give
the example in the book of what a government is required to do in the event
that they are facing inflationary pressure or, indeed, Dutch disease, where the
exchange rate strengthens so dramatically as to kill off the export
sector. Very often governments then
issue bonds when the currency is very strong, to try to flood the domestic
market with the domestic currency, so that it can cause the currency to
weaken. Those types of interventions are
very, very costly. The estimate that I
put in the book is that in places like Q49 Mr Singh: Was that inflationary pressure? Dr Moyo: The specific examples I used here was on the back of Dutch disease. Q50 Mr
Singh: And you say that was entirely due to the aid
that was going into Dr Moyo: Yes, absolutely. In the book and in the discourse amongst academics, the evidence is very stark. I picked one example but across the continent there are many examples of this. Q51 Mr Singh: Is there any way of removing that kind of risk? Dr Moyo: As I say, I think the cost of removing that risk would be that the central banks in these countries would have to intervene in the markets. The procedure of intervening means that they would have to issue bonds into the domestic market, which could be inflationary and therefore cause the currencies to depreciate, which is what you want, but the cost of doing that and issuing bonds is very expensive. Q52 John Bercow: You argue that aid has not worked. Many of us can envisage particular circumstances in which particular allocations of aid, if undertaken insensitively, can have the effect of damaging local markets rather than assisting the recipient population. But I confess that I find it difficult to get my mind around - and maybe I would have done so better if I had had the privilege of reading your book which I have not yet done - how as an overall statement it stacks up to say "Aid does not work". Specifically, how do you respond to those who say, "Well, we can demonstrate quite explicitly how it has worked in certain important respects which are the focus of the MDGs and of British Government policy; for example, providing education to millions of children and HIV AIDS treatment to millions of people." Those are, I think we would say, some of the directly positive consequences and benefits of aid. How would they happen without the aid? Dr Moyo: With respect to the MDGs in
particular there have been a number of statements from officials, from the
United Nations but also from the broader development community - and I am happy
to provide the Committee with the quotes from many of the key officials
involved in this - that they are almost certain that Africa will not meet any
of the MDGs, as they were spelt out, by 2015.
In some cases there is a greater concern - and maybe this is a neo-Malthusian
concern - that, given the rapid population growth in the continent and the fact
that 50 per cent of the population is less than the age of 15 on the continent,
and also given the shrinkage in resources and demand for resources, that you
could see much more instability across the continent. With respect to the MDGs specifically, it is
very clear to my mind and I think to the minds of the architects of the
MDGs, that those goals are not going to be met whether or not aid has been
pumped in, which we know it has. On the
point about the implementation, I agree with you that very often people who
vociferously defend the fact that the international community should be
intervening via aid would point to education or HIV treatments. I agree that those types of interventions
have helped, but in a micro way. In
reality, to my mind, the goal of aid is ultimately to get Q53 John Bercow: That is a very interesting response. I cannot help but feel that you have inadvertently, rather than calculatedly no doubt, parodied or even, dare I say it, caricatured some aspects of our aid. I have probably almost spoiled the argument by referring to the MDGs, because it is perfectly clear that the MDGs are not going to be met - although I think it would be hard to argue that they are not going to be met because of the aid: they are not going to be met for a whole plethora of reasons which we do not have time to explore. But let me come back, if I may, Dr Moyo, to this question of particular aid currently provided and to which, because we are the Committee that scrutinises this, DFID is committed, HIV work. The development assistance that we provide on HIV is not just in the manner of immediate relief. It is not just to fight a fire, if I might put it that way; it is also aimed at strengthening the domestic capacity and organisational robustness, if I might put it that way, of the health systems in the recipient countries. It is, in that sense, intended to build for the long tem. Dr Moyo: I think the intention is
laudable. In practice I think that is
not the case at all. I must say
that I do not have specific evidence in respect to the DFID programme that is
supporting HIV AIDS, but if you allow me some indulgence I will give you an
example from the Q54 John Bercow: Of course. Dr Moyo: Under the PEPFAR programme
the Q55 John Bercow: I understand your thesis, but I am not clear how, in the absence of what may be very imperfect aid, it would be possible to fund basic services like health and education, and, in particular, what would be put in place to ensure that the poorest people had access to them rather than those somewhat above the poorest threshold who could no doubt buy their way in. Dr Moyo: That is a very important question. I think it goes to the heart of the matter. Ultimately, the delivery of services, such as public goods, should be the responsibility of the domestic governance. Ultimately, it is that to which we are aspiring. The only way that African governments can get to a position where they are able to finance that out of their own public purse is if the economy is growing. The fact that African governments are not able to deliver those goods because the public purse is challenged, is ostensibly because we have been under an aid model. As I said to you earlier, we have been in a situation where ten per cent of the population was impoverished and we are now in a situation where 70 per cent of the population is impoverished. If we continue down this road, who knows, we could be over 90 per cent of the population impoverished, and therefore moving away from what I would call a utopia where the government has taxation and is representing the domestic citizenry. The point that we are skirting around slightly - or I am, certainly - is the issue of the aid model disenfranchising local Africans. The fact that African governments are more beholden and responsive to the donor community means that, ultimately, we cannot get to a situation where African governments are focused on raising the money through the tax system or growing their economies in an accountable manner to the point where they can then deliver the social services that you are talking about. The prescriptions in my book are not meant to be an immediate aid turn-off. The suggestion is basically that we should aggressively pursue a model where, on a step-by-step basis, governments start to move away from the aid model and start to find alternate ways of financing developments, such as raising taxes through foreign direct investment, through trade, through the capital markets - and we can talk about that some more - through micro-finance, and, ultimately, through building these economies so that they can use the money to provide the social services. John Bercow: That is very helpful. Thank you very much. Q56 Chairman: This Committee is not responsible, obviously, for the American aid programme. Dr Moyo: No. I understand that. Chairman: I think it would be fair to say that the model you describe in PEPFAR is one which, had our government pursued it, this Committee would have robustly criticised and rebuked. We have a different approach and we want to explore whether or not there is any qualitative difference and we would like to think there might be. I am going to ask Andrew Stunell to take that forward. Q57 Andrew
Stunell: Dr Moyo, you have put forward an extremely
seductive argument and of course for many voters and governments it is self-serving:
"Let's not give the money, we can find plenty of other things to do with
it." I wonder if I could pick up this
point about Dr Moyo: Before I answer you, if you do not mind, might I just comment on the fact that I draw on the American example. With respect to DFID, I think what I should do and what I will do is go and look at how many Africans have been employed and educated and how much capacity has been built on the back of the multi-year, multi-decade interventions from DFID, even in the health sector, because I think those are the kind of metrics that would effectively shut me out. Q58 Chairman: We would be delighted to have that information. Dr Moyo: Yes. Thank you.
To your question with respect to aid versus other countries that are
ostensibly failing across the continent, I would say that you are absolutely
right. I am not saying that aid is the
only cause of state failure or the failure of governments to deliver economic
growth. What I am saying is that aid is
a deliberate policy where we sit in London and we say, "Well, I think we should
give African countries x additional billion dollars," whereas with
something like an oil purse you either have it or you do not, you are either
endowed with oil or you are not. That is
not to say that there are not a lot of issues. Q59 Andrew Stunell: Would you say capacity building of African governments and African civic institutions should be the highest priority for the application of this money? Dr Moyo: Here I confess my bias towards economics. I believe that you will not get strong institutions, civil liberties, or a transparent or strong judicial system in a place that is aid dependent because of the corruption and the negative externalities that I have talked about. In that sense I believe that the economy is a deep pre-requisite to delivering on the governance and the democracy and all the positive attributes of a developed society. Q60 Andrew
Stunell: To bring you back to Dr Moyo: Yes. Q61 Andrew Stunell: Is governance not at the heart of that? Dr Moyo: I believe it is, but I do not
think that aid-supported governance programmes are going to help Chairman: Perhaps we could now move to the other half of your thesis and I will bring in John Battle. Q62 John
Battle: May I say thank you for the book and for writing
it, and I want to say thank you for getting us on to the ground of
economics. I think economic justice, not
charity, is where I start from. As someone
who has read the book, I share with you the shift, if I might put it this
way, of people in the North and the West regarding Dr Moyo: Thank you very much. First of all, the book is dedicated to Peter Bauer because he was clearly ahead of his time. He was absolutely right in his predictions. As I am sure many of the Committee members know, he was effectively ostracised from the economics profession. Q63 John Battle: For a while. Dr Moyo: For a while. Q64 John Battle: Keith Joseph championed him here for 20 years. Dr Moyo: That is true, but ---- John Bercow: As did Enoch. Q65 John Battle: Enoch Powell, as well, yes. Dr Moyo: That was much later in his
life, though. As you know, he
subsequently was bestowed a peerage by former Prime Minister Margaret
Thatcher. That said, I completely agree
with him. The world was so taken by the
view that aid could work that they ignored him.
On your point, there is a fundamental statement that I would like to
make, which is that no country on this earth has achieved sustainable growth
and alleviated poverty by relying on aid.
There is not a single one. For
the world to be so gripped and obsessed with delivering more aid to Q66 John Battle: I am not sure it is, because remittances are four times the value of aid alone, remittances from people working abroad. Aid is ten per cent of the influence they bring. They are getting trade relations right. People say aid and trade, do they not, and remittances - the whole bundle - rather than thinking aid is going to do it? Do you not think there is a disproportionate emphasis on aid on your part? Dr Moyo: No. I just came back from spending time with the President of Rwanda a week and a half ago and in their country 70 per cent of the public budget is aid dependent. The problem is not that there are other sources of financing - remittances, as you say, four times investment trade and so on. The problem is that the government, which is charged with delivering social services and is supposed to deliver the public goods, is primarily financed by aid, which means it disenfranchises the domestic population and means that the government is beholden or is catering to another group rather than the people that it is ostensibly supposed to be supporting. Q67 John
Battle: If you take Dr Moyo: I would say that as long as
governments have an alternative way of financing themselves, financing their
armies, financing their lifestyles, they will not need to build the tax bases
that are required to deliver long-term growth.
That is essentially the problem.
The other thing is that I wish aid had not existed in Q68 John
Battle: I live in inner city Dr Moyo: I address this question in the book. The financial cost, you are right, it is much more expensive to issue bonds in the international capital market, but there is an additional hidden cost that is not generally factored when people debate aid. What do I mean by that? As someone who has spent time working in the city, I know that if you are selling a product to a client, an investor, the first thing they ask you is what is the country rating or what is the rating of the assets. Most African countries do not have credit ratings and yet this is a relatively objective way of figuring out a credit rating: Are they good? Are they bad? - just as we on an individual basis have credit ratings for our banks. The important thing with that is that those credit ratings determine how much foreign direct investment goes to those countries, whether people want to trade in these countries. It reflects how easy it is to do business in these places. In some African countries it takes two years to get a business licence. My point is that, yes, although the financial cost is higher to issue bonds in the capital market, when you factor in the last amount of money through FDI potential investment and longer-term growth, the fact that you have a negative stigma associated with being aid dependent, the basket case that goes to the World Bank, it means that longer term the costs of relying on aid is higher. Q69 John
Battle: What is burning my head up, in a way, is that
in Dr Moyo: I think it would be a step
forward. It is funny that you should
pick Q70 John Battle: That is why we need it. Dr Moyo: It is the tip of the iceberg. This again is the problem with these types of situations. The British Government has given money to a country - and here we have it, $11 million. He has been charged, he has not been indicted, but I think it is quite important. John Battle: We have people who have let
systems collapse all over the world, including in banks in Chairman: They have locked up some of
the ministers in Q71 Mr Hendrick: In answer to an earlier question with regard to aid, you talked about the impact it would have on the currency in terms of it becoming weaker and devaluing. You said that, in order to counter that, the issuing of bonds would in itself strengthen currency. Is there not a case for doing what you are suggesting in terms of issuing bonds at the same time as balancing that with aid to make sure that the currency is at a level somewhere in between? Dr Moyo: The fundamental point that I
think is important with aid is the negative externality. I picked one thing, the issue of the exchange
rate getting stronger, but we have not discussed the other negative
externalities, the corruption, the bureaucracy, which is causing these
governments to have a lazy muscle. Let
me just give you an example. Q72 Mr Hendrick: Is anybody advising Prime Minister Meles in that direction? Dr Moyo: He was one of the members of the Africa Commission which the British Government underwrote. To me, this is an obvious case. Q73 Chairman: A very good point. Dr Moyo: You have a situation with 85
million people - and I was just in Q74 Mr
Hendrick: I do remember the British Government in
particular at one point was quite supportive and then that support was withdrawn
at a later date. You are very
complementary in your book with regard to Chinese investment in Dr Moyo: I believe that what the Chinese
have done in ten years in Q75 Mr Hendrick: In the West it is a lot more fashionable now to talk about conditions like improvements in governance, measures to combat corruption, all sorts of strings attached in terms of aid that perhaps in the past were not attached. Another criticism of the Chinese is that they provide the aid in a "no strings attached" way and are quite willing to deal with governments that are at best dubious and at worst corrupt and tyrannical. What is your view on that? Dr Moyo: I think it is quite
interesting that from the perspective of an African some of the most evil
despots that have ruled the continent, many of them still ruling African
countries, have done so under the reign of western involvement in Africa, the Mabutos,
the Idi Amins, the Bokassas and so on, so it is very interesting to see that
the West now is kind of offended to have the Chinese there doing the same
thing. I give an example in the book
about how Mugabe is an example. Q76 Mr
Hendrick: Tomorrow the President of Somaliland is
visiting. As you know, it is fairly
democratic, fairly well run - a big contrast with Dr Moyo: I do not know what the nature
of the discussions of that are going to be, so I cannot comment, I am
afraid, on whether it is good or bad. I
cannot come down hard on that. My family
lives in Mr Hendrick: Thank you. Q77 John Battle: The credit crunch internationally, would that not put pressure on private financing now? In a sense, I am moving on to your next book, but if the whole financial systems of the world are clogged up and there is no private money being put forward, if we stop the aid programmes internationally in the next three months, where would the money come from? Dr Moyo: Yes, the credit crunch is a
challenge but I do not view it as permanent.
We all know that this apocalyptic state is not permanent, so for me I
would encourage African governments to start to think about whether or not they
will be ready with ratings and so on when the market comes back. But even beyond that, if you look across the
world as opposed to focusing on traditional markets, such as the Q78 Chairman:
You
conclude that the financial crisis could be the best thing that has happened to
Dr Moyo: I think so, yes. Q79 Chairman: Other people have said "Be careful what you wish for." You are about to have your model tested. Dr Moyo: Yes. Q80 Chairman:
Why
do you think and how do you think this crisis can be the best thing that
happened to Dr Moyo: It can be the best thing
because Q81 Chairman: Thank you very much. It has been a very interesting exchange. It has been very provocative. On some of the things you have said the Committee would agree with you. There are others where I think you have challenged us and we will reflect on them. If you are able to give any input on the specifics of a DFID critique, we would value that, because we will have the Secretary of State giving evidence to us. John Battle: I think Dr Moyo would be a breath of fresh air to the Treasury Select Committee also. Q82 Chairman: That is also true, but I would make the point that some of the things you have said are qualitative issues which we would take on board. It is really important that in testing these things we have a challenge and we are made to think and indeed we make our department think hard about what it is doing and what works. Your contribution is really interesting and really helpful. We are grateful to you for coming in and giving us evidence. Anything you can follow that up with we would be very glad to have from you. Dr Moyo: Thank you. May I also encourage you if you have the time
and inclination perhaps to reach out to President Kagame of Q83 Chairman:
I am
not sure we can either visit Dr Moyo: He comes here often. Chairman: We are going to John Bercow: It would be quite an interesting development for us to invite a sitting president. Q84 Chairman:
We
have had a prime minister in front of us.
The point of us going to Dr Moyo: Since you have said you are going to Q85 Chairman: We are going to both. Dr Moyo: Wonderful and I hope you enjoy your trip there. Q86 Chairman: Thank you very much. Dr Moyo: Thank you for having me. I really enjoyed our conversation. Memorandum submitted by Examination of Witnesses Witnesses: Dr Neil McCulloch, Fellow, Institute of Development Studies, Dr David McNair, Senior Economic Justice Adviser, Christian Aid, and Dr Dirk Willem de Velde, Programme Leader (Investment and Growth), Overseas Development Institute, gave evidence. Q87 Chairman: Thank you very much, gentlemen, for coming in. I am sorry it is slightly later than expected but I think you will agree the first session was an interesting and provocative one for us. Perhaps we can start on this. We are looking at aid under pressure: the impact of the global downturn and how it may affect development in the poorest countries. Are you able to give us an assessment of what you think the impact will be? Having just heard Dr Moyo's assessment or read her accounts, do you agree that the crisis actually offers opportunities or is it all downhill for poor people in poor countries? Dr de Velde: I think that the global financial crisis will have a major effect
on African countries as well. It started
in developed countries but it is now clear that there are lots of countries
that are now going to be affected, including African countries. We can do some back-of-the-envelope calculations
on that, but we estimate that there might well be an output loss of about
US$ 50 billion for sub-Saharan Q88 Chairman: Given that Dr Moyo was almost implying that it might lead to a surgence of self-help, people being innovative, do you think that is right? Dr de Velde: I would certainly agree that growth innovation is important. The question of course is: how is that being stimulated? If we look at evidence around the world, does the recession actually help innovation and growth? I am not so sure whether that is the best way to stimulate innovation and growth. I can say that there is a window of opportunity now to engage in good economic policies to respond to the crisis. We have short-term economic policies, fiscal policies, monetary policies. There are also long-term policies, such as price sector development, policies that could be improved - infrastructure development. I think there is a question mark over this. There is a window of opportunity and in some countries in monetary terms they are more protectionist in a crisis; that would be quite dangerous. We see in the West that there is a danger of becoming more protectionist and therefore I cannot say for sure that the crisis will stimulate more growth and innovation. Dr McNair: Thank you for the opportunity to come and address the
committee. Some of what Dr Moyo says
that we would agree with. The financial
crisis is clearly going to impact on the poorest worst. Dirk has talked about a fall in financial
flows, a fall in aid, fall in foreign direct investment and also trade finance,
the oil that keeps the global trading system working, but we do not see this as
a completely negative picture. In a
sense, the financial crisis does present a unique opportunity to address some
of the global issues which impact negatively on development. There is no doubt that aid is under
pressure, but now is not necessarily the
time to renege on commitments but to show deeper commitments, and not just
through aid but through policy, solidarity and addressing some of the policy
coherence issues around development. We
are very encouraged to see the Secretary of State's comments to this committee
when he was last here that, in addition to supporting developing countries
through ODA, we need to look at the impact of our policies on trade, on climate
change and on tax and essentially support the capacity of developing countries
to raise their own revenue for development.
I think one of the big things that has been highlighted in this crisis
is that external sources of finance are very much pro-cyclical, whether that is
investment or ODA or foreign direct investment.
We need to think very carefully about the role of domestic resource
utilisation, which was very much a theme of the Financing for Development
Conference in Dr McCulloch: Thank you for the opportunity to come before the committee. The question was about the impact of the
crisis and whether there are opportunities arising. One of the first things that the Q89 Chairman: But she is not wrong that they are the right instruments for development? Dr McCulloch: Absolutely right. I think it
is very important to tap these alternative sources of finance, but in the
particular climate, as David mentioned, I think it may be extremely difficult
to do so. Q90 John Bercow: I do not know how well you think so far DFID has taken up the challenge of helping developing countries to respond to this and specifically whether you think that DFID has sufficiently sophisticated and robust analytical tools to be able to assess the particular needs of different partner countries on a worthwhile basis. Dr McCulloch: I think there has been a little cottage industry generated over the last couple of months in trying to define vulnerability. I know IDS and ODI have both come up with ways of attempting to assess how vulnerable countries are. DFID have one, the World Bank has one and so forth. Of course the nature of the impact on different countries is going to be very heterogeneous; it depends on the nature of your current account deficit; it depends on the state of your finances, of your ability to respond in a counter-cyclical world; it depends on your reserves and on your exposure to debt, and so on and so forth. My personal view is that DFID have rightly identified social protection against the potential shock to domestic absorption, which this crisis will entail as a major area where they should be putting more emphasis. They have already indicated that they will support this global vulnerability fund, which the World Bank has talked about. One of the areas where I strongly agree with Dambisa Moyo's analysis is that it worries me slightly that this will be a huge international fund from Western donors to support social protection. It is important that DFID are careful not to actually undermine the ability to generate domestic political demand throughout the developing world for those things, rather than it being funded entirely externally. Q91 Andrew
Stunell: You have made the case that social
protection should be the number one priority and if DFID follows that through,
then there are consequences in terms of the Dr de Velde: Thank you very much for that question. Let me say first that I think DFID has been doing quite a number of things in response to the crisis and it is also trying to assess vulnerabilities. It is working together with other institutions, as Neil mentioned, with World Bank and the IMF, which has just put out a paper yesterday, on vulnerabilities. It has also commissioned us to co-ordinate a ten country case study on the effects of the global financial crisis on developing countries and six of the country case studies are in Africa, all led by African researchers. The other thing that it has done is to try to support the commitments that it has made, commitments to reach 0.7 per cent of GDP, with aid staying at that level. It has also tried to do that internationally and to work with European partners. I think that is a very good thing. Then, in terms of where aid could be spent in order to respond to the crisis, the first task is to make sure that the disbursement channels are right. It is important that funds can actually deliver now and not next year or the year after when recovery might be taking place. The recession is hitting this year. In terms of the specific areas where it could be spent, there are three types of responses: the short term response is fiscal stimulus in terms perhaps of budget support; then social protection issues; but we should not forget long-run development. One of the most effective ways to get yourself out of a crisis is to engage in good and appropriate policies to stimulate growth in the long run. One of the areas of aid on which we have focused in the last year or so is aid for trade; first, thinking about more aid for infrastructure, aid to help trade take place. That is an area where aid can be effective. DFID has recognised that and is rightly putting money and funds into that area. Andrew Stunell: Perhaps before the other gentlemen answer, you have answered the half of the question I did not ask. I can see where we might spend it but what programmes would you judge can take a scaling back? Q92 Chairman: DFID is going to have to find some money from somewhere and it has already re-ordered its priorities, so it has less money to spend and it has also changed its priorities. Dr McNair: To be honest, I do not feel sufficiently qualified to suggest where DFID should cut money. The only thing that I would say is that we need to ensure, as Dr Moyo said and both Neil and Dirk have said, that our aid budget supports the democratic structures that are in place and supports the capacity of developing countries to manage those budgets and should not at any point undermine or in a sense put money in without consideration for those democratic parliamentary structures. Dr McCulloch: Let me give you the political answer and then the real answer. The political answer of course is that DFID
does not have to cut. DFID is a long way
from meeting its obligations and existing commitments. If one looks at the track of expenditure, we
are still supposed to be hitting our 0.56 per cent by 2010 and our 0.7 per cent
by 2013. Unless something pretty
dramatic happens over the next two or three years, that is simply not going to
be met. If DFID did take that target
seriously, then it would be ramping up aid substantially and so there would be
more than enough money to be able to fund additional funding for social
protection without cutting other areas.
That is the ideal world. The
reality of course is that it will be shuffling money around in different
budgets. I had a look yesterday at the
sectoral allocation of funds of DFID expenditure over the last few years, the
last five years or so. One of the things
that struck me most interestingly was the huge growth in expenditure on
government and civil society. That is
particularly interesting because we have been talking about strengthening
government systems. The reason why that
money has gone up is because people have recognised the desire for greater
ownership, therefore greater money flowing through government systems, and
therefore they need to strengthen those systems through better support for
public financial management, training accountants, better procurements systems
and so forth. So I would very much not
like to see a cut back on that, but that is the area that has grown most rapidly
in the last few years, and certainly during a crisis it would be a mistake
to cut back on the social sectors - health, education, sanitation, water and so
forth - and similarly we would almost certainly not want to cut back on the
infrastructural work which is likely to create jobs and build useful
infrastructure to enable the progression out of the crisis at the end. That is one possibility. I did want to qualify that, though, with one
comment. You said that I had made it
clear that social protection is where the money ought to go. One of the key findings that comes out of the
literature - there is a lot of confusion in the literature - is the damage that
is done by aid volatility. It is the
fluctuations and sudden changes in fashion in aid which actually damage growth
prospects for many developing countries.
I feel this very keenly. I worked
in a DFID-funded poverty project which achieved a wonderful star rating and then
was closed down because the DFID representative told me that they were spending
all their money on harmonisation. This
sudden change in fashion can be quite harmful.
What I think we need to be doing is focusing, as you were pointing out,
on aid quality, but we can do that perhaps with much better local knowledge,
including not just local DFID staff but staff from the country, as to what
works in that particular context. If
DFID's government and civil society projects are really delivering the good in
that particular country at that particular time, do not cut them. Everybody who works in a local office knows
which are the good projects and the things which are really functioning and
which do not. We do not rely, in my
view, nearly enough upon that local knowledge to steer our aid programme. We believe that we can sit in Q93 Chairman: Dr de Velde, you talked about a rainbow stimulus - blue, red and green - as a means of combating recession. I wondered if you could briefly explain what you mean and how you balance across those sectors. Then I have a supplementary question to that. Dr de Velde: Let me first say that there is now a range of institutions calling for a fiscal stimulus to combat recession and that developed counties are engaged in a fiscal stimulus and if developing countries, particularly the poorer developing countries, cannot engage in a fiscal stimulus, then those fiscal stimuli in developed countries and in the richer developing countries might become a beggar they neighbour economic nationalism against the poorer developing countries. The World Bank has called for a US$ 15 billion vulnerability fund for developing countries. Yesterday, the IMF suggested that US$ 25 billion, maybe up to US$ 140 billion was needed to address the effects of the global financial crisis in concessional lending. So I think that there is clearly rationale for a fiscal stimulus in that sense. The fiscal stimulus of course has most effect if it is put in those places where it has the most effect on addressing the crisis. The general consensus in the literature is that it has particularly large effects in those circumstances where consumers are most clearly constrained. It might not have a big effect in those circumstances where consumers have just over-spent and any fiscal stimulus might still be saved rather than spent. That might well be the case in developing countries. That could be in the form of transfers of money, although I think much of the literature, at least the literature that I am aware of, in terms of spending on aid for trade, would suggest that aid that is spent on stimulating the supply side of economies through investment, in infrastructure and on aid for trade, is particularly effective. In that sense, a stimulus that supports the private sector to develop, much in line with what Dr Moyo mentioned this morning, could be very effective in a number of countries. I do not think we should forget the long run in all of this. We know that there are market failures currently happening. We know that these have affected the financial markets, but we also know that the greatest market failure of all is in climate change and related to activities on the environment and in terms of the adoption of new technologies. In particular, in developing countries what might be really helpful is to stimulate innovation and growth policies so that countries can engage in the adoption of new technologies, which could also be greener. In that sense, we could think about a green stimulus. I think there would be a number of stimuli. Q94 Chairman: You have given a number of ranges of figures that people have
suggested the stimulus should be in size.
Bob Zoellick has suggested that 0.7 per cent of the developed countries'
stimulus packages should be targeted to developing countries. I am not entirely clear what that figure
amounts to. It is a rising figure at the
moment. I am not sure, for example,
whether the Dr de Velde: The number is about £15 billion. The idea, at least in the eyes of the World Bank, is that 0.7 per cent of the global fiscal stimulus should go to developing countries and the global fiscal stimulus at the moment is worth around $2 trillion, in their eyes. Q95 Chairman: Is that a reasonable proposition?
Looking at the Dr de Velde: I think it is important that the aid system can play the counter-cyclical role. There are a number of ways through which that can be done bilaterally but primarily I would have thought multilaterally. There are a number of instruments like IDA or the EDF and IMF. Q96 Chairman: I want to tease you a bit more.
The Prime Minister has already acknowledged that the Dr de Velde: I think so, yes. Q97 Mr Hendrick: Could I ask you all what you feel that the multilateral banks should be doing really to help with the problems of the financial crisis? Dr McCulloch: It is very much related to the issue of the fiscal stimulus. I very much support Dirk's idea that we need to make a distinction between short term and longer term. In the longer term and for a very long time, this committee and many others around the world have been looking at the quality of aid, and that is a very important debate. In the short term, there is a huge financing gap and that financing gap will not matter at all for some countries because they can deal with it themselves through their own reserves; for other countries it will be extremely serious and give rise to major adjustment within the country. There is good academic evidence, indeed by Paul Collier, that for countries that experience major shocks of that kind, whether it be from export prices or whatever, you can at least ameliorate some of the damage which is done by significant injections. The Fund obviously has a very important role to play in that but the Bank has a very important role to play because it is a large pipeline. I was reading something from the Brookings Institute just a week or so ago, which was pointing out that there is a very large sum of money that is stuck in the disbursement pipeline. This is not money that needs to go through the umpteen steps of the World Bank approval process and go up to the board and be approved; this is money that has already been approved by the board and which is still sitting in a bank account which has not actually yet been disbursed. I think there is a very strong case for giving fairly large amounts of money basically as budget support to plug the gap during the immediate crisis. That of course is not a model for how we would like aid to continue in the longer term. I think for aid to continue in the longer term, we get back to all of the issues associated with how we improve the quality of aid in the longer term. One of the key issues there will be taking seriously the commitments which were made in the Paris Declaration. I was rather saddened to look at the performance under the Paris Declaration, the OECD's Better Aid document, which I am sure you have seen. It shows that really the performance on the commitments which we all made in 2005 has been pretty poor. There have been some areas of progress but we are really nowhere near meeting the targets which were set for 2010 in terms of the amount of money that is going through budget systems or the degree to which country aid programmes are genuinely owned by the governments that are receiving them. Dr McNair: One of the best ways to address the complex problem probably at the moment is to stimulate widespread employment. I agree with Neil's point that if multilateral banks were to stimulate employment domestically through investment in the kinds of green jobs that President Obama was talking about, that could be a very positive role. We need to be careful that the lending that is done by multilateral banks is not subject to the kinds of harmful conditionality which in a sense in some ways has led to this crisis - the idea of liberalisation of financial services, which leaves some developing countries more vulnerable to the kinds of capital flight that would happen in a crisis. Dr de Velde: There are a number of multilateral and regional institutions that
could help: the regional development
banks, the African Development Bank, the Asian Development Bank and the
Inter-American Development Bank. Then
there is the IFC as part of the World Bank group that could help, and there is
the IMF. All these institutions need at
least to examine whether they can front-load some of their disbursements. Could the IDA front-load its
disbursements? That will be important. Four weeks ago I was in Q98 Mr
Hendrick: The G20 will be held on Dr McCulloch: I was reading through Douglas Alexander's speech to Chatham House
just a few days ago. I think he is
quite right in saying that there needs to be far better representation of
developing counties on the board of the Bank and also throughout the international
financial institutions. I think that was
needed a long time ago. This may well be
the moment when we really start seriously pushing forward an agenda. The difficulty of course is that in order to
increase representation for some that means decreasing representation for
others and getting people to agree a reduction in their vote is fine. I notice he did not say in his speech that Q99 Chairman: It has just appointed a full director. Dr McCulloch: What I thought was much more interesting and innovative in his
speech, which I very strongly support, is the idea of getting greater
decentralisation and local knowledge.
The World Bank, for example, has already done a great deal of
decentralisation; it is much more decentralised, for example, than the Asian
Development Bank with much larger local offices. It is still the case that most World Bank
officials - and I speak as a former one - spend most of their time serving
the Washington machinery and then speaking directly with senior officials in
the developing country rather than getting out into the country and finding out
what the issues are, finding out who the key political players are, finding out
who the key heads of the organisations are.
There is no incentive mechanism within the operations of these
institutions for you to do so. DFID
officials are in a similar position. I was always struck, sitting as I was in Q100 Andrew Stunell: When times get hard, the obvious thing is for people to tighten their belts. We have identified a number of ways in which that might be a possibility as far as aid goes. Dr McCulloch, you have produced a second contrarian contribution by saying there might not be quite such an obvious connection between recession and reduction. I wonder if you would like to paint that out a little bit for us. Dr McCulloch: I should not take credit for this because I stole half of it from ODI. People like Dirk and myself go and actually look at figures and then look at the broader literature. We were quite surprised that there is no immediate and obvious connection between recession in rich countries and levels of aid flows. Certainly you can point to individual situations like the Nordic banking crisis and so forth where you get major declines or the Japanese crisis of the early 1990s where there were significant declines. When you actually look across 40 years of data, which we have now, of ODA flows from all of the donors, there is no strong association which comes out of that kind of analysis between the level of GDP and the growth of GDP in rich countries and the levels of ODA given. This is a good thing of course; this means that it is not the case that if you automatically have a recession, you will cut aid. It appears to have been the case that aid has been relatively protected in the past. One hopes that that will be the case. This of course may be different because now the recession is much broader, much wider. I do not think there are very many people out there who will put their hand on their heart and say that they do not think that global ODA will fall; I think it may well. Much will depend, though, on the leadership of the big donors. The British are amongst them. Certainly the British Government's continued commitment to its ODA targets and its delivery of those commitments will make a huge difference as to whether or not global aid flows are cut. The other big difference of course will be whether or not the Americans start letting their timetable for doubling their aid contribution within the first term slip or not, but it is a political decision. The point of my submission to the committee was that it is not an inevitable economic rule that aid must decline when there is a recession in the north; it is a political decision as to whether or not aid will be cut. Q101 Andrew
Stunell: The example of Dr McCulloch: It is not at all a one-off. Q102 Chairman: Dr de Velde: If I may add to that, to start out the case for aid is stronger now
than it was before the global financial crisis.
In that sense, if you think about a policy - aid is a policy in
a sense - it is difficult to forecast that. However, we can do some back-of-the-envelope
calculations. If you think about the
value of Q103 John
Battle: Listening to the conversation, I am
tempted to say, as someone who has pressed for the aid budget to be held, if
not increased, that I want to know what the money in the fiscal stimulus has
been spent on and what the increased aid might be spent on. I put it in these terms. I have argued in our Parliament that I think
we are in very different times now and I get the impression we are just
applying old economics and not re-thinking economics. I say that because what we do know from
previous recessions is that those that pay the highest price and suffer the
most are the poor everywhere. To give an
factual example, if you just have a fiscal stimulus, everyone rushes out and
builds buildings and we think we have a capital asset we can look at and
it is proof that we have done something, but what if we put revenue spend
in? I suggested in Parliament for my
neighbourhood, to help tackle poverty, that paying 1,000 carers as home helps
to work at home looking after people would be a fantastic fiscal stimulus
because some of their children might even be able to afford an iPod to keep the
economy going. In other words, what does
the money go on and can we re-think what the aid budget would be spent on. Getting to the point of the question, at the
G20 when we deal with the commitments, we re-state existing commitments from Dr McNair: I think it comes back to the point that stimulation of employment growth is one of the best ways to address these issues. If this global stimulus was spent on creating employment within the social sectors and social protection but also in looking at the kinds of green employment that are required --- Q104 John
Battle: You said that previously. What Gordon Brown and Barack Obama have in
mind when they talk about green jobs is loft insulation and that is not going
to work in Dr McNair: That is a very good point and we need to invest a lot of money in that kind of analysis, in looking at what kind of employment would benefit African countries. Dr McCulloch: We already know the sorts of things that are likely to generate
employment growth and get cash in people's pockets. That is one of the reasons why I was
delighted to see that DFID has just announced this big road-building programme
and more support for trade. If it takes
28 days to get a shipment of copper from the DRC down to the port and out, that
is ludicrous. It takes two days to go
the same journey in Q105 Mr Hendrick: What about the green jobs - I think you are alluding to green jobs - what examples, what projects? Dr McCulloch: I do not have an answer to that. Q106 Mr Hendrick: I think one of the speakers mentioned that? Dr de Velde: May I answer that in a general sense first and then come back to
it? It is important to stimulate growth
in Q107 John
Battle: I think this is a 1960s model
because we are building roads to ports to transport agricultural products to
the port and out. It is the export-led
growth model. I do not think that is
where people are situated; they are in towns.
I saw kids coming into the centre of Dr de Velde: I absolutely agree. That is a very good point and it applies not only in African country but across the world. It is the services sector that has been behind growth in the last ten years. That may be contrary to what many people are thinking but most of the growth has been in services. Dr McCulloch: There is an important link here to the conversation we were having
right at the beginning about social protection.
Precisely because the expenditure patterns, particularly of the poor,
are very much biased towards non-tradeables, particularly on services and
locally‑produced stuff rather than exportable stuff, they have much
bigger expenditure multipliers when you give them some money. Therefore, we should not just treat cash
transfer mechanisms and cash transfer programmes as a social protection thing;
they are also a tool of macro-economic policy; they are also injecting in
demand. You are injecting demand that
does not leak out in the form of imports because poor communities in Q108 Andrew Stunell: A related issue that we were talking about with Dr Mayo was the taxation system. Dr McNair gave the Christian Aid figure of £160 billion that has gone in tax evasion. That seems to be quite a controversial figure with plenty of different estimates floating around. I wondered if you would like to tell us how that figure arrived on your piece of paper. Dr McNair: First of all, we definitely agree that it is a very complex
issue. The figure of £160 billion is an
estimate of lost tax revenue on illicit capital movement via trade mis‑pricing
and false invoicing, so the way that multinationals trade within or between
themselves and mis-price those trades in order to minimise their tax
burden. In many ways, that is a common
practice and seen a legitimate practice.
So it does not cover all tax evasion.
As for the way that we calculated it, and I can provide more detail later
in written form if you wish, in a sense we need three main pieces of information: first, an estimate of the share of reported
trade which is in fact illicit; secondly, data on developing countries' trade;
and thirdly, data on applicable marginal corporate tax rates in developing
countries. The way that we came about
this figure: it was based on the best
deal that we had at the time of writing the report. So we used estimates of illicit capital
movement calculated by Ray Baker, who is a senior fellow at the US
Center for International Policy and a guest scholar at the Brookings
Institute. His estimates of illicit
capital flight, which relates to this first requirement for information to
calculate the figure, has been quoted extensively by the World Bank and it is
based on 550 interviews with heads of trading companies in 11 countries. Before using these estimates, we confirmed
that they were broadly consistent with estimates obtained in peer‑reviewed
academic analysis of trade statistics, most notably Professor Simon Pak of Q109 Andrew Stunell: You have clearly done that; you have put it on the agenda and the Secretary of State has gone to the trouble of saying he does not agree with your figure. Just taking that forward, the British Government is saying that at the G20 meeting it is going to put this kind of issue much higher up on the agenda. First of all, I suppose I can ask you if you believe it but perhaps more relevantly what exactly needs to happen operationally at G20 to make a difference? Dr McNair: I think this is one of the key issues that I talked about earlier where the financial crisis provides a huge opportunity for development in terms of addressing the kinds of flows that are happening globally. In a sense, the role of financial capacity or financial secrecy in both facility and the kinds of risks that banks have taken and that caused the crisis in the first place but also facilitating trade mis-pricing need to be addressed. It is encouraging to see that the Prime Minister, as well as President Obama, President Sarkozy and others are starting to take this issue seriously. There are two things that need to be addressed. The first is the way that multinationals are required to account for their profits. At the moment, they are required to account on a global consolidated basis and that is great for shareholders but it does not tell us where profits are being made and where taxes are being paid. One of the issues with transfer pricing is that revenue authorities in developed countries, never mind developing countries, find it very difficult to monitor the kinds of things that are going on. If multinational companies were required to report this on a country-by-country basis, then they would be in a much better position to target resources towards companies that they feel are abusing the transfer pricing system. I think the second thing that needs to be addressed is financial transparency in tax havens, and particularly the implementation of a multilateral agreement on automatic information exchange of tax payments. Currently, there are bilateral agreements, tax information exchange agreements, but part of the problem with those agreements is that they are negotiated bilaterally and tax havens and other jurisdictions will agree tax agreements with very powerful economic partners, because they are obliged to, but when developing countries com looking for that information, it is not necessarily forthcoming. Those are the two things that we think could happen at the G20. Q110 John Battle: Some of you have mentioned the need to boost trade and aid for trade will be a way of spending the resources. What impact do you think the downturn is having on international trade in goods from developing countries? Are there any figures or statistics to show that already trade is shutting down, as it were, and shutting them out? Dr McCulloch: Immediately the crisis broke, we started work on a set of research
projects, one of which is to use the global trade model, which we have in the Q111 John Battle: Presumably that applies to other minerals and metals too? Dr McCulloch: Yes, it applies to other minerals and metals as well, but particularly oil. I am happy to send that information. Q112 John Battle: And trade in food? You may remember that this time last year we were discussing the food crisis and the price of rice. How is that affecting the trade in food? Dr McCulloch: I do not have the detailed figures of trade in food, although food is obviously included in the model. It is nothing like as significant a component of overall export revenue obviously as oil. The thing that really drives the figures is the relative oil dependency or otherwise of the countries. Q113 John Battle: I take the point that you made earlier about building roads. I think there are some proposals for roads and also opening up border posts and things like that. Will it do enough to boost trade? Is there enough push behind that to make a difference? If you are seeing the figures coming down, will they send them in the counter-cyclical direction? Dr McCulloch: Presently, I think no. DFID
and some other donors too have neglected more economic reforms for a little
while. I am glad to see us getting back
in that area. I worked for some time on
investment climate reforms in Dr de Velde: I agree with Neil. I think
there is evidence of a trade shut-down, particularly in Asia where trade was
growing at 20 per cent year on year up until October last year and then in
November/December it started to plummet with negative growth rates. From the provisional material that we are
getting from the country case studies, that is also the case in some of the
poorer countries. In Q114 John
Battle: There was a little bit buried in the
FT that I recall, and nobody dare
mention the expression "green shoots off cars", but it was looking at
transportation and shipping rates, and shipping rates have gone up in the last
week, and also the hire of vans and trucks has increased in the last week. Dr McCulloch: We do not pick it up in the data. Bear in mind that that increase is relative to a dramatic collapse which we saw in both shipping rates and trucks and so forth. It is good to see not quite green shots of recover but a little bit of movement. There is another thing I wanted to mention, specifically in relation to the food crisis. Dirk mentioned that ODA have a project in ten countries looking at the impact of the crisis. DFID also commissioned IDS to do the qualitative part of that. We are working on pilot projects in five countries qualitatively doing research down in rural communities and in urban communities as well specifically looking at the way in which they are responding to the crisis. One of the most interesting things which we have got back from the initial data is that people feel anxious. One of the reasons they feel anxious is because they have already exhausted a lot of their capital, their assets if you like, dealing with the food price shock, so they are already vulnerable to further decline as a consequence of last year. Chairman: The common thread between the two sets of evidence this morning is, first of all that we should listen to the voice of the recipient countries and poor people more than we do, and, secondly, that what they really want to do is to be able to participate in a dynamic real economy. If both those things were to happen, we might have better development. The debate is around the role of aid and social protection. I think we have had two interesting sessions and we are very grateful to you for what you have put into it. I am sorry if you feel you have been compressed. You actually have not been in the end because we have just let the time run, but it felt like it. I think that is the sign of a good session where there is clearly a good exchange of information and ideas. Thank all three of you very much for coming |