Is International Cooperation about Altruism or Greed?
Bert Meertens, October 2010*
Introduction
The financial crisis that started in 2008 had as side effect that in many countries the debate on the usefulness of international aid or cooperation has intensified. For example in the Netherlands the scientific council for government policy reflected on many aspects of international cooperation during the past 60 years. One of its conclusions for the future policy on Dutch aid is that it has to be more in the form of an enlightened self-interest to safeguard global stability. According to this report pure, financial self-interest does almost not exist anymore in the current international cooperation from most West-European donors (WRR, 2010). This article will show that this is far beside the reality and that one has to look a little bit deeper into the content and effect of international cooperation.
Self-interest is related to selfishness or in other words greed, one of the basic human instincts. Next to greed the basic human instincts comprise of survival, competition, sexual drive (love), aggression, fear, search for knowledge, and sociability (interaction with other humans). In the interaction with other humans one speaks of pure or true altruism whenever one individual is helping another for no reward, often at some cost to himself. In contrast to altruism, cooperation could be broadly defined as behavior undertaken together with another person for the attainment of mutual benefits.
The main known argument for international cooperation is the desire to help other people in need. People help because they are aroused und upset, and they strive to reduce their arousal. However, sometimes people help others to display their virtue and heroism to a public audience. In the context of international cooperation true altruism is mainly confined to short-term relief assistance. International cooperation is correctly phrased because most aid activities are related to cooperation instead of altruism. This article will show that modern international cooperation is still not free from greed. Even humanitarian aid has not been immune from politics with self-interest (Browne, 2006).
To answer the question whether international cooperation is more related to altruism or greed this article first describes shortly the main strategies of past and present aid activities in the last 60 years. This is followed by a more detailed description of the main returning features of international cooperation during this period. The next section presents some alternatives for developing countries in relation to international cooperation. Finally some concluding remarks are provided to answer the question whether international cooperation is about altruism or greed.
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Past and Present Strategies of International Aid Cooperation
Trumans’ famous presidential inauguration speech in 1949, in which he initiated the US aid policy to developing countries, is generally taken as the start of international cooperation. As this start happened to be during the Cold War, geopolitics had a major influence on the first aid destinations (Browne, 2006). With the gradual onset of the Cold War, some bilateral aid began to focus on countries of strategic interest (for example US aid to the Philippines, Thailand and South Korea). Based on the argument that economic development would keep developing countries in the western camp and out of the clutches of communism, western aid was helping to finance economic development throughout the 1950s and 1960s. At that time it was believed that import substitution strategies would lead to economic development. For that matter ‘infant industries’ needed to be protected from external competition in the early stages (Kanbur, 2006). Aid was used to provide the needed capital for this import substitution strategy.
After some time the import substitution strategy came under increasing criticism and investments in human capital through increasing knowledge, health and skills started to dominate the aid agenda (WRR, 2010). The 1970s became the era of the basic needs strategies and of the focus on redistribution of growth. In fact the policies supported by the aid agencies during the 1970s included the encouragement of state intervention, often leading to huge state expansion and insufficient and bloated bureaucracies (Groves and Hinton, 2004).
The financial crisis of the late 1970s and early 1980s, in the wake of global economic instability, provided the leverage for those who could finance or refinance developing countries debts. The era of ‘structural adjustment’ and neo-liberalism was upon us (Kanbur, 2006). The neo-liberals envisaged the problem of Latin-America and other developing countries as too much state intervention in developing national industries, which caused them to be inefficient and uncompetitive and required too much government spending, which ultimately caused runaway inflation (Stiglitz and Charlton, 2005). Countries had to discontinue their inward directed strategies for development, and had to liberalize their trade, privatize their government industries, and subject themselves to the monetary stabilization programs (WRR, 2010). With the World Bank’s (WB) first structural adjustment loan in 1980 to Colombia, a new aid phase of macro-economic governance began, in which the policy choices for the poorer developing countries were increasingly prescribed by the WB and the International Monetary Fund (IMF). Countries requiring IMF and WB loans had to adhere to structural adjustment policies that prioritized debt repayment (Groves and Hinton, 2004). Some of the Western bilateral donors also began to align themselves with the emerging neo-liberal prescriptions that characterized WB and IMF conditionality (Browne, 2006).
The new neo-liberal thinkers asserted that development was a process attainable all over the world, provided that the market was allowed to assert itself over the state (Payne, 2005). By the end of the twentieth century trade liberalization had become part of the mantra of political leadership of both the left and the right in the advanced industrial countries (Stiglitz and Charlton, 2005). However, wide-ranging trade liberalization in the 1980s and the 1990s wiped out whole swathes of Mexican industry that had been painstakingly built up during the period of import substitution industrialization (Chang, 2007).
With the end of the Cold War in 1992, aid fell by 10 percent between 1992 and 2000 and was effectively switched from Africa to Eastern Europe and Central Asia. In tandem with humanitarian assistance, donors sought to expand their markets across this frontier through hastily extended commercial trade credits to the new countries (Browne, 2006).
Partly as a result of the strong criticisms of the market based approaches of the 1980s and the early 1990s, the development doctrine in the 1990s moved back to emphasizing poverty reduction as the ultimate objective of development, and supporting specific interventions to this end (Kanbur, 2006). The eight Millennium Development Goals (MDGs) adopted by world leaders in the year 2000 and set to be achieved by 2015, are an example of this shift in development strategy. In 1999, the WB and IMF devised the Poverty Reduction Strategy Papers (PRSP), which was to be ‘country-driven and owned’. However, because the PRSP was also to be the sole basis for debt cancellation and new concessional lending from the WB and IMF, power in the partnership was strongly skewed in favour of the creditor (Browne, 2006).
In the 1990s there was a shift from less governance to good governance. The call for better governance was a donor reaction to concerns of the relative ineffectiveness of aid, frustrations with the lack of commitment by many developing countries to reform processes, and endemic corruption (Browne, 2006). Good governance refers to transparency and accountability of a government on the basis of democratic principles. The basic idea behind the good governance strategy is that a liberal democracy is by far the best precondition for development. From now on developing countries were only supplied with aid or loans if they complied with the conditions of good governance (WRR, 2010).
To see how deep our present desire to help people in need goes we take a look at the US, which is often the largest aid donor in financial terms.[1] In 2009 the US spent 28 billion US$ on official development assistance (ODA). In order to know if this amount is a lot or not, it has been compared in Figure 1 to some other selected expenditures in the US during the year 2009.
Source: De Volkskrant newspaper editions throughout 2010.
Figure 1 shows that the 2009 US expenditure on ODA is peanuts compared to most other selected expenditures. Even money spent on sweets and as a consequence slimming down has been more. More cynical is the 145 billion US$ which the major US banks and securities firms have paid their employees in the form of bonuses for 2009. This is just one year after the onset of the worldwide financial crisis, which was caused by the now rewarded financial people. Figure 1 shows that government expenditures for supporting the financial sector and for defence are very much higher than for ODA. Even the expense on security agencies such as the CIA has been almost three times as high. Clearly self-interest of the US takes an overwhelming part of the pie compared to helping other people in need. In other donor countries the situation is more or less the same as in the US.
In 2008 the official development assistance of all donors reached a total of 120 billion US$. This might appear to be a lot of money. However, this flow of aid is dwarfed by global trade flows (Kanbur, 2006). In fact development aid is only 2% of the total money flow between Africa and the West. For example migrants and migrant workers send each year worldwide 350 billion US$ to their families in the developing countries. The official remittances to Africa totaled around 20 billion US$ in 2006, while this was 68 billion US$ in Latin-America and 113 billion US$ in Asia (Moyo, 2009). Through the informal channels another 150 billion is added to the money sent by banks (WRR, 2010). A much larger flow of money entering the developing countries comes from Foreign Direct Investment (FDI). Since 1980 the FDI flow has steadily increased and in 2008 this type of investment amounted to a total of about 1700 billion US$ (WRR, 2010).
Apart from inflows there are several important outflows or losses of money for the developing countries. The rich countries namely collect in tariffs on the imports of some of the poorest countries much larger sums than they provide in aid to the same countries (Browne, 2006). EU protectionism deprives developing countries in that way of nearly 700 billion US$ in export income a year (Mahbubani, 2008). The developing countries have further a debt which amounted to a staggering 3.7 trillion US$ in 2009. Paying back the debt costs the developing countries annually 560 billion US$ (Sharife, 2009). From developing Africa there is even a reverse transfer of capital (new borrowing minus debt service on past loans), which amounted to 11 billion US$ during the 1990-2000 period (Browne, 2006). Many countries have further lost huge sums of revenue because tax incentives undermine the revenue base of developing countries and enable transfers to tax havens. More than 60% of capital flight from Africa leaves in the form of multinational tax avoidance and internal transfer mispricing (Sharife, 2009). Poor countries lose an estimated 284 billion US$ each year in that way.[2] Figure 2 gives an overview of some selected in- and outflows of money in developing countries. Clearly ODA is just a minor source of money and is even surpassed by negative outflows such as tax avoidance, debt servicing and EU protectionism.
To be able to understand why ODA is such a minor source of money in developing countries the next section will describe in more detail the main motives and characteristics of international cooperation. International cooperation is then not restricted to aid but includes trade and global politics.
Returning Features of International Cooperation
The history of international aid cooperation shows us that development strategies changed often in the period of 60 years. However, a number of features in international cooperation, covering aid, trade and global politics, have been remarkably more stable during all this time. The following section presents some of the main features that keep on returning in international cooperation.
Rich countries will always need allies among poor countries
One way to keep communism away and to win the war on terror is the transfer of resources (e.g. aid) to poor countries to secure their political and military support (Kanbur, 2006). The Marshall Plan was not only a very generous aid programme; it was also a spectacular example of enlightened self-interest (Browne, 2006). In Western Europe the Marshall Plan had to make sure that communism could not install itself in this part of the world (WRR, 2010). In Africa, it was the great powers that propped up African dictators like Mobutu because they guaranteed Western strategic interests during the Cold War. Mobutu was installed in mineral-rich Zaire following the CIA-backed assassination of the popular radical nationalist leader, Patrice Lumumba, and feted by Western governments, corporations and banks for much of his 32-year reign (Capps, 2005).
More than any other donor, aid from the US is strongly correlated with military assistance. After Truman’s 1949 speech 80% of US aid went to countries surrounding the USSR and China; at first mainly Taiwan and South-Korea, later Iran, Pakistan and South-Vietnam (WRR, 2010). For most of Africa, US aid flows have been modest and fickle. From the 1970s to the 1990s, more than 40 countries in sub-Saharan Africa (SSA) received less aid than Israel and Egypt together (Browne, 2006). In 2002 alone, the US government gave Uzbekistan, where it has a large military base, over 500 million US$, of which 120 million US$ was in military support and 80 million US$ was in support of the Uzbek security services who were working alongside their CIA colleagues (Mahbubani, 2008). Economic aid packages were further offered by the US to key countries during the preparations for war against Iraq in the spring of 2003 (Groves and Hinton, 2004). In the 2011 US aid budget request, one priority area is to secure critical frontline states and this will involve 7.7 billion US$ in State and USAID assistance in Afghanistan, Pakistan, and Iraq.[3]
Apart from military and political support international aid cooperation is also often related to commercial aspects. Like India, China’s aid is strongly influenced by commercial interest, and currently driven by the need to secure supplies of energy and raw materials to fuel its voracious expansion. China’s increasingly urgent search for oil sources drives its friendship with Iran, from where it purchases one-third of its oil, and from Angola, Gabon, Nigeria, Sudan and other states in Africa, from where it gets another third of its supplies (Browne, 2006). China states that this foreign assistance is meant to compensate for economic unbalances, but in fact it comes down to trade with a limited number of countries (WRR, 2010). Likewise Japanese aid continues to be driven by commercial interests, primarily focused on East Asia and Pacific countries (Groves and Hinton, 2004).
From the early stages, it was evident that aid was to be a form of patronage serving the political and commercial interests of its donors. Because of the way aid is currently financed and managed, it is linked inevitably to influence. All manner of aid reforms have been proposed. But donors are as influential as ever (Browne, 2006).
Donor countries dictate the aid strategies
Changes in development strategies are made remarkably fast and often. Every time a new strategy pops up and claims to deliver the development that was not obtained with the previous strategy. These changing agendas are largely reflecting Northern perceptions of the South and are dictated by the donors, with aid as a means of influence. Most recipient countries have never had control over the content and uses of aid (Browne, 2006). Despite the current rhetoric of ownership, participation and partnership, the present system is still based on entrenched patterns of dominance, hierarchy and control by the donors (Groves and Hinton, 2004).
A good example is the experience with the PRSPs. The PRSPs provide the basis for debt relief under the Heavily Indebted Poor Countries (HIPC) program, as well as for all WB and IMF concessional lending (Groves and Hinton, 2004). To qualify for the relief, recipients must prepare a poverty reduction strategy to be endorsed by the WB and IMF boards. Many bilateral donors were also prepared to realign their own aid programs to the PRSP (Groves and Hinton, 2004). In the first place, the PRSP was a take-it-or-leave-it proposition. There was little time given for initial consultation with developing countries on the design of the instrument (Browne, 2006). Key issues suggested by civil society during the PRSP process were dropped at the last minute in a more than hushed-up fashion (Groves and Hinton, 2004). As a result it has been mainly the WB which set the pace for the PRSP process and finally took the important decisions and even wrote the paper itself in many cases.
Due to the undemocratic formal organization structures of WB and IMF, and undemocratic informal decision structures of WTO the developing countries have little say in the decisions of these global institutions (Payne, 2005). The rich countries collectively control namely 60% of the voting shares of the WB and IMF (Chang, 2007). An unwritten but firm rule dictates that the head of the IMF should be European and that the head of the WB should be American (Mahbubani, 2008). The IMF’s organizational shape has a structural bias in its decision making in favour of a small group of countries, principally the US and the other leading post-industrial countries, giving the US alone a veto power in its own right. The US government further operates as the dominant force within the councils of the WB and, in effect chooses the President of the Bank (Payne, 2005).
The General Agreement on Tariffs and Trade (GATT), the WTO’s predecessor, was established in 1947 and continued to govern international trade in the form of a multilateral treaty to the creation of the WTO in 1995. In theory, the WTO is a more egalitarian organization by far than either the IMF or the WB (Payne, 2005). However, all important WTO negotiations were held in the so called Green Rooms on a ‘by-invitation-only’ basis. Only the rich countries and some large developing countries that they cannot ignore (e.g. India and Brazil) were invited. Thus the decisions are likely to be biased towards the rich countries. They can threaten and bribe developing countries by means of their foreign aid budgets or using their influence on the loan decisions by the IMF, the WB and regional, multilateral financial institutions such as ADB, IDB, AFDB and EBRD (Chang, 2007). The Green Room process has now been formally abandoned but the ongoing negotiation practice continues to place the developing countries in a disadvantageous position because of the complexity of the negotiations and their limited staffs (Stiglitz and Charlton, 2005).
Least developed countries (LDCs) have great difficulty participating fully in WTO negotiations. Many LDCs lack WTO representation because they cannot afford to staff a mission. LDCs also have very limited staff available to focus on WTO issues in the national capital, making it difficult to ensure the negotiations reflect LDCs’ national priorities. Many LDCs are hampered because they must manage a number of trade negotiations simultaneously. Those that are members of the African, Caribbean and Pacific (ACP) group of countries, for example, are negotiating bilateral Economic Partnership Agreements (EPAs) with the EU. Since the EU is the primary export destination for many of these countries, the EPA talks take priority over negotiations at the WTO. At the same time, many LDCs find their voices muted by pressure from bilateral donor countries, on which they depend for foreign aid money. LDCs, and developing countries that benefit from preference schemes, are also vulnerable to pressure by the preference-providing countries (Murphy, 2007).
The WTO’s Dispute Settlement System also lacks procedural fairness in some important ways. The increasingly legalistic process has raised the transaction costs of settling disputes. For example, the costs to a developing country to attack a claim of intellectual property by a Western company in a case of bio-piracy may be very high. Thus the WTO dispute system favors rich countries with the resources to use it effectively for their own interests (Stiglitz and Charlton, 2005).
Powerful countries gain from unequal development and want to keep their position
Adverse trading conditions have held back development progress in many of the poorest developing countries throughout the aid era. By most estimates, the costs to the developing countries of unequal access to markets are substantially larger than the value of net aid transfers, prompting the conclusion that developing countries would be better off with less aid, but fairer trading rules (Browne, 2006). However, after two decades of trade liberalization the 49 least-developed countries accounted for less than 0.4 per cent of world trade and capital flows in 2000 (Oxfam International, 2001). Industrialized countries make much of the trade preferences provided to the LDCs under various schemes. These preferences typically take the form of lower tariffs on LDC imports. However, contrary to the impression created by trade ministries in rich countries, the advantages of these preferences are wildly exaggerated. They are concentrated on products where tariffs are already low (and preferences therefore minimal), and conspicuous by their absence in areas where they might yield real benefits, such as textiles, footwear, and agriculture. Moreover, the capacity of LDCs to take advantage of trade preferences is undermined by quota and other restrictions. The result is that, in areas where they have the potential to penetrate markets, LDCs often face trade barriers which are higher than those faced by their competitors (Oxfam International, 2001). Therefore, although the EU has given ACP countries significant market access since 1975, trade between the two blocs has been decreasing. ACP exports to the EU fell by more than a half, from 8 percent in 1975 to 2.8 percent in 2000.[4] A further example is the "Everything But Arms" (EBA) arrangement, in which the EU has been granting all LDCs duty free access to the EU market for all their exports (except arms and ammunitions) with some limited transitional restrictions for sugar and rice. Trade in goods given preferences for the first time under the EBA arrangement in 2001 amounted to just 0.02 % of LDC exports to the EU in 2001 (Stiglitz and Charlton, 2005).
Between 1980 and 2002 the prices of coffee, cocoa, sugar cane and natural rubber all fell by between 77 and 86 percent but final product prices increased. The special and differential treatment that the US and EU offer to developing countries does nothing to solve the tropical export crop crisis. In the past decades some existing commodity agreements for sugar, cocoa and coffee all collapsed. One of the main reasons for these collapses is the non-participation of the main consuming countries (US, EU) in such agreements. The US and EU were able to block the implementation of the Integrated Programme for Commodities by refusing to finance its centerpiece, the Common Fund (Koning et al., 2004). It is estimated that more than half of world trade takes place within transnational corporations (TNCs) and that a small number of these companies control the value chains of products such as cocoa, coffee, tea, cereals, fruits and vegetables (WRR, 2010). Probably these mostly western TNCs have been influencing the US and EU governments with their lobbying teams.
The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies (Chang, 2007). However, developed countries that have been the most ardent advocates of trade liberalization are more reluctant to open up their own markets and to eliminate their own subsidies in other areas, where the developing countries have an advantage (Stiglitz and Charlton, 2005). Rich countries tend to disproportionally protect products that poor countries export, especially garments and textiles, with higher import tariffs (Chang, 2007). Developed countries namely do not impose any restrictions on textile imports from other developed countries (Stiglitz and Charlton, 2005). According to Stiglitz and Charlton (2005) the tariffs for developing countries are more than 4 times as high as the average rate faced by goods from developed countries. The WTO thus contributes to unequal development by making trading rules that favor free trade in areas where the rich countries are stronger but not where they are weak (e.g. agriculture or textiles).
Back in 1966 the UN Industrial Development Organization (UNIDO) was set up following pressure within the UN General Assembly from would-be industrializing countries to create an international body to help promoting their industrialization. However, with the general shift to neoliberal thinking from the late 1970s onwards, it came under pressure, principally from the US and the UK, to limit its role to the support of private enterprise (Payne, 2005). In the WTO Uruguay Round subsidies were permitted for agriculture, but not for industrial products. At the WTO meeting in 2002 the US even called for a total abolition of industrial tariffs by 2015 (Chang, 2007). Many of the rules act to constrain the industrial policy options of developing countries. For example tariff escalation (higher tariffs on processed and semi-processed goods) restricts industrial diversification in developing countries (Stiglitz and Charlton, 2005). During the 1990s, many states such as Zambia were urged to sell factories and lower import tariffs. Like the agricultural sector, the manufacturing sector was before walled off from foreign competition by high import tariffs. Now the textile sector of Zambia could not compete anymore and Zambia became a large importer of tariff-free second-hand clothes from the US (Browne, 2006).
In the Uruguay Round of trade negotiations, agriculture largely determined the pace and progress of the talks, and the unwillingness of the EU to make significant concessions on agriculture blocked agreement for a long time. The US and EU cleverly avoided making any real concessions in the agricultural negotiations and total subsidies to agriculture in the rich countries amounted to 327 billion US$ in 2000. So the chief custodians of the open global trading system are increasingly becoming the main opponents of further trade liberalization. The Doha Round is not making progress ostensibly because both the EU and the US refuse to adhere to their previous commitment and end the massive subsidies to their agricultural sectors (Mahbubani, 2008).
Developing countries are, however, pressurized to abandon the subsidies and protections in their agricultural sectors. Haïti presents a good example as it has in recent years undergone rapid trade liberalization, and is now one of the most open economies in the world. Liberalization of the rice market started in the 1980s, but the final stroke came in 1995 when, under pressure from the international community (notably the IMF and the US), the tariff on rice was cut from 35 percent to 3 percent. Imports increased by more than 150 per cent from 1992 to 2003, with 95 per cent of them coming from heavily subsidized US rice. In real terms, prices for rough rice in Haiti fell by 25 per cent in the second half of the 1990s. These trends have severely undermined the livelihoods of more than 50,000 rice-farming families and led to a rural exodus. While cheap imports initially benefited poor consumers, in recent years these benefits have vanished. The FAO says that overall malnutrition has increased since the start of the trade liberalization. In 2005 three out of every four plates of rice eaten in Haiti came from the US (Oxfam International, 2005).
Confronted with tariff barriers that have come down in unwanted areas, developed countries have increasingly resorted to non-tariff barriers such as dumping duties, countervailing duties, safeguards and restrictions to maintain food safety. The advanced industrial countries have used all of these at times to restrict imports from developing countries when the latter have achieved a degree of competitiveness, which allows them to enter the markets of the developed countries (Stiglitz and Charlton, 2005). The US has even backed out of several global agreements, and it is using bilateral free-trade agreements with developing countries to get around the restrictions that multilateral conventions impose on the freedom of action of American corporations (Browne, 2006). However, developing countries may be even more disadvantaged in one-on-one bargaining with the US; a series of such agreements may leave many developing countries worse off than they would be even with another unfair multilateral agreement. For example the North American Free Trade Agreement (NAFTA) in 1994 between Mexico, the US and Canada was not really a free trade agreement. The US retained its agricultural subsidies and NAFTA pitted the heavily subsidized US agribusiness sector against peasant producers and family farms in Mexico. Moreover, the US continued to use what were effectively non-tariff barriers (Stiglitz and Charlton, 2005).
Worldwide there are now a bewildering 300 regional and bilateral trade agreements, which comprise more than 30% of world trade. Bilateral and regional trade agreements, especially between very unequal trading partners, can undermine the commitments made in multilateral negotiations at the WTO. The US, Australia, Canada, and the EU in particular set up bilateral and regional agreements with developing country trading partners to lock in conditions that they cannot achieve at the WTO: these are known as ‘WTO plus’ conditions (Oxfam International, 2005). Take for example the EPAs, which the EU is negotiating with its former colonies in Africa, the Caribbean and the Pacific. The EPAs require that ACP-countries open their markets with at least 80% for imports from the EU, which is more than requested by the WTO. This means that if the ACP-countries decide to protect their agricultural sector there will be almost no protection left for their industrial sector against EU imports. And if they decide to protect their industries they will be flooded with EU agricultural products of which an overproduction exists in the EU due to production and export subsidies. Apart from this 80% market opening, which implies that the tariffs for 80% of the EU imports have to be reduced to zero, the EPAs also want to include agreements on many other issues such as public services and foreign investments, which go much further than what the WTO asks. Many ACP-countries and NGOs criticized the fact that the EU was putting the ACP-countries under time pressure to agree with the EPAs (WRR, 2010).
In the ongoing WTO negotiations the new, so-called Singapore issues primarily reflect the interests of the advanced industrial countries (Stiglitz and Charlton, 2005). The rich countries are now for example forcing developing countries to strengthen the protection of intellectual property rights (IPR) to a historically unprecedented degree through the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement and a raft of bilateral free-trade agreements (Chang, 2007). About 97% of the patents and the major part of the copy rights and trade marks are in the hands of the rich countries (WRR, 2010). The patent system most detrimental impact lies in its potential to block knowledge flows into technologically backward countries that need better technologies to develop their economies. The strengthening of the rights of IPR-holders means that acquiring knowledge has become more expensive for developing countries. The WB estimates that following TRIPS will cost developing countries 45 billion US$ per year (Chang, 2007).
Gaining from (food) aid
According to Payne (2005) a way to ‘pay off’ the worst excesses of global inequality is (food) aid to Africa. However, even this (food) aid from the western donors is not free from self-interest.
Not all aid is freely available to the recipient countries. Many donors still attach many conditions and other expenditures to their aid. In 2009 only about 50% of global ODA was free to spend. The rest went to debt relief, costs of students from developing countries who are studying in donor countries, costs of taking care of asylum seekers, technical assistance hired from the donor countries and administration costs (WRR, 2010). The commercial motivation for bilateral aid has always been strong and an important proportion of capital assistance is tied to the purchase of goods and services in the respective donor countries. In 2004, according to the Organization for Economic Cooperation and Development (OECD), some 70% of US assistance was tied to procurement from US sources, the second highest proportion among donors, behind only Japan (Browne, 2006). Mahbubani (2008) estimates that out of every 10 US$ that is allegedly spent in the Third World, 8 US$ returns to the donor country in the form of administration expenses, consultant fees, and contracts for donor country corporations.
The in 1954 signed Public Law 480, authorized US food aid, because according to President Eisenhower “it would lay the basis for a permanent expansion of our exports of agricultural products with lasting benefits to ourselves and peoples of other lands”. The US is the only donor to provide food aid solely in kind, rather than cash, because Public Law 480 is in fact used as a means of disposing of domestic agricultural surpluses (Browne, 2006). In May 2008 the Public Law Act changed into the Food for Peace Act, but in 2009 the US was still spending 20 times as much on food aid in Africa as it was spending to help African farmers grow more of their own food.[5]
Gaining from developing countries’ debts
During the commodity boom of the 1970s, private banks bulging with inconvertible dollars had enticed governments of developing countries into heavy borrowing (Koning et al., 2004). Western countries furthermore responded to the world recession of 1974-75 with a scheme which tried to boost demand for their home industries by underwriting the export of arms and machinery to developing countries. The ‘export credits’ were in reality tied loans that could only be used for the purchase of specified imports. If the developing country could not cover the costs, the export contract would be honored by the Western government and converted into a bilateral loan which would either be charged at market interest rates or at marginally lower, concessional rates and recorded as ODA (Capps, 2005). Export Credit Agencies (ECA), such as the UK’s Export Credits Guarantee Department (ECGD) and the US’s Export-Import Bank provided 80% of capital market financing and funded mega-projects in 70 of the world’s poorest countries during the earlier part of the 1970s. In the 1970s and 1980s many ECA backed loans were syndicated by commercial banks such as UBS, Citigroup, Goldman Sachs and Barclays, in conjunction with institutions like the WB and the IMF. Accompanying these capital loans were mandatory Structural Adjustment Programmes (SAPs). SAPs included tax reforms, i.e. lowering tax to attract foreign investors (Sharife, 2009).
As a former so called Economic Hit Man (EHM), John Perkins describes how EHMs working for western, mainly US, corporate firms trapped governments of developing countries into taking huge loans for developing their infrastructure, e.g. electric generating plants, highways, ports, airports, or industrial parks. A condition of such loans is that engineering and construction companies from the western countries must build all these projects. If an EHM is completely successful, the loans are so large that the debtor is forced to default on its payments after a few years. When this happens the developing countries have become easy prey for controlling their United Nations votes, for installing military bases on their territory, or for access to their precious resources such as oil. However, they still have to pay their debts to the western banks (Perkins, 2005).
In terms of financial liberalization, Latin America was in the 1970s far more open than South East Asia, where controls over foreign capital flows were strict. Latin America’s reliance on foreign capital flows and FDI are what made it particularly vulnerable to global economic shocks. By the end of the 1970s the foreign debt of Latin America had exploded and debt service payments reached 33 billion US$ per year; nearly one third of Latin America’s export earnings (Stiglitz and Charlton, 2005). The loans taken by African dictatorships were often used to purchase arms. At that time 74% of manufactured arms were delivered to developing countries, with the US in the lead at 52% of deliveries (Sharife, 2009).
In 1981 the chairman of the Federal Reserve of the US, Mr. Volcker, drastically raised the interest rate on US loans to 21% to save the US economy. This more than tripled the outstanding debt of developing regions (Sharife, 2009). The external debt of all developing countries was less than 60 billion US$ in 1970 but by the mid-1990s it was over 2 trillion US$, close to half their total GDP (Browne, 2006). As stated before, the present debt stands at 3.7 trillion US$ and paying back this debt costs the developing countries 560 billion US$ per year (Sharife, 2009). The US is the largest net recipient of ODA loan repayments among the OECD countries, the flow turning negative, against the developing countries, in every year after 1989 (Browne, 2006).
Already marginal to the global system, sub-Saharan Africa plummeted faster and further than any other developing region since the debt crisis of the early 1980s struck. By 1987 only 12 out of 44 African countries were able to regularly service their debts without debt relief. The remainder was locked into an infernal cycle of further borrowing, compounding interest and accumulating debt stock and arrears. The ratios of foreign debt to the continent’s gross national product (GNP) rose from 51 percent in 1982 to 100 percent in 1992, and its debt grew to four times its export income in the early 1990s. The huge increase in Africa’s debt burden was accompanied by a massive outflow of resources to foreign creditors. The huge outflows were not matched by the inflow of new loans. Africa received total loans of 540 billion US$ and paid back 550 billion US$ during the three decades between 1970 and 2002, while retaining a total debt of 295 billion US$. In 2001 debt service in sub-Saharan Africa as a whole amounted to 3.8 percent of gross domestic product (GDP), compared to the 2.4 percent of GDP spent on health (Capps, 2005).
An increasing majority of African borrowing has come from bilateral and multilateral loans, rising from 61 percent in the 1980s to 80 percent by 2003. This situation was effectively institutionalized after the official debt crisis broke in 1982. The nominal price of primary commodities fell a staggering 30 percent between 1980 and 1982. A combination of record high interest rates, oil price rises and a new world recession meant that borrowers could no longer generate the export revenues to service their rapidly escalating debts. The London Club, an organization representing the interests of the private creditors, facilitated the commercial banks’ withdrawal from the Third World debt market in general and sub-Saharan Africa in particular. With the exception of the strategic mineral economies, the banks barely lent to the continent again (Capps, 2005).
The inter-state, bilateral lending of Western governments was particularly significant in the build-up of Africa’s debt and is the subject of the HIPC debt relief initiative. Multilateral debt, the final portion of Africa’s debt, is increasingly owed to the IMF, the WB and its affiliates. The WB increasingly lent money to fund development projects in the Global South from the 1950s on. The bulk of the bank’s lending went to major infrastructural projects like power stations or dams, which relied on Western construction companies, consultants and imports. There was a particular orientation on financing extractive, export-orientated industries, such as mining, in partnership with private Western banks and multinationals. Because the WB operated like a commercial bank, it was compelled to recover all its debts while continually expanding the number of new project loans, particularly from the late 1960s on. The IMF also began to specialize in lending to the developing countries, providing short term loans to poor countries in Africa and elsewhere that were experiencing trade deficits (i.e. an excess of imports over exports) and balance of payments crises in the wake of the 1974-75 world recession. In 1970-78 only 3 percent of the IMF’s new conditional credit went to Africa, but by 1979-80 this figure had shot up to 30 percent (Capps, 2005).
Both the IMF and the WB ensured that the commercial banks were repaid by lending African states more money to service their private debts. They acted as debt collection agencies for the Western countries and themselves, working with the creditor governments through the Paris Club. This is an informal grouping of 19 states (Western Europe, Canada, the US, Japan, Australia, Russia) that aims to get the maximum repayments out of the developing countries’ debtors and ensure they don’t default. It divides and rules by insisting all bilateral debts are rescheduled on an individual basis and will only agree to negotiate with a country if it has already signed a debt management agreement with the IMF. The IMF and WB also insist on the repayment of their own multilateral loans on even harsher terms. The charters of the IMF and WB specifically forbid debts that they hold to be rescheduled or written off. Moreover, most of this debt is charged at market rates. The new and powerful conditions attached to the loans during the structural adjustment and good governance periods enabled the IMF and WB to dictate the economic policy of almost the entire continent (Capps, 2005). Macroeconomic policies have been imposed on developing countries that seriously hamper their ability to invest, grow and create jobs in the long run. If rich countries were in similar financial crisis circumstances they would never do what they tell the poor countries to do. Instead they would cut interest rates and increase government deficit spending in order to boost demand (Chang, 2007). The reaction to the recent 2008-2009 financial crisis just confirms this.
By 1996, more African states had failed to meet their debt service obligations, forcing the Paris Club to offer a series of piecemeal concessions which still proved inadequate to keep the payments flowing in. The African debt burden had to be reduced so that debt service payments could be maintained to the private banks. The IMF and the WB responded by jointly proposing the Highly Indebted Poor Country scheme which was adopted that year. The original HIPC scheme proved inadequate and was further ‘enhanced’ in 1999. The scheme is based on three testing and time consuming stages through which a country must successfully pass before it is granted any debt relief. Each is policed by the IMF and the WB. First, only the poorest and most heavily indebted countries are allowed to qualify and must have an established track record of following SAPs. The IMF and WB have determined that only 40 out of 165 developing countries, of which 33 from sub-Saharan Africa, are eligible for the scheme. Each of the 40 countries deemed eligible have to draw up a Poverty Reduction Strategy Paper with the IMF, containing on average over 100 conditions which are to be strictly followed for three years. These include commitments to use the funds released by debt reduction to reduce poverty. Second, the qualified countries must then pursue implementation of the PRSP in full, which can take a further one to three years. Countries that successfully complete their PRSP stage are judged to be ready to have their debt stock reduced. However, only the non-ODA (i.e. concessional) proportion of the bilateral debt is reduced. The rest of the bilateral debt stays in place along with the private debt stocks (Capps, 2005).
In 2005, to help accelerate progress toward the United Nations MDGs, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). The MDRI allows for 100 percent relief on eligible debts by the IMF, the WB, and the African Development Fund for countries completing the HIPC Initiative process. Of the forty countries eligible or potentially eligible for HIPC Initiative assistance, thirty are receiving full debt relief from the IMF and other creditors after reaching their completion points. Six countries have reached their decision points and some of them are receiving interim debt relief. Four potentially eligible countries have not yet reached their decision points. The total cost of providing assistance to the 40 countries that have been found eligible or potentially eligible for debt relief under the enhanced HIPC Initiative is estimated to be about 75 billion US$ in end-2009 net present value terms.[6]
If the rich countries were serious about writing off Africa's debt they could do it at a stroke. There was, for example, no problem cancelling Iraq's 120 billion US$ debt when it suited their interests after the invasion in 2003. At the time, US President Bush argued that Iraq's liabilities endangered its 'long-term prospects for political health and economic prosperity'. This is true of Africa's debt a thousand times over. As the Senegalese activist Debar Moussa Dembele makes clear, the African debt has a purpose: 'It is an instrument of domination, control and plunder, used to promote Western countries' economic, political and strategic interests' (Capps, 2005).
Alternatives to International Aid Cooperation
In the preceding we have seen that ODA is only a minor flow of money compared to other in- and outflows of money in the developing countries. Aid appears to be often used as a way to forge military or commercial alliances with developing countries. The rich countries furthermore want to keep their position and use international institutions such as the IMF, WB and WTO to prolong unequal development between them and the developing countries. They even gain themselves from (food) aid and developing countries’ debts. So what benefit do the developing countries get from the current international cooperation? Are there no alternatives? Yes, there are some other opportunities for the developing countries and the following will describe them in more detail.
Reduce dependence on aid
Although ODA is in general a minor global flow of money, some SSA-countries are chronically dependent on aid. Aid accounted for 40% of the government budget and 6.2% of GDP in Burkina Faso during 1960-1999. In Mauritania, this was 37% and 12%, respectively (Djankov et al., 2007). Throughout the 1990s between 30 to 50% of the GNP in Tanzania consisted of ODA (Groves and Hinton, 2004). In Uganda and Mozambique almost half of the current government income exists of donor contributions (WRR, 2010). With such high dependence on aid a country becomes an easy prey for military, commercial and political influence from the donors. It also leads to high debt repayments of loans, which were needed to finance the inconsistent, rapidly changing and unsuccesful development strategies invented by the donors.
As a general rule, the well-managed developing countries that have performed best in reducing poverty and meeting human goals are those that have learnt soonest to reduce their dependence on aid (Browne, 2006).
Aid to governments, inevitably, frees up public money for other uses. Aid destined to support the social sectors, for example, may facilitate increases in defence spending (Browne, 2006). Foreign aid and natural resources share a common characteristic: they can be appropriated by corrupt politicians without having to resort to unpopular, and normally less profitable, measures like taxation. Since most foreign aid is not contingent on the democratic level of the recipient countries, there is no incentive for governments to keep a good level of checks and balances in place. When revenues do not depend on the taxes raised from citizens and business, there is less incentive for accountability. At the same time corrupt government officials will try to perpetuate their rent seeking activities by reducing the likelihood of losing power. Therefore, being dependent on foreign aid seems to result in worsening democratic institutions. This effect is akin to the so called “curse of oil” effect (Djankov et al., 2007).
Moyo (2009) accuses aid of more damage done to Africa than what is already stated above. According to Moyo the vicious cycle of aid on the basis of soft loans chokes off desperately needed investment, instills a culture of dependency, weakens civil society, facilitates rampant and systematic corruption, causes inflation, and even induces civil wars, all with harmful consequences for growth. Instead of depending on aid Moyo (2009) advises African governments to take more commercial loans, to attract more FDI, and to trade more, especially with China and India. Moyo (2009) believes that the African political leaders will repay on time the more expensive commercial loans, because otherwise they will lose the support from their voters and will not get new loans from the commercial banks. Unfortunately, this believe is not backed up with recent evidence. In the past, the 35 African countries that had issued bonds in the international capital markets virtually all defaulted (Moyo, 2009). The fact that Moyo worked between 2001 and 2008 for Goldman Sachs in the debt capital markets and as an economist in the global macroeconomics team might explain her optimistic view. Goldman Sachs is namely one of the prominent banks that supplied loans to developing countries in the 1970s and 1980s. As already stated before, both the IMF and the WB ensured that commercial banks such as Goldman Sachs were repaid by lending developing countries more money to service their private debts. When the 1994 economic crisis in Mexico threatened to wipe out the value of Mexico's bonds, mainly held by Goldman Sachs, even the US Treasury Department stepped in with 20 billion US$ to bail out these Mexican bonds.
The IMF used to push strongly for capital market opening during the 1980s and especially the 1990s (Chang, 2007). Successive rounds of deregulation stripped the African states of what little control they had previously exercised over the activities of foreign firms. The wholesale privatization of state-owned industries and utilities simultaneously provided the multinationals with ‘public goods’ in the form of bargain basement assets that could be stripped, squeezed and sold on. In that way the IMF and WB significantly boosted the power and profits of the Western multinational corporations operating in Africa. By 1997 the rates of return on US direct investments in the continent were, at 25.3 percent, the highest of any region in the world (Capps, 2005). Japanese companies said in 1995 that they made more profit from their African investments than from those in all other parts of the world (Moyo, 2009).
The IMF helped companies not to pay their taxes in developing countries through stimulating tax reforms which lowered the tax to attract foreign investors. As a consequence developing countries started to compete with tax concessions to attract foreign businesses (Stiglitz and Charlton, 2005). In that way many countries have lost huge sums of revenue because tax incentives undermine the revenue base of developing countries. Companies can furthermore vastly reduce their tax obligations by shifting most of their profits to a paper company registered in a tax haven. As a result more than 60% of capital flight from Africa leaves in the form of multinational tax avoidance and internal transfer mispricing (Sharife, 2009).
FDI may help economic development, but only when introduced as part of a long-term-oriented development strategy. FDI by private equity funds, mutual funds or hedge funds typically buys up firms with a view to selling them off after 5-10 years, or even earlier, without improving their productive capabilities, if they can get away with it. An entry by a TNC through FDI can destroy existing national firms through premature exposure to competition, or it can pre-empt the emergence of domestic competitors. Policies should be designed so that FDI does not kill off domestic producers, which may hold out great potential in the long run, while also ensuring that the advanced technologies and managerial skills foreign corporations possess are transferred to domestic business to the maximum possible extent. Most of today’s rich countries regulated foreign investment when they were on the receiving end. The WTO, however, introduced the TRIMS (Trade-Related Investment Measures) Agreement, which restricts the ability of developing countries to regulate FDI (Chang, 2007).
More democratic global institutions
When a country wants to be less dependent on aid it will need more democratic and fairer global institutions to facilitate the implementation of its own chosen development path. Mahbubani (2008) proposes to adopt a clear and transparent process for selecting the heads of organizations such as IMF and WB in which meritocracy and not nationality is the key consideration. At present, important decisions within the IMF and the WB require a qualified majority of 85%. The US has 17% of the votes and is the only country which can block important decisions on its own. Africa, on the other hand, has in total only 4% of the votes. At the 2009 summit of 20 rich countries (G-20), the US proposed that some European countries would reduce their votes with at least 5% in favor of increasing the votes for emerging economies such as China and India. However, both France and Britain were particularly reluctant as an increase in China's votes would give China more votes than the UK and France. Moreover, even this proposed reform fails to fully redress IMF imbalances as the poorest countries do not have enough voices, while some main emerging countries are still underrepresented in the organization. In that way the IMF will remain the world's rich country club.
While in the past the members of the GATT had to agree unanimously with the decisions taken, the situation is now that WTO-arbitraments can only be barred by the members unanimously. However, LDCs do not have the means to engage themselves in expensive arbitrage processes. To enable LDCs to participate fully in the WTO the costs of a process must not form an obstacle. LDCs have a lot to gain from a transparent and predictable global trading system, where large countries are discouraged from cheating by a system of enforceable rules, and where collective bargaining is possible, uniting poorer countries with shared interests (Murphy, 2007).
For some of the smallest and poorest states, the adjustment costs of trade liberalization may significantly outweigh the benefits available (Stiglitz and Charlton, 2005). According to Christian Aid (2005) trade liberalization has cost sub-Saharan Africa 272 billion US$ in the period 1985-2005. So two decades of liberalization has cost SSA roughly what it has received in aid. To enable development special WTO rules have to protect LDCs from negative liberalization effects. One way is to provide LDCs the possibility to protect their vulnerable agricultural and industrial sectors. On the other hand rich countries have to lower the import tariffs for processed products exported by the LDCs.
Developing countries, unable to protect their producers with subsidies, must also be allowed to block dumped imports immediately at the border (Murphy, 2007).
Build own capacities
The democratization of the global institutions will not be effectuated in a short time. It would not be wise for developing countries to wait for that moment to come. In fact there is always the option to build your own capacities in the absence of perfect global institutions. This is what countries such as Japan, Taiwan, South Korea, China, Vietnam and India have done in the past decades. These Asian countries pursued complex economic development policies which combined government intervention with export promotion and controls on the volume and quality of capital inflows. Moreover they sequenced their liberalization and paid attention to social policy, including education and equality, as well as investing heavily in infrastructure and technology (Stiglitz and Charlton, 2005). First they blocked their countries for imports and exports. This made sure that products such as food were produced for their own populations. Then they perfected the quality of their products so that they could compete on the international market. At that stage the imports were restricted and the exports maximized to gather as much as possible foreign currency for capital accumulation. Later on they slowly allowed imports when free market trade became profitable for them.
An absolute precondition for building the own capacities of a country is a strong and effective government and this was certainly the case in the so called Asian Tigers (WRR, 2010).
To date, not one successful developing country has pursued a purely free market approach for development by simply opening themselves to foreign trade (Stiglitz and Charlton, 2005). Practically all of today’s developed countries, including Britain and the US, have become rich on the basis of policy recipes such as protection and subsidies that go against neo-liberal economics. The best-performing economies have been those that opened up their economies selectively and gradually. Britain was one of the most protectionist countries until it converted to free trade in the mid-19th century when it had acquired a technological lead over its competitors behind high and long-lasting tariff barriers. Later Britain abandoned again free trade due to the successful use of protectionism by its competitors. Despite being the most protectionist country in the world throughout the 19th century and right up to the 1920s, the US was also the fastest growing economy. It was only after the Second World War that the US, with its industrial supremacy now unchallenged, liberalized its trade and started championing the cause of free trade (Chang, 2007).
In the 1860s, a group of Meiji reformers from Japan sailed to all leading Western societies to discover the best practices from the West. The Meiji reformers learned well and were remarkably successful in applying Western best practices so that Japan emerged quickly as a major power. The Japanese were completely pragmatic and were willing to consider Western best practices from any country and were prepared to mix and match policies in a free fashion (Mahbubani, 2008). The Meiji Japanese state established state-owned model factories in a number of industries (shipbuilding, steel, mining, textiles and armaments) in the late 19th century, which were privatized mostly soon after establishment. Later on the Japanese government channeled subsidized credits into key sectors through directed credit programmes. It took Toyota more than 30 years of protection and subsidies to become competitive in the international car market. Foreign companies were required to transfer technology and buy at least specified proportions of their inputs locally. However, in most key industries foreign investment was simply banned. Even when it was allowed, there were strict ceilings on foreign ownership, usually a maximum of 49 % (Chang, 2007).
The secret of South Korea’s success lay in a judicious mix of protection and open trade, with the areas of protection constantly changing as new infant industries were developed and old infant industries became internationally competitive. Spending foreign exchange on anything not essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs and excise taxes. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business; credit (Chang, 2007).
Like the US in the mid-19th century, or Japan and Korea in the mid-20th century, China used high tariffs to build up its industrial base (Chang, 2007). Trade liberalization certainly did not cause China’s growth. China began to grow rapidly in the late 1970s, but trade liberalization did not start until the late 1980s, and only took off in the 1990s after economic growth had increased markedly (Stiglitz and Charlton, 2005). China also learned from Japan how to benefit from foreign companies. In exchange for the transfer of their knowledge to the local engineers foreign companies were allowed to share in the benefits through joint-ventures. However, China made sure that the foreign companies never had too much power in these joint-ventures. Often these foreign companies finally sold their shares within the country. As a result of China’s rapid growth over the last three decades, the number of people living in absolute poverty (under the UN definition) in China has fallen spectacularly from 600 million people to slightly more than 200 million (Mahbubani, 2008).
Why do we not let Africa do what Asia has done? Markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are already good at. In the long-run, free trade is then a policy that is likely to condemn developing countries to specialize in sectors that offer low productivity growth and thus low growth in living standards (Chang, 2007).
The stated aim of ‘macroeconomic shock treatment’, as the WB called it, was to jumpstart growth and get Africa back on its feet. The indebted economies would be reoriented on the world market by shifting them away from industrialization strategies of the early decades after independence. They were to be (re)specialized in a narrow range of raw material and cash-crop exports. As a consequence, sub-Saharan Africa was effectively de-industrialized. But the new surge in primary commodity exports only flooded already saturated markets and forced world prices further down. The majority of sub-Saharan African countries were now particularly vulnerable to downturns in the world economy because of their increased reliance on a narrow range of price sensitive primary commodity exports like cocoa, coffee or copper (Capps, 2005).
Rich countries are kicking away the ladder for poor countries to reach higher and develop by forcing free-market, free-trade policies on them. Free trade demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of firms before they can acquire new capabilities. Despite what the free trade economists recommend (concentrating on agriculture), manufacturing is the most important, though not the only, route to prosperity. Countries should defy the market and enter difficult and more advanced industries if they want to escape poverty. Cases of failures in infant industry protection cannot discredit the strategy per se. The examples of bad protectionism merely tell us that the policy needs to be used wisely. If tariff barriers or subsidies allow domestic firms to accumulate new abilities, the temporary reduction in the country’s level of consumption may be totally justified (Chang, 2007).
The alternative view to neo-liberalism places less confidence in markets and recognizes a stronger role for government in economic development. Markets are certainly powerful forces but where they are imperfect, especially in developing countries, government intervention in trade, FDI, technology transfer, and domestic resource allocation may be required to correct their failures and make them work efficiently. This view has been greatly influenced by the success of the East Asian Tiger economies (Stiglitz and Charlton, 2005). There is nothing inevitable about poor performance by public enterprises and that improving their performance does not necessarily require privatization. Public enterprises have often been set up in order to kick-start capitalism, not to supersede it, as it is commonly believed. State-owned enterprises are often more practical solutions than a system of subsidies and regulations for private-sector providers, especially in developing countries that lack tax and regulatory capabilities (Chang, 2007). Many western donors have been overzealous in their advocacy of privatization in developing countries. There has been, however, inadequate attention to the development of adequate checks and safeguards under public auspices to ensure that privatization results in better and more affordable services and that public good is not sacrificed to private gain (Browne, 2006).
Because it is unthinkable to the neo-liberals that free trade, privatization and the rest of their policies could be wrong, the ‘explanation’ for policy failure is increasingly found in non-policy factors, such as politics and culture. There is, however, no culture that is either unequivocally good or bad for economic development. Many forms of behavior such as easy going or living for today are largely the outcome of economic conditions common to all economically underdeveloped countries, rather than of their specific cultures. Culture moreover changes with economic development. Thus no country is condemned to underdevelopment because of its culture (Chang, 2007).
Conclusions
This article has clearly shown that past and modern international cooperation has more to do with greed than altruism from the side of the donors. Instead of bridging the gap between wealth and poverty there is actually a net outflow of money from the poorest countries to the richest countries. First of all, the rich countries reserve only very little money for aid to developing countries in comparison to expenditures for their own safety and their financial stability. Secondly, the poor countries lose much higher amounts of money to the rich countries due to market protectionism, debt servicing and tax avoidance by foreign companies operating in the poor countries. Finally, the rich countries benefit themselves considerably from the aid supplied to the developing countries.
The rich countries dictate the aid strategies and use international institutions such as the IMF, WB and WTO to prolong unequal development. By forcing free-market, free-trade policies on developing countries they are preventing the poorer countries from using the tools of trade and industrial policies that they had themselves so effectively used in the past in order to promote their own economic development. Countries which depend highly on aid are an easy prey for military, commercial and political influence from the donors. Aid budgets are then used to persuade developing countries to adopt neo-liberal policies. So the aid system serves more the interests of the rich than the poor. Or in the words of Mahbubani (2008): “Self-interest has almost always trumped altruism in how ODA money is spent”. Is this what people mean with an enlightened self-interest to safeguard global stability?
Aid can instill a culture of dependency, facilitates often corruption and inflation, and seems to result in worsening democratic institutions. Developing countries that have performed best in reducing poverty and meeting human goals are those that have learnt soonest to reduce their dependence on aid. It would not be wise for developing countries to wait until the global institutions have reformed according to their wishes. It is better to start building your own capacities right now, just as the Asian countries have done in the past decades. These Asian countries combined government intervention in trade, technology transfer, and domestic resource allocation with export promotion, controls on the volume and quality of capital inflows, and heavy investments in infrastructure and technology. They only started opening their markets when they were ready for it. Africa should follow their Asian counterparts because history has shown that culture has never condemned a country to underdevelopment.
Development workers have an astonishing low acceptance of regarding aid as a means of influence for the donors. Is this because they are depending on the aid sector themselves or is their world view too positive? There is a near-universal refusal by most western people to acknowledge that the West dominates and controls the world in order to serve western interests. The fact that aid has failed in the past 60 years stimulates western people to invent again new development strategies. They almost always miss the real point why aid is not working. They forget to mention that donors are not really committed to help the poor and want to stay in power. It is high time that donors stop telling the receiving countries how to develop so that they can choose their own development path. This is only possible when the rich finally control their greed and selfishness and start acting as true, good Samaritans.
References
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[1] But the US ranks with only 0.2% of GNI (Gross National Income) amongst the lowest in terms of meeting the internationally committed 0.7% target for ODA.
[2] Estimation mentioned by Frank van der Linde, director of Fairfood International, in his contribution to the online discussion of the WRR report on The Broker website: http://www.thebrokeronline.eu/en/Online-discussions/Minder-pretentie-meer-ambitie/Minder-pretentie-meer-ambitie/Frank-van-der-Linde-Fairfood-Talks-Naar-coherent-en-eerlijk-handelen
[4] Source: The East African newspaper edition of 01-06-2009.
[5] Source: The East African newspaper edition of 01-06-2009.
