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A noble effort to end poverty, Bono, but it is misdirected

Author: Jagdish N. Bhagwati, Senior Fellow for International Economics
February 27, 2006
Financial Times

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Dear Bono,

Having worked in development for almost 50 years, and on foreign aid for almost as long, I confess to a slight sense of deja vu regarding your collaboration with Bob Geldof to increase aid flows to reduce poverty, especially in Africa. After all, one may ask, which big policy figure in the developmental field in the postwar years has not worked towards the elimination of poverty and demanded that aid flows be increased to that end? Yet, I do not agree with those who write cynically that the poor have done more for the rock stars than the rock stars have done for the poor. Your dedication certainly lends an extra edge to the efforts made by many over the years in this great cause.

But I am afraid your energies have been misdirected when they are used to advance an agenda that is based on two obsolete and counter-productive premises: first, that aid for Africa must be spent in Africa rather than outside it; and, second, that we must work to increase aid flows to a target of 0.7 per cent of gross national product.

The key problem in much of Africa is what has long been called the “absorptive capacity” problem: will aid be used productively or will it be wasted? This issue was understood by the pioneering development economists Paul Rosenstein-Rodan and Gunnar Myrdal. The former estimated aid requirements in the 1960s by reference to this notion. He calculated how much investment was required to help accelerate the growth rate of an aid recipient, based on an assessment of that country’s ability to manage such growth. Foreign aid would then be given to finance the investment, provided that the recipient made a matching effort to increase domestic savings as well.

But many economists became skeptical. They argued, with substantial empirical evidence, that when aid was provided, the recipients were likely to reduce, rather than increase, their own savings efforts. This was an early recognition of the "aid curse" that afflicts some aid recipients. Uncritical proponents of aid deny this effect even as they talk of the "oil curse"; as if largesse from the windfall of oil earnings is somehow more corrupting than largesse that comes from aid donors.

The large amounts of aid given to Africa and the small results that have generally accrued from them require us to look at the absorptive capacity question with a critical eye. We should disregard the hysterical charge that everyone who questions the effectiveness of a sudden and substantial increase in aid flows is a heartless reactionary. The increase in the number of democratic governments in Africa, and some bold initiatives by the African Union in places such as Darfur, have increased the absorptive capacity of a growing number of African nations. But that justifies a graduated increase on spending in Africa rather than a substantial and sudden one.

In addition, absorptive capacity is far less of a problem if increased aid for Africa is spent outside the country. Spending can be increased in the rich countries to develop vaccines and cures for diseases that severely afflict Africa, such as Aids and malaria. Research on cures for diseases such as yellow fever and sleeping sickness should be well financed. Since much of Africa suffers from huge skills shortages for virtually every developmental problem, education and training of African students in western universities could be vastly increased. They will mostly stay abroad. But then the west should develop and pay handsomely for programmes where they can contribute in other ways, such as short-term visits to train others, for instance. Until these shortages ease years from now (as they did in the 1990s in India; the “brain drain” was a big issue there in the 1950s) as more nationals are trained and find return attractive, surely we could send out more of our own. I have advocated programmes such as a Grey Peace Corps that would find our aged and retired doctors, engineers and other professionals jobs in Botswana, Zambia and other African nations.

But, if you have erred in allying yourself with the development experts who wrongly focus exclusively on aid spending in Africa itself, a greater folly is to have tied your initiative to the aid target of 0.7 per cent of GNP. This target goes back to 1969 and has not been met except by a tiny fraction of donors, essentially the Scandinavian countries. The problem is that the target relates to government spending. Fiscal spending is subject to what economists call “hard budget constraints”. There are always many demands on the government. The US, for instance, has just had a colossal increase in spending on the Iraq war and on Hurricane Katrina relief and reconstruction. Even Paul Martin, the progressive former prime minister of Canada, was most reluctant to sign on to this target last year at the United Nations.

Richard Manning, the head of the development assistance committee at the Organisation for Economic Co-operation and Development, recently expressed concern that the main European Union donors would fail to fulfill even proposed aid increases, way short of 0.7 per cent of GNP, pledged for 2010. With all the good intentions in the world, developmental aid will take the back seat against politically more pressing needs.

How, then, are we to translate the enthusiastic altruism that you have generated, dear Bono, into larger, sustained flows of aid? Surely the answer is to go after personal, rather than governmental, flows. Personal spending on aid typically runs into softer budget constraints. With all the charitable spending I do, I could always forego a dinner at Maxim’s and eat at McDonald’s instead, pledging another Dollars 100 to the Geldof-Bono aid fund. So, if you take seriously the estimated audience for Live8 concerts at 2bn, halve it for those who were there for a lark or are impoverished themselves, and halve it again for those who attended the concerts twice, you would have half a billion who could sign up for an average pledge of Dollars 50 a head as a supplement to their normal giving, yielding a net sum of Dollars 25bn outright. The money would be worth almost twice that amount in actual aid, since they would be grants whereas most aid consists of loans that must be repaid.

This would mean abandoning some of your current allies. But you can do nothing less if your efforts are to yield results. In a recent interview, you said that you expected your music would endure forever but poverty would have ended in a hundred years. I wish you good luck on your music. But not even a hundred years would suffice to end poverty if you fail to correct your course.

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