FINANCING DEVELOPMENT: A promise broken

25/05/2010 | Sid Verma

The West will break its aid pledges to Africa this year because of a lack of political will, and not as a direct result of financial crisis. As rich country governments take an axe to their budgets in coming years, the future of the Millennium Development Goals has never looked so bleak

In the decade before the global financial crisis, Africa’s economies seemed finally to have defied modern history as they surged forward with unprecedented momentum.

Sky-high commodity prices, improved macroeconomic management and a flood of foreign capital appeared to have reversed the region’s fortunes once and for all, after countless years of hampered development. And a wave of debt relief programmes, notably the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI), lent a much needed boost to sovereign balance sheets from Congo to Senegal.

The result was near-universal optimism that the continent’s anti-poverty drive, buoyed by aid flows and robust economic expansion, would bear much needed fruit.

But the 2008 financial crisis changed all that. As exports, capital flows and bank lending collapsed, so too did the region’s drive towards economic development. Although investment, consumption and trade are once again picking up, the jury is out on whether the global crisis will prove a cyclical blip in the region’s growth cycle, or whether further economic gloom in western economies will haunt Africa’s development story once more.

The uncertainty has lent new urgency to calls for more aid. The World Bank, aid agencies and NGOs are urging the international community to ramp up aid to offset the impact of weak growth. According to the Organization for Economic Cooperation and Development (OECD), total net overseas development assistance (ODA) rose 0.7% in real terms relative to last year.

“You can’t call this a counter-cyclical response,” says Dirk Willem te Velde, economist at the Overseas Development Institute (ODI). “Aid is a policy and not a direct outcome of economic behaviour. As a result, aid should have been increased as a counter-cyclical measure. But it was not.”

Over the past two years, Africa has stepped up its reliance on multilateral support, finding itself largely unable to stimulate domestic economies with monetary or fiscal tools. The IMF provided sub-Saharan Africa with $3.6 billion in concessional loans (effectively zero-interest rates) last year, while disbursing $1.4 billion in IMF balance-of-payment support. In total, this represents nearly a five-fold increase compared with 2008, bringing into sharp relief the surge in Africa’s sovereign financing needs.

But deep recessions and high public debt burdens in advanced economies put paid to the idea that donors – saddled with 9.2% budget deficits in 2009 – would scale up aid and provide Africa with a short-term stimulus last year. What’s more, western governments have already hiked their structural aid commitments over the years, according to the OECD. It estimates aid flows – excluding debt relief – from traditional donors to Africa tripled between 2000 and 2008 from $8 billion to $24 billion.

Greek fallout

But market panic over the Greek debt crisis and its fallout on Europe could be a game-changer. Fears are growing that aid cuts in the rich world will become a structural consequence of the global crisis. The ferocity of the downturn and the unprecedented levels of public debt burdens would have heaped on the risks, says economist Homi Kharas, a senior fellow at the Brookings Institution. “Even though aid is a very small fraction of GDP, it is discretionary funding, so by definition it is liable for a chop as governments look to cut their deficits in the face of growing threats that their sovereign credit rating will be downgraded”.

The Greek debt crisis has set off a wave of spending cuts around the globe as governments worry that fragile market confidence in public debt sustainability – particularly in the eurozone – will trigger a jump in sovereign financing costs. As a result, fears are mounting that aid budgets will be slashed for political reasons too, as voters faced with massive belt-tightening measures balk at the prospect of increasing overseas aid financing.

“Empirical studies confirm the link between donor economic cycles and aid flows, especially during severe downturns,” says Alexei Kireyev, an IMF economist.

Spain, Greece and Portugal – which cut aid by 1.2%, 12% and 15.7% last year – are poised for further budget cuts, although ODI’s Velde notes that they “are relatively small donors, so they won’t affect the aggregate aid flows to Africa that much.”

The broader implications are more distressing, however. Adds Velde: “The market panic in the eurozone over sovereign debt and subsequent budget cuts in southern Europe has increased the risk of cutbacks in aid in the rest of Europe.”

Heightened sovereign debt fears in the rich world hit at a critical time for international development. This year marks the deadline for donors to deliver their aid commitments made at the G8 (France, Germany, Italy, Japan, United Kingdom and Russia) Summit in Gleneagles in 2005, where rich countries pledged $130 billion in aid by 2010, a commitment heralded at the time by Bono, musician and development activist, as “the beginning of the end of poverty in Africa”.

Such statements seen in the harsh post-crisis light now seem wildly off the mark. Most African governments are off track to meet the UN’s Millennium Development Goals by 2015.

In April, before Europe committed to unprecedented bailout packages for Greece and the eurozone, the Donor Action Committee warned that the aid disbursements to Africa this year are likely to be $14 billion short of the $25 billion increase pledged in 2005, measured in 2004 dollars.

Overall, overseas development aid this year is expected to hit $108 billion expressed in 2004 dollars, an increase of $28 billion over the 2004 baseline. The overseas aid (ODA) to gross national income (GNI) level ratio is set to rise over the same period from 0.26% to an estimated 0.32%. But this leaves an aid shortfall of $18 billion (in 2004 dollars) against the 2005 commitments, once the effects of reduced GNI are taken into account, the OECD said last month.

LARGER AND SMALLER

But according to statistics published by the ONE Campaign, an aid advocacy NGO, overseas aid in the G8 is set to fall further. It estimates aid this year will be $13.6 billion more than 2004 – in other words, a 49% shortfall on the 2005 pledges.

“Overall, we have seen since 2005 the largest ever increase in aid to Africa over a five-year period,” says Jamie Drummond, co-founder of the ONE Campaign with Bono. “But the figures are significantly lower than the [OECD group of donor assistance countries] DAC promises.”

According to the ONE Campaign, the shortfall is principally accounted for by Italy, whose 2010 aid budget represents a real terms cut of 6% over 2004 levels, while Germany and France are set to deliver only a quarter of their aid pledges. Ireland’s real GDP contraction of 1.5% this year has sparked a E100 million aid cut, with the development budget already cut by 19% last year.

Overall just $4 billion of the total $18 billion shortfall was a direct result of the global financial crisis reducing national income, principally in Ireland and Italy, says the OECD.

Brookings’ Kharas says: “The financial crisis is a poor excuse for not meeting aid targets. The OECD’s projection for DAC country GNI for 2010 is only 2.6% below what was expected in 2005 when aid commitments were made at Gleneagles.”

Gleneagles midpoint

This year is also a landmark as it represents the mid-point between the historic Gleneagles summit and the 2015 target date for meeting the 0.7% ODA/GNI ratio. The OECD says the Gleneagles promise made by 15 European Union countries to raise their overseas aid budgets to at least 0.51% of national income this year would be broken by six nations: France, Germany, Austria, Portugal, Greece and Italy. Italian aid in 2010 is likely to be just 0.19% of its national income, spurring the wrath of aid campaigners.

“Italy should be thrown out of the G8 and barred from all global discussions on aid as it has completely failed to fulfil its aid pledges,” says Drummond.

The global financial crisis has laid bare the structural weakness of the West faced with ageing populations, weak banking systems and over-indebted governments and households. According to the IMF, the average decline in GDP in the OECD group of donor assistance countries hit 3.7% in 2009 while only a modest 2% growth is forecast in 2010.

“Aid declines with lower growth, a worsening of the fiscal stance, and higher debt in donor countries, although the statistical relationships are not always strong,” says Kireyev. On the latter point, optimists point to the UK where all three major parties have pledged to achieve the 0.7% aid to GDP target by 2013 – despite facing one of the largest deficits in the EU at 11.4% – and have vowed to enshrine this in law.

This historic cross-party consensus has fed optimism. Drummond says the UK is an example where political leaders are responding to citizen demands to elevate the status of aid budgets, akin to military spending. Citing the need to ramp up aid to address security, immigration and international health concerns, he argues development assistance is a self-interested policy in an integrated world economy and requires long-term consistent commitment.

Nevertheless, “even if countries commit to keeping aid programmes constant as a share of GDP, this would translate into lower aid flows,” says Kireyev.

Kharas also fears that climate change financing – for which rich countries have pledged to provide developing economies with $30 billion annually until 2012 and then $100 billion until 2020 – will “compete with aid to Africa”.

Mixed story

Yet donors shouldn’t be tainted with the same brush. According to Kharas, a former World Bank chief economist, rich countries can be classified into four groups. In the first group, Sweden, Belgium, Spain, and the United Kingdom can be characterized as ambitious and largely successful in delivering on their promises.

The second group includes Australia, New Zealand, Norway and Canada, which under-promise but over-deliver.

The third, which includes the US and Japan – the two largest economies in the G8, which are set to spend 0.19% and 0.18% of their GDP on aid, respectively – promise little and deliver little.

And the fourth – Italy, Greece, Ireland and France – over-promise and significantly under-deliver. “The first two groups deserve to be commended for their ambition and success, while the last two groups should be scrutinized as to whether they are bearing their fair share of the global poverty reduction effort,” says Kharas.

Nevertheless, in aggregate, aid is expected to have risen 36% in real terms between 2004 and 2010. “For all the clamour around failed aid pledges, it’s important to remember: this is the largest volume increase ever in ODA over such a period, and does not depend on the large increase in debt relief which boosted the aid numbers in 2005–07,” says Kharas.

Development assistance is rising – even if the ambitious 2005 pledges have been broken. Against this backdrop, vocal aid critics – many of whom argue that corruption and weak economic governance have squandered the money and hampered growth – have stepped up their attacks. One of the more high-profile accounts of the theory that large-scale development assistance has ripped Africa apart by sanctioning corruption was economist Dambisa Moyo’s polemic Dead Aid last year.

But the raging battle between self-styled pragmatists and aid romantics, who trumpet the virtues of overseas aid in financing healthcare, sanitation and medicine, “has polarized debate” to the detriment of international development, says Velde at the ODI.

“This debate certainly won’t help donors to deliver the 2015 commitments,” he says.

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