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Wipe the slate clean for the world's poorest countries

Diane Coyle
Thursday 20 February 1997 00:02 GMT
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The recent annual review of aid to poor countries by the Organisation for Economic Co-operation and Development, the rich countries' club, makes unusually sombre reading. The flow of aid to poor countries from rich governments has slumped in the latest year for which figures are available - with the UK one of the meanest donor countries.

In its annual review of development assistance provided by member countries, the 29 richest in the world, the OECD revealed that total aid spending fell by nearly a tenth in real terms in 1995. The total declined to $58.9bn in cash terms.

The normally upbeat report described this as a slump, and said 15 out of the 21 countries reviewed had slashed aid spending. The OECD set out an action plan, including increased official assistance, for giving more help to poor countries.

It put a positive gloss on the disappointing official contributions by noting that increasing private sector investment meant total capital flows from the rich to the developing countries had reached a new record of $239.3bn. Private money accounted for $159bn of this. Portfolio investment has fallen since the Mexico crisis, but bank lending and direct investment are both growing strongly.

However, as the charts show, the private investment is heavily concentrated in the richest developing countries. Flows to sub-Saharan Africa are down and it now receives almost none. Both South America and Asia have enjoyed increases, but these are concentrated on the handful of economies that are growing rapidly anyway. More than three-quarters of all private investment by OECD countries in the developing world goes to a dozen "upper middle income" countries.

The report's conclusion is that there needs to be more official aid, but focused on creating the underlying conditions for private investment: "Aid, in short, must now be used with a deliberate mission to help countries break out of aid-dependency." The message is that increasing private capital flows to the few are no substitute for official aid flows to the many.

It is hard to see any hope of aid budgets being increased, however. The UK was one of those leading the way in cutting official aid. It amounted to $3.2bn (pounds 2bn) in 1995, a fall of 6.5 per cent in real terms. Britain has been overtaken for the first time by the Netherlands in the amount of development aid it provides. UK aid was sixth lowest as a share of GDP, well below the OECD average at only 0.28 per cent, although the think- tank conceded that the British programme was "businesslike".

The US was the fourth-biggest donor in absolute terms, but bottom of the league for aid relative to GDP at only 0.1 per cent, following a 28 per cent real-terms reduction in 1995.

Only four countries met the UN target of giving the equivalent of 0.7 per cent of their GDP in aid to developing countries. These were Denmark, Norway, the Netherlands and Sweden.

In short, any country with government deficit reduction high on the political agenda - including all of the EU and the US - has cut its aid budget. Brave is the politician who would ask for more money for poor foreigners when national welfare budgets are being slashed.

It is also worth wondering how extra funds from the countries of "the north" could actually help the poorest countries of "the south" get themselves into a state which will attract private finance and see them become fully fledged members of the international economy. It surely cannot be a question of infrastructure: the World Bank has been funding bridges, roads and dams for 50 years.

It is hard to see how shovelling in funds from one set of governments can help another set of politicians become less corrupt or better rulers - if anything, the reverse will happen. That leaves, perhaps, areas such as educational and social spending, but even here there must be a suspicion that more is lacking than oodles of money.

The call for higher official assistance to developing countries is not only a forlorn hope, but also less useful than an alternative financial commitment the rich nations could make. That is writing off, on generous terms, the debt poor countries already owe Western governments.

Thanks in large part to the efforts of Chancellor Kenneth Clarke - which go a long way to compensate for his cutting the overseas development administration's budget - a debt relief initiative was agreed at last October's annual meeting of the World Bank and International Monetary Fund. It is a modest initiative, which will provide only a slow trickle of relief for a couple of dozen poor nations in terms of the amount of interest they must pay to governments in the north.

Even so, getting the necessary international agreement has been painfully difficult. Asking for more generous debt relief is almost as idealistic as asking for more aid.

Yet writing off past debts would, above anything else, help some of the world's poorest countries stand on their own feet. These huge debts were shovelled on to them by the rich countries in the past - as willing to lend as the recipients were to borrow. Paying the interest on these accumulated debts has been a crippling burden with far-reaching effects, including the disastrous focus of many countries on growing cash crops for export rather than growing food and following the proven development path of industrialisation.

A bigger debt write-off would not even cost very much. The package agreed last October amounted to pounds 3.6bn. That is little more than the likely error in the Treasury's forecast of this year's public sector borrowing requirement, and only about twice the UK's 1995 aid budget.

In a real sense, Britain could have afforded to finance the whole debt relief initiative by itself. The moves so far have been mainly symbolic and the rich countries should do much more. It would cost them little, but those small amounts would constitute a huge increase in the amount available for southern governments to spend on their own health and education programmes. It would wipe the slate clean for the world's poorest countries to have a fresh go at developing themselves rather than having to take the OECD's advice along with its aid dollars.

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