April 22, 2002
SUDDENLY, aid is sexy. The clear message from finance ministers from around the world who gathered in Washington last weekend, for the spring meetings of the International Monetary Fund (IMF) and the World Bank is that helping developing countries to participate in the international economy is now at the top of the political agenda. Even before the terrorist attacks on America last September, policymakers in the rich countries had begun to recognise the need to act more decisively to help their developing country neighbours. The United Nations Millennium Declaration in 2000 committed rich countries to an increase in aid. And the big UN conference on aid and development in Monterrey last month had long been planned. But as President George Bush's war on terrorism got under way, and concern grew about the risks posed by "failed states", aid policy has assumed a new geopolitical significance. Writing big cheques to ease poverty and speed development started to make sense in domestic political terms for leaders in the rich nations.
Now, though, the hard questions are starting to emerge. The round of meetings in Washington underlined the work that still needs to be done if the objectives now shared by the large industrial nations are to be met. How much aid makes sense? What is the best way of providing it? How can waste, corruption and plain inefficiency in many developing countries be by-passed? And, just as important, what obligations is it fair to impose on the recipients of the largesse?
Until recently, rich-country governments and their taxpayers frequently aired doubts about the value of aid to ordinary people in poor countries. They decried the corruption and waste involved in many aid efforts. Those in poor countries complained that rich-country donors were too interested in helping their own firms with aid, or manipulating poor-country governments. Even when people paid lip service to the idea of resource transfers to help poorer nations, they tended to keep their wallets tightly closed. As a share of national income in donor countries as a group, overseas aid is less than it was in the 1980s. In theory, that should all soon change.
But there is a long way to go. Though progress has been made in reducing poverty in developing countries, the World Bank published new figures on April 20th showing that in all regions of the world some countries have little hope of being able to achieving the Millennium goals. And per capita income in developing countries would need to grow at nearly double the rate achieved in the past decade to meet the goal of reducing the number of people living on less than a dollar a day to half the 1990 level by 2015. That is a tall order.
It also emerged during the meetings in Washington that in spite of the progress made with the initiative to write off the debt of the most heavily indebted and poorest countries, launched in 1999 and in which 26 countries (out of a possible 42) now participate, it has not been an unqualified success. "Debt sustainability remains an issue" was how the carefully-worded communiqué of the IMF's main policymaking committee put it.
Critics of the way the initiative has been implemented put it more strongly. In arguing that the effort has not guaranteed that poor countries can escape from their debt trap, they point to Uganda as an illustration of how things can go sour. Uganda was seen as a model of how debt relief should work: the country delivered on its commitments to policy reform and co-operation with the international financial institutions which oversee the debt-relief programme. And yet it now finds itself struggling to cope with the effects of a 40% fall in the price of coffee—which accounts for 60% of its total exports. Debt relief cannot, of itself, protect countries from external economic shocks which can quickly make their debt burdens unsustainable once again.
As is so often the case in international economic policy, America holds the key to progress. The world's largest economy is also the biggest shareholder in the IMF and the World Bank: what it says goes. America can be instrumental in shaping policy through these institutions, through the G7 industrial countries, and bilaterally. In spite of mutterings from some members of his administration who are dubious about the benefits of foreign aid, Mr Bush led from the front at Monterrey, promising an extra $5 billion dollars a year in overseas aid within three years—the largest such rise (from an admittedly meagre base) in thirty years. Other donors, particularly the Europeans, fell over themselves to compete with this example of American generosity.
Now the Bush team is pushing hard an idea which it inherited from the Clinton administration and which, in some ways, builds on the debt-relief initiative. For the very poorest countries, America strongly favours moving from loans to grants, though other industrial-country donors are still doubtful of the wisdom of this. Giving grants, they argue, will cut future aid flows because some of the funding for loans on generous terms comes from money which has been repaid to donors.
America takes the view that, since many developing-country loans will never be repaid, mainly because the recipients cannot afford to make large payments to their creditors, it makes more sense to treat them as grants in the first place. The Bush administration has threatened to hold up the replenishment of the funds used for this sort of aid, International Development Assistance (IDA), if it cannot persuade everyone else to come on board. All participants talked about having made progress in this area, but it remains a stumbling block.
Work is also under way in the IMF and the G7 on ways to reform the international financial system. This now has two objectives. One is to make it harder for terrorist organisations to obtain funding by cracking down on money-laundering and increasing financial transparency. The other is to reduce the occurrence and severity of financial crises in emerging-market countries. On this, American views seem to have prevailed. The G7 meeting on April 19th-20th ended with an unexpected decision to proceed with an American plan to include collective action clauses in future loans taken out by emerging-market governments. The idea is that in the event of a default—such as that by Argentina last December—a government could negotiate with a "super-majority" of its creditors to restructure its debts, rather than, as now, have a small minority of creditors able to undermine such attempts.
This market-based approach is still controversial, and implementing it could be difficult given the previous reluctance of governments to include such clauses in loan contracts (lest they appear to be signalling a readiness to default even as they borrow). Work on IMF plans for more far-reaching reforms of sovereign debt, on which the Bush team recently appeared to pour cold water, is to proceed at the same time. The two approaches, said the G7, are "complementary".
It is starting to dawn on those involved in reshaping international financial institutions that the various mechanisms for helping developing countries are more interlinked than ever before, and more interdependent. Sending generous cheques will not of itself guarantee poverty reduction. Reconstructing the international financial architecture also is not, by itself, enough. The steps which industrial economies will need to make if they are serious about helping the world's poorest countries to develop their economies have barely begun to register with political leaders in rich countries.
Much the most important is trade. Ultimately, developing countries can only hope to prosper and help themselves if they have access to rich countries' markets. Free trade is a favourite mantra of the industrial countries, and they renewed their commitment to opening their markets when the new Doha round of trade negotiations was launched last year under the auspices of the World Trade Organisation. So far, though, free trade is something honoured more in the breach than in the observance.
When he imposed new tariffs on many imports of foreign steel into America, Mr Bush appeared to be saying he is not wholly committed to free trade, and the European Union's response—to threaten barriers of its own—sent a similar message. Industrial countries still spend more on subsidies to their farmers than they do on foreign aid, even though opening their food markets to foreign competition, and cutting and eventually eliminating farm subsidies, would bring huge benefits both to developing-country farmers and rich-country consumers and taxpayers. (Uganda's export problems are partly a result of its farmers' inability to diversify away from coffee, for instance, because they cannot freely export other farm products to Europe or America.)
In Washington, ministers did little more than repeat their commitment to a more-open trading system. Given the current row between America and Europe, the linkage between aid and trade, for now, is one which the rich nations would rather not focus on too much. But it is one which, if they really mean to help poorer countries, rich countries will have to face sooner or later. For everyone's sakes, rich and poor alike, it should be sooner.
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