On Tuesday, Martin Wolf, the pro-globalization associate editor and chief economics commentator at the Financial Times (UK) & author of Why Globalization Works (Yale UP, 2004), argued in a piece entitled "The Wrong Aid Debate" that those who blame global poverty on the poor and those who blame global poverty on the rich are both "absurd."  --  According to Martin Wolf, "The debate on aid is being diverted by three subordinate issues:  debt forgiveness; the choice between grants and loans; and the international finance facility (IFF) of Gordon Brown, UK finance minister.  What matters to the recipient, however, is the resource transfer -- the trade deficit -- that aid finances.  More precisely, it is the present value of the deficits that matters." -- Wolf's main point:  "The focus of the debate should be on the scale of the net flows to the world's poorest countries, not on secondary questions.  The big point is that the flows of net aid to the poorest countries are positive, but very small. In 2002, for example, net official flows (excluding flows from the International Monetary Fund) were only 5 per cent of sub-Saharan Africa's gross domestic product.  Similarly, the net flows to the 27 beneficiaries of the HIPC initiative amounted to about 7 per cent of GDP (see chart).  The net resource flow to sub-Saharan Africa's 700m people is about one-fifth of what the U.S. has been spending on its intervention in Iraq (a country of 24m) every year.  It is also just 0.06 per cent of the aggregate GDP of the high-income countries.  This is grotesque." ...

Comment & analysis

Columnists

THE WRONG AID DEBATE
By Martin Wolf

Financial Times (UK)
February 8, 2005

http://news.ft.com/cms/s/ca74b704-7a05-11d9-ba2a-00000e2511c8.html (subscriber only)

The campaign to "make poverty history" is aimed at the world's greatest challenge and biggest scandal. In the midst of abundance, some 1.1bn people live on less than $1 a day, at purchasing power parity. To its credit, the British government is trying to focus the attention of the rich on the plight of the poor. What chance has it of achieving its aims? Not that much, alas.

A part of the reason is the polarization of the debate on aid and development. On one wing are those who blame the poor for their poverty. The poor should, they believe, lift themselves up by their own bootstraps, unaided. On the other wing are those who blame the rich for the plight of the poor. In this view, the poor will thrive as soon as they are liberated from markets, trade, the need to balance budgets and external debt. Both positions are absurd.

In the post-second world war world, no country has developed without expanding its engagement with the world economy and maintaining a reasonable degree of macroeconomic stability. This is not a sufficient condition for development, but it is certainly a necessary one. The world's poorest countries will be no exception: without access to the markets, capital, technology and managerial know-how of the advanced world they have no hope of development.

Equally, there is strong evidence for the effectiveness of external assistance if institutions and policies are tolerable. As the Center for Global Development in Washington DC points out, particularly strong evidence of aid's effectiveness comes in the field of health. Consider the eradication of smallpox.* A broader paper, also from the center, shows that the kinds of aid that could plausibly stimulate growth (just over half of all aid flows) have a strongly positive effect on output: a $1 increase in aid raises the present value of output by $1.64.**

How then should the debate on aid be framed? The answer, I suggest, is in terms of the size of the needed net transfers of resources from the rich to the poorest countries and on ways to ensure the best use of those resources.

The debate on aid is being diverted by three subordinate issues: debt forgiveness; the choice between grants and loans; and the international finance facility (IFF) of Gordon Brown, UK finance minister. What matters to the recipient, however, is the resource transfer -- the trade deficit -- that aid finances. More precisely, it is the *present value* of the deficits that matters.

In 2002, the net flow of official resources (including grants) to sub-Saharan Africa was $14.7bn. Reduction in the debt stock would be a way of increasing this net inflow, by lowering debt service obligations. But it is perfectly possible for the impact of a reduction in the debt stock on outflows to be offset by a reduction in new inflows. In that case, the net resource transfer would be no greater than before. If, for example, the debt of the 37 countries eligible for the heavily indebted poor countries (HIPC) initiative were written off, the cost of the scheme would rise, in 2003 present value, from $54.5bn to $114.8bn. But this additional $60.3bn could be made available, instead, as new aid flows, thereby offsetting the debt service obligations. Which of these alternatives would be better for development depends on how effectively the money would be used. Debt reduction gives a government far greater freedom in the use of the resources than new aid. Some, though not all, governments can be confidently expected to waste these opportunities.

A similar point applies to a shift from loans to grants, already well advanced for the least developed countries (see chart). Whether that will increase the present value of the resource transfers depends on the scale and terms of the loans relative to the scale of the grants. A shift from concessional loans to grants could reduce the present value of the resource transfer if the face value of the grants were small relative to that of the loans. This is quite possible since repayments by successful developing countries would cease.

Again, the IFF rests on the assumption that aid would be worth more today than in future. That is possible, but uncertain. If capacity constraints were to be more binding today than five to 10 years hence (as is likely), it would make sense to build up from lower levels of aid rather than down from higher ones. The answer is not even general: some countries can use far more aid today; others cannot.

The focus of the debate should be on the scale of the net flows to the world's poorest countries, not on secondary questions. The big point is that the flows of net aid to the poorest countries are positive, but very small. In 2002, for example, net official flows (excluding flows from the International Monetary Fund) were only 5 per cent of sub-Saharan Africa's gross domestic product. Similarly, the net flows to the 27 beneficiaries of the HIPC initiative amounted to about 7 per cent of GDP (see chart). The net resource flow to sub-Saharan Africa's 700m people is about one-fifth of what the US has been spending on its intervention in Iraq (a country of 24m) every year. It is also just 0.06 per cent of the aggregate GDP of the high-income countries. This is grotesque.

It is just as important to focus on the second big question -- how to use aid. Some campaigners seem to believe that elimination of debt would bring forth vastly improved results in itself. But all that does is recognise past failure rather than ensure future successes. Moreover, if extra resources alone guaranteed development, we would not have the literature on the "resource curse." Extra aid has, after all, the same economic impact as the discovery of oil. Its impact will be better only if it is far better employed.

The view that extra aid cannot be used is a council of despair. It will condemn many of the world's poorest to lag ever further behind. Frighteningly, 20 sub-Saharan African countries, with aggregate population of 349m in 2003, had falling GDP per head between 1990 and 2001. More aid will be insufficient to change this dismal picture. But for the poorest of poor countries, rapid development is inconceivable without more assistance. The rich can readily afford the money, but the poor cannot afford that it be wasted. On this foundation alone can we tackle the plight of the poorest.

* Millions Saved, http://www.cgdev.org;
** Michael Clemens and others, Counting Chickens when they Hatch, July 2004

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