G-8 Summit: International Aid

World leaders gathered in Scotland this week for the G-8 summit are discussing an increase in international aid as a means of reducing poverty and disease in Africa. British Prime Minister Tony Blair has been encouraging other G-8 nations to double monetary aid to the continent by 2010, while the U.S. has favored a more cautious approach. What are the prospects for change in international aid for Africa? How would these funds be used?

Raj Desai , professor of International Development at Georgetown University, was online Thursday, July 7, at 11 a.m. ET to discuss the G-8 summit and international aid.

Read more: Bush, Blair Deadlocked on Global Warming.

G-8 Countries Trying to Reach Compromise .

A transcript follows.

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Northern Virginia: As disgusting as the undeniable poverty in Africa is, I find it even worse that the governments that provided the aid in the first place are being blamed for Africa's problems, while there is none towards the Africans themselves.

Sure, the industrialized nations greatly harm African economies with their agricultural subsidies, but hundreds of billions of dollars in aid have been mismanaged by African leaders for decades; furthermore, their own failed economic policies have only increased their dependence and poverty.

Why should we expect that a few more billion dollars in aid will help the people that need it the most when previous aid has been so grossly mismanaged?

I think people having their party protesting at the G-8 should focus their energies in demanding the abolishment of the agricultural subsidies of the third world, but at the same time strict accountability towards the African leaders in how the aid is managed and to increase economic freedom.

Lord P.T. Bauer was right. Foreign aid (government to government) doesn't work and never will.

Raj Desai: You are certainly correct that official development assistance to Africa (and other developing countries) has a very uneven record.

However, many African countries in recent years have taken great steps towards combating corruption. Three decades of evidence on the effectiveness of aid, moreover, shows that aid to countries that have controlled corruption, that possess better-managed public institutions, independent judiciaries, etc., has actually reduced poverty in those countries.

Towards that end, donor countries as well as multilateral development banks have placed unprecedented attention on the issue of corruption, accountability, and on the necessity of the rule of law. In addition, newer grant-giving efforts of the richer nations (e.g., the US's own Millennium Challenge Accounts) are designed to fund directly the people in greatest need through local NGOs, etc., and to avoid money going to governments. So the nature of foreign aid is changing quite a bit.

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Washington, D.C.: David Ignatius' editorial in yesterday's Post advocated poverty alleviation via strong private sector engagement, not traditional development aid. What do you think of this "bottom of the pyramid" business-driven approach?

Raj Desai: The book by Pralahad that Ignatius was referring to makes an important point: the poorest often constitute a vast, sometimes neglected consumer base. And the logic behind encouraging companies to restructure their marketing and distribution networks to place greater emphasis on bringing goods to markets where countries' poor people live is compelling.

I would go even further: not only is there an untapped consumer market, the poor also represent a large group of often-ignored entrepreneurs--microentrepreneurs, farmers, street vendors, homeworkers. They are a large part of the informal economy, and will benefit from the same measures that would improve the opportunities and incentives for larger private firms.

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Washington, D.C.: Is there any plan to encourage more foreign investment in Africa, particularly for manufacturing of goods (as opposed to simply extracting raw materials)? Without this foreign investment, and consequent development of infrastructure in these poor nations, wouldn't we simply be temporarily alleviating some of the effects without solving the root problem>

Raj Desai: Experience suggests that neither reform nor debt relief alone will attract foreign investors to Africa. Some have argued that reform generally has to be accompanied by an active marketing or investment promotion program designed to "sell" the opportunity of the African marketplace-something that can be expensive and must be carefully targeted to be effective. Since their markets are relatively small and they do not border rich nations, African countries are unlikely to attract foreign investment into the non-resource sectors in volumes that will have a major impact on total capital formation -- at least in the near future.

As for initiatives, several of the G-8 have their own African trade and investment initiatives underway (such as, in the US, the African Growth and Opportunity Act). Meanwhile, the New Partnership for Africa's Development (NEPAD) emphasizes, in addition to good governance and human rights as necessary preconditions for Africa's recovery, the need for investment-driven economic growth.

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Washington, D.C.: My comment is as follows: As an African of American citizenship living in D.C., I fully support the poverty alleviation programs, including debt relief. My concern is the corruption which has drained resources from Africa into European and American banks. Can the G-8 countries not resolve that any cash deposit or investment exceeding $5,000 or $10,000 from Africa should be explained and reported to an international monitoring agency with investigative powers?

Raj Desai: This is an area that requires substantial cross-national coordination. Efforts to combat money laundering, of course, gained a significant boost after Sept. 11, 2001, with more nations concerned primarily with controlling the sources of terrorist financing.

In fact the G-7 (minus Russia) already have an arrangement in place, known as the Financial Action Task Force (FATF). All members of the FATF have criminalized money laundering and are working toward implementing a full range of international anti-money laundering standards known as the "40 Recommendations."

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Toledo, Ohio: Talk all you want about the poor being entrepreneurs or consumers.

The reality is that the global economy is currently structured to benefit the powerful--particularly multinational corporations.

Political power lies in the hands of the wealthiest of the wealthy, and that's why the current level of disparity (beyond all reason, in my view) will not soon dissipate.

Raj Desai: There are wealth inequities both with all countries and across nations, it is true. But three points need to be made. First, the persistence of income or asset inequality does not mean that poverty cannot be reduced in developing countries. And countries that have reduced their poverty headcounts in recent years (and there are several) have done so through improvements to the climate for business and investment where the poor live. Second, surveys of individuals living below national poverty lines consistently show that they seek employment and self-employment opportunities as the No. 1 route out of poverty. Finally, all available evidence shows that improvements to the investment and business climate actually benefit domestic micro, small, and medium firms much more than they do MNCs (since smaller firms suffer disproportionately from corruption, etc., they also benefit more from its elimination). For more information, see the links below.

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washingtonpost.com:

The G8's African challenge , ( The Economist, June 7, 2005 )

World Development Report 2005: A Better Investment Climate For Everyone.

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Washington, D.C.: How much of the outcome from the G-8 meeting is decided during the summit? I know a lot of work has gone on behind the scenes before the leaders even get there. Are the aid plans already made or could the terror attacks disrupt the meeting and throw the entire outcome in jeopardy?

Raj Desai: The terrorist attacks on London transit system have, obviously, disrupted the G-8 summit. As horrific as they are, right now it does not seem that they will dramatically change the substantive outcomes of these meetings (as you point out, much of the groundwork for these agreements is laid in advance), although it is quite possible that there will be some statements on joint anti-terrorism efforts in the final communique.

Tony Blair has left for London for the day, but has insisted that the other leaders press on with the agenda. From what we know thus far, in their joint statement, the other leaders intend to do just that. As Blair has said, "it's particularly barbaric that this has happened on a day when people are meeting to try to help the problems of poverty in Africa, the long-term problems of climate change and the environment."

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Raj Desai: Incidentally, on the issue of debt relief, one of the frequent arguments made is that African governments have been already given massive amounts of money (and debt relief basically amounts to another big transfer) and have squandered these resources. There is certainly truth in this, but two things should be pointed out. First, if one takes away food assistance, military assistance, and loans, the actual amount of economic grants have not been that large. The US, for example, has given all 48 Sub-Saharan African countries on average approximately. $900 million per year over the past decade, and the US is the largest donor. Second, in much of the 1970's and 1980's--when Sub-Saharan African countries borrowed most heavily--much of the lending was politically-motivated, aimed at supporting pro-Western, anti-communist leaders (e.g., at various times Selassie in Ethiopia, Doe in Liberia, Mobutu in Zaire/Congo, Eyadema in Togo, to name a few). Many of the lenders knew their funds were being stolen, but continued to lend. A new generation of democratically-elected African leaders is now asking whether there nations should be held responsible for these debts.

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Washington, D.C.: Have you read the new book, "The Market for Aid" yet? It calls for independent evaluation of aid agencies, similar to the independent bond-rating agencies. I heard about it here: Next Billion and am wondering if you could respond - should aid agencies be rated like stocks based on their performance?

Raj Desai: I am somewhat familiar with this book by Michael Klein and Tim Hartford. Their point of the need to gauge donor performance is important. Several analysts have pointed out that the aid industry is in many ways like a cartel-collusive, resistant to innovation, and often opaque. Klein and Hartford make that point that competition in aid has, actually, grown in recent years, but that the advantages from this have yet to translate into significant improvements in poverty alleviation. Finally, the private sector has become hugely important as both a source and recipient of loans and even grants (surpassing the public sector by some estimations). The idea of external rating would, naturally, necessitate the kind of market-based monitoring that has thus far been lacking for donors, and is an idea that deserves to be taken seriously.

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Raj Desai: Thanks to all participants for their questions.

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