Transcript of IMF/Royal African Society Joint
London, July 4, 2006
Scaling Up Aid - Can aid be more effective?
The global community has made a commitment to help countries attain the Millennium Development Goals by 2015, including by mobilizing additional resources for development. Such a scaling up of resources is essential to step up efforts to fight poverty and to increase spending on health and education, as well as infrastructure and productive investment. But only if managed well, both by recipient and donor countries, will these additional resources have the desired impact.
Director, Royal African Society
Chief Economist, Department for International Development, UK
Advisor, International Monetary Fund
Economist/Senior Editor, Economist Intelligence Unit
MR. VENABLES: Good, okay. The Royal African Society is one of those organizations that I think one has always been dimly aware of, but I have never actually had dealings with before. So it is a pleasure to be here and thank you for inviting me to this.
As has already been said, I want to give really a bit of an overview of some of the issues. First, I always like to start with some facts, although, of course, they are not facts; they are projections, some numbers on how aid might be scaled up over the next couple of years, and then some of the choices, some of the issues that face us in trying to make sure that the scaling-up is effective.
So the choices that face us are which countries the aid goes to, how scaled-up aid gets allocated between countries, which sectors and sorts of activities aid goes to -- to some extent, that is a devolved decision, something that will be in the hands of recipient governments but not entirely -- and then some of the issues about how to deliver aid, effective delivery mechanisms, so we don't get bogged down in a lot of the problems that have been encountered in aid delivery in the past; then something about DFID's approach and a little bit on some of the further challenges, in particular some of the macroeconomic issues, although I am sure they are going to be picked up in a lot more detail by other speakers. So it can be fairly scene-setting.
Let me start with the immediate background to scaling-up and some of the undertakings that have been made. You will note, last year from Gleneagles, the commitments that were entered into. More aid, in particular in this context, of course, the doubling, projected doubling of aid to Africa compared to 2004, and also better aid, the idea that the donors should or must deliver aid better than they have in the past. The second element of the Gleneagles debt relief, where obviously a lot has been delivered already, more to come, are briefly listed there. Trade, quite obviously nothing has been delivered, and we are waiting to see over the coming weeks whether it will be or not, and then other things from Gleneagles, obviously, a whole set of further issues to do with investing in people, addressing issues of climate change, other issues coming up on the horizon affecting developing countries.
When we talk about scaling up aid, those projections, what do they actually look like, numerically?
I could do with a pointer at this point. I have one? Okay, I was looking for a laser device, but that is perfect.
These are DAC projections of aid flows, so real dollars on the right scale, total ODA to Africa. Of course, you see the doubling from these numbers, just around $20 billion per year up, projected. Obviously, the dotted line is the projected, up to approaching $60 billion by 2010. So that is the scale of the real dollar increase that is being talked about.
The higher lines here give ODA. Well, that is to Africa. This is total ODA, and then ODA as a percentage of income which, of course, is a rather interesting line. A couple of things to note about it: First, scaled-up takes it to around about one-half of the 0.7 percent target that some countries would like the OECD to be aiming for. Of course, after a long period of decline, there was a turning point a couple of years ago. So that is the magnitude of the scaling-up to Africa, clearly doubling, more than doubling as projected and then that increase in percentage of GDP.
Those are aggregate figures, breaking it down by country. Let me just make a couple of points on this one. First, the U.K. share, it is going to 0.6 percent by 2010, but obviously with a 0.7 percent target by 2013. So the U.K. on a sharply rising trajectory there, that is one point I want to make, looking at the numbers here. The other point to make, of course, is that when you look at the share of the extra aid commitment by countries, it is the E.U., the E.U. countries that have got to deliver. Maybe 80 percent of the increase is coming from the E.U. countries. Of course, some of these countries, well, let me just say who they are -- Germany, Italy, Spain, U.K., where there are those largest increases, the countries are really going to have to deliver if the commitments are to be met. Some of these are countries with budget deficits in excess of Euro guidelines, monetary E.U. guidelines as is, but delivery is obviously important for those countries.
But then against that, obviously, let us remind ourselves of the needs, attaining the Millennium Development Goals. Growth in Africa has speeded up over the last couple of years. The share of Africa in the world economy has actually increased as growth in Africa has gone up 5 percent per year, but nevertheless, that is short of the 7 percent per year that is going to be needed to raise the chance of hitting the MDGs. Here, much, too much, information but just look at the SSA column where, obviously, red means off-track for attaining an MDG and yellow means --well, it is amber, it is not green -- some progress but not on-track either, so the whole of the SSA column of MDGs, not on track. There is a sort of background of facts on things.
What choices are going to have to be made if we are going to deliver these increments effectively? Well, the first set of choices donors are going to have to make is across countries. Who are the recipients going to be? Let me just make a couple of points on this. First, obviously, as it stands, aid per capita varies hugely across countries. There are small favored countries receiving large amounts of aid per capita, whereas for India, the per capita figure is miniscule; it is trivial. So the notion that we are running in sort of diminishing returns is simply wrong. There are a lot of very big countries getting very, very little aid per capita.
The second point to make on this: What is going to be the evidence base that drives aid, that drives the allocation of scaled-up aid between countries? How do we know whether it is going to be more efficiently spent in one place or another? A couple of points on that: There is econometric work identifying circumstances, conditions under which aid is relatively more or relatively less effective. We know that aid tends to be more effective in good policy environments. So the DFID aid allocation model actually works with giving more per capita to countries with a good policy regime and more to countries with low per capita incomes. That is driven by a combination of need and policy. So we have this evidence base shaping aid allocation decisions, but when you look at actual flows compared to those sort of optimal as predicted by that evidence base, some countries are way over-rated relative to others that are horribly under-rated, so real scope, therefore, for targeting countries where we think aid can be absorbed and can be effectively used.
I said there is an evidence base there. It is obviously not enough, not good enough. Work is going on to try and identify circumstances, situations where aid can be particularly effectively used, for example, turnaround situations in states coming out of conflict, and we know quite a lot about this. Giving them a lot of cash immediately is not very helpful. There is a sort of timing and shape of an aid profile that countries in turnaround situations should get. We know a bit about that, and we are learning more. So the first set of issues is across countries.
The second set of issues is across sectors. Now, as I said here, these are decisions to be taken in partnership with recipient country governments, not imposed. Just running through the list, obviously, there is need in health, education, infrastructure, and, as you all know, initiatives are underway on all of those. I have given a few examples on here. Very important also, of course, aid really is used to develop capacity for economic growth, and again I have put a number of headings there. You have to have capable government. You have to have tax administration, public expenditure management that works, and contribution of aid is to make sure that it works. We have to have an investment climate that is business-friendly, and it will be private sector development that drives growth. We have got to develop missing markets, particularly credit markets, finance, develop science and technology, and, of course, make sure things are as transparent as possible, particularly oil sectors, extractive industries, the whole agenda, aid agenda to support capacity, building an environment that supports economic growth.
Again, we have these priorities. We know where the needs are. It is very important that we build up the evidence base on that. There is a big academic effort being taken up by the World Bank and others on really doing scientific evaluations of the effective interventions. Often, that means randomized trials but really trying to get a good scientific basis for figuring out what works, what expenditures, what interventions work and what don't.
So choices in countries, in sectors, and delivery modes -- delivery mode, the delivery process, that, too, is going to be important. Let me speed up and go as quickly as I can. Probably most of you know about the basic principles as they were enunciated in the Paris Declaration of 2005, principles that the countries, the donor countries signed up to. The five countries being country ownership, so the partner countries, recipient countries really have to exercise leadership over setting their development policies, and the donors have to be aligned with that, have to work with that. We have learned from the past that just donors going after one agenda and national governments going after another is not an effective way to deliver aid. So country ownership, alignment of the objectives of the different players, harmonization amongst the donors to as great an extent as possible, really keeping an eye on results, managing for results, monitoring results, terribly important as well, and then, of course, being accountable for results, not just walking away from things. Those are the five principles to which countries have signed up to make the delivery of aid more effective through the Paris process.
How does this map into what DFID is doing, what the U.K. Government is doing here? Let me run through very briefly DFID approaches to this. Fully signed up to the aid process being country-led, in practical terms that means country assistance plans where DFID works with country governments, with their poverty reduction strategies, so a joint country-led process. It means working with other donors through coordination and harmonization. It means U.K. aid is completely untied. It is in the international bank. So it is not tied to U.K. purchases at all. DFID's preferred mode of support is not project by project but general budget support. So a third of DFID aid to Africa goes into the general budget of countries for them to spend in line with their poverty reduction strategy as worked through and discussed with the country assistance plan.
DFID also has a conditionality policy which essentially says we don't condition our aid on countries pursuing particular economic policies. So we are very clear about the circumstances under which aid might be withdrawn, and really that is not according to detailed economic policy. Aid might be withdrawn if there is an increase in fiduciary risk, if there are human rights violations, or if countries are really going off their agreed poverty reduction strategy programs.
Further challenges -- last slide -- we are going to hear more about the micro side, I think, from the Fund and other speakers. Let me just make a couple of very quick points on this one. First, I think there are some short run economic management issues that arise in a world where there are larger foreign exchange flows coming in lumps to developing countries, be it aid, be it Chinese investments, be it resource revenues, or be it speculative capital inflows. So there are some short run macroeconomic management issues.
There are longer run issues of aid dependency and government incentives that get created in a world where aid flows are very large. Let me just say one thing on that. Aid is not oil. We know that very large foreign exchange flows from oil revenues going to some countries have been disastrous, but aid is not oil. I mean the whole set of principles in the Paris Declaration and working with governments, I think, ensure that aid does not buy into such acute problems as, for example, our revenues. A final point here is Dutch Disease, the worry that a rising share of aid damages export industries. I think that is a serious concern and one that we are going to have to think about more in coming years. As countries get aid flows that amount to 15 and 20 and 25 percent of their GNP, either imports are going to be higher by 15, 20, 25 percentage points of GNP or exports are going to be lower by that much or some combination of the two. So there really is a danger of aid inflows damaging exports. I think the way to manage that is to make sure that aid is used to promote economic growth and that economic growth sucks in the imports and therefore leaves space for the exports and gets the exchange rates to the right level where a country has export growth as well.
Anyway, that is setting the stage, and I am sure the other speakers will fill in a lot of the detail.
MODERATOR: Thank you very much, Tony. I think that is a really good introduction and overview of the issues and challenges.
Christopher is now going to deal in particular with some of the political issues. Christopher? Thank you.
MR. EADS: I am not going to indulge you with PowerPoints. This is going to be more of an old fashioned type where you actually get to look at me.
In recent years, there has been a move towards direct budgetary support by donors because, from a management point of view, it makes more sense. Money can be more useful. It can be targeted, and it can be used to increase capacity within different governments and agencies. But there have been a few things in the last couple of years that have shown some of the risks that go along with that.
I specialize in the Horn of Africa, so if I use some of the things from that region as an example, forgive me.
One of the main problems with moving to direct budgetary support is the manageability of money, and there is concern about monitoring and evaluation of where it is going and where it is being spent. As governments might begin to display less than ideal philosophies towards human rights or opening up the political scene, this has become an issue. I think the first place to use an example would be Ethiopia. Last year and during the May elections, there was quite a lot of trouble in Addis and surrounding areas where you had nearly 100 people killed during riots in the capitol, opposition supporters protesting against what they perceived to be a stolen election.
The reaction immediately from the donors was one of not entirely sure of how to respond. DFID announced very quickly that they were going to suspend some funding, although the amount, the final amount wasn't particularly clear immediately. At the time, there were lots of emergency meetings between different ambassadors and different bilateral arrangements there. One big question was: How bad is bad? How bad does it have to get before we pull back a significant amount of funding? You have different opinions. The Swedes might be more sensitive than the Belgians, and the Americans might be less sensitive than the Brits. You also have the World Bank which at that time in the beginning was quite adamant that it was going to be sticking around for a long time and it would have to be really, really bad before they pulled out their program.
What this really illustrates is the vulnerability that donors are exposing themselves to when a government begins to behave badly as such. It is a risk that I think, with the doubling of aid, hasn't been talked about enough possibly because a lot of the macroeconomic implications of aid and whether it is going to be managed correctly and the issues of capacity within government, these all become secondary issues if the government that you are cooperating with decides to become dictatorial or starts to abuse its population. So I think that what is very important is to find a way to attempt to mitigate the risks that donors are exposing themselves to in these situations.
As I said in the Ethiopia example, it was very much an ad hoc response, and in the end, they did come up with a final response. The donors assistance group in Ethiopia has come up with protection for basic services program which is still going to be distributing a little over $2 million over the next two years. The way that the donor group found its way around the issue of dealing with the federal government is they are going to be dealing more directly with district governments which then creates a whole new set of capacity constraint problems. It creates new potential risks for mismanagement at the district level. It requires much greater amounts of monitoring and evaluation. So in this case, I think what would have been quite useful is -- and they are having some efforts made upon this -- to design a framework that has very specific trigger points as to what needs to happen and what the exact implications are going to be of that. It is not donors necessarily being able to predict what is going to happen, but at least they will know what they are going to do if A happens or B happens or C happens.
In the Ethiopia example, there was lots of running around after things had gone wrong, trying to answer those question, and I think it would have been better and more effective had those questions been preemptively asked, even just outlining different scenarios, whether everything goes great and the elections are free and fair and everybody is nice to each other or if it goes a bit off.
Another example where this has been a problem was in Uganda which just had elections earlier this year, and this shows the potential changes that happen when donors change their attitudes toward the government. The Museveni regime was effectively operating as a one party state or a non-party state for the better part of 20 years, and that was okay. The donors were fine with that. Everybody knew the situation there. Everybody knew how the political system worked. Then slowly there became more caution from the donor groups and also from some of the local intelligentsia to start to open up the political space in the country, and donors reacted to that by slowly putting more pressure on the government. And so, when it finally came to change to a democracy in Uganda, the government didn't handle it particularly well. They did an alright job, but it wasn't perfect. So, again, DFID reacted, suspended some direct budgetary support, and then it was followed by the Norwegians and the Swedes, and it was kind of the domino effect that happens in these situations. Again, I think that a framework outlining exactly what needs to happen and what the reaction is going to be would have been helpful in this situation.
At the moment, donors need a star in Africa. They need somebody who is going to perform and who is going to be their showpiece to prove that their programs are working and that it is making a difference, and African governments know this. I think that a lot of the danger comes from donors almost beginning to be held hostage in some situations where you have a country that is performing very well and you have a big program there. You have invested lots of time, lots of effort, and you have had good levels of cooperation with the government, and they could even be implementing policies quite well. Then if the political side takes a turn for the worse, how do you respond?
I think Tanzania is a really good example of a country that donors can point to as a good performer, and again, you had elections there last year. There was a big concern at that time about what was going to happen on the island of Zanzibar because you have got a major split between opposition support there and support for the ruling party. Again, being down there and speaking to the ambassadors before that, the question was they were all waiting to see what was going to happen in Zanzibar because if it really went wrong and there was a major disturbance or security forces were shooting lots of people and there were major riots, again, donors were stuck. We have this amazing country. We are doing really well here. How are we going to respond if anything goes wrong in this one part? Again, the Tanzanian Government would have been aware of that. They couldn't just pull out and walk away.
It is about defining the lines that a government shouldn't cross or can't cross, so there is not this cat and mouse game. How much can we get away with? How much can we influence an election? How many people can we arrest? Can we clamp down on the free media? These types of questions. So Tanzania is a good example of where it could have gone wrong, but it didn't. That was all right.
Another country that I think has been very interesting and where there are going to be elections in 2010 is Rwanda, which has a government that is receiving a lot of money and which the U.K. is very much involved with, which is effectively now a one party state ruled by one man who rules his one party with pretty much an iron fist. Again, what is going to happen when the elections occur which, fair enough, is four years away? But again this is a question which I think needs to be answered ahead of time. How is the donor community going to react and what exactly needs to happen to make them withdraw funding or even to agree to withdrawal? What plan are they going to implement?
So what I guess I would like to make the biggest point is that through donors cooperating-and donor cooperation has improved immensely over the least few years. (Even as much as between 7 to 10 years ago, donor groups were still fighting quite a lot in between themselves, protecting their patches of influence, and there was lots of replication of projects)-There has been massive improvement in donor harmonization, but I think in terms of the political questions and what different donors expect and what they are willing to tolerate also needs to be harmonized in some sort of policy outline. And so, in the current climate, this notion of doubling aid, I think it maybe makes the risks associated with this lack of planning even greater, not in the least because the stakes are going to be much higher, not only for the donors and for the people that they are answerable to but also for the governments involved because they are going to be looking at a lot more money to fight over. I think they will be looking at a lot greater opportunities to leverage one another and to also leverage donors, and if donors are going around and doubling aid, then they are really going to need to prove that it is effective and that it is making a difference. I think that this political question is quite possibly the first question that should be answered before the more technical macroeconomic implications of the doubling of aid. So that is it.
MODERATOR: Thank you very much. That is a topic that I am sure people will want to come back to in the question and answer session.
Elliott, can I ask you to do your presentation now? Thank you very much.
MR. HARRIS: I thank you very much, Sally. I wanted to focus my presentation more on some of the more macroeconomic aspects of the scaling-up question, but first I wanted to start off by giving a sort of brief overview of what the Fund actually does in low income countries and how that might be of relevance to the scaling-up debate. I wanted to look at what issues are concerned with the scaling up from three particular aspects. There is the resource question, policies, and then the institutions for implementing these policies and accelerating them towards the progress of the MDGs. Then out of the resource part, look specifically at the aid issues, and then from that, derive some of the macroeconomic implications that have to be addressed.
I see basically three complexes of questions that we would need to look at. How the aid is absorbed, and that is a very touchy question in some cases, and we need to look at it very carefully; sustainability issues, both on the fiscal side and on the debt side; and then the overall predictability of aid flows and the volatility of such flows going forward because that can complicate quite considerably the whole management of the macroeconomic implications.
What I put up here is the Fund's role in low income countries, and I think most of us are pretty much aware of that here. We provide policy advice and technical assistance for capacity building in the areas of macroeconomic policy with an aim to maintain macroeconomic stability as a precondition for growth. There, that is the party line.
But we have had a change gradually over the last few years as more and more countries have successfully stabilized their economies, and what we are looking at now is we are paying greater attention to three areas: aid, debt, and shocks. The aid issue poses itself in the present context of the likelihood, finally, that aid will be scaled up, and those are the issues that we will be coming to in this presentation. Debt, of course, we have successfully reduced the debt of quite a few countries, and that leaves much more space for countries to borrow and so they should, but we think that in doing so, they need to be very careful not to commit the mistakes that got them into problems in the first place. Then shocks, even those countries that have done extremely well in stabilizing are still, to a large extent, vulnerable to shocks, and the issue here is to prevent the shocks from derailing the progress towards the MDGs.
Now, the Fund has been changing its policies and instruments to sort of equip itself to deal better with the challenges facing its low income members. If you look at the first four of these, which I think are all pretty much well known, you will see that three of the four are in full collaboration and cooperation with the World Bank, and I think that is something that I think needs to be emphasized, that we don't do very much in low income countries without the World Bank, nor should we. The last two, the policies of the quota instrument and the exogenous shock facilities are a direct response to the two issues I mentioned earlier, that there are countries that have made a lot of progress in stabilization, who don't need the typical type of Fund financial support through the PRGF but who would like nonetheless to maintain the kind of exchange in terms of exchange on policy issues that comes with a typical Fund-supported program, and PSI is a direct response to that. We have also introduced the Exogenous Shock Facilities that enables us to respond much more effectively to countries that are suffering shocks.
So the last point that I would make here is that all of this is within the framework of the commitment to the MDGs, which was very clear from the Millennium Summit in 2000 and has been reiterated on several occasions, most recently in the Medium Term Strategy that the Managing Director presented in April.
Now, when we talk about scaling up to meet the MDGs, which I think is the objective of us all here, there are three areas where we need to step up the effort. The resource side, the external, that is the aid that we are going to talk about a little bit more, but also domestic because no matter how much a country may be aid-dependent, still the bulk of resources for development, for poverty reduction will have to come from inside. The effective use of whatever resources are available--and I talk about several areas, policies but also institutions--the ability to formulate the policies and implement them correctly-and we see some of the areas like public expenditure management, public administrations, financial sectors, things that Tony talked about in his presentation. Lastly, though, is a more conducive external environment. Tony had shown seven MDGs. The eighth MDG is a partnership, the mutual accountability part, and that is what I am looking at here. It is not just aid. It is also that developed countries must provide coherent policies in other areas, most specifically in the area of trade because trade policy, a more liberal, a more fair trade policy is going to greatly enhance the impact of any aid that is given and will give countries greater opportunities to grow their way out of policy under their own efforts.
Aid is going to be the centerpiece of the international debate on accelerating towards the MDGs, in part because there is a recognition that there is a need for a large sustained increase in spending in all of the social, economic infrastructure, productive investments and that countries themselves just don't have enough money right now to do it. Tony has talked about the commitment the donors have made under the Monterey Consensus, going up towards the U.N. target of 0.7 percent of GNI and the implications of that graphic are the doubling of aid effectively by 2010. One other thing I would like to add on there is that there is a concerted push now towards creating this increase in aid within the context of what we would call a resources and results framework. There is going to be or there was, sorry, last Tuesday, a discussion in Paris on exactly that, that it is not just a question of pumping the money in, but you have to have a framework within which the countries indicate how the money will be used and the donors make commitments and there is mutual agreement on how the use of the aid will be monitored.
For many of the trends that both Christopher and Tony have explained, the harmonization in light of the agenda and in particular the shift to general budget support among some donors -- we need to qualify that a bit -- and the implications that might have for greater attention to political issues.
So for Africa, what does this mean? Well, it means that the poverty reduction strategies that the African countries put together need now to be reformulated to reflect the greater availability of resources and the higher spending and the more ambitious programs that will be needed to reach the MDGs. These more efficient programs have to be well costed because you will not get donors to support them if they are vague. We see that this has already started. Some countries have already started designing scenarios for a much more ambitious push towards the MDGs, in part going on needs-based assessments of what would be required to get there. Africa has to make much more progress in improving its absorptive capacity. I will come back to that in a little bit.
Some of the challenges are strengthening capacity and policy planning and formulation and monitoring and evaluation, particularly if you want to be able to measure the impact to see what is going well and what is not, setting better links between aid and how you use that aid to translate it into growth. Some of the fiscal challenges, I think it is very important for countries that are facing the prospect of considerably more aid to think right now about an exit strategy if only because no country would want to stay dependent on aid forever and also because it is unlikely that the aid is going to stay at this level forever. But also you need to look at the current expenditure implications of whatever spending policies you do. You need to target the poor more effectively, and you have got to make sure that your poverty reduction programs are reflected in the budget. Then, of course, there are debt sustainability issues and governance.
I referred to recently in May in Abuja where ministers of African countries and of donor countries got together. The African countries put forward the Abuja Commitment on pushing forward this scaling-up agenda. The Fund's role in all of that would be, of course, the continued advice on policy coordination and making sure the right polices are in place for these scaled-up flows. Helping countries to design the scaled-up scenarios from the macroeconomic side, we have done that already in three countries -- Ethiopia, Sierra Leone, and Zambia. The technical assistance and capacity building is needed, particularly in public financial management because systems that might manage a certain amount of resources may not yet be in the position to manage a substantially higher flow of resources effectively.
Lying outside, to my great pleasure, was the handbook that the African Department of the Fund prepared this year on how to go about managing the macroeconomic implications to the scaling-up of aid, as a guide for country authorities. I refer to the workshop that we had in April with DFID on preparing for that scaling-up. Then, of course, the Fund is constantly encouraging countries, donor countries in the recipient countries, to scale up their ODA but also to improve the predictability.
Now to the final part, the meat of the presentation which is a question of: What are the issues and challenges that you have to manage from the macroeconomic perspective? Well, there are four: absorbing the aid, managing the predictability and the volatility of the aid, fiscal sustainability, and debt management. We see ourselves as having a role in each of these areas.
Before I start in on absorbing of the aid, I wanted to look a little bit on the question of alternative scenarios. Most countries in Africa have macroeconomic scenarios that are based on the available amount of resources which, generally speaking, are the commitments the donors have made and are woefully inadequate for meeting the MDGs. As the countries face the prospect of higher aid flows, they need to adjust these macroeconomic frameworks in such a way that macroeconomic stability is maintained but also in a way that balances ambition and realism.
What do I mean by that? No self-respecting Finance Minister can formulate a budget and implement a budget based on aid promises or desires or general declarations of intent. Finance Ministers have to know how many resources are going to be available and be able to program budgets on that basis. We find that, in some countries, the lack of predictability or the volatility of aid causes many Finance Ministers to actually discount the flows. And so, we think the use of alternative scenarios can give that type of balance. It can show how the policies and the programs would be changed if more resources were available and then demonstrate what can be used, what can be achieved through the higher aid. Our role in that would be in helping them to prepare the scaled-up scenarios and also to help with contingent planning for spending.
Now in managing the aid inflows, the issue here, from the macroeconomic side, is one of absorbing the aid or suspending the aid, and that is a difference that is very often confused. The spending is essentially a higher fiscal deficit motivated by the aid. Absorbing, however, is getting a real resource transfer from abroad to the recipient countries, and that is generally affected in a wider accounting deficit, and Tony mentioned that. It is higher imports or lower exports. You are going to have absorption and spending that can proceed on different tracks. The right mix, the right amount of absorption and right amount of spending, will depend on what the countries and circumstances are. I can get into a lot of detail. I will sort of hold back on that and maybe if there are specific questions.
One example might help to illustrate this. You might have a country that is subject to very large shocks and whose international reserves are very low. In that case, it might make macroeconomic sense for that country to receive a surge of aid and to save all or most of that aid in the form of additional international reserves while not extending or expanding the fiscal spending. That would be different from the absorb and spend scenario, but it might be the most appropriate macroeconomic response in that particular circumstance.
If we are looking to scale up the effort toward the MDGs, we need to plan for the more medium term, which essentially means donors, sorry, Finance Ministers and Line Ministers need to know up front how much they can expect from donors. It means early and medium term commitments of support. The problem here is that most aid budgets are appropriate on an annual basis and are subject to political control by Parliaments. In addition, the disbursements themselves can be quite volatile which complicates economic management. Our role in all of this would be to encourage donors to make their commitments early and to make commitments for a longer period of time to the extent they can. We would also want to demonstrate what the impact of volatility would be on macroeconomic management and to help countries to formulate fiscal and monetary policies based on what the commitments are and also to deal with volatile flows.
Fiscal sustainability questions, a lot of the expectations are based on the fact that with additional aid, countries should be able to spend more, but in doing so, they need to look at certain issues to make sure that the effort, the scale of effort can be sustained over time, which means a medium term perspective looking in particular at the implications for future spending of spending decisions you make today, bearing in mind that higher spending can lock itself in. You hire people who will have to be paid in the future as well. Another issue there is making sure that the aid does not compromise your domestic resource mobilization effort if you want to phase yourself out of it and improving the ability of financial management systems to handle larger volumes of resources. Again, I give you some areas where the Fund could be involved.
Debt sustainability, not all of the additional aid is going to be grants, and even though countries have much more space to borrow now, we would want them to do so in the context of a rational debt management strategy, so they don't fall back into debt overhang situations, and that points them to the need for medium term analysis of debt sustainability in conjunction with such debt management systems. Again, you have some of the areas we at the Fund, together with the World Bank, will help.
So, to close, what are the key messages? Tony's slide, the graph on aid, showed that the actual scaling-up is going to start at about 2008 through 2010 and then accelerate further through 2015. We think countries, recipient countries, should use the time now to prepare, improving their poverty reduction strategies, costing programs that could be scaled up, linking them into budgets in medium term expenditure frameworks, strengthening institutions and service delivery mechanisms, and in part also preparing alternative scenarios, so that they know how to use the aid. Donors, for their part, should make predictable and longer term commitments, and in some cases, that will mean that they need to change the legislative basis for their aid programs, and they have to continue with the Paris agenda of harmonization and alignment. Both sides, donors and recipients, must do a careful analysis of debt and fiscal sustainability. Our role in all of that is to help the countries manage the macroeconomic implications of the debt, provide some of the underlying analysis that is needed, and assist in the scaled-up macroeconomic framework, and continue to advocate for more and more predictability.
So, with that, I will stop.
MODERATOR: Thank you very much.
MR. HARRIS: Thank you very much.
MODERATOR: Thank you very much. We have had three excellent presentations that have given us bases for thought. I am sure that people might well welcome copies of the presentations if we could perhaps ask the speakers who had presentations to provide them, and I am sure the Society will be able to email them around, perhaps if people leave names and email addresses.
Can I ask for questions and comments from the floor now? I will take them in batches of three, so that people can give considered answers across a range of questions. I would just ask that people introduce themselves and just say where they are from because it does actually help the speakers in responding. At the end, perhaps I will ask Richard Dowden as the Director of the Royal African Society if he would like to wrap up the session.
One, two, three for start. Do you want to stand up?
QUESTIONER: You talked about the doubling of aid and obviously that raises the issue of staff. Are you going to be doubling the staff? One of the reasons, I assume, for spending all this money in direct budgetary support is that it is the easiest way of spending money. If you are going to double the aid, you also need to monitor it. That means more people on the ground. So what are the plans for increasing the staff in the next 10 years?
MODERATOR: Thank you.
MR. VENABLES: I can answer that straight.
MODERATOR: Go on then.
MR. VENABLES: We are subject to head count limits as are all U.K. government departments. So staff will not be increasing.
There is an efficiency. Those head counts might change with governments. So there is real pressure, but it has its own logic. It is not just that we are getting large sums of money through the door.
MODERATOR: Thank you. Like politicians, I feel in the middle of this.
QUESTIONER: My name is Carl Ziegler. I founded the Center for Accountability and Debt Relief here in London in 1991, and my concern is principally on accountability. Sorry, I missed some of the earlier presentations, but I did, I think, hear most of the IMF's argument.
I want to ask the whole panel and the room at large if there is any consideration of the extraordinary amount of capital flight that is going out of Africa in increasing amounts, particularly the IMF, if your presentation is focused on adjusting budgets and aid flows and so on. You totally overlooked the fact that in 2004, capital flight was $95 billion out of Sub-Saharan Africa, and according to a multiparty consensus in March of this year, called the Other Side of the Coin, the figure for 2005 had risen abruptly to $150 billion capital flight out of Sub-Saharan Africa. Now those kinds of figures should, I think, with respect, be factored into your arguments at the IMF. As I say I missed the other arguments, and I would be interested in hearing DFID and other people's response to this central, central question. Thank you.
MODERATOR: Thank you very much. Thank you.
The man here?
QUESTIONER: I am a member of the African Council in the U.K.
We have seen a lot of graphs that actually span over the last 20 years, and I am really amazed that nobody mentioned it, the major calamity we had in Africa was actually AIDS disease poverty. Basically, we talk about trade and the MDGs. We are almost halfway, and we are not going to make it.
One example, Tony, you mentioned it, are states coming out of conflict. There is one country, Somaliland, which improved from the bottom up. They have built their own democracy from within, not imported. But yet, DFID is actually aiding those war lords rather than the African Union. One thing Christopher mentioned was doubling aid.
I think the problem is actually helping the governments if the aid is going direct to the district level or to the village level. I have an example In Somaliland, there is a Chinese water or irrigation that was put in the 1970s. That water system is running after 30 years, and that is what I call real aid.
Most of the aid, I don't know whether any of you can tell me how much in terms of percentage actually goes direct to what it is meant to help because as you mentioned staff and also nobody is actually asking us Africans what we need. We are told what we need. You are telling me what I need, but you are not asking me what I need. With the IMF and the World Bank, I think there is a problem with a solution.
Take the example of Malawi and Kenya, they grow flowers. They pay three cents an hour for the workers. Do you know how much we spend on Mother's Day in the U.K.? 60 million pounds while Kenyans are starving. We have to realize.
The Chinese are coming back now to invest. So we have to make sure. We cannot just listen to you for what we need. We have to discover it for ourselves.
MODERATOR: Okay, thank you very much.
Now we have had a range of issues: capital flight from Africa, aid effectiveness, the role of China, project support versus budget support. Those are some of the big issues.
Who is going to start off with that? Tony, do you want to start?
MR. VENABLES: Okay, if I have to. Let me just start addressing a couple of those points and then hand off to others.
The role of the donors and listening to country governments, let me deal with some of the points that were raised there. The whole focus of DFID policy and more generally a lot of other donors now, it really is to try and work with governments, to listen to what governments want. Governments develop their poverty reduction strategies, their PRSPs, and donors listen to those and work with them and then, where possible, try and put money through government processes. We have learned through decades and decades of aid that perhaps wasn't as effective as it should have been that just the donor saying, well, you need that, so we parachute it in, and then it doesn't get maintained is not the way to do it.
Really, I think certainly DFID and a lot of donor agencies have taken on board absolutely a large part of the thrust of your question, that we have to listen to what countries want, work through governments, work through the PRSPs. Whether we are doing it well enough, I don't know, but certainly, it is right at the top of the agenda at DFID. We are working with governments, certainly working with NEPAD, the African Union. There is no point in us telling countries what to do. It is wrong, and it is ineffective. It is morally indefensible and ineffective anyway. So, absolutely, well, that is my point on that.
For Somalia, DFID doesn't have an operation in Somalia, as far as I know.
Let me turn to the capital flight issue which clearly is very, very serious, a very serious issue in Africa. Of course, the response has to be how do we create the environment where there are the investment opportunities for capital to yield high rate of return if it stays in the continent. You have to add security and property rights and all that but more generally just an environment of prosperity and economic growth, where there are returns to investing locally. I don't think there is any point in trying to say let us prohibit capital movement in and out Africa. I think the response has to be let us create the environment where there are returns to investment.
MODERATOR: Elliott wants to say some more about the capital side, and then Christopher will deal with your concerns as well. Elliott?
MR. HARRIS: I think Tony is absolutely right. Capital controls can maybe address just a little bit of the problem, but I am not aware of any capital control that can eradicate capital leave. It has been tried in many, many countries, and it has failed. But one thing I would like to add on to that is that where policies have improved, there have been capital resources. Where private sector individuals who have money abroad have seen improvement in the prospective for investments, the money does come back to a certain extent. What Tony said is quite right. If we can get a situation where there is not only an improvement in policy but also a credible improvement in policy in the sense that people have the confidence that this will be maintained, it will not only reduce the incentive for capital leave but it could bring some of that capital back.
MODERATOR: Okay, thanks. Christopher?
MR. EADS: I would just say in terms of what really we are attempting to do more of now in Ethiopia, with looking at the district level, I think that it does create another set of potential problems in that if you have one district that is performing particularly well, that donors start to work a lot more, then I think that is going to attract a lot of political attention. Anybody operating within that district government is going to come under greater pressure from the central government and also from the surrounding districts as well. I think that because you are going to have such a huge difference in terms of capacity and how well people perform at that small level, it opens up other different potential problems on a political scale.
QUESTIONER: Do you have any examples?
MR. EADS: Well, I mean, for instance, in Tigra in the north, a lot of the Irish have been operating different programs up there, specifically because that is an area where the ruling party comes from and it is already getting a lot of attention from the central government. Then you have areas in the east in Ogaden near Dawa down in the southeast of Ethiopia that are being more or less neglected. So you are going to start having district battles over funding and things like that. Out of necessity, people need to go where the money can make the bigger difference, but by doing that, you're going to create problems of trying to manage equity and things.
I think you mentioned how to get there. I think Somaliland is actually a fantastic example of a place that is doing everything it should be doing, and this is a country that had three successful elections, a democratically-elected President, and a National Assembly that is controlled by the opposition party. This is a place that is not receiving aid.
MODERATOR: I think the Somaliland issue is going to continue.
We have had a whole flurry of hand shows, so we are going to take a group of people. Did you actually indicate or not?
QUESTIONER: (off mike)
MODERATOR: There is one. There is a woman in front, and there are other people waiting, and then a man there, and then there are three there. Then I will come over to this side if we can do it that way. Take this group, and then I will ask the panel to come back.
QUESTIONER: (off mike) My question is really directed to all of you but particularly to DFID, I think, and to the IMF. I mean the argument that it is ineffective and morally offensive to tell governments what to do is, of course, right, but it also sounds like an alibi, in fact, for sitting on your hands. The trouble with donors is that by their vacillation, I think they send unfair signals to the governments and they reduce their ability to serve their populations, and I think that is a bit of a problem.
A question for all donors is how do you determine where the red line will be and who is going to take the lead?
MR. VENABLES: Can I ask for a clarification? The red line in what dimension?
MODERATOR: I think his question is absolutely clear, actually.
I am going to ask other people to comment. Yes, the woman in front, that is it.
QUESTIONER: (off mike) Barbara Jones, Managing Director of the African Center Capital Association.
When Christopher and Elliott were speaking, they focused on direct budgetary support for African governments, and I wanted to comment on the role of the private sector, the financial industry, and more specifically the venture capital industry. It seems to me that getting enough aid requires a significant portion of aid to be channeled into private sector development. As the head of a financial association, I don't see that happening in my industry. In this country, the venture capital industry creates close to one in five jobs. In our response to the Commission for Africa last year, we made very specific practical recommendations of how to stimulate the venture capital industry in Africa to create more jobs, but we don't see the translation of these ideas and initiatives which are African-borne into reality. I am not sure how we need to make that happen.
MODERATOR: Thank you very much. To my left, the one behind you.
QUESTIONER: (off mike) My name is Frederick (off mike) Why are the donors still giving money to people who (off mike)
MODERATOR: Okay, thank you very much. We have got all the necessary people to answer these questions. One, two three, okay, here.
QUESTIONER: (off mike) My name is Rodney Taylor. I am an accountant, but I am also a student. I am not sure really whether I have got a question, but I have just come back from Bangladesh, and I have been studying micro finance in Bangladesh. What occurs to me in Bangladesh is that there are four major micro finance institutions which all started spontaneously from Bangladeshis. They get no foreign aid at all. Basically, now they are self-sustaining institutions.
Now I am very reluctant to say that this might be a solution for Africa because it is not my position to say that, but I would be very encouraged to see micro finance and the concept of micro finance taking deeper roots in the continent of Africa.
MODERATOR: Thank you very much.
QUESTIONER: I am Joe Hammond (?) from American University. I write about Mozambique which is one of the donor recipients. I actually have a question for Elliott, but I have a comment for Professor Venables.
Two weeks ago, DFID circulated a memo to the other budget support donors in which it said how do we collectively make a front to stop UNDP from doing its assessments and how do we collectively make Mozambique stop listening to Jeffrey Sachs who is coming to visit. What DFID is saying is: How do the donors stop Mozambique setting up its own policy by listening to other people? How do we stop other information coming into Mozambique? This is not DFID wanting country-driven strategies. This is DFID explicitly trying to block. The memo is on my web site, if you want to read it.
Now my question for Elliott Harris is actually much more technical. One of the issues for scaling-up of aid is salaries? The IMF has traditionally said that countries should limit their salary expenditures, government civil service salary expenditures, to 7.5 or 8 percent of GDP. Now the problem with meeting the Millennium Development Goals is hiring enough doctors and nurses and teachers and so on to meet the Millennium Development Goals. For a country like Mozambique, this task has become quite a serious issue, and there is a lot of debate going on. So my question is: Is there any academic or technical support for these kinds of caps? Why is that 7.5 or 8 percent number used so widely, and why does the IMF stick so rigidly to it?
MODERATOR: Thank you.
QUESTIONER: I am Gary Mitchell. I have spent most of my life at the BBC, but Joe Hammond, I have never seen him before. I am delighted to meet you, Joe, who has reported for us on Mozambique for so many years.
I teach research, market research, opinion research, development research. I have been doing it for the BBC all over the world as well in Zambia, Tanzania, East Timor, and many other countries. What horrifies me, though, is the degree to which we spend money on aid without any attempt to find out what is going to be effective. As our Somali friend reminded us just now, we never or hardly ever try to find out what people actually think.
Aid is now big business. It is producing money in huge amounts. No self-respecting commercial organization would ever do what aid agencies are doing without doing market and opinion research. All this is money, and there is no use pretending otherwise. When I asked Hilary Benn about this, and he mumbled something and said that is not a good answer. He was gracious enough to admit that his answer was a weak one.
Why is it that so much aid and development money is spent around the world with little or no research ever being done to ensure how to do it, what people think, what they like? The professor made a lot of emphasis on testing effectiveness, and, in fact, that is about the only research that is ever done is after the event. How did we do? Why is research not done beforehand? We start making mistakes. We still see echoes of the grand schemes of the 1940s when money was spent without anybody actually trying to find out what the country was like, what the people were like, how they behave, what they thought, et cetera.
I don't really expect an answer to this. I have said it so often, but it is somehow rejected by the aid development people or they never think about it. They don't talk about it. It is not on their agenda, and it is nowhere even on the horizon.
MODERATOR: Thank you very much.
Can I ask, Christopher, if you want to respond to the question about the venture capital or whatever you want.
MR. EADS: The reports that the A.U. puts together is obviously looking at both clinical and economic issues, and the issue of private sector development and private sector involvement in driving economic growth is a big one. I think that there are some technical obstacles to private sector development in a lot of African countries, even very undeveloped financial markets. The banks are unwilling to lend to the high risk or get involved with extending credit to small businessmen and things. On top of the access to credit problems, which are definitely there, you also have a vested interest in many places. You have individuals or companies that are closely associated with the people in the ruling administration, and who get preferential treatment for various contracts, also preferential treatment for access to foreign exchange for imports that they may need. This again creates other obstacles within the system.
The issue of land tenure and private property ownership in Africa is a huge one. It is legitimately a major obstacle for small businessmen to get better access to capital to develop.
And so, in this way, I think this is a good example of a very domestic obstacle that has been created within the country. If you have groups and individuals getting preferential treatment because they are closest to the government, this is a problem, and this obviously happens in every country around the world. The degree to which it happens, it might actually stifle. You want to think about the fact that every country is going to have a certain capacity for corruption and nepotism and beyond that point, the ability to develop is going to cease to exist, and I think this is the issue in a lot of these cases. The capacity for corruption and nepotism has been exceeded. You are never going to get rid of it, but it needs to be scaled down. I think this is a major problem for private sector involvement in Africa, in most African countries.
MODERATOR: Thank you very much.
Before I bring in the next two panelists, I would just say that if you can keep your answers reasonably brief because I know some of the questions beg sort of very long answers, but there are several people who actually want to come in.
Elliott, I think you had a specific question about Mozambique in particular. I think you might also want to deal with some of the bad debt issues, and you also want to deal with some of the micro finance issues as well.
MR. HARRIS: Thank you.
On the question of wage ceilings, I don't think there is any sort of specific academic research that says 7 or 8 percent. The value of the research has shown that 7 or 8 percent of GDP in the form of wages tends to occupy a very large share of the budget that is financed by revenues of 15 percent of GDP. It is a simple arithmetical equation. If you have 15 percent of GDP, instead of spending it on wages, it is not that much different than anything else.
But the issue about resources, the reason we put wage ceilings on it is just to prevent the wage dynamic from getting out of control while other reforms take place. It would allow for more flexibility. What we have noticed is that where, for example, additional resources are made available and we know about that happening, in time, we adjust the program. There are many examples of that. It is not that we are married to any particular wage ceiling level.
On the question of debt relief, it is the sort of thing I am really quite reluctant to get into again. We have talked about debt quite a lot in the last six years, and I am sure there has been a lot of debate about odious debts, and people are starting to think about whether that needs to be taken into account in making debt restructuring suggestions. I really do not want to get into that here. Those are political questions that would perhaps reflect or need to be reflected in a political discussion, which this is not the forum for it.
I do want to make a little response on the question of micro finance. There is a lot of micro finance all over Africa. Perhaps, they don't have the kind of bank situations, but the problem has always been how do you get the micro finance to work. Part of the problem in some of the African countries that I have worked on is that they remain very, very localized. It is within a community or within a city district, and the reason for that is because they are based on personal acquaintance, personal knowledge of the people. That is the whole basis of this kind of financing, and getting it to go beyond that requires some form of formalization, as it were.
QUESTIONER: (off mike) There are models of financial institutions in Africa where you don't find that problem.
MR. HARRIS: It is not as if we are not aware of it. We are trying to inspire any bank that wants to grow the financial sector. We do see that as very necessary simply because access to the formal banking sector for the small and micro enterprises is through the micro financial institutions. One aspect is quite interesting, that i`f you try to make a link between the formal banking sector and the institutions of micro finance where the formal bank, which can't go out to individuals, provides money to the small scale institutions which then distribute it. Let us not forget, however, that the average interest rate on a micro finance loan can be as high as 30 percent.
MODERATOR: Thank you very much. I am sorry, we have to move on. Do you want to deal with the red line question as well?
MR. HARRIS: Yes, that is right. I am sorry.
On the question of who takes the lead in defining the red line, what we have noticed in some of the cases where there is an evolving partnership between the government and the donors is that in cases where the government has the kind of vigorous leadership that we would like to see, there are certain things. You have your partnership framework there. You agree on what issues would constitute political considerations for donors, but the line is drawn by what we intend to do and that is in our poverty reduction strategy. You find that in a country like Mozambique where they won't allow the donors to come in and say, well you should do this and you should do that, but again that requires a very clear amount of government leadership. On the other hand, donors need to be very clear. This is as far as we can accept it and beyond that, we will not continue to support you. I don't see anything wrong with being very firm and very clear on that. I think clarity helps.
MODERATOR: Okay, Tony, I think you wanted to deal with some of the aid effectiveness issues and perhaps some micro finance.
MR. VENABLES: Yes, let me start off with the case of the red line and donor objectives and things. I have a couple of remarks on that and actually some of it, Christopher said in his talk. First, in thinking about these things, it is absolutely important to remember that DFID's objective, by act of Parliament, is poverty reduction. It is not bringing democracy to Africa or even stamping out corruption in Africa, so far as that is a means to the end to poverty reduction. We have one objective. It is poverty reduction. You have to keep that in mind.
Then if governments are misbehaving, what do we do? Well, obviously, the amount of aid that we give and the mode through which we give it, whether it is budget support or through governments in other ways or completely stepping around government as we do in Kenya essentially, does depend on government characteristics. So there are lines. Particularly through fiduciary risk, human rights, government commitment to policy reduction, there are lines that are there and that are laid out explicitly.
Then how much detail do you lay them out in? Should we have trigger points? Well, I think, I just don't see that working. What is it we have here? Looking up 20 journalists is fine but 25 is unacceptable? There, you can draw sharp trigger points that have practical problems like that. Then ultimately, political problems, the Secretary of State, subject to U.K. political forces, will decide. That is a fact of life that, obviously, we have to live with.
I could talk about conditionality more -- the whole conditionality-predictability tradeoff is a difficult one that DFID has struggled with -- but let me move on. Let me not spend time on that.
The whole DFID aid effectiveness, do we know whether aid is effective? What is the evidence base for doing things? That is a very important point that is made and one for which I have a good deal of sympathy. I have been Chief Economist at DFID for less than a year, and in a sense, my job is to make sure there is evidence-based policy and money is being spent to get the highest return in terms of our objective of poverty reduction, and it is pretty scary sometimes. You feel you are flying blind when the evidence base isn't there, but it is not as bad as all that. I mean, obviously, we would like a lot more evidence, but there is a substantial body of academic work, both at the aggregate level, looking at effective aid on growth and increasingly at the very micro level, looking at what sorts of interventions work and what sorts don't. So there is an increasing body of academic research.
There is increasing attention simply to tracking expenditures. You put money into the Ministry of Education, and do you know whether it ends up in primary schools or elsewhere? There are expenditure tracking systems.
So while I agree with a lot of the spirit of the question, I do feel I am flying in a lot more of a fog than I would like to. There is work there, and it is something we are trying to build up with the academic community, with the Bank, and with other people. So it not completely a lost cause.
Venture capital and all that, yes, tremendously important, developing, well, private sector development, that is where prosperity is going to come from. The DFID role in that is sort of the venture capital funds of the Old Commonwealth Development Corporation and venture capital itself. There is support for the financial development sector. There are the African Enterprise Challenge Funds and things that operate. But I think we do have this uncomfortable tradeoff often. Obviously, you want private sector development, but there is no point pretending that we or governments can pick winners and say, let us subsidize that firm and not that firm. So there is a difficult tradeoff to make in trying to improve the business environment as a whole versus pretending that we can actually pick winners and put money into particular private sector activities.
Micro finance, again, something DFID is working on quite heavily, but the challenge is really scaling it up and essentially getting the commercial banks to get engaged in very, very small scale lending, but there is a lot of exciting stuff going on there, obviously, driven partly by technology and working with people in the city. There are really exciting, innovative ways to bring banking to poor people that are going on.
As for memos from DFID Mozambique, I am going to claim ignorance.
MODERATOR: You can look at the web site.
MR. VENABLES: Obviously, individuals have views as to what is good and bad advice, but I hope that people aren't just trying to blank out advice they disagree with.
MODERATOR: Right, we have time for a very quick round to take on this, and people have indicated here. (off mike)
QUESTIONER: (off mike)
MODERATOR: Okay, thank you very much, public-private sector partnership.
QUESTIONER: Thank you. Yes, Jonathan Boardsman (?) from Crown Agents (?).
There has been a lot of talk about budget support and fiduciary risk and managing that fiduciary risk. There is also the need for improving public finance management regimes within countries and debt management systems and so on. The question is really: How is it possible for a country with such an administration, tax or whatever it may be, in a way that is going to be effective and so move away from having to rely on some of these tracking systems that you mentioned which actually is only going to consume or devour more aid with money being spent on those external monitoring activities? The question is: How is it possible to support elective reform?
MODERATOR: Thank you very much. Carl?
QUESTIONER: Yes, Carl Ziegler again.
I just want to come back to capital control is something I have never advocated in my banking life in Kenya or since. I don't agree that they would work, and I have never advocated them. Private investment in Africa, Barclays Kenya made the best profits ever. BAT, Unilever, the traditional investors, probably even some of the oil companies with all their problems in Nigeria and elsewhere are doing very well, thank you. The private multinationals know that Africa has a higher rate of return than most other places. The dilemma is that aid is one of the growth industries in Africa. I don't know a single manager of an aid program in any major development country that says we should give less this year than last year. It is bad for their career prospects, and that is a central problem.
So that advocates and that contributes to two of the other growth industries, the capital flight problem which won't be addressed by capital controls but by good governance, and one of the other great growth industries, of course, that has been talked about is corruption and then finally Africanization. One of the dilemmas about private entrepreneurs coming in is if they develop a project that succeeds, it will probably be nationalized, taken over, eased out, taxed out, and in effect taken over by local interests. This is good governance gone wrong.
Now the question is: How can we then ensure that if aid budgets are increased, that we essentially answer the question of this gentlemen here about how it gets to the people who need it? If poverty eradication is relevant, listen to the poorest people, not to the governments. IMF, DFID, and all the rest of them deal through governments. That is the core mistake. Let us change the whole scenario. Thank you.
MODERATOR: Elliott, do you want to start?
MR. HARRIS: (off mike) I am going to start by contradicting Carl. I go on a mission, and I spend 70 percent of my time talking to people outside of government. That is a C change. Maybe not all of my colleagues do it yet, but we have a lot more participation. We have a lot of the different instruments that are coming up, but most importantly of all, we are listening to other people. Now it is a big aid industry. It doesn't change overnight. It has been doing things a certain way for 40 years, but we have recognized that we do need to find out more directly what people need and then to direct our efforts that way. You are right; we do listen to governments, but we listen to others.
On the question from Jonathan of building up the capacity, I think, and depending less on tracking resources, I think, first and foremost, we need to have a proper capacity building approach and make sure that is supported by a good human resource management strategy, but I think one of the most important ways of getting away from separate tracking exercises is to rely on Parliaments which should be playing a role in scrutinizing government activity and supporting the building up of systems that let Parliaments have access to the information that they need to exercise that role and then stepping back and letting them exercise that role. Now, of course, political systems don't always allow for that, but I think that is probably the best way for us donors to get out of the way and let countries manage their own affairs without having separate monitoring tools that we require for our fiduciary analysis.
MODERATOR: Hang on. On the public-private partnership?
MR. HARRIS: On the topic of public-private partnership, I agree. That is certainly a very promising way of moving forward. I think part of the problem has been that there isn't a long tradition in Africa of that kind of partnership with the private sector. That may be changing. A few countries have started and do show very good results from that. Some of them have a longer experience with it. But the problem is that the public-private partnership should take place within an environment where the private sector feels that it is a valued partner and its interests are protected, and a lot of that requires legal and regulatory strengthening of systems.
MODERATOR: Thank you. Tony?
MR. VENABLES: Let me comment on a couple of those. The whole question of through governments or not, let me address that. Clearly, we are listening, consulting widely in society. It is something that is important. It is done. It is very much part of best practices and part of the poverty reduction strategy papers that governments draw up. So it is there; it is done.
Let me address the question head-on. Suppose we think that health systems in a country should be improved. Suppose we think that education systems should be improved. What do we do? Do we set up the U.K. education system in Tanzania and the Japanese education system in Tanzania and the French education system in Tanzania, or do we get inside the government of Tanzania's Ministry of Education and say, we are going to support the government and give the government resources to build up education through its own Ministry of Education? I think it is pretty clear that we don't want a whole set of parallel education systems, one for each donor. We want to work through government doing health, doing education, and doing roads. I think that is the way it is and should be as well. Ultimately, it is not efficient to do these things in lots of different parallel silos.
Picking up another point that was made, in the economic jargon, the relationship between aid and private sector development, obviously, public-private partnerships are important but absolutely, fundamentally, we have to make sure that aid is a complement with, not a substitute for, private sector development. If I thought aid was just crowding out private sector activities, then that would clearly be a dreadful problem, and there are some mechanisms through which it does, the depreciating exchange rates, these things. There are adverse side effects, but let us be aware of them and try and make sure that we design the aid programs, so that it is complementary with, not a substitute for, private sector development, so it is creating the environment and the infrastructure, bringing down elements of costs, so that the private sector can thrive and prosper.
MODERATOR: Thank you very much.
Just in closing, we have had some excellent presentations and a very good and lively discussion through some of the really big issues facing the development community and also facing countries in Africa as well.
Can I just thank the three panelists very much indeed -- Tony Venables, Christopher Eads, and Elliott Harris -- for three excellent presentations?
I remind people to leave their names with the Royal African Society.
I was going to get Richard to conclude, but can we just first of all thank the speakers in the traditional way?
MR. DOWDEN: (off mike) Thank you, Sally, and thanks to the speakers as well. It was really very, very stimulating.
All I want to say is simply that perhaps when we talk about policy, DFID's lack of conditionality which does seem to be prevalent, and conditionality, of course, is not nonexistent. It is just hidden, and it has still left no doubt in my mind, whether aid is for economic growth or to try and hit the MDGs. They may be not at all compatible. Policy is obviously very important; capacity, even more important in Africa; trade and the private sector are the real driving forces here, but underneath all of these is politics, and that is where direct budget support is getting into extremely dangerous water. I don't just mean in politics in terms of governance policy or even in terms of capacity but in terms of human rights and democracy and the benchmark things which I think were suggested. I agree. It is crazy. It has not anything to do with Africa. It is: Are you on TV? Are you being criticized on TV? The minute they see it in the paper tomorrow, they will cut aid. That is the way it works. We know that. It is the politics here as well as the politics there, and that is a factor. Nobody dares talk about what is underlying the whole thing.
Aid, yes, predictable, coordinated, and look at the macroeconomic effects, your currency appreciation, Dutch Disease, and then the evidence-based elements of the success or the reality of its effectiveness. What are the results of evaluation? How much consultation is there about what aid is for? Is it because we think people need this or because they think they need it? So there, I think, are very, very big issues.
I just read a recent DAC report on DFID which seemed to me to come away with two messages. One was DFID doesn't listen enough to other people. I mean it was very, very positive, I should say, first of all, but the two criticisms I picked up was DFID doesn't listen to people. It thinks it knows all the answers. And, secondly, how are they going to double the amount of aid with the same staff cuts that the rest of the donors also suffering?
Then the need for success stories: Somaliland was offered, and I would certainly support that. The need for an African success story, when it comes to looking for one, are you looking for the people or the governments? I think that is a big one, something that wasn't said, but I will throw it in. That is very, very, very important, particularly for international aid officials. Do they drive around in 4x4s and stay in air conditioned hotels and travel first class, or do they go with the rest of us and travel in economy and actually meet people in the back of the plane as they are traveling and take taxis where you meet people all the time and actually just walk around? Stay in the village. Do they just go in, meet the minister and fly out again? I mean that, to me, is really, really important.
Then the big question of capital flight, why should we be putting money in when Africa itself is shoveling money out as fast as it can or the rich Africans, instead of investing it there? It is a vote of no confidence.
That led us into the private sector area, obviously, the driving force. Not enough, I think, was said about the effect of China's demand for Africa's raw materials with investment in its own aid, and of which, of course, the banks are reaping huge profits out of Africa. Barclays just made its biggest profits ever from Uganda this year and spent quite a lot of it from soaking up the excess liquidity through treasury bills created by aid.
All these problems, it seems to me, actually a lot of them -- this is my final thought -- a lot of them were actually there in the first place and are the reason that Africa is in the problems it is in already. But because we hold the whole approach of Africa 2005, the Commission for Africa was aid agencies -- I will use shorthand, Geldof-driven, i.e., poor starving Africans; what is the answer; give lots of aid -- we came to that view and only now are we discovering why it was that in the first place. Whereas, if we had actually tried to understand Africa in the first place and why it was in the problems it was in, then maybe the approach would have been slightly different and wouldn't have just immediately demanded the doubling of aid. That, to me, was one of the great failings of the last year's Commission for Africa report -- a very, very good report indeed, I thought, but what a coincidence, it ended up with the answer of doubling of aid which was thought up before the Africa Commission report. What an amazing coincidence. I think that is really at the heart of where we are at now, and I think we are only at the beginning.
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IMF EXTERNAL RELATIONS DEPARTMENT
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