Surprise! Aid flows are at a new all time high

So here’s a big surprise. Until last year, global aid flows were declining in the wake of the financial crisis – a trend that was widely expected to continue. But here’s what emerged when the OECD’s 2013 aid statistics came out last month:

Development aid rose by 6.1% in real terms in 2013 to reach the highest level ever recorded, despite continued pressure on budgets in OECD countries since the global economic crisis. Donors provided a total of USD 134.8 billion in net official development assistance (ODA), marking a rebound after two years of falling volumes, as a number of governments stepped up their spending on foreign aid.

An annual survey of donor spending plans by the OECD Development Assistance Committee (DAC) indicated that aid levels could increase again in 2014 and stabilise thereafter.

Admittedly, there are two important qualifiers here. One is that while aid may be at an all-time high in absolute terms, that’s not true for the arguably more important measure of aid as a proportion of donor countries’ gross national income: in 2013 they gave 0.30% of GNI, as compared to 0.32% in 2010 (and way lower, of course, than the 0.7% target).

The other point, flagged up by OECD Secretary-General Angel Gurria in his comments on this year’s statistics, is that the trend of falling aid to the neediest countries, especially in Sub-Saharan Africa (which saw a 4% real terms decrease against 2012), is still happening and appears likely to continue in the future. The new aid stats also show that donor countries only gave 0.09% of their GNI to least developed countries in 2012 – as compared to 0.10% the year before.

Donor countries have got to sort this out. While middle income countries now have access to a huge range of sources of finance for development – foreign direct investment, remittances, commercial debt, portfolio equity, and a vast increase in domestic resources from tax revenue and savings – that doesn’t hold true for low income countries, who are still highly reliant on aid. With the post-2015 agenda now about to move into the home straight, this is the year when donors need to set out a clear timetable for making good on their long-standing promise to give at least 0.15% of their GNI to least developed countries – and ideally go beyond it to 0.20%. And the OECD DAC’s High Level Meeting this December is the right moment to do it.

New Book on Poverty and Development in Fragile States

poverty development fragile statesI am pleased to announce the publication of my new book on fragile states — Betrayed: Politics, Power and Prosperity (Palgrave Macmillan). The book focuses on the biggest challenges in the development field today: how to create inclusive societies, equitable governments, and dynamic economies that will give the poor the opportunity to accumulate the means and skills to control their own destinies. Up to now, change has proved illusive in most parts of the world, leaving three billion people — roughly one-half the population in the developing world — disadvantaged. The concrete suggestions described in my book are targeted at political, economic, and civil society leaders as well as scholars, practitioners, policymakers, and students.

The book combines the latest research on poverty and state building with my personal observations drawn from many years working in the developing world, and covers a far wider range of issues than comparable titles. These include social exclusion processes, ideology, elite incentives, strategic urbanization, connectivity, livelihood factors, power dynamics, transaction costs, social networks, and business linkages.

Former President of Ghana Jerry Rawlings wrote the foreword, calling the book “a compelling and eloquent argument for empowering all citizens, especially the poor.”

I hope you will share this information with your colleagues and friends. You can order a copy from Amazon. Continue reading

G20 gives U.S. until end of year on IMF reform

When finance ministers and central bankers from the G20 major economies met last week in Washington, they rapped the United States on the knuckles for its failure to ratify reforms of the International Monetary Fund. The reforms, which leaders from around the globe agreed in 2010 but which require U.S. Congressional ratification to be implemented, would increase the voice of emerging market economies on the IMF’s board and strengthen its general account (what the IMF calls “quotas”). In the G20 final communique, the global financial chiefs expressed how “deeply disappointed” they were, and fired off a stern warning, giving the U.S. until the end of the year before they request the IMF to proceed on reform (without the United States, to insert the subtext). Given that the U.S. was instrumental in founding the IMF and has always been its largest shareholder and exercised a veto over major institutional changes, the warning is serious stuff. Whether or not the IMF can actually do anything without the buy-in of its largest shareholder remains in question, but certainly the rest of the world is growing impatient with the extended delay.

In a recent analysis, I point out that the delay is undue. The IMF has traditionally enjoyed support from Democrats and Republicans, and the current proposal for reforms builds upon a process that began under the George W. Bush administration. The IMF helps to maintain global financial stability and prevent and mitigate economic crises, something both parties can get behind. The reforms strengthen the IMF’s core capabilities and improve its governance, equipping the IMF to better prevent and manage economic crises of the twenty-first century and creating a platform for constructive relations with emerging market economies such as India, Brazil and China.

And despite some claims to the contrary, the reforms do not increase U.S. financial commitments, because the new U.S. contribution to the IMF general fund would be offset by an equal reduction in its commitment to another IMF fund (the New Arrangements to Borrow). The Congressional Budget Office, Congress’ official budget scorekeeper, estimates the technical cost of implementing the quota reforms at $239 million – but also estimates that shifting the funds away from the NAB would save $693 million over the same time frame. So the reforms don’t increase US financial commitments, and the US might actually recoup money on account maintenance costs. A pretty good deal.

The case for the reforms seems obvious, so why the delay? The toxic political environment in Washington is the primary culprit. The Obama administration has not made the case for reforms as clear and compelling as it could and should, and delayed proposing them, while Congress is loath to give the Administration any kind of victory. And with the rise of tea party influence in the Republican party and an increasingly isolationist American public, Congressional blockers may actually reap political rewards. In return for ratifying IMF reforms, some Republicans are demanding a delay in the Obama administration’s proposed rules to limit political activities of non-profits. (If that seems like a a non sequitur, that’s because it is. Such is political deal-making in today’s Washington.)

All of this is bad news for the U.S., and bad news for the world. The fact is that for now and the foreseeable future, the U.S. is still the world’s preeminent power. And that power must be exercised with commensurate responsibility. As the G20 warning made clear, the rest of the world will not wait indefinitely. They are already eying a plan B if the U.S. does not ratify the IMF reforms. Whether they act without the U.S. remains to be seen, but everyone loses if the U.S. does not step up to lead the modernization of an international system that emphasizes cooperation over competition. The IMF is an early but important step in a revitalized, rules-based global order that can manage the challenges of the twenty-first century.

 

Sustainable development goals, targets and…clusters?

The UN’s Open Working Group on Sustainable Development Goals (OWG) will meet next week to discuss potential goals and targets to replace the Millennium Development Goals (MDGs), which expire in 2015. The OWG and its co-Chairs deserve praise for making significant progress in an incredibly complex process involving an overwhelming number of issues and actors.

The OWG co-Chairs have admirably attempted to reduce a long list of development priorities into 8 “clusters” for discussion (issued last week), following reactions to the 19 “focus areas” they released last month. Many asserted that 19 is too many, compared to the 8 goals of the MDGs. Though the co-Chairs are careful to caution that the focus areas are not goals – and that the clusters are simply for discussion – these caveats are generally ignored. The co-Chairs themselves have indicated they would like to have a better sense of the sustainable development goals and targets by the end of next week. Under considerable pressure to provide structure, producing the 8 clusters is a natural attempt to meet these demands. But any clustering of issues at this point will inevitably raise questions.

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IMF: To solve inequality, tax food, books and funerals

The IMF has attracted plenty of favourable attention from unfamiliar places with two ‘staff papers’ (we’re enjoined to consider them as the personal opinions of the authors, not the IMF itself, an injunction that we all merrily ignore). The first argues that inequality reduces growth, while redistribution is an effective tool for reducing it; the second explains how governments should use taxes and public expenditure to achieve this goal.

Inequality campaigners are over-the-moon to have the IMF on their side. Oxfam International hails the IMF for “mashing myths and debunking dogma in economic policy,” while the Oxfam inequality guru, Nick Galasso, is fulsome in his praise of an “ideological sea change” at the Fund (“if If it sounds like I have a crush on the IMF’s Managing Director, Christian Lagarde…”).

But what tools does the IMF think we should use to shrink inequality? Oxfam’s tweet leads to a Reuters article covering a speech by IMF deputy managing director, David Lipton. The speech is definitely worth reading in full – it’s a digestible summary of emerging IMF thinking, while the table on page 43 of the IMF report provides an overview of its suite of policy prescriptions.

Key recommendations for developed countries include substituting means-tested benefits for universal ones; raising the retirement age and making the rich work longer than the poor; charging more for university education in order to spend more on schools; and making income tax more progressive, while eliminating tax breaks.

Many of these are good policies, but let’s not pretend they’re all politically palatable. Take the last one as an example. In the United States, President Obama and the Republicans are locked into fruitless combat on eliminating a few of the most egregious pro-rich tax breaks. A recent revenue-neutral tax reform plan from a Republican has provoked a blizzard of protest from Wall Street and has been roundly condemned by his colleagues.

But the IMF is not interested in these small-bore controversies, it has the big one in its sights: the 37 million Americans who benefit to the tune of $70bn or so from tax relief on their mortgages. And that’s a political live wire. I’d speculate that any presidential candidate – Republican or Democrat – who ran for 2016 on a “tax the homeowners” platform would have as much chance of winning the nomination as I do.

This is not just an American problem. Look at the IMF’s core policy prescription for the United Kingdom – one good enough that it makes it into Lipton’s speech as well as into the report. The UK should move to a flat rate of VAT on all goods and services, Lipton argues, and use the money to increase benefits.

That would mean imposing a 20% tax on food (raising £16bn or so), and on rent and house construction (another £13bn), while increasing tax on household electricity and gas from 5% to 20% (£5bn). Tax would also go up on books, children’s clothing, tampons, condoms, stamps, charities like Oxfam, and… funerals. Yep – the IMF is proposing a burial tax.

All in all, this would give George Osborne £60bn to play with (table 4), more if he axes universal benefits in favour of greater means-testing (goodbye child benefit, winter fuel allowance etc). This would be enough to double benefits for working-age low earners and the unemployed (table 8.2).

Good news for inequality, maybe, but an act of political insanity. In the UK, we once had a manifesto that was derided as ‘the longest suicide note in history’. Flat rate VAT (for all its merits) would be the shortest. VAT on food? On books? On coffins? Just look at the disaster that befell the British government when it tried to tax Cornish pasties to see how badly this would go wrong.

There are equally obvious political bear traps when you look at the problem from the point of view of low and middle income countries. And the task ahead of them is daunting, given that inequality levels are higher in Asia and the Middle East than in the West, and much higher again in Africa and Latin America. A European minister told me that he was hoping for a post-2015 goal that would inspire the whole world to be as equal as his country by 2030. I shudder to think of the collective apoplexy this prospect would cause in the G77.

IMF Disposable Income Inequality

No-one is pretending that IMF-branded policies represent the final word on inequality. Oxfam issued a media brief this week, which proposes the UK tackles inequality by cracking down on tax dodgers, implementing a Tobin tax and a tax on land, and increasing the minimum wage.

But what the Fund’s excellent report does is underline the importance of going from high-level aspirations to detailed scrutiny of the policies we want governments to implement to bring inequality down. Only then can we understand how today’s high level debate on inequality will play out in the bruising world of retail politics. It would be good to see Oxfam’s proposals costed and their likely impact on inequality audited, so we can see what they’ll deliver and who’d foot the bill. Without that the politics remain hard to read.

A greater focus on policies and implementation, and the politics of both, is especially important for those arguing that we should stop being “belligerent” about the “unrealistic goal” of ending sub-$1.25 a day poverty and instead build a post-2015 agenda on the the more sustainable political foundations that inequality offers.

Sure, we have an ‘emerging consensus’ that something needs to be done to bring inequality down. But will that consensus hold when publics around the world, and assorted lobbyists, get a better sense of what that something looks like?

Development Dilemmas

In our development dilemmas piece we consider what progressives should do now the split between foreign and development policy no longer exists:

Should aid be used as an instrument of foreign policy? If so, how? If not, why not? If policy coherence’ really means ‘foreign policy first’, how should DFID prioritise if the countries which are the breeding grounds for terror are not the same ones with the greatest incidence of poverty? Should a combustible Nigeria, at 153 in the UN Human Development Index, command more attention than stable Sierra Leone, languishing at 177? Should aid money be spent, as it is by the United States, more in the powder keg of the Middle East than the desperation zones of sub-Saharan Africa?

Can Empowered Cities Save Fragile States? My article on Lagos in the NYT

Lagos,_Nigeria_57991Nigeria is arguably the worst run of the world’s seven most populated countries. Despite earning hundreds of billions of dollars in oil revenue over the past decade, it is expected by 2015, by some calculations, to have the second-most destitute people in the world after India. But its largest city, Lagos, which until recently was known as one of the world’s most difficult cities to govern, seems to have turned a corner. As I argue in a recent article in the New York Times, one of the chief reasons for this better performance is the nature of incentives that elites and politicians face: Continue reading