The G8's African challenge

Jul 7th 2005
From The Economist Global Agenda

Help for Africa will be high on the agenda of the G8 summit in Gleneagles this week. But it is not clear that debt relief, or even substantially increased aid flows, will be enough to produce success where so many previous development efforts have failed

“THE poor you will always have with you,” said Jesus. Few observers of global development policy would disagree. For decades, the international aid community has tried and tried again to find a way to lift the world’s poor out of destitution. And yet, innumerable aid programmes and billions of dollars later, the World Bank estimates that 2.8 billion people—more than half the population of the developing world—still live on less than $2 a day. Almost half that number live on less than $1.

Tony Blair would like to change that. Late last year, the British prime minister announced that he would make poverty reduction in Africa and tackling climate change the twin priorities of Britain’s year-long presidency of the Group of Eight (seven rich countries plus Russia). In the run-up to the G8 summit being held this week in Gleneagles, Scotland, he assiduously pushed his fellow leaders to embrace a combination of debt relief and increased aid flows to Africa, which he hoped to have sewn up into a neat package at the end of the conference—an ambition that remained intact on Thursday July 7th despite Mr Blair's decision to return temporarily to London after a series of bomb attacks in the capital. He also hopes to be able to announce an agreement that goes some way to recognising the science behind global warming, though there is little chance of seeing more than the slightest shift in policy from America, which has refused to ratify the Kyoto treaty on climate change.

On poverty reduction, Mr Blair has already had some success. Last month, at a meeting of G8 finance ministers in London, a deal was hammered out to forgive the debt of 18 nations, many of them in Africa. Other nations may qualify if they meet good-governance targets. For the celebrities and non-governmental organisations that have long harangued the rich world to forgive the unpayable debts of poor countries, this is a big victory.

But by itself, debt relief will not solve the problems of the third world. Though the G8 deal will forgive over $40 billion of debt, this translates into only about $1 billion a year for sub-Saharan Africa, because the loans are heavily subsidised. This is but a tiny fraction of aid flows. And countries left out of the deal—because, like Kenya, they are not “heavily indebted”, or like Nigeria, are deemed too well-off to qualify—still have remarkably low standards of living. Oil-rich Nigeria’s per-capita income is less than $500 a year.

Recognising this, Mr Blair’s Commission for Africa has called for an increase in aid flows to the troubled continent of $25 billion a year by 2010. America, the European Union, Canada and Japan have all promised to double their aid budgets for Africa within that timeframe. Germany, which had been grousing that this was a bad idea, shifted its position on Monday July 4th, making a similar pledge—though it also pointed out that its budgetary problems would make finding the money difficult. A raft of demonstrations and concerts, organised by Bob Geldof, is meant to put pressure on world leaders to reach a generous deal this week. On Tuesday the African Union, meeting in Libya, weighed in too. The communiqué issued by the 53-nation group called for the debts of all African countries to be written off, and for a timetable to be established for the abolition of “subsidies that stand as an obstacle to trade”.

But does it do any good?

Nevertheless, some continue to think that the focus on Africa is misguided. Last week David Dodge, the governor of the Bank of Canada, told the Financial Times that the G8 should be addressing the gigantic economic imbalances that are threatening the current burst of global prosperity, rather than concentrating on aid to Africa. He has a point. In recent years, the world has grown far too dependent on American consumer demand to support export-linked growth in other countries—and the American consumer has grown far too dependent on cheap money to fuel spending, much of it lent by Asian central banks trying to keep their currencies artificially cheap in order to stimulate exports. This is clearly unsustainable. If the central banks, or consumers, suddenly decide to retrench, many worry the result could be a “hard landing” for the American economy—which would fall even harder on poor countries’ export industries than on Americans.

This is not quite as hard-hearted as it sounds. Many people question whether aid does much to help its intended recipients; some even argue that it has a negative effect on growth and poverty reduction. In a new paper from the International Monetary Fund, Raghuram Rajan and Arvind Subramanian try to assess these claims. After controlling for a number of factors, such as the type and duration of assistance, they find that aid does little to either promote or hinder economic growth. This provides little incentive to pour massive new sums into poor countries.

This emphasis on economic growth is important, for the evidence suggests that growth is by far the most effective way of alleviating poverty in the developing world. With growth comes rising incomes, with which the poor can buy adequate food, medical care and clothing. It also brings tax revenues that can be spent on public goods like clean water and decent schools.

A new report by the World Bank confirms this view. In a study of growth and poverty in 14 developing countries, the authors found that poverty dropped in the 11 countries that experienced substantial growth, and rose in the three that saw little or no growth. Moreover, the countries that had higher rates of growth tended to have sharper drops in the poverty rate.

If growth works, and aid does little to help, what are rich countries to do about their needy brethren abroad? Many—including The Economist and Messrs Rajan and Subramanian—think the answer is trade. Gordon Brown, Britain’s finance minister, seems to think they have a point.
Now that progress has been made on securing promises from rich countries on aid and debt relief, Mr Brown has gone on the offensive against rich-world agricultural subsidies, which put farmers in poor countries at a disadvantage. Since poverty in the developing world tends to be highest in rural areas, giving those countries’ farmers access to the lucrative agricultural markets of richer nations would ease the suffering of the world’s poor.

Better government policies in the third world would also make a difference. Critics of aid have long pointed out that corrupt or incompetent governments will waste any hand-outs they are given—indeed, by providing funds that such governments can use to maintain their hold on power, aid donors can even make things worse.

Givers of aid have (so far fruitlessly) sought ways to keep recipient governments on the straight and narrow. But even well-meaning governments need a helping hand in figuring out ways to maximise the poverty-fighting potential of economic growth. The World Bank report suggests that while growth alone is good, policies like trade liberalisation, as well as things like improving infrastructure and access to capital, can greatly boost the speed at which the lives of the poor improve.

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