International Development CommitteeWritten evidence submitted by Dr Richard Thomas

The Aid Business and the False God of 0.7—by Richard Thomas

The debate about the UK aid programme has been heating up over the last few months. There is general agreement that we should respond to humanitarian disasters, such as famine or tsunamis, but the debate has now focused on whether we, the UK, should give 0.7% of our GDP towards our aid programme and whether this should be enshrined in law. The argument for an aid programme is strong, for reasons of self interest as well as morality, but the doubters are not short of powerful facts and difficult questions.

We will give £220 million a year to the DRC in 2013–14, not a country with which we have close links, and one which according to Richard Dowden, has a government which is “unpopular, corrupt, rapacious and incapable of establishing effective institutions”. Other governments are not much better from the point of view of the poor. For example, why should we double our aid to Pakistan in the next two years when they do not bother to collect tax from the rich or give money to India when they have a space programme?

The best answer to these questions was given by Hilary Benn when Secretary of State for International Development. He said “we should not punish the people twice”, ie remove assistance because they have a bad government.

Nevertheless, the inexorable rise of the Aid budget from around £8 billion in 2010–11 to £11 billion in 2014–15 in times of austerity is not just unsustainable in terms of UK policy; it is developmentally unjustifiable. In short the God of 0.7% is a false God.

Origins

The key to understanding this is to be found in history. The UK Aid programme developed out of the 1939 Colonial Development and Welfare Act which led, in 1964, to the formation of the ODM, later ODA and DFID. DFID and its precursors funded projects in agriculture, health, and education—supporting up to 15,000 people on professional courses in the UK each year.

Meanwhile, in 1967, international leaders, headed by Lester Pearson of Canada, were asked by the World Bank to review the widening gap between the rich and poor countries, and to investigate the “Crisis in Aid”. The Report, “Partners in Development” was published in Sept 1969; many of its findings resonate today. It made recommendations about the need to make trade freer and more equitable; to promote flows of private direct investment; to increase development aid and to make it more coherent, less tied and more of a partnership. It assumed that the process of capacity building through education and training would continue.

Of equal importance for today’s debate, was the discussion about the troublesome 0.7%. Pearson felt that it would be acceptable and sustainable to recommend that transfers from what is now called the “North” to the “South” should be around 1% of GDP of the richer (donor) countries. This was not based on economic research but on what they believed “the market would bear”. Some Scandinavian donors gave about this amount; the UK gave around 0.3% and the US rather less.

Pearson concluded that initially 0.7% should be official (government) aid flows and that approximately 0.3% should come from the private sector. The first part of this formula (0.7%) was adopted by the UN and later by the major donor countries. Pearson expected that this ratio of 2:1 (government: private) would, within two decades, be reversed. He felt that a more natural relationship was 0.3% from government funded aid flows and approximately 0.7% or more from the private sector. Reducing poverty in Africa and Asia depended on investment, trade, better health and education, adding value locally to primary products etc. Not, in other words giving developing countries fish (aid), but giving “them” a fishing rod so that they could develop themselves.

Private investment would flow, they believed, when internal capacity and investment-friendly institutions had been developed—partly by aid. But it was necessary to begin with a front loaded “Marshall plan” approach, hence the 0.7%. The long term need for 0.3% was to help build and sustain local capacity.

Implications

The UK government’s commitment to enshrine the 0.7% into an Act of Parliament is a misunderstanding of Pearson’s Report. Not least, because the decision to spend 0.7% has led to strange policies. In Africa the instrument which enables donors to meet their ever increasing spending targets is Direct Budget Support; this involves giving funds directly to partner countries’ sector ministries such as Education or Health or to the Ministry of Finance to spend more or less as they wish. It is readily accepted that DBS has contributed to an increase in the number of children in schools in many African countries. Free bed net provision has reduced malaria deaths and improved water supply has made the lives of many women less onerous.

The trouble is that all government income is fungible so that even if every penny of aid money was accounted for (it is not) then government and political elites can and do spend their “own” money on buying elections, buying armaments, and funding lavish lifestyles.

If Governments are offered more money than they have the capacity to sensibly absorb this will almost certainly increase corruption, remove rather than increase the need for reform and, over the medium term, will increase dependency. More indirectly, it reduces the likelihood that elections would be allowed to be “free and fair” because the incumbents have so much to lose. And, rather more cynically, it lessens the need for “northern” governments to remove the bias in trade arrangements, to restrict dumping, and to make it harder for European Banks to accept money clearly stolen from developing countries.

Ironically, the pressure to spend has involved a DFID presence in relatively well-off countries. The programme to India is £280 million; miniscule (0.03%) in terms of Indian national income. South Africa receives £19 million; under 1% of their development budget. DFID has, in the face of criticisms, decided to end these programmes. This may be a mistake, since there are many millions of poor people in both countries and it is often in middle income countries that the reforms initiated by donors have the greatest chance of success.

Equally, cutting funding to these countries creates pressure to spend more in other places, such as the DRC, where the likelihood of spending large sums sensibly is vanishingly small. It is also true that the large and welcome reductions in poverty in recent years in China and India have had almost nothing to do with aid and everything to do with the reform of economic policies and institutions by the governments concerned.

Africa, Aid and China

Something has gone right in Africa over the last decade; the World Bank found to its surprise that between 2000–10 six out of the 10 fastest growing economies in the world were in Africa. Similarly the (March 2013) World Development Report shows encouraging trends in health, education and wealth indicators for many African countries.

However, much of the development was caused not by donor policies but by the growth of Chinese, and to a lesser extent, Indian, investment in Africa. Whether we believe the role of the Chinese is essentially benign or rapacious, there is no doubt that they have fundamentally changed the “rules of the game”.

The Chinese “Scramble for Africa” which focuses, like the European one in the 1890s, on minerals and primary products has been called the Great Chinese Takeaway. They are seeking both minerals and markets and the rapid rise in Africa’s trade with China ($55 billion in 2005 to approximately $166 billion in 2011) is certainly significant. Perhaps only the South Africans have pushed back, mainly because they have seen their small manufacturing sector virtually wiped out by cheap Chinese imports.

The Chinese may have given $54 billion in grants to Africa over the last decade, but they have also supported some of the nastier regimes, such as Zimbabwe, Angola and Sudan. They have imported Chinese labour to do jobs which Africans could easily do, and have made deals (such as over Angolan Oil) which do not bear scrutiny.

The role of the Chinese in Africa has fundamentally changed the equation for western donors. For many years more than 50% of the Budget of several African countries (Uganda, Rwanda etc) came from the West but now this assistance is less important than it was. The Chinese are an alternative source of funds providing vast sums in both investments and grants. And unlike the West they do not impose conditions.

The British Dilemma

DFID thus finds itself to be of marginal importance, not always effective, reluctant to expose corruption and unable to withdraw. Why? Because of the imperative to keep up the spend by “shovelling money out of the door” so that the 0.7% target can be achieved. The perverseness of this incentive should be recognised. It has been suggested that part of DFID’s “hard to spend” budget should go to the FCO or even to the Military (among others A Thompson, The Times, 9 January 2013). If the extra funding to the FCO and British Council is used for short and longer term scholarships, specialist training, academic and commercial exchanges and a significant boost to the BBC World Service then it would be money well spent. The old hostility between DFID and the FCO, engendered by Clare “I’m not giving them any of my money” Short is untenable but a closer relationship between the two Departments will not happen when DFID’s budget is rising and the FCO’s is shrinking.

The suggestion that DFID money be given to the MOD is even more complicated. The MOD is just not good at re-construction and “hearts and minds” work. However, it is crucial to development work in post conflict situations—as long as it accepts that it needs DFID experience and expertise, not just its money.

What is to be done?

A new Paradigm for Aid and Development assistance is needed. The 0.7% model encourages donors to focus on quantity rather than quality and discourages the kinds of reforms which would engender sustainable growth. The Chinese alternative, which is just as exploitative as the western neo-liberal model, appeals to many African elites who are neither reformist nor pro-poor.

Pearson’s expectation that the educational and structural investments achieved by aid would trigger increasing investment and trade has, thanks to the Chinese, been realised (although probably not in ways he expected). But bulk or wholesale aid, whether 0.7 or 0.3 %, is no longer the key to African development. It could be argued that small scale initiatives which act as a catalyst (adjusting the “rules of the game”, removing log-jams, increasing the role and influence of civil society, improving the capacity to audit flows of funds etc) are both cheaper and much more useful to developing countries in the long run.

Successful but hard won initiatives such as the Extractive Industries Transparency Initiative (EITI) and the Bribery Act (2010) are good examples of the difficult but relatively cheap ways in which aid funding can be spent. And, historically, the technical help given to Botswana in the 1960’s enabled the income from diamonds to benefit their exchequer and the people; not just De Beers.

Dropping the commitment to 0.7% is merely the first step. The UK needs a Royal Commission, (or similar High Level body), to provide a platform for a discussion of the widest possible range of ideas and to decide how much we can and should spend on both Aid and Development. It needs to encourage the articulation of ideas from developing countries (The World Bank’s Voices of the Poor (1999) is a good model). It should review the lessons being accumulated by independent researchers and should note how the Gates Foundation, among others, achieve results.

Economists need to look at fundamental issues such as the terms of trade, investment policy, international banking and capital flows. This year’s Africa Progress Panel Report shows how Africa loses twice as much in illicit financial outflows as it receives in international aid. Ha–Joon Chang of Cambridge has reminded us that the USA and others were extremely protectionist as their nascent industries grew and that the West’s insistence on “kicking away the ladder” will stop the poorer countries from developing. A UK-centred discussion should also respond to the issues raised in the May 2013 report, “A New Global Partnership”, about updating the Millennium Development Goals. Their key “five big transformational shifts” might easily have come from the Pearson Report.

The conclusions of a wide ranging and independent study might make uncomfortable reading for grandstanding politicians and rock-stars, but might result in an aid policy which costs less, accepts that is not the main event, is more developmental, reduces dependency, adjusts the power relationships and helps more poor people in developing countries.

September 2013

Prepared 11th February 2014