Sixty-second General Assembly

Second Committee

Panel Discussion (AM)

conditions ‘shackling’ aid with millennium goals risk plunging poor countries

into dependency, Second Committee panel discussion told

 

Ugandan Bank Chief Underscores Importance of Tackling Economic Challenges

If donors continued to shackle assistance with conditions emphasizing the Millennium Development Goals without addressing physical infrastructure and other economic issues, developing countries would tumble into aid dependency instead of using aid to trade themselves out of poverty, Michael Atingi Ego, Executive Director of the Bank of Uganda, said this morning as the Second Committee (Economic and Financial) held a panel discussion under the theme “Moving out of aid dependency”.

Opening the discussion, Peter Le Roux (South Africa), Vice-Chairman of the Committee, asked what development paradigm was needed for countries to move out of aid dependency; what could be learned from investing in social expenditure; what had countries graduating from aid to other types of flows experienced; how the aid machinery could be reformed further to enhance effectiveness by aligning delivery with an overall development strategy; and what improvements could be made to the criteria for allocating aid to enhance its effectiveness.  The underlying question was how an aid-dependent country could move out of aid dependency in the long run.

Addressing those questions, Mr. Atingi Ego said most aid had traditionally come in the form of budget support, the bulk of which aimed to achieve the Millennium Goals.  The danger in that was that aid was funnelled to social expenditures and non-credit goods sectors such as health, education and road infrastructure development at a time when the relevant costs were rising.  For instance, educating a child took about 15 years before the benefits could be reaped.  Thus countries investing aid solely in social expenditures to achieve the Millennium Goals hobbled themselves economically by becoming aid-dependent in the long run.  To correct that, there must be a balance in fiscal infrastructure, which would trigger trade and its benefits.  To enhance effectiveness, aid must also be constrained by an economy’s ability to absorb it.

Reforms were needed to wean countries off aid, he said, explaining that developing countries needed external assistance to, among other things, balance low domestic savings, narrow savings-investment gaps and develop infrastructure.  Aid should be used to lower the costs of doing business, increase productivity and insert goods from the least developed countries competitively into international markets.  India, China and the Republic of Korea had already enjoyed success in raising the skills of their labourers, but that was futile without international market access.  “In the absence of markets you have nowhere to sell.  If you have only a poor population, they can’t buy what you are producing.  Regional trade is the stepping stone to participating in international trade.”

He said that in countries that had graduated from aid dependency, such as Chile, the Republic of Korea and India, there had been a deliberate attempt to raise domestic savings to reduce reliance on foreign assistance.  That had been accomplished by increasing household income through investments in infrastructure, improving technology, marketing and processing, as well as reforming trade, including by lowering and unifying tariffs.  Those nations had pursued macroeconomic reforms through sound fiscal and monetary policies, and financial-sector reforms, particularly in the pension sector.  They had also promoted the private sector’s role in institutional development, simplified business regulations, strengthened property rights, eased tax burdens and increased access to credit.

Benu Schneider, Chief of the Debt, Finance and Systematic Issues Unit in the Financing for Development Office of the Department of Economic and Social Affairs, concurred with the banker, reiterating that solving the development dilemma hinged on redefining current aid approaches.  Uganda, for instance, had operated an aid-dependent economy following action under the Heavily Indebted Poor Countries (HIPC) Debt Initiative, which had unfolded substantial aid through budgetary support for social expenditures.  However, aid conditionality had resulted in a failure to build up productive and trade capacity, leading instead to a debt build-up with ballooning interest costs.

She pointed out the need to address the question of too much aid, which could crowd out private credit.  In addition, volatility was triggered in part by the gap between commitments and disbursements, as well as the unfortunate phenomenon of donor “orphans and darlings”, whereby some countries attracted plentiful assistance and others were left by the wayside.  A much simpler aid-delivery mechanism must be created to rectify those discrepancies, and patchy aid architecture must be streamlined.  To meet those challenges, the focus must be placed on the fact that industrialized countries dominated voting power at the World Bank, while the voices of recipient countries were not formally heard in the bilateral aid arena.

Roy Culpepper, President of the North-South Institute, provided the scenario likely to emerge if the South were indeed empowered to redesign the international development architecture.  A new development paradigm that levelled current imbalances and gave developing countries equal status in global international financial institutions would be part of the new architecture, according to conclusions reached in a recent project commissioned by the United Kingdom’s Department for International Development and co-sponsored by the Swedish and Norwegian Foreign Ministries, as well as the Canadian International Development Agency.  The project was based on theme papers and commissioned studies on Bolivia, Burundi, Nigeria, Sri Lanka and Viet Nam.

He said conclusions from the project highlighted the current international development architecture’s lack of legitimacy due to the imbalance of power between industrialized and developing countries, among other reasons.  At the global level, rectifying that imbalance would require a more equitable balance in decision-making and voting power at the International Monetary Fund (IMF), the World Bank and the World Trade Organization.  At the national level, less intrusive conditionality and leverage over developing-country policies would be needed.  In that hypothetical new architecture, developing countries and donors would invest in building South-South collaboration, and developing countries would broaden national ownership into civil society and the private sector, while shaving aid dependency and debt overhang to reduce conditionality and donor leverage.  Accountability would be reversed, with donors becoming more accountable to aid recipients instead of the other way around.

Poul Engberg-Pedersen, Director-General of the Norwegian Agency for Development Cooperation, took a different approach, saying aid was a mindset problem more than a financial constraint, and moving out of aid dependency required cultural emancipation from both donors and recipients.  A recent visit to Afghanistan had shown that politicians and civil servants at all levels appeared to be in a dependency mindset, while donors operated in an interventionist mindset.

Economic growth, human development and human security were essential for poverty reduction, he said, adding that overcoming aid dependency would mean that donors must focus on results and ensure much less interference in the process by countering the strong forces of bureaucratization and control.  Donors must also recognize that aid was an instrument in the complex international regimes governing climate change, terrorism, human trafficking, energy and human rights.  Recipients must create the political space for aid utilization, broaden the concepts of “local ownership” and take the “driver’s seat”, whereby people rather than countries did the “driving”.  Recipient countries should also view assistance as a way out of aid dependency.

Irma Adelman, Professor at the University of California at Berkeley, described her experiences helping the Republic of Korea’s planning agency design a strategy to move out of aid dependency.  About a dozen countries had moved from the least developed category to join the Organisation for Economic Cooperation and Development (OECD), including Japan, Republic of Korea, Taiwan and Singapore.  To realize that success, they had used part of the proceeds from one development phase to create the resources necessary to transition into the next phase.  Countries traditionally progressed from a natural-resource production pattern to a labour-intensive production one, then to a skill-intensive pattern, and finally to a society based on high-level, university-educated manpower.  That transition was made possible by foresight in investment policies.

She said a comparative advantage was created by anticipating and coordinating the restructuring of production and investment patterns; technology; social development; economic, social and political institutions; investment; and trade policies.  In order for economic development to occur, leaders must be committed.  It also required social capital; institutional and social resilience and malleability; and appropriate policy design in investment, capital accumulation, technology and trade.  In the early 1960s, the Republic of Korea was regarded as a quagmire for foreign aid, but it had turned into a fully developed, industrialized nation in a short time.  It had shifted from classical import substitution between 1963 and 1966; to labour-intensive, export-led growth between 1967 and 1972; to heavy industrial promotion between 1973 and 1978; and finally to stabilization, liberalization and maturity from 1979 to 1996.  A financial crisis from 1997 to 1999 had been followed by reform and a restoration of growth.  Assistance to the Republic of Korea had mostly been untied, while current aid flows were tied.

Debapriya Bhattacharya, Permanent Representative of Bangladesh to the United Nations Office at Geneva, agreed, noting that steady aid flows played a key role in leading countries out of extreme aid dependency.  While assistance to the 50 least developed countries had increased to $24.9 billion in 2004, it had actually decreased in real terms by 4.4 per cent between 2003 and 2004.  The dramatic rise in official development assistance (ODA) after 2000 had been attributed solely to the rise in emergency assistance and debt forgiveness grants, but real ODA per capita to least developed countries had actually been 13.5 per cent lower in the 2000-2004 period, as compared  with the 1990-1994 period.

Between 1994 and 2004, ODA inflows had increased by 20 per cent annually in Afghanistan, Burundi, Democratic Republic of the Congo, Lesotho, Sierra Leone and Sudan, he said.  However, aid to the Comoros, Mauritania, Myanmar and Bangladesh had been declining.  There was, in fact, a skewed distribution of ODA in favour of failing economies, and prospects for future aid flows were uncertain.  Bangladesh was emerging as a least developed country that had moved out of extreme aid dependency by generating non-debt-creating foreign exchange earnings, such as exports and remittances from temporary migrant workers, which had addressed the country’s balance of payment problems.  However, the flow of foreign direct investment (FDI) had been subdued, and Bangladesh was yet to fully explore new forms of development financing.  The country’s move out of acute aid dependency had not been rewarded with greater flows of quality ODA.

During the ensuing discussion, the representative of Guinea said African countries were interested in the experiences of their Asian counterparts in moving out of aid dependency, and highlighted the need to examine current strategies as well as the quality of aid.  Even the World Bank was no longer insisting that aid be used only for agriculture, but instead had widened the focus to include the processing of agricultural produce.  Ethiopia’s representative said the country was doing its best to overcome aid dependency through private-sector investment.  Afghanistan’s representative stressed the importance of aid and regional cooperation for countries emerging from conflict, while the representative of the Republic of Korea sought clarification regarding the “mindset” of aid dependency.

Mr. Engberg-Pedersen said aid was very small in comparison with objectives like the Millennium Development Goals, which were very ambitious.  Total aid to low-income countries was $40 billion, the same as world military and security spending in Afghanistan.  Regarding the dependency mindset, it caused aid to be more influential than it should be.  Focusing on results and politics instead of aid resulted in diminishing its role.

Mr. Culpepper said not enough had been said about the role of new donors.  China had been mentioned, but not Brazil, South Africa or India.  A new forum was needed for such a dialogue, since the OECD had its own traditions and biases.  Concerning knowledge banks, each country must have the wherewithal to invest in its own knowledge bank for its own development purposes.  As for domestic-resource mobilization, many poor countries had been forced to adopt trade liberalization policies, and had subsequently found it difficult to replace the revenue lost through reduced tariffs with value-added or other taxes.  Trade barriers had been lowered too fast, but some countries had been able to succeed in that regard.  For example, Ghana had focused on reforming and streamlining its tax system, while Uganda had succeeded in doubling revenues accruing to the Government.  That was important since countries should be able to finance their own social expenditures, rather than being chronically dependent.

Mr. Atingi Ego stressed the need to increase domestic savings in order to reduce reliance on aid, adding that domestic-resource mobilization involved obtaining revenue by raising exports and financial-sector reforms, among other factors.

Mr. Bhattacharya emphasized the importance of discussing not just aid, but also development financing and how to leverage other sources of funding for the least developed countries.

The representatives of Malaysia and Togo also took part in the discussion.

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For information media • not an official record