Observations of an expat: Development Aid

This week the British government announced that it planned to cut its overseas aid budget by 0.2 percent or about $4 billion a year. In 2019 it was $19.3 billion and Britain laid proud claim to being the world’s third largest aid donor and one of only five countries which had reached the internationally agreed aid donor figure of 0.7 percentage of GDP.

The announcement this week by Chancellor of the Exchequer Rishi Sunak was an emotional short-sighted political decision by a populist government as a knee-jerk response to the economic difficulties created by the coronavirus pandemic. It had no grounding in either humanitarian or economic considerations.

Instead it caved in to the popular conception that charity begins at home without any acceptance of the fact that we live in an increasingly interdependent and interconnected world.

Schools in the developing world will close or not open. Children will go hungry. Unemployment will rise along with political instability.  People, lots of them, will die if the proposed cut in British aid goes ahead.

British prestige in the world will also suffer. So will British trade and the British economy. The aid budget has never been an exercise in unadulterated altruism.  The fact is that aid flows from the developed to the developing world encourage global economic growth which creates markets for British goods and services. Poor people buy fewer British products. Dead people buy even less.

The aid cut still has to be voted on by parliament, and there is a growing cross-party consensus – including a number of rebel conservative MPs – that the proposal is a mistake and should be rejected. But parliamentary arithmetic – an 80-seat majority for the Johnson government – coupled with the political attraction of a simplistic solution to a complex problem, means that it will probably be approved.

It is therefore, time to consider alternatives to make up the shortfall. One of them could be a proposal which won an honourable mention in the 2018 Ashdown Prize competition for a “big, bold, radical idea” to tackle Britain’s problems.

The proposal was entitled “Development Bonds”. Boiled down to its bare essentials it called on Britain – and other members of the Developed World – to launch bonds to finance infrastructure development in developing countries. These countries would re-pay the money at a reduced rate of interest which would be attractive to bond holders because the developed countries would give tax relief on the repayments.

The proposed system is basically an international extension of America’s municipal bond system which has played a major role in developing the US infrastructure, starting in 1812 with finance raising for the construction of the Erie Canal.  At the end of 2019 $3.9 trillion was invested in American municipal bonds.

In the proposal submitted in 2018, each Development Bond starts with a request from a developing country.  An African government, for instance, identifies a priority project for funding as part of its national development plans. An example could be a $50 million rural roads programme serving a mix of smallholder and large-scale farmers.  Funds are unavailable from the government’s own internal resources. Traditional sources of funding  – World Bank (IDA]) lending, African Development Bank (AfDB) soft loan, bilateral donor – cannot be programmed within the required timeframe, or for other reasons offer a less attractive option. Commercial funding is too expensive.

As an alternative, the African government approaches donor governments for help in identifying a suitable financial institution prepared to issue Development Bonds to finance the project. Such an institution would typically be an investment bank in a G7 or OECD country.

A lead donor government carries out a rapid initial appraisal, taking into account political (e.g. human rights and governance record) and economic considerations.  The appraisal process is likely to involve coordination between ministries of foreign affairs, finance, and trade.  If a green light is given, a more detailed feasibility study is carried out, including environmental, social, and deeper economic appraisals, to ensure an acceptable rate of return on the investment.

If this also gives the project the go ahead, the African government invites financial institutions, through a process of international competitive tendering, to submit proposals for organising a bond issue.

Development Bonds are not a complete solution. They do not solve short-term crises such as natural disasters, refugee assistance and food relief. But they can contribute to the development of economies that frees dwindling resources to be more focused on immediate and pressing concerns while financing projects that help developing countries become less aid-dependent. With Britain’s proposed aid cut, it may be a proposal whose time has come.

 

* American expat journalist Tom Arms is LDV's foreign affairs editor, author of the forthcoming book “America: Made in Britain” and Campaigns Chair for Wandsworth Lib Dems

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7 Comments

  • My daughter in law is a front liner in refugee relief in Africa. She told me that British development relief is the best structured and managed. So the % loss is much gteater than just the money. Our aid workers including her have been shamefully let down.

  • I understand that British aid also gives the most bang for the buck. It is roughly a third of American aid levels but much more carefully thought through in order to achieve the greatest possible positive effect. American aid, by contrast, is more politically motivated with both eyes fixed firmly on domestic considerations.
    I would like to stress that my development proposal is not meant to be a complete response to the proposed cut. But, if it is successfully implemented, it could free up resources that would not be suitable as investment opportunities.

  • Public opinion is in favour of reducing international aid.

    If you want to protect the international aid budget then you need to show how international aid makes life better for the average family in the UK who is themselves struggling to get by.

  • @slamdac. Part of the problem is that simply cutting aid is a simplistic populist solution which is easily sold while being so terribly wrong because the world is more complex than that. But I can repeat what I said in my article: “Poor people buy fewer British products. Dead people buy even less.” One can add: Aid creates exports. Exports create jobs. Jobs create prosperity.
    @ Peter Wrigley. I agree that stopping the cut is the much preferred course of action and that is where the emphasis should be at the moment. But parliamentary arithmetic is against the anti-cut brigade and so we should prepare for the worse while fighting for the best. Development bonds is just one possible way of plugging the hole that will be created if the cuts go ahead. Other possibilities also need to be imaginatively investigated.

  • Jonathan Hunt 29th Nov '20 - 3:51pm

    A few more Tory MPs might be persuaded to vote against cutting the aid budget if they realise that British exports and business will suffer.

    Having lived in Africa, and written about it since, it is clear that many projects are linked to using British equipment and knowhow. Those trained in the UK, or using our technology, use and order what they know.

    By cuts of this magnitude, we shall lose those orders now and in the longer term.

    In making minimal savings today, this Government of the economically short-sighted and stupid ministers will lose many regular customers in the future.

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