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                                              april 9 2002

                                    Has aid helped development?

                                        By Shahid Javed Burki

The two routes taken to the Monterrey conference by those who give aid and those who receive it
traversed very different territory. A number of aid givers had reached the conclusion that what
really matters are government policies that support development in many different ways.

According to this view aid plays only a marginal role. In fact, in the countries with weak institutions
and weak legal systems, aid may corrupt the officialdom. The primary emphasis, therefore, has to
be institutional development and improvement in the quality of governance. Without it, aid can be
counterproductive. As two development experts put in a recent contribution to Financial Times, "aid
all too often fattens bloated bureaucracies or enriches corrupt autocrats - and has played no small
part in creating the economic and political chaos in which fanaticism flourishes and totalitarians win

The aid receivers take an entirely different view. They maintain that most of them are so poor that
they cannot adopt the policies that would support sustainable development unless some room for
manoeuvre was created by large flows of aid. They were looking for fiscal space within which they
could operate. Which of these two points of view is correct?

As is so often the case in economies, the truth lies somewhere in between. The evidence for both
positions on aid can be gleamed from the data and information available in the various studies
carried out by the World Bank, by far the largest development agency in the world. The data on
global poverty can be used to argue in favour of both propositions. As I indicated in the article last
week, it is possible to suggest that roughly $1 trillion of aid provided to the developing world since
World War II has accomplished little.

One half of the world's population still lives in poverty, earning less than $2 a day per head. One
third of the world population lives in abject poverty with per capita income of less than $1 a day.
Some development aid agencies which audit their projects admit to significant failures. The World
Bank's own evaluation department suggests that barely half of its lending operations of the past
decade are likely to produce sustainable benefits. Asian Development Bank's internal audits show
that fewer than one-third of the projects it has financed in recent years are likely to provide lasting
social or economic benefits.

The same numbers can be told in a different way - the glass is not half empty; in fact, it is half full.
Since 1980, the number of people living on less than $1 a day has declined by 200 million. This
happened while the world's population increased by 1.6 billion. As one commentator put it in the
press coverage that preceded the Monterrey conference: "That is a stunning achievement given that
the rank of the poor previously had swollen steadily at least since 1820."

Not only have the number of poor declined but there has been a significant improvement in the
well-being of the poorer segments of the population. The adult illiteracy in the poor world has been
reduced by one-half during the past three decades and life expectancy at birth for the people living
in the world's poor countries has increased by 20 years over the past four decades. "Again a
stunning achievement," according to the observer quoted above. The previous 20-year jump in
longevity had taken a much longer period - it occurred in the period between the Stone Age and the
middle of the 20th century.

In other words, although there are still a very large number of poor people in today's word, the
proportion of the world population living in poverty has declined steadily in the last several
decades. Although the income gap between the rich and poor countries has been widening, that has
happened not because per capita incomes in poor countries have not increased.

The gap has increased because incomes in the rich countries have increased faster since their
populations are not growing. What was added to their gross domestic product was distributed
among the same number of people - in some cases even fewer people. In the developing world, on
the other hand, population growth consumed a significant part of the increase in economic output.
Since fertility rates in developing countries have begun to decline, one important reason for the
widening of the gap between the rich and poor countries should become less significant.

These global numbers do not, of course, provide a robust argument for more aid. In fact, as a recent
World Bank study on the effectiveness of aid suggests, much of the global improvement in living
conditions occurred in the countries that did not receive much government to government
assistance. China - and more recently India - with a combined population of more than 2 billion
people have done well for their poor people. The improvements in living conditions in both
countries have made enormous contributions to the improvements in literacy and health in the
developing world.

Much of what China and India accomplished by way of poverty alleviation was the consequence of
good government policies and not because of large amounts of foreign aid. Aid flows to these
countries were only a fraction of those received by scores of smaller countries in Asia and Africa. If
we take out China and India from our calculations, the claim on behalf of aid based on a significant
improvement in the lives of people becomes weaker.

To further strengthen its argument, the pro-aid lobby has come out with another set of numbers,
once again relying on the copious work done by agencies such as the World Bank. The World Bank
maintains that aid has a direct and visible impact on poverty not camouflaged by global statistics. It
has calculated that $1 billion in extra aid lifts more than 250,000 people above the $1-a-day poverty

It is not only government-to-government aid that works well for the poor; government to the private
sector aid also produces very positive results. The International Finance Corporation, World Bank's
private sector affiliate which lends to businesses in the developing world, estimates that the median
project in its portfolio between 1998 and 2000 earned a post tax return on capital of 10 per cent a
year. This is a better rate of return than that provided by many multinational companies. At Alcoa, a
company once headed by Paul O'Neill, the US Treasury Secretary who has been critical of aid, the
post-tax return on capital averaged 9.6 per cent a year during the 1990s.

Those who suggest that capital flows from the world's financial markets do a better job of helping
developing countries, must contend with both old and recent history. Capital markets don't invest in
health and education in the developing world. Economic historians maintain that Britain's 19th
century economic take-off would not have happened without public sector's investment in
sanitation. It took a great deal of money provided by the government to clean up London's sewerage
and water supply systems. History offers several other examples. For instance, it was the massive
investment by the government in health and education that laid the basis for China's spectacular
growth in the last quarter century.

It is now well recognized that public investment plays an important role in human and social
development. As the United Nations' background document for the Monterrey conference pointed
out, "the primary resource for development is the great untapped reservoir of human creativity and
talent of the people of the developing countries themselves; the release of this human potential
requires investment in education, infrastructure, public health and other basic social services, as
well as in production for the market." But how is this untapped human resource to be prepared and
motivated to participate in the important but often difficult task of sustained and sustainable
development? This effort requires resources - a great deal of them. From where will they come?

As the participants in the Monterrey conference finally recognized, good policies in poor countries
cannot substitute for foreign capital flows. Aid is important to break the vicious cycle of poverty. It
is a great irony of modern times that aid stagnated precisely at a time when two developments of
great significance occurred. One, there was a broad consensus reached among development thinkers
and practitioners about the sources of growth and how the rewards of growth could be used to
benefit the poor. Two, a very large number of developing countries undertook significant reforms in
economic, political and social governance. In spite of these propitious developments, ODA flows
stagnated. They stagnated not because the world was short of savings but there was an absence of
political will.

As an analyst who specializes in development puts it: "It must be acknowledged that political
support for foreign aid is very weak in the United States and other rich countries. Why does rock
singer Bono figure so prominently in the debate on world poverty, HIV/Aids and debt relief?
Because, as he said after George W. Bush invited him to the Oval Office, 'I am a pest, I am a stone
in the shoe of a lot of people living here in this town.' Bono's celebrity enables him to make
politically visible what would otherwise be almost invisible to American leaders." The Monterrey
conference was convened to do globally what Bono accomplished in the White House - to convince
the leaders of the world's richest countries that a small part of global savings had to be directed
towards poor countries.

In 2000, countries around the world saved and invested $7.5 trillion out of global output of over $30
trillion. The global savings rate was of the order of 25 per cent of total product. The problem,
however, was that this amount of money was not evenly distributed, let alone distributed in favour
of the developing world. The net transfer of resources from capital surplus (generally the developed
world) to the capital-importing (generally the developing world) was of the order of $450 billion.
However, three-fourths of this amount was captured by the United States, by far the world's largest

Much of the cross-border capital flows emanate from private sources and most of these flows are
among the countries of the developed world. Of the amounts that flow to the developing world, the
bulk is directed towards a dozen or so countries, most of them in East Asia and Eastern Europe.

Money attracts money. A significant proportion of the capital flowing into the developing world
goes to the countries that have high domestic savings rates. It is a combination of high rates of
domestic savings and capital inflows that produced the East Asian miracle of the seventies and the
eighties. The conclusion from all this is fairly clear. For a large number of poor developing
countries there is no substitute for official development assistance if the world wishes to see them
progress and alleviate poverty.

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