Inequality: Can the foreign aid industry help roll it back?

When news arrives from faraway places of disaster, hunger and economic setbacks, our political figures and media usually start talking about how to mount a rescue with foreign aid. It’s the cowboy in the white hat. After all, some of the world’s most powerful institutions, notably the IMF and World Bank, lead the aid industry. It has a global budget of over 70 billion Euros a year and employs a global workforce of more than half a million. Its people rub elbows with diplomats, military commanders and influential pundits. It has strong lobbies in capital cities and still has a certain residual appeal for the public, at least in much of Europe. These things help account the forward motion and longevity of the foreign aid system, which reaches its 60th birthday next year.

Now the proposition that the foreign aid industry can help remedy inequality is seldom heard, but it has a certain plausibility. For a lot of people, foreign aid sounds like simply a bigger version of our public welfare systems, which genuinely do redress social and economic inequalities. But that’s mythology. The realities of foreign aid are different. The proposition that today’s foreign aid industry could lead efforts to roll back inequality is not realistic. Its current purposes and strategies afford it little leverage against the things that reproduce inequality –- some of which can be traced in part to the aid system itself.

Let’s first consider inequality and what’s driving it

A virtual visit to an African city, say Nairobi, by way of websites such as Google Earth, is an easy way to see how inequality manifests itself today. Those aerial and on-the-ground snapshots of massive slums and gated suburbs can tell us something. On the Internet you can’t smell the open sewers or hear the barks of the ferocious dogs behind steel gates, but you get the idea. If those websites had aerial snapshots from the past, they would demonstrate inequality’s forward march in the astonishing growth of slums, and in the stagnation and decline of many rural zones.

Source: Volker Bornschier 2002, ‘Changing Income Inequality in the Second Half of the 20th Century: Preliminary Findings and Propositions for Explanations’ Journal of world-systems research, 8:1, page 125

Here is a graphic illustration, a chart that aggregates income inequality data from 103 countries over about two decades beginning in 19791. It confirms findings of many, including the United Nations Development Programme, whose Human Development Report 2005 (1) concluded: “there has been a clear trend over the past two decades towards rising inequality within countries.” A few places, such as Armenia and Mali have managed to crawl a bit out of deep canyons of inequality; but most low-income countries have not.

Forces driving inequality are many, and hit societies in different combinations and intensities. Inequality is usually thought to be driven by such things as:
worsening distribution of land ownership or access;
worsening access to suitable training and education
“urban bias” in development.

These factors are indeed at work in many settings. But they are often overshadowed by newer forces at work at global levels. Here are some key drivers:

1.Global economic integration on terms set by advantaged actors. Those terms have favoured high mobility for capital and some skilled workers; these are the first to capture benefits. Smaller producers and unskilled labour are largely denied them. As productivity rises, gains have gone disproportionately to capital and far less (if at all) to labour, whose mobility and liberties to organise are restricted.

2.Economic openness and deregulation at a forced march. Premature exposure to more powerful competitors will usually wipe out or block the means whereby poorer economies can gain robust capacities in know-how, internal markets and infrastructure -– capacities that all major economies built up at earlier stages of their growth precisely because they enjoyed protection. For poor people, greater openness can lower costs of some goods, but it can also expose the poor to volatility and shocks. Those can intensify competitive scrambles for existence. And those open the door to conflict. Conflict in its turn is often about dispossession – the transfer of assets from the weaker to the stronger.

3.Technology policies oriented toward rich country settings, increasingly driven by private actors. Incautious introduction of these technologies (say, high external input agriculture) will often reward the better-educated and shut out the unskilled.

Some financial consequences of these kinds of forces are enormous. Here is a graphic illustration of where the money is going. The graph presents a net summation of all officially recorded North-to-South financial flows including foreign aid, net of South-to-North flows. It shows that, in net terms, it is not the rich who aid the poor, but the poor who aid the rich. Just as massive are illicit flows based on drug and corruption money, but even larger are flows based on false invoicing to evade taxes. For every foreign aid dollar assigned to poor countries, at least seven dollars in illicit funds flow out of poor countries. Today’s system rewards local elites for not investing at home.

The foreign aid industry

In the past, has foreign aid has made a positive difference for equity? There are a few positive cases. Here in Italy, as in my adopted country the Netherlands, some still remember the impact of Marshall Plan aid after the Second World War. That was extraordinary because the aid was massive and was provided on recipient-friendly terms. Influenced by Keynesian economics, it favoured expanded employment, public sectors and political processes that improved the position of the poor. In South Korea and Taiwan in the 1950s and 1960s, political interventions backed by aid radically improved equality in those countries (mainly land reform) thereby putting them on paths to growth. There are a few other cases like that, but not many.

That was yesterday. What about today and the day after tomorrow? Could the foreign aid system lead an effort roll back inequality? Nearly forty years of working in or close to the foreign aid industry, and studying it in my spare time, lead me to conclude that it is not a very realistic proposition, despite the positive episodes noted and a number of encouraging present-day initiatives.

Aid Industry Purposes

It is important to recall that throughout most of its history, fighting poverty was never among foreign aid’s main purposes. Rather, its purposes have been mainly mercantile and political. During its first 40 years, its main job was to contain communism. Indeed in the 1990s it was tasked with helping demolish the Soviet economic and social system. Foreign aid continues to be a political tool, an instrument of statecraft. In those respects, it has enjoyed considerable success.

Of course foreign aid has pursued many sub-purposes on the front of development. Indeed a lot of the ways we define “development” can be traced to foreign aid’s idea factories. These produced a cavalcade of policy formulas. The 1950s, aid policy was about things like the “big push” and “planning”; in the 1960s “human capital” and “balanced growth”; in the 1970s “integrated rural development” and “appropriate technology”.

Then came the 1980s and the counter-revolution against Keynesianism. The aid system was duly put in the service of that counter-revolution. Its old drivers were replaced with the turbo-charged motor of market fundamentalism. Its policy formulas pivoted on “outward orientation”, privatization and de-regulation – especially de-regulation of capital, giving us a huge shadow financial system.

In the 1990s there came more of the same, with some add-ons like “New Public Management” and micro-credit. In the current decade has come a lot of talk about “recipient ownership”, “poverty reduction” and “good governance”.

In short, the captains of foreign aid have launched many policies using many paradigms. As each successive crew arrives on the scene with new, improved, sure-fire ‘solutions’, they take a look at the previous group’s work and say “What a mess! This cannot continue!” Whereupon they sweep the previous paradigm into the garbage can and get down to promoting the Next Big Thing.

Now if this parade of aid formulas had been about disciplined experimentation, learning, and avoidance of error and risk (and by the way, it was not aid workers whose livelihoods were at risk) it might be justified. But there is still not much evidence that the aid system is overcoming its learning disabilities. Rather, the pattern reflects much more institutional survival: the industry been able continually to re-invent itself and its missions, to assemble coalitions of interests and to escape into the future.

Such patterns don’t inspire a lot of confidence. Doubts are analogous to those of the economist Paul Krugman, who recently observed in the New York Times, regarding the response to the financial crisis by the American Minister of Finance: “He’s making it up as he goes along, just like the rest of us”.

To summarize: Foreign aid has been associated with some stunning successes, particularly in its earliest years. These contributed to greater social equity. But the industry has been tasked with a large and changing mix of purposes, sometimes to the point of incoherence. The captains of aid have commonly set off with solutions without probing the problems themselves. Policy-making about it often stands rational problem-solving on its head.

Outcomes

Foreign aid presents us with a paradox. As an industry it is flourishing as never before. Yet in the very places where it dominates, namely sub-Saharan Africa, well more than half the population faces material penury, while a lucky few advance. That is also the case in most countries of the former Soviet Union, although income distributions may have improved a little from the depths they reached in the 1990s (2). Here are some voices of the poor, recorded by researchers for the World Bank in the Kyrgyz Republic, whose economy has been steered largely by the aid system since the early 1990s:

Well-being is what we had in the past; we had enough money then, prices were low, health care was free, and doctors were very polite. Education for children was free too. People respected each other. Everybody had a job, wages were paid on time. Things are getting worse everyday. People are afraid of starvation, lack of heating, ethnic unrest. People bite one another like dogs(3).

No one has yet shown a one-to-one correlation between aid intensity and inequality. But a host of case studies show that foreign aid in the past 25 years has, at minimum, failed to put a brake on inequality.

Has the aid industry addressed any of those drivers of inequality mentioned earlier –- especially the newer forces of economic subordination, premature openness, technological change ? At the margins, aid has subsidized a few counter-currents, some of them promoted by civil society or professional bodies: think of low-external input agriculture, of social protection systems, and of rights of labour to organize. But the balance of evidence points in the other direction. Foreign aid’s central authorities have not curbed, but rather helped create, impose and enforce policies driving those trends.

This evidence can be found in research results from think-tanks, academicians and policy activist groups. And it has found confirmation in the writings of economists such as William Easterly and the Nobel laureate Joseph Stiglitz, both with first-hand knowledge of how the top of the aid system works.

What then could be done?

An important line of approach is to tackle the destructive as well as promote the constructive. At the time of Tony Blair’s Commission on Africa report, Britain’s Royal African Society issued A message To World Leaders: What About The Damage We Do To Africa? Its main headline read: “It’s not just about thinking up good things we should do to Africa - it’s about the bad things we should stop doing”. Following that advice would mean bringing to the surface and squarely addressing a host of practices, many involving flows of money, goods and people, that disadvantage and weaken already fragile communities, states and entire regions.

Such work would imply recasting foreign relations in such a way that foreign aid would disappear as a distinct branch of our public services, being integrated with all other branches others affecting poor countries. Some European governments, such as the Netherlands and Portugal, have committed themselves to such a whole-of-government logic and to putting an end to policy incoherence toward the South.

Today’s financial crisis offers a window of opportunity for what some call “financial disarmament”, the creation of genuinely public, transparent means by which democracies may get a grip on shadow economic circuits and govern them rather than to continue allowing them to put economic life, in the South and in the North, at further risk.
Finally – and this seminar represents a step in that direction – is a suggestion simply to raise the status of social equity as a talking point and ultimately as developmental goal, alongside growth, good governance and so forth. That is not easy. Especially since it would mean bringing politics to the surface, once again, as a fact of life in development policies and thus in foreign aid.

In 1931, at a time not unlike our own, Keynes wrote: “The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty.” Assessing today’s foreign aid against the light of that maxim would be an enlightening and useful place to begin.

Notes

(1) UNDP Human Development Report 2005. See also analyses available from the Working Group on Extreme Inequality. Website: http://extremeinequality.org/

(2) PovcalNet

(3) J. Rysakova and others, 2002, ‘Kyrgyz Republic: Crumbling Support, Deepening Poverty’ in D. Narayan and P. Petesch (eds) Voices of the Poor. From Many Lands, Washington: World Bank and Oxford University Press, p. 285.

Text presented 18 October 2008, in panel ‘Equity and Prosperity: Escaping from the vicious circle of inequality’ Centro Pio Manzu International Conference, Rimini, Italy. Published in: : Penia and Poros. The Conscience of Prosperity: For a New Moral Economy. Volume 2, Pio Manzù International Research Centre, Rimini, 2008.