DEVELOPMENT: Doubts Over Financing Country Projects

By Thalif Deen Reprint | | Print |

Thalif Deen

UNITED NATIONS, Jun 18 1998 (IPS) - Joseph Stiglitz, a top official at the World Bank, admits he isn’t sure whether development aid would work more effectively if donors were given the option of selecting the country and the projects they intend to finance.

“There is strong evidence that aid increases growth only in the context of sound policies,” says Stiglitz, the Bank’s senior vice president and chief economist. One implication is that donors can achieve greater returns for their resources by shifting money from countries with “unsound policies” to countries with “sound policies.”

“This is donor selectivity of countries,” Stiglitz told a U.N. seminar this week in discussing “How can Aid best facilitate Development?” He said there also was a second implication from recent World Bank findings: that donors need to exercise greater selectivity of projects.

“Although the idea of more carefully selecting projects is appealing – indeed, much of the operational work at the World Bank is concerned with just that – I would like to argue that it has only a limited ability to break the link between unsound policies and aid effectiveness,” he said.

If donors, for example, took over the funding of a rural health project in a recipient country, this would free up resources for that government to use elsewhere, either as additional spending or tax reduction. But donors, especially when they focused exclusively on projects, had little control over this additional spending.

Stiglitz also pointed out that project-oriented foreign assistance often could promote projects that the recipient otherwise would not have undertaken.

It was unlikely, he said, that river blindness would have been eradicated in West Africa if the World Bank had not targeted it directly. The World Bank economist admitted that aid can play a vital role in facilitating development. “If aid is to fulfill its potential, we have to rethink what we do and how we do it.”

He argued that aid had to be accompanied by supporting policies, not just in recipient countries but also in donor countries. In developed countries, for example, the potential benefits of aid often were misunderstood and undermined by practices in other areas, including trade policies.

Stiglitz pointed out that while aid can work in the context of sound policies, it can also be ineffective and cause poverty instead of eradicating it. “Let me be frank: some aid has been counterproductive.”

For instance, in some cases food aid by Western donors had been motivated by a desire to get rid of the mounting agricultural surpluses that resulted from “the misguided and distortionary agricultural policies in many developed countries.”

The consequence, in many cases, had been a decrease in agricultural prices in the developing world which contributed to poverty by robbing farmers of their livelihood, he contended.

Globally, net official development assistance (ODA) from major donors has fallen to just 0.25 percent of gross domestic product in 1996 – the lowest level since foreign aid was institutionalised with the Marshall Plan about 50 years ago.

In 1992 ODA stood at 61 billion dollars, then declined to 55 billion dollars in 1993 and rose to 58 billion dollars in 1994. In 1995, it moved slightly up, to 59 billion dollars, then dropped to 55 billion dollars in 1996, according to the latest available figures. Overall, ODA in real terms, after discounting for inflation, has fallen 16 percent since 1992.

In a report released last year, U.N. Secretary-General Kofi Annan said the declining trend in ODA budgets also reflects a certain crisis of confidence in aid as an instrument for promoting development. “Unless this crisis is addressed squarely, it may be difficult to reverse the negative trend,” he said.

Annan said the rationale for ODA needed to be reaffirmed and placed on a stronger footing in the years to come. “This calls for a clear understanding and a sense of partnership and shared purpose between donors and recipients.”

In 1970, the U.N. General Assembly set a target of 0.7 percent of gross national product (GNP) as the quantum of aid that each of the rich countries was expected to provide developing nations. But so far, only four countries – Denmark, the Netherlands, Norway and Sweden – have met or exceeded this target.

Western donors believe that the decline in ODA should be offset by increases in private sector funding and investments.

Stiglitz said that over the past five years, flows of private capital had overtaken and dwarfed official aid flows. In 1996, private capital flows exceeded about 240 billion dollars, and were now nearly six times greater than they were at the beginning of the decade.

But he complained that nearly three fourths of all private capital flows have gone only to about 10 mostly middle income countries. “Many low income countries continue to rely almost exclusively on official flows,” he said.

“At times, aid has supported projects which have not been sensitive to environmental effects. Also aid may have, in some cases, created a culture of dependency and discouraged countries from helping themselves,” he noted.

He said that research had shown if aid was dissipated in unproductive investments or siphoned off by government officials and consumed, it could not be expected to promote growth.

“What really matters is the interaction between aid and policy. In particular, we would expect that aid would benefit countries with sound economic policies, while failing to provide any boost to countries with unsound policies,” he added.

Stiglitz said that World Bank research supported this intuition because it has found that better policies (measured in terms of inflation, budget deficits and tariff levels) are associated with higher growth rates. Other researchers had reached the same conclusion, he said.