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Less To The Poor

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Inequality is exploding within a large number of countries, with the potential negative consequences that we have just analyzed and, at the same time, standards of living in the world as a whole are converging. How can we maintain the trend toward increased global equality while curbing the rise in national inequalities that will, eventually, come into conflict with this first objective?

If the question itself is simple, the answer is anything but, primarily because it involves the interplay between the global economy as a whole and individual national economies, particularly those of rich countries. For example, if we believe that the increase in national inequalities is due above all to the globalization of trade, it would be tempting to try to remedy it by taking protectionist measures. Several figures in France and elsewhere in the world have come out in favor of this policy. Some have even advocated a policy of “de-globalization.”

The problem is that even if such a policy did lead to a reduction in inequalities in some countries — which, as we will see later on, is itself doubtful — it would also be a hindrance to the development of other countries and would ultimately slow down the reduction of poverty in the world. This is exactly the kind of trade-off that a community that cares about global well-being must avoid. It is therefore important that we explore those policies that would allow us to pursue these two objectives simultaneously or in parallel. I will begin with policies at the global level and then look at policies aimed at correcting national inequality.

Policies toward a Global Convergence of Standards of Living and the Reduction of Poverty: As we have seen, it is likely that the convergence between emerging economies and rich economies will continue in the years to come, and perhaps even accelerate. Things are not so clear for poor countries, most of which are located in Africa, whose current development is based on exporting raw materials. A large number of these countries have experienced a period of growth since the early 2000s, largely thanks to high commodity prices on the world markets.

But it is unlikely that this situation can be sustained over the long term. For global poverty to continue to fall, growth in these countries must remain high over the coming decades. Of course, growth is the responsibility of the countries themselves, but, in poor countries, it is heavily influenced by the international economic climate. As experience has shown us, it is difficult to intervene and control prices on global commodity markets; we must therefore look at the question of the support that the international community, and especially the rich countries — but also, increasingly, emerging countries — can and should offer to poor countries for their development.

Development Aid
Currently, development aid is the only true instrument of international redistribution from rich to poor countries, but its size remains quite limited and its effectiveness in reaching those who need it most in poor countries is open to debate.

Rich countries allocate about 0.35 per cent of their Gross National Incomes, around $130 billion in total, to development aid, or official development assistance, as it is officially called, to poor countries. In comparison to the redistribution that takes place within nations, such sums appear almost negligible. For example, the French system of taxes and transfers redistributes around 15 per cent of the income of the richest 20 per cent (which is approximately the same proportion as the population of rich countries represents in the world) to the rest of the population. This is forty-five times more redistribution than what we see at the global level! For the countries on the receiving end, the sums of money redistributed by development aid are nonetheless far from trivial. In certain cases, development aid can account for up to 15 per cent of national income, and sometimes more than half of the government budget.

Historically, the idea of official development assistance and the focus on reducing the income gap between rich countries and the Third World developed in the early 1960s, at the moment of decolonization. This humanitarian concern was clearly coupled with a geopolitical objective.

In the midst of the Cold War, each side was trying to win the good graces of the countries in the middle, who often hesitated when it came to choosing which economic system to adopt, or which set of alliances to join. On the Western side, the International Development Association, a branch of the World Bank responsible for managing a large percentage of multilateral aid, and the Development Assistance Committee, which coordinates bilateral aid from OECD countries, were established. A few years later, the Pearson Commission would ask that rich countries commit to spending 0.7 per cent of their Gross National Income on official development assistance.

This number was never reached. Some countries, notably the Scandinavian ones, kept their commitment, but they were too small to weigh heavily on the total numbers. From the end of the 1960s to the end of the 1980s, overall official development assistance stabilized at around 0.35% of the GNI of donor countries, or half of the stated objective.

It dropped significantly with the end of the Cold War, proof of the important role geopolitics had initially played. It began to shift back upward again in the early 2000s, with the energetic mobilization of the United Nations in favor of the “Millennium Development Goals” with a target date of 2015. These goals include in particular cutting poverty in half, universal primary education, and the reduction of infant mortality rates by two-thirds. This initiative, which is a concrete sign of the international community’s will to fight to reduce inequality and poverty in the world, has returned the volume of development aid back to its earlier levels.

Yet, it is not clear that the geopolitical or diplomatic motivation of aid has completely disappeared from the motivation of the donors. At the same time, new sources of funding have appeared that are not taken into account by the numbers given above. These include private organizations such as the Gates foundation, as well as emerging countries such as China, India, or Brazil. These sources of funding are growing.

At present they represent a little more than 10 per cent of the official aid from the developed countries, whereas they were close to negligible fifteen years ago.

What has been the impact of these monetary flows on development and the reduction of world poverty? Have they been effective in reducing poverty? For some time now, this question has been the subject of intense debates between partisans and critics of aid.

For its partisans, only development aid can help countries emerge from the “poverty traps” in which they are often caught, given that on their own they are unable to finance the investments necessary for their economies to take off and for them to reach the millennium goals. Critics of international aid, for their part, emphasize the absence of any significant statistical correlation between aid and economic growth, and are skeptical that aid has truly contributed to improving the ability of recipients to bring people out of poverty. Several reasons have been offered for this apparent failure.

The primary explanation emphasizes governance, which is often deficient, and the levels of corruption observed in a number of recipient countries. As sovereign states are the recipients of official development assistance, the donors cannot really control the way that it is used without violating basic principles of national sovereignty.

A large portion of aid therefore ends up being diverted, most often to the benefit of the leaders or their entourages. Everyone has heard of the immense personal fortunes that certain African leaders were able to accumulate, in part by embezzling development aid; between 1980 and 1990, Mobutu was able to amass a fortune of almost $5 billion in Zaire, and in just four years in the 1990s, Abacha managed to amass a fortune of $2–5 billion in Nigeria.

Actually, the issue of deficient governance in connection with aid is more serious than the mere diversion of aid flows by corrupt governments. Indeed, it might also be the case that development assistance itself bears some responsibility for bad governance by making the elite in recipient countries unaccountable with respect to their own population of the way aid is spent. From that point of view, aid has the same lack of transparency as the rent from natural resources accruing to governments.

As such it could be said to help lock recipient countries into a cycle of bad governance and slow development—not only doing little to reduce poverty but actually contributing to the creation of more poverty by preventing appropriate institutional reforms and faster growth.

Should we therefore adopt the point of view of those critics of aid who urge poor countries as well as donors to turn down aid? Or, should we, as some researchers suggest, focus aid only on very time-limited projects and experiments to determine “what works and what doesn’t” in development?

Alternatively, perhaps we should distribute aid selectively, as is often the case today, by orienting it principally toward countries whose governance seems acceptable, and only to sectors where funds are supposed to be harder to divert, which is to say, social sectors such as health or education?

Without going to either extreme, I would suggest that there are a few simple principles that deserve to be taken into account. First of all, insofar as a large portion of aid has relieved poverty and improved the opportunities of the poorest individuals in the areas of health and education, it is hard to claim that aid is completely useless, even if it doesn’t immediately boost growth.

The observation and evaluation of projects funded by multilateral aid demonstrate that it has supported significant progress in these areas.

Our fundamental concern should therefore be to ensure that aid is not diverted, that its volume is sufficiently high, in line with the commitments made by both donor and recipient countries, and that it is concentrated on poor received, their intended use, and their actual use in the interests of clearer policymaking.

In donor countries, it also matters that the allocation of aid, its use, and its monitoring, are fully transparent to civil society. Such transparency might deter donor countries from allowing their own political interests and views about development to dominate their aid policies, as was the case during the Cold War, when geopolitical motivations influenced where aid was given, or subsequently with the structural adjustment policies imposed in the name of the Washington consensus upon recipient countries during the 1980s and 1990s.

There also needs to be better coordination between donors to avoid replication of programs and to apply consistent management principles vis-à-vis the recipient countries.

With this in mind, the ideal situation would probably be one in which the majority of international aid was managed by multilateral agencies free of preconceived notions regarding the best policies for economic development. 

With permission  from Princeton University Press

(This story was published in BW | Businessworld Issue Dated 18-05-2015)

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