Hamish McRae: Ragged-trousered philanthropists they're not, but they know how to help Africa

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The Independent Online

"The man who dies rich dies disgraced," said Andrew Carnegie, the Scottish-born industrialist who gave away the fortune he built in the US steel industry. When you consider the legacy of rich Americans, their names living on in their charitable foundations, you can see that Bill Gates is following a time-honoured tradition.

It is a tradition that we in the UK are only just beginning to revive, after the charitable instincts of the rich were damaged by two generations of punitive taxation.

Arguably, the wealthy define themselves more by how they give away their money than how they make it: the former shows their values and their priorities, the latter merely their talents and their luck.

Carnegie was 65 when he retired, sold up and switched his energy to philanthropy. Mr Gates was 50 last year. So in deciding to go from making money to giving it away at this stage - he is quitting his full-time role at Microsoft in 2008 - he will have a lot of time to make an impact on his chosen fields of global health and education. In doing so, he is bound to influence the way in which the rich world, mostly through state-funded aid programmes, tries to improve conditions in the poor world.

For example, one of the key features of successful philanthropy is follow-up and monitoring. When rich people give away money, they want to make sure it is wisely spent. Instinctively, they apply the order, discipline and reporting systems of the business world. In other words, they apply "conditionality". By contrast, the ruling ethos of public sector aid is to move away from conditionality, tying aid to specific projects or only giving the money if certain policy terms are met.

I have just been sent a working paper, "What next in international development", written by Simon Maxwell at the Overseas Development Institute (ODI) in London. This gives an excellent summary of the present state of the official aid industry, and in particular the distinction between the "20 per cent club" and the "0.2 per cent" club.

The figures are stunning, and professionals in the aid industry know it. In several countries, mostly African, official aid accounts for more than 20 per cent of GDP. If you add in other forms of aid, the total contribution to GDP is even higher. Five members of this club are shown in the left-hand graph above, together with five members of the 0.2 per cent club - countries where such aid is around 0.2 per cent of GDP.

One obvious point is that successful developing countries have low levels of aid. China and India have achieved economic take-off pretty much on their own, though China has had huge foreign direct investment, mostly from America.

A further, more controversial, point is that if over 20 per cent of GDP comes in from other countries, that must to some extent skew the domestic economy. Goods have to be imported to service the needs of the foreigners charged with spending the money. Scarce administrative resources have to be deployed in negotiating with donors.

The ODI paper reports quite a lot of progress, with debt relief and commitments to double aid by 2010. The projections for such official aid, both as a percentage of the donors' gross national income and in absolute terms, are shown in the right-hand graph. But the ODI acknowledges problems, including the ability of these countries to absorb additional flows of aid and the impact of these funds on exchange rates. Debt relief sounds wonderful but arguably it damages economies by pushing up their exchange rates and making their export industries uncompetitive.

The ODI also notes "deep-seated concerns about the impact of aid funding on political accountability in poor countries characterised by patronage politics" - which is, I suppose, a polite way of saying that aid fuels corruption.

The growth of flows from the Bill and Melinda Gates Foundation is bound to change the aid industry but it is harder to see quite what the long-term implications will be. Charities that are founded by private individuals and in essence hand out personal wealth have greater freedom as well as greater discipline than state-funded agencies. The absolute scale of the flows remains relatively small, and one is not a substitute for the other. In 2005, the Gates Foundation gave away $1.36bn (around £750m). By comparison, our Department for International Development gave away £3.8bn in 2004-05 and that is scheduled to rise to £5.3bn in 2007-08.

This is a bit like comparing apples and pears, for the nature of the flows is rather different. But the central point here is surely that an organisation with the focus and drive of Mr Gates will create a bow-wave that affects the way aid is targeted globally. As Tony Blair once said, "what matters is what works"; Mr Gates will insist that things do work.

There is a parallel with higher education in the developed world. In the US, which supplies 17 of the top 20 institutions in Shanghai University's global rankings (the other three being Cambridge, Oxford and Tokyo), universities rely on a combination of fee income and charitable donations. For the top US universities, philanthropy is the key to success, while in Britain, there is a tremendous push to build up endowments to enable our universities to compete better against the States. In continental Europe, which lags disastrously behind the US in quality, university education is still largely state funded.

From the perspective of the top universities, philanthropy drives educational quality.

There is every probability that it will carry on growing for the foreseeable future. The ranks of the rich are swelling, creating a global class whose members see it as part of their duty to use their wealth to support wider social objectives. The Carnegie stricture may be a bit too radical, for he gave away 90 per cent of this wealth. Most American families would perhaps shoot for a somewhat lower proportion.

Here in the UK, charitable giving runs at about half the level in the US, proportionate to GDP. Nevertheless, quite a lot of evidence suggests that the US attitude is spreading: that for wealthy families to have a charitable programme is normal and correct, and not to have one is wrong.

So it seems reasonable to think that the Gates Foundation will have a knock-on effect in a number of ways. It will have imitators. It will bring focus. Its successful programmes will teach others about the best ways of deploying such resources. And it will put pressure on national governments to ensure that aid funds are spent more effectively. This is wholly good and Mr Gates will deserve his - redefined - place in history.

Spend more and rates will go up - it's retail therapy in reverse

Is it just the flat-screen TV boom, or have retail sales genuinely perked up? They were merely inching up earlier this year. But sales surged by 0.5 per cent in May, bringing the three-month increase up to 1 per cent, or a 4 per cent annual rate.

The uplift may have been due to special circumstances - the rise in sales of electrical goods and other football-related stuff. Beyond this, and looking ahead, there are two opposing forces. One is the strength of the housing market, with a sharp pick-up in both mortgage applications and approvals. The other is the squeeze on real earnings from the rise in the price of essentials, including fuel and so on.

The more you look about, the more you see these totally conflicting forces. Thus, on the positive side, employment remains high, though unemployment has been creeping up. But on the negative side, pressures to save - including for pensions - are increasing. Taxation is scheduled to rise but growth is expected to pick up.

Then comes that little matter of interest rates. The US and Europe will carry on raising rates, with US home buyers now facing substantially higher borrowing costs than we do here. The general judgement seems to be that our rates will remain flat through the summer, despite the somewhat negative speech by the Bank of England's Governor, Mervyn King, last Monday. The response to the speech may have been more bearish than the content warranted, though. He was trying to warn of the dangers of excessive borrowing rather than hinting about the direction of interest rates.

What happens to rates after this long, flat period will depend as much as anything else on the consumer. If this pick-up really is World Cup-related and sales fall back, the chances are that the next move in rates will be down, not up. But if the increase in consumption is sustained - back, say, to 4 per cent a year - then the next move will be up.

Neat, isn't it? Spend more in the shops and we will get higher mortgage rates; cut back and rates will come down. Sounds like retail therapy in reverse to me.