Can this year's anti-poverty promises be kept?

By Alan Beattie and Chris Giles in London and Andrew Balls in Washington

Financial Times

Published: January 6 2005

The fragility of life and livelihoods in the developing world have been brought shockingly home by the devastation wrought by the tsunami.

But while it highlights the plight of the marginalised in Asia, the tsunami may also divert effort from the world's poorest countries. This year's campaign for greater aid, debt relief and trade access for nations stuck in long-term poverty, which already faced obstacles, may now find itself competing for money and attention with a more immediate disaster.

This year was to have seen a renewed focus by the rich countries on development, and particularly on Africa. The UK will be urging more aid and deeper debt relief during its presidency of the Group of Eight leading industrial nations, which will be punctuated by the spring report of the commission on Africa set up by Tony Blair, the prime minister. September will see a United Nations summit assessing progress towards its 2015 Millennium Development Goals. And in Hong Kong in December, the World Trade Organisation ministerial meeting will reveal how the current round of trade liberalisation talks, ambitiously badged as the "Doha Development Agenda", has progressed.

Even before the tsunami, budgets in some countries, notably Germany and Italy, were straining to meet promises of more aid made at a UN summit in 2002. Now, money flowing to countries affected by the tsunami may compromise efforts elsewhere. Japan, for example, has pledged $500m, more than 5 per cent of a shrinking aid budget that was already being refocused away from Africa towards countries closer to home.

Similarly, Washington's promise of $350m more or less exhausts the US Agency for International Development's disaster relief budget. Senior Congressional Republicans including Bill Frist, Senate leader, have suggested that billions more could be needed from the US. Since the Bush administration is promising a clampdown on overall federal spending, this bodes ill for projects such as the Millennium Challenge Account, the White House's flagship aid programme launched in 2002. This project, supposed to reach$5bn a year by next year, is already running behind schedule and has yet to disburse any funds.

The UK insists that the tsunami is an opportunity as well as a threat. "Any action for countries affected by the tsunami should be seen as the first stage in a global effort to stump up cash for developing countries in general," says a Treasury official. "We look at the scale of loss of life in Africa due to poverty and communicable diseases as being equally deserving."

It is in this context - the search for fresh sources of money - that the proposal from Gordon Brown, the chancellor, for rich countries to increase aid through an international finance facility (IFF), which would issue special bonds securitised on future government aid budgets, has come back into focus. When Mr Brown started to promote the facility some years ago as one of the few ways of increasing aid quickly, critics said it was disingenuous financial sleight-of-hand that merely hid the true cost of aid budgets and endangered future aid spending, since the bonds would have to be repaid. As the World Bank warned in an assessment of the facility: "Because of the added cost . . . of establishing and running the IFF, of its market transactions, and interest paid on its bonds, flows diverted from aid budgets to pay IFF bonds could be substantial."

The IFF has struggled to get enough governments - the World Bank recommended at least five participants - to take part. The US, Germany and Canada say their public finance rules deter them from participating by requiring them to account for the borrowing up front.

These criticisms still stand. But with Mr Brown pushing it relentlessly, the IFF has come back on to the agenda for two reasons. One, it could provide a short-term solution for governments suffering budgetary strains. Two, fears about the difficulty of spending lots of aid quickly and well have diminished. The rapid spread of HIV-Aids in the developing world, and the ability of the Geneva-based global fund for Aids, tuberculosis and malaria to disburse money swiftly, has increased the case for ramping up spending. "The epidemiology of Aids provides a clear reason for frontloading aid," says Richard Feachem, the global fund's director."Countries like Swaziland will simply cease to exist if Aids is not stopped."

Mr Brown still faces a substantial task getting the IFF off the ground. France and Italy say they support the facility. The UK is trying to persuade Canada and Germany at least to back the scheme by providing secondary guarantees. A senior UK Treasury official said he thought that this would persuade the US, and then the Japanese, to get involved. Initially, the UK may settle for a small pilot version of the facility, perhaps to fund an advance purchase scheme for vaccines.

The US is adamant that how aid is used, rather than the search for new wheezes to raise it, is the imperative. John Taylor, the top international official at the US Treasury, does not envisage a year spent mulling over the finer points of Mr Brown's initiative. "We do not need to be debating the best ways for raising finance for development," he says. "If the IFF works best for the UK or for others that is fine. How best to use the aid is where the discussion should be."

Disagreements between the US and UK also cause problems for the second item on the G8 agenda, increased debt relief for the poorest countries.

Eight years after the heavily indebted poor countries initiative was launched to write off bilateral, World Bank and International Monetary Fund debt to some 40 governments, mainly in sub-Saharan Africa, there is a widespread belief that it has failed to achieve its promise. Thanks to new borrowing and falls in export prices, some countries have seen debt-to- export ratios and other indicators of debt sustainability rise above target levels even after receiving relief.

The UK's solution is to write off all IMF and World Bank debt for all very poor countries, not just the original heavily indebted poor countries, whose governments function well enough to use the money wisely. Donor countries would pay for the World Bank's debt reduction, while the IMF would fund its part by revaluing its gold holdings. .

The US believes the World Bank can instead fund its own debt relief by stopping lending to such countries and moving to grants. It also opposes gold revaluation. The US sees successive rounds of HIPC, and the rolling-over of debts to poor countries, followed by debt forgiveness, as part of a lend and forgive cycle that makes little sense. "The British proposal . . . does not go as far as we think it is appropriate to go on grants," Mr Taylor says. "The debt relief and moving to grants go hand-in-hand."

Mr Taylor sees the gap with the UK and other G7 countries as bridgeable, but largely if they come round to its position. This seems unlikely: the UK worries that the US proposal will damage the World Bank's finances.

Moreover, ideas floated for a moratorium or outright debt write-off for Indonesia and other countries affected by the tsunami, which will be discussed at a meeting of the Paris Club of rich creditor governments next week, will require additional funds. And unless new money is found, granting more debt relief either to tsunami victims or existing heavily indebted poor countries could simply divert existing aid budgets into a different form of resource transfer rather than increasing the flow.

Like the IFF and more aid, deeper debt relief for very poor countries remains some way off. A French official source says: "For us, there is no real debt problem for the HIPCs. It is not necessary to cancel more debt and it does not give a good signal to developing countries." It made sense to target aid on those countries requiring more help rather than indiscriminately writing off debt, the source added.

If there is resistance to moving further with aid and debt relief, the third and most important leg of the poverty reduction campaign, trade, may be promising more than it can deliver.

Most economists agree that enabling poor countries to integrate into the world economy would be a better and longer-lasting poverty reduction tool than transferring more cash through aid and debt relief. This places December's WTO ministerial meeting in Hong Kong into symbolic salience. At the ministerial in Cancún in 2003, poor countries showed their willingness to collapse a meeting they felt was going badly for them. As Peter Mandelson, the EU's new trade commissioner, says: "The Hong Kong ministerial won't be a success unless the G90 [poor countries] feel they have gains to take away."

Since the talks got back on track with an outline agreement last summer, negotiations are proceeding, though slowly. But the benefits for the poorest countries may fall well short of the rhetoric.

At the core of a successful conclusion of Doha is likely to be an agreement by the rich trading blocs, particularly the EU and US, to cut or reform agricultural subsidies and tariffs, in return for tariff cuts on goods in the big emerging market countries. This will benefit middle-income countries such as Brazil that have efficient agricultural exporters longing for new markets. Michael Bailey, head of trade policy at Oxfam, international development campaign, says: "The biggest gainers in the Doha round were always likely to be the larger emerging market countries like India and Brazil." The poorest countries, which tend to be net importers of food, may lose from agricultural liberalisation if the reduction of subsidies means that world food prices rise.

Indeed, while the developing world largely continues to maintain political solidarity within the WTO, there is a risk that for many of the poorest nations the Doha round will be at best an irrelevance and at worst a disadvantage. True, some farmers in very poor countries, such as the cotton-growers of west Africa who are undercut by subsidised US cotton, could benefit from the cotton deal promised within the Doha agreement. But most of the poorest nations already enjoy special access to northern markets by dint of their poverty. There are many special preference programmes offered outside the WTO process, from the EU's "Everything But Arms" initiative for the least-developed countries, which overlaps with a separate EU agreement with African, Caribbean and Pacific nations, to the US's African Growth and Opportunity Act (AGOA) for sub-Saharan Africa.

The value of these special preferences is threatened by a reduction in overall global tariffs between richer countries. Mr Bailey from Oxfam says: "Poorer countries, and especially African countries, already have quite good access at least to European and US markets through Everything But Arms and AGOA. Their focus is largely going to be on ensuring those preferences are not eroded."

One solution to help developing countries would be to make preference programmes simpler and more generous. Their impact is limited: the least-developed countries, for example, account for just 1 per cent of the EU's imports. This is partly because such countries, with poor transport and a weak business environment, fail to take advantage of the opportunities offered. But it also reflects the notorious complexity of the access schemes, with exports hampered by "rules of origin" designed to prevent, say, China funnelling textile exports through African countries to enter EU markets, and by hygiene standards for food.

Some experts such as William Cline at the Center for Global Development in Washington argue that the US and EU should unilaterally offer free market access to all least-developed, heavily indebted and sub-Saharan African countries. In the absence of such a generous offer, the world's poorest nations may well conclude that the Doha Development Agenda is failing to live up to its label.

This could still be the year of increased help for the world's poorest countries. But while the tsunami has increased the visibility of development problems, it also puts more pressure on scarce resources. The relief of Asia may come at Africa's expense.

Competitive over compassion

The politics of aid can be a cynical business, as this week’s scramble to take leadership of the tsunami relief effort shows. Whatever the outcome of this year’s agenda for international development, it is a safe bet that rich countries will rush to take the credit for any breakthrough.

The standard was set by Bill Clinton, then US president, who elicited gasps of admiration at the 1999 IMF meetings with a promise to give 100 per cent bilateral debt relief to heavily-indebted poor countries. The promise was largely symbolic, since the US had already agreed to at least 90 per cent relief. Since then governments, particularly those with vocal domestic non-governmental organisations to placate, have been involved in a game of competitive compassion.

The UK Treasury, which debt campaigners say was privately furious at Mr Clinton’s show-stealing act, made its own 100 per cent relief promise weeks later and has since announced and reannounced an array of mini-initiatives on debt relief. Most amounted to little more than a restatement of existing programmes and principles.

Others are entering the game and increasing its complexity. The French, for example - no slouches at portraying themselves as les amis du tiers monde - have recently recruited a clutch of developing world stars such as Luiz Inácio Lula da Silva, the Brazilian president, to support their pet project of raising money for aid through new international taxes, perhaps on financial transactions, arms trading or carbon emissions.

France supports the principle of the UK’s proposed international finance facility, which would issue bonds securitised on future government aid budgets, in return for the UK agreeing to consider these taxes. “We think these ideas and the IFF are complementary,” a French official source says. “Where will the money come from to repay these [IFF] bonds? The taxes could help.” But some sceptics think this is a cynical bargain that will eventually break down when each government calls the other’s bluff. Gordon Brown, for example, the guardian of a world-class financial centre in London and facing a powerful domestic lobby of defence manufacturers, would be politically courageous in the extreme if he accepted a tax on financial transactions or arms.

Meanwhile the Nordic nations, the world’s most generous aid donors as a share of national income, struck their own bargain, saying they would only support the principle of the IFF if Mr Brown set a date for the UK to reach the United Nations’ goal that rich countries should spend 0.7 per cent of national income on aid. In the latest UK spending review, Mr Brown came close enough to promising to meet the target to invoke a statement of qualified support for the IFF from the Nordics. But they made it clear they would not participate themselves.

The US, meanwhile, which never signed up to the 0.7 per cent target and remains one of the world’s least generous aid donors by that measure, tries to shift the basis of the argument. It points at the US’s openness to migrants and the remittances they send home as evidence of its commitment to the developing world.