28 May 1992 - 30 May 1992

Development Aid to the Developing World: Philosophy and Practice. Conditionality. The Role of Private Investment

Chair: Sir Peter Leslie

On the eve of the UN Conference on the Environment and Development in Rio de Janeiro, it was appropriate to examine the whole philosophy of aid-giving by the industrialised countries of the world to the developing, what are the objectives of such giving and what should be counted as aid? Was the target of 0.7% of GDP still relevant?

Traditionally overseas development aid (ODA) is defined as assistance on concessional terms, whether through project or programme aid, to a list of countries approved by the Development Aid Committee (DAC) of the OECD. The motivation for making available ODA is mixed: originally the principal motive for US aid-giving, it was claimed, was strategic, to bolster friendly regimes against communism. With the end of the cold war new justifications were needed. In other cases, the principal motive might be commercial - this was probably true of Japanese and more recently Korean aid, though peer pressures also played a part. For the ex-colonial powers, aid to former colonies had mixed strategic, commercial and moral objectives. While some suggested that it was necessary to distinguish between poverty relief and economic development as the objective, it seemed to emerge that the latter could only be seen as a means to other ends, be they the relief of poverty (the moral imperative), strategic or commercial. If, as it was argued, there had been a shift of motivations since 1945 towards the moral imperative (a shift which might be reversing to-day), there was also a strong flavour of self-interest: the desire to avoid instability, to create markets, to anchor would-be migrants, to remedy environmental damage that threatened the whole globe and so on.

Against that background, it was noted that while this conference was looking at the general picture, each recipient of aid was unique. There had been some spectacular successes: Japan itself had been a recipient of aid and was now the largest donor. In the current DAC review, Israel, South Korea, Singapore, Thailand and several countries in Latin America should now be considered as graduates from the DAC list (on the basis of three main criteria: per capita income, the index of physical quality of life and the index of economic diversification). India was a potential graduate while some, e.g. Bangladesh, might either graduate one day if things went well, or drop back. At the same time, some countries might be regarded as qualifying for the first time for the DAC list: for example, while the countries of Central Europe and the former Soviet Union could not all be seen as ‘developing’, the Asian republics should be so considered. Africa was the area where experience had been most depressing: for some countries there, there might be an indefinite need for concessional aid.

Much attention was paid to environmental issues. Given that in most donor countries (with some notable exceptions) public opinion was disillusioned about aid, due to the perception that much had been ineffective, whether through mal-administration, corruption, ill-advised choice of projects or whatever, the environmental element, which had captured public imagination, might be exploited to gain support for maintaining and increasing aid budgets. There was a case for arguing that resources for the environment, like resources for the revival of the economies of Central Europe and the former Soviet Union, should be kept separate from ODA, but in practice, capital was in short supply and it seemed inevitable that just as Central and Eastern Europe diverted thinking, so also actual resources would be diverted. In fact, despite public apathy, real levels of ODA had been maintained, but the conference saw little chance of significant increase.

The conference kept returning to ‘conditionality’, a word which although generally understood, was criticised because it did not reflect the partnership which should inform the dialogue. A distinction was drawn between conditions calculated to make ODA more effective (e.g. improved management, reduction of bureaucracy), and conditions arising from the donor’s wider concerns (democracy, human rights, birth control, etc). In both cases the cooperation of the recipient was essential and was increasingly forthcoming, although it was noted that some African countries were resistant. However there were dangers: donors must not demand more than they asked of themselves; the cumulative effect of a number of conditions, each desirable in itself, had to be taken into account; and, while consistency, both among donors and between recipients, was desirable, each case had to be addressed separately (e.g. the objective might be jeopardised if a recipient government’s standing with its own public was undermined by demands which were not sensitive to the indigenous culture). Positive support was the best approach, with some system of graduating the level of ODA to match performance (though how to weigh good administration against women’s rights?), but, it was suggested, with a core level of aid in the case of the neediest so as not to punish the poor for the failings of their government Here perhaps the distinction between poverty relief and economic development was most relevant. If the objective was economic development, it would make sense to channel ODA to those who would make best use of it, not to the poorest. Indeed, in practice this tended to happen, the poorest receiving only 10% of the total ODA and countries spending more on armaments (a subject that was touched on but not fully addressed) often receiving more than others, presumably on strategic grounds. The point was made that if they were to support ODA, the work-force in industrialised countries would demand that workers in developing countries should be paid a proper living wage.

There was much discussion of the role of the private sector, where direct foreign investment had risen somewhat in recent years. The general acceptance that state-run enterprises tended to be inefficient and that market forces should rule, had created a danger that the essential role of government was being too much discounted. The private sector by its nature invested to make a profit. There were many areas, e.g. in the fields of infra-structure, education, health care and the regulatory regime, which only governments could tackle. The multi-lateral development banks (e.g. the IBRD and International Finance Corporation) could help here. The IFC was urged to be more adventurous in such fields (though the IFC also operates commercially). One area where the IFC works well is that of financial institutions, with a view to mobilizing domestic savings in recipient countries and making available local venture capital for local entrepreneurs.

In most developing countries there was increased recognition of the role of the private sector and ’in particular of the multi-nationals, but there was still residual suspicion, both among the public and in the bureaucracy, so that foreign direct investment was hampered and discouraged. Red tape, the difficulty of obtaining work permits for expatriate staff (and the consequent difficulty in training young successors to the ageing “old Africa hands”) were obstacles. Management contracts might sometimes be appropriate, e.g. where publicly-owned utilities were privatised, but good quality staff were not always readily available, and salaries might have to be subsidised from aid sources. One point that emerged, it seemed, was a gap in understanding of what each could do, between the public and the private sectors.

Emphasis was placed on two further areas. The liberalisation of trade, with access to the industrialised world’s markets, was crucial. The Uruguay Round was important here. Too often what was termed asymmetrical liberalisation was the rule. Secondly there was a real need to concentrate on human resources, e.g. through education and training (especially, in Africa, of women).

Two other areas did not receive as much attention as the conference recognised, they deserved, population growth and debt relief. On the importance of the former there was no dissent: it should be, and has been, the subject of a specific conference. On the latter there was some disagreement, with on the one hand claims that the problem was no longer acute, that debtors were meeting their commitments and that resources should not be diverted to service debt (all agreed that budgetary support was the least desirable application of ODA); and on the other, that the burden on the poorest was excessive, that relief had been uneven, leaving some with disproportionate burdens, that relief had often amounted merely to rescheduling so that the last state was if anything worse, that the whole issue especially of multi-lateral debt (to the IMF, the IBRD, etc) called for more sensitive handling, and that a solution of the debt problem would have far more impact than anything else. It was suggested that in Africa, where the problem was most acute, education was required in the imaginative methods successfully used in Latin America, e.g. debt/equity swops. US pressure to count relief of debt incurred for military purchases as ODA was noted.

There were many other strands, some of which there was no time to develop. For example, health and in particular the threat, e.g. to the managerial classes in Africa, of AIDS, was mentioned but not discussed in detail. The conference ended with a call for vision. On the one hand, we faced in Central Europe and the former Soviet Union an historic opportunity which must not be missed, while on the other we faced continuing poverty in the developing world and newly perceived environmental dangers. Did we have to wait till the moral imperative gave way to the survival imperative? In the light of these demands the need for concessional aid seemed likely to increase. Resources were constrained, however, but their more efficient employment would help. And finally, a caution: do not ask of others what you are not prepared to do yourself.

This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.

Chairman: Sir Peter Leslie
Deputy Chairman, Midland Bank pic; Chairman, Commonwealth Development Corporation


Mr Gordon M Baker
Head, West Indian and Atlantic Department, Foreign and Commonwealth Office

Dr Vincent Cable
Group Senior Economist, Shell International

Mr Alan Coverdale
Mr Stephen Fidler
Latin America Editor, Financial Times.
Dr John Howell
Director, Overseas Development Institute; Visiting Professor in Agricultural Development Wye College, University of London

Mr Roger Murray
President, Cargill Europe Ltd

Mr Barry Newton
Managing Director, Booker Tate Ltd
Mr Mark Robinson MP
Member of Parliament (Conservative), Somerton and Frome (1992-); Member, Commonwealth Development Corporation; Director, Leopold Joseph & Sons Ltd

Professor Jack Spence
Director of Studies, Royal Institute of International Affairs, Chatham House, London

Professor John M Stopford
Head, Department of Strategic and International Management, London Business School

Mr David Preston
Director, Economic Relations with Developing Countries, Department of External Affairs and International Trade, Ottawa

Dr Bishnodat Persaud
Director and Head, Economic Affairs Division, Commonwealth Secretariat, London; Director, Commonwealth Equity Fund

M Zaki Laïdi
Specialist in development aid, Centre d’Etudes et de Recherches Internationales, Paris    

Dr Serge Michailof
Director, Dakar agency, French Caisse Centrale de Coopération Economique

Dr Alexander Gunther Friedrich
Chairman, Development Policy Forum, German Foundation for International Development (DSE), Berlin (1979-88)

HE Dr Werner Reichenbaum
Foreign Office, Bonn: Ambassador, Commissioner, North-South Negotiations, and Deputy Director General for Development Cooperation/North-South-Dialogue

Sir William Ryrie KCB
Executive Vice-President and Chief Executive, International Finance Corporation, World Bank

Mr Katsuhiro Fujiwara
Director, Economic Cooperation Department, Keidanren, Tokyo.

Mr François van Hoek
Director-General, European Centre for Development Policy Management, Maastricht

Mr Alexander R Love
Chairman, Development Assistance Committee, Organisation for Economic Co-operation and Development (OECD), Paris

Mr Kenneth K S Dadzie
Secretary-General, United Nations Conference on Trade and Development, Geneva.

Mr Youngil Lim
Senior Economist, Global Issues and Policy Analysis Branch, United Nations Industrial Development Organisation, Vienna

Professor Richard N Cooper
Maurits C Boas Professor of International Economics, The Center for International Affairs, Harvard University

Mr William C Doherty
Executive Director, American Institute for Free Labour Development

Dr Catherine Gwin
Special Programme Adviser, Rockefeller Foundation

Mr Robert D Havener
President, Winrock International Institute for Agricultural Development

Professor Carol J Lancaster
Assistant Professor of Political Science, Georgetown University and Visiting Fellow, Institute for International Economics, Washington DC

Dr Richard W Richardson
Managing Director, International Investment Services

The Hon Kate Crangle Semerad
Private consultant and writer

Mr John W Sewell
President, Overseas Development Council, Washington DC

Mr Attila Karaosmanoglu
World Bank: Managing Director, Office of the President

Mr Frank Potter
An Executive Director, World Bank