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How The G8 Got It Wrong: Or Why Aid Isn’t The Answer

Rebecca OUP-US

Today we are thrilled to have an original piece from Paul Collier the author of The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It. Below, Collier a Professor of Economics and Director of the Center for the Study of African Economies at Oxford University, argues that the G8 did not go far enough in its efforts to assist Africa.

Since the 1960s around a billion citizens of the world have been diverging from the rest of us at an accelerating rate, a trend which will generate unmanageable social pressures. Most of these countries are in Africa, and so it is appropriate that the region should again have been on the G8 agenda during the recent summit in Germany. collier1.jpgUnfortunately, the debate on what the G8 should do about Africa has been entirely dominated by aid. Enlarging aid packages and programs for parts of Africa would probably be helpful, but it would not be decisive in helping the bottom billion catch up. It is, in fact, a side-show relative to the other policy instruments that G8 governments control, instruments that could help prevent future tragedy. Because aid has dominated the airwaves people are simply unaware of our true potential for more direct interaction. Africa faces three distinctive economic problems, each amenable to a distinct policy.

The first economic problem is that the region has failed to diversify into labour-intensive manufacturers. For example, 60% of the world’s buttons are now made in one Chinese city. Asian cities now have massive concentrations of manufacturing activities geared for export, generating ‘economies of agglomeration’ which lower costs of production. Africa’s coastal cities need to be pushed over the entry threshold constituted by these agglomerations. How do we help Africa? By giving them a temporary advantage over Asia in the G8 markets. Both Europe and the US already provide this through Europe’s Everything-but-Arms (EBA) and America’s Africa Growth and Opportunity Act (AGOA). Both schemes let goods in duty-free if they are manufactured in Africa but impose tariffs on goods from Asia. However, with trade deals the devil is in the detail and both schemes are flawed. Currently, Kenya can export its shirts duty-free to the US, but not to Europe or Japan. EBA is so badly flawed that it is ineffective, whereas AGOA, despite weaknesses, has raised African exports of garments to the US market by around tenfold in five years. Africa needs programs that get the details right. The right trade policy has the potential to create millions of jobs in Africa.

The second problem is that the resource-rich countries have almost all lost or wasted the income from their resources, income they might have used for sustained bottom-billion-cover.JPGgrowth. In a new analysis of how high commodity prices affect commodity exporters I found that after a few years of boom, in the long term the economic effects are catastrophic unless governance is good. The current high level of commodity prices such as oil, together with new discoveries, present Africa with a huge opportunity: it would be a tragedy if the opportunity were lost.

But history will be repeated unless the incentives are changed through institutional reform. Because these windfalls, such as profits from oil and diamonds, inevitably accrue to governments, the key to change is better accountability in public spending. Democracy is not enough: elections can be manipulated. Accountability depends upon a range of effective checks and balances which are currently missing because nobody has an incentive to supply them. The needed policy is new international standards and codes. The international community has just set up an organization called the Extractive Industries Transparency Initiative (EITI), headquartered in Norway, to try to raise standards. It aims to let citizens of the exporting countries know what revenues are coming into the country. This is a start, but quite a modest one. The international banks remain home to corrupt African money under a veil of secrecy: if the money is linked to terrorism the banks are legally required to report it, but if it is merely looted the banks don’t ask questions. There are no international standards that recommend appropriate savings strategies for managing windfalls. When Ngozi Nkonjo Iweala became finance minister of Nigeria for example, she had to invent a savings rule. There are no recommended procedures for awarding resource concessions. All companies in developed countries are now prohibited from offering bribes. The principle needs to be extended so that companies should be required to seek contracts for resource extraction only through verified auctions instead of through secret deals. There are no recommended guidelines for the transparency of public spending out of resource revenues. The absolute minimum should be clear rules for the competitive tendering of public investment projects: when Nigeria introduced such rules, only very recently, costs fell by 40%. The checks and balances that help natural resource revenues to be harnessed for development are an internal African struggle, but international standards help: they provide both a rallying point and a benchmark for internal reform efforts. The Nigerian reformers promptly adopted the present limited form of EITI as the foundation of their programme for change.

This issue was quite rightly on the G8 agenda. The result was merely a bland exhortation to good governance. Leaders failed to get serious and instruct the international institutions to put together a comprehensive set of standards and codes pertinent for resource-exporting countries.

The third problem is that much of Africa faces high risks of internal insecurity from rebellions and coups. This is partly due to decades of economic failure, and partly because most countries are too small to reap security economies of scale. Africa needs a stronger international security presence: prolonged peacekeeping in the fragile post-conflict situations, and ‘over-the-horizon’ security guarantees in the form of long-term forces. Both of these should be conditional upon clear standards of governance which could be set by the African Union. The model is the provision of external security for Sierra Leone. A few hundred British troops ended a civil war and have maintained the peace ever since. This was so cheap relative to the gains from a secure peace that it is about the most effective form of aid Europe has ever given to Africa.

Understandably, military intervention is the issue that the G8 was most reluctant to face. It postured over Darfur, but avoided the issue of shoring up the many fragile post-conflict situations around Africa through security guarantees. As we lurch between fear and belligerence we keep making mistakes: doing nothing in Rwanda in 1994, and full invasion as in Iraq in 2003.

Trade preferences, standards and codes, and security may not play as well on the streets of Europe as doubling aid, but they are likely to be more effective on the streets of Africa, where it really matters. However, they are not alternatives but would enhance aid programs. Before dismissing them as fantasies think how Europe was restored. The Marshall Plan was complemented by trade policy (GATT/WTO), by standards and codes (European Community), and by security (NATO). The leaders of the G8 could go beyond the politics of gestures and really make a difference. Judging by their performance last week, they haven’t got the guts.

Recent Comments

  1. Nicholas Shaxson

    The Bottom Billion is an interesting and important book, and Collier makes some very useful points. I would now urge him to consider in more depth this sentence of his: “The international banks remain home to corrupt African money under a veil of secrecy: if the money is linked to terrorism the banks are legally required to report it, but if it is merely looted the banks don’t ask questions.” Collier, and others, ought now to research this subject in much greater detail. Norway is at the forefront of this new field of research, with advice from the former Paris-based investigating magistrate Eva Joly, as well as Raymond Baker’s Global Financial Integrity in Washington and the Tax Justice Network. Specifically, related to EITI, Collier might look at this comment piece: http://www.ft.com/cms/s/edd9b506-0c74-11dc-a4dc-000b5df10621.html and, more generally, on the subject of illicit financial flows, he might refer to this FT editorial: http://www.ft.com/cms/s/d92314d2-22b7-11dc-ac53-000b5df10621.html which, among other things, gives pointers as to why there should no longer be an artificial dividing line between western domestic concerns about democracy/poverty and the concerns of those in bottom-billion countries. It is time for an entirely new chapter to open up in the “development” debate. Taxation (and international tax avoidance and evasion in both rich and poor countries are central to the issue) must be at the heart of this.

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