The FT has reported a deeply worrying plan being proposed by the UK's Department for International Development (DfID). They note that:
The UK's £13.9bn aid budget is set for its biggest overhaul in years, with plans to use development spending to push British exporters and pension funds to invest in poorer parts of Africa and Asia.
Penny Mordaunt, the International Development secretary, said her department would experience a “big shift”. It has faced political pressure to justify its growing budget at a time when other ministries face sizeable cuts.
They add:
Under the new strategy, aid money will be used to help African companies raise debt in local currencies through the City of London, and to facilitate British companies selling and directly investing in less familiar markets. Dfid's aim is to facilitate pension funds' investment in emerging countries, by helping to smooth regulations and to make companies creditworthy.
Deep in the report is the sting in the issue:
One idea under review is a development bank that would lend to countries. Another is to increase the amount of money directed to CDC – the government's private sector development arm – whose private equity investments have previously been criticised for not focusing on poverty reduction.
The subtext is also clear:
The change in strategy follows public outcry over sexual harassment by aid workers at Oxfam, which raised questions about the accountability of big charities that account for a large share of Dfid's spending.
As I have said previously, nothing excuses abuse, but as I said at the time that these reports were published, those pursuing this particular issue had an agenda when doing so. What is now abundantly clear is that this is the case. If anyone has prevented the spreading role of business in the aid agenda it has been the aid agencies. And they have done so for good reason. The role of the development banks in many countries has been dire. The requirement to get aid has been market liberalisation of the sort that leaves nations and their people vulnerable to exploitation by the funders. Time and again the World Bank and IMF have failed for this reason at cost to the world at large. Now the UK looks like it wants to replicate that.
And you only have to have read Private Eye over the years to know of the failings of CDC - the former Commonwealth Development Corporation. Run as a private company although wholly owned by DfID, which operates a completely hands-off approach to it, CDC is characterised by heavy reliance on tax haven linked investment, partnering with 'tax efficient' arrangements that mean that the developing country in which investment takes place does not necessarily get its share of the revenues from the activity it promotes, and a 'for profit' business model that means it panders to the whims of the elites in the country where it invests. It has done a nice line in hotel and supermarket investments over the years, for example.
This may be economic development, but it's not the development that is needed to relieve poverty. This is the old logic of trickle-down writ large. And this is the British private sector looking to use the government as an agent to help it make money in developing countries just as Brexit is happening. Let's not be too unsubtle about this: it's a 'back to the age of colonies' policy where we, as the 'rich partner' look to exploit developing countries for our gain. There will only be one winner. Tax havens will rubbing their hands with glee as the rake-offs head their way.
And Mourdant is doing this because she believes that the NGOs will be silent because of a sex scandal. That makes me very angry at those who abused. But only a bit less at those who are exploiting their abuse to harm development all over again.
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History does indeed suggest we should be very suspicious about the motives of some behind this move, but we should also not dismiss it out of hand. We cannot acheive our Global Goals without a big lift in private investment into developing countries. But so far investors are shunning risk while pushing more and more Global capital into perceived “safe” assets in high income countries.
The scale of the problem needs to be properly understood. Combined Global foreign aid peaked in 2016 at $146 billion, which is not even 5% of the $3-4 T required to achieve our Global Goals by 2030. Even if all countries matched the UK’s 0.7% of GNI pledge, this would still only yield around $500 B.
Tax havens are a huge issue. Gabriel Zucman conservatively estimates they cost developing countries $170B every year in lost tax revenue. In addition they enable a system of corrupt government, which helps to deter private investment in developing countries, adding to their woes.
Interestingly, the biggest flow of funds into the Worlds poorer countries actually arises from remittences sent home by migrant workers, amounting to some $500B every year. But increases to these payments will remain politically unacceptable, at least until citizens of wealthy countries are given a Basic Income ( which will improve their negotiating power in the labour market, and place limits on the competitive downword pressures on pay from migrant workers ).
This leaves only private investment as an option to close the funding gap of around $2-3 trillion per annum. In theroy this should be easy to attract. Developing countries today offer opportunities for the kind of big jumps in productivity that the industrial revolution delivered in Europe and America through the 20th century. Growth rates in developing countries will average 4-5% in the coming decades compared to 1-2% likely in high income economies, so should offer much better returns for pension funds and big private investors.
The issue is how to reduce the risks of investement, both for investors, and for developing countries who borrow the funds. Better governance and reduced corruption is key to build confidence. But we also need detailed and transparent criteria for projects that are going to be assisted or underwritten by public funds. These must ensure that investments do not undermine progress towards any of the Global Goals, through their environmental, economic, or social effects. Policing this system will be critical to ensure that investments benefit the people they are meant to help out of poverty, as well as providing a reasonable rate of return to investors.
I remains to be seen whether NGOs, journalists, and parliamentary committees will collectively be able to hold feet to the fire in the DfID to make sure this happens. But it is important that we seriously consider how it could be made to work, without being captured by selfish commerical interests.
If the World Bank bought sovereign debt of developing countries the funding required could be provided
Robert P Bruce says:
“We cannot achieve our Global Goals without a big lift in private investment into developing countries.”
Yeah Right. Private sector investors are ‘putting money in’. And why do they do that ?
Because they can take more out.
You think any of this has to do with ‘Global goals’. ? It has considerably more to do with exploiting alternative profit streams. (With government subsidy as ever to mitigate risk, and give profit guarantees)
Let’s get real about motivations.
Lets be clear. If I ruled the World I would make every country pay 5% of GNI into a fund to deliver the basic standards needed in the developing World, (which could partly be funded from a Global FTT). But this is simply not going to happen.
Owners of Global capital will only invest in developing countries if they can get a for a sensible return on their investment. Our aims should be to ensure that
1) The return is not excessive, so that the main benefit accrues to developing countries, not to the lender. (A key step here is to make the loan and repayments in local currency so that poor countries do not carry the risk of currency movements).
2) The projects are selected based on what investment countries most need, rather than what makes the most profit for the lender.
As Richard points out, some of this investment could partly be covered by the World Bank buying sovereign debt from poor countries, but even this has practical limits, so may again be best to leverage this to enable bigger private finance where this is viable.
Robert P Bruce says:
” Our aims should be to ensure that
1) The return is not excessive,……
2) The projects are selected based on what investment countries most need, rather than what makes the most profit for the lender.”
And I suggest that is ‘not going to happen’ either.
We have no independent pan-global governance organisations that can apply regulation.
The US sees to that and the UK is complicit.
Most activity by such an entity will be dwarfed by Chinese lending….
Richard
This is a very good post & I’d ask anyone who is as angry about it as I am to lobby their MP. As you say, regardless of the rights & wrongs, there was a pretty clear agenda to destroy or, at best, neuter the aid agencies.
Penny Mordaunt is not, to put it mildly, a nice human being.