Alternative Scenarios for Aid and Development

There are two main purposes for aid. The first is to tackle an emergency, such as a famine, a flood, or a Tsunami. The second is to support people as they seek to improve their lives in the long-term.

The assumption for the second type of aid is that it will render itself unnecessary as the recipients will be able to support themselves after a number of years. Sometimes I wonder how seriously the donors and agencies take these aims.

Aid given directly to Governments is of course necessary, for without effective government, with properly functioning institutions, a stable and prosperous economy cannot be built. All to often however, aid given to governments is stolen or wasted.

I recommend that aid donors look seriously at two private sector channels for aid.

Capital investment for SME’s

Governments can raise funds for health, education and other social services from three sources – aid, borrowing, and taxation of incomes, profits and value-added or sales. Of these, the only source which is both independent and sustainable is taxation. Healthy tax revenues require an honest and efficient administration and a healthy economy, which in turn requires a healthy private sector.

A healthy private sector depends on flourishing Small and Medium-sized Enterprises (SME’s) which in developing countries are usually family businesses. These businesses generate by far the most employment and they are the large companies of the future. They are also less susceptible to the priorities of decision-makers overseas as they will usually be wholly or substantially owned by local people or locally-based expatriates.

What such companies usually lack is access to investment capital on sensible terms. Working capital is now less of a problem in many countries but investment capital in the $ 2,000-250,000 range is difficult to find. Below $2,000, microfinance can help; and above $250,000 the venture capital funds are interested.

It is in the $2,000-250,000 range that many promising investment opportunities are to be found, and it is here that aid funds can be of great help. By providing much or all of the capital investment required (usually in machinery, buildings and equipment), they help create sustainable employment and tax revenues.

The Netherlands Government are already doing this through their PSOM programme which provides 60% of capital investment up to €800,000, for pilot projects in many developing countries.

I recommend that the EU looks at this programme very seriously and channels substantial amounts of aid through it. Each of the other Member-States should have a similar programme.


Making use of private sector infrastructure, administrative systems, and goodwill

Large companies often have a presence in developing countries in areas where the government finds it difficult to reach the population to provide basic health and education, and other services.

Often these companies themselves provide such services for their employees and even for other people in the immediate vicinity, and they could do much more if they were provided with the funds. There is no reason in principle why commercial companies should not receive public funds for this purpose – indeed with a few high-profile exceptions they have better accounting systems, greater transparency and greater efficiency than most governments and NGOs. They also have communications and information-technology, and trained managers who are accustomed to being accountable, and to dealing with central and local government in the places where they work.

I believe that they could provide services far more effectively and probably at lower cost than the government would have been able to do if it had to set up its own infrastructure. The object would however be defeated if the donor (for example the EU) employed an expensive and time-consuming bureaucracy of its own to monitor the application of the funds. In the case of international public companies with well established and audited accounting procedures, all the donor should do is to agree the objectives, transfer the funds, and receive a quarterly report.

In this age of Corporate Social Responsibility, many companies would be happy to co-operate in this manner according to their skills and capacity, and to contribute much more than they would otherwise have done. I do not think they should be expected to do the preparatory negotiations with the donor at their own expense, and these costs should be funded. It would be for each large company to decide what it can do, having regard to its particular skills and its relationship with government in the country concerned. In addition to health, education, and other services, they could complement the first channel which I identified earlier, by providing technical and commercial assistance to local businesses.

I believe that the EU and other donors should seriously address these issues as a matter of urgency. Of course there is no point in giving aid merely to make good the damage to local businesses caused by trade restrictions, tied-aid, and dumping, and these issues need to be seriously addressed as well, as an integral part of this process.

General Issues

It is essential to encourage capacity-building in developing countries, and the development of import-substitution policies and local content provision where these are competitively chosen against foreign substitutes. There should be a presumption in favour of local rather than foreign products if all other factors are equal. It is essential to engender a partnership with foreign investors, for example by local manufacture under license, and partnering local manufactures in the final assembly or manufacture of products.

The World Bank should modify its preponderant involvement in structural adjustment and in the financing of large infrastructure and energy projects and to focus as well on supporting the funding of grassroots health and education, and on the needs of village micro-enterprises, co-operatives and local capacity building.

The IMF should desist from its now discredited policy of opening up economies before their financial sectors, public institutions, industries and civic societies are robust enough for global competition.

In Financial Services I welcome the three new agreements signed within the framework of the WTO in 1997 which dismantled tariffs on trade in information-technology products, in the telecommunications sector, and on the liberalisation of the financial services sectors including banking and insurance.

This will liberalise over 90 percent of the world market in insurance, banking and brokerage services. with total global bank assets estimated at more than US$41 trillion, with the insurance sector bringing in over $2.1trillion in premiums and the trading in shares worth over $15 trillion per year.

I also welcome the sensitivity of the Financial Services Agreement which does not oblige countries to open their markets fully from the start; enabling countries to file specific reservations so that they can build the appropriate local infrastructure and capacity to compete openly later. However, the agreement does 'lock-in 'liberalisation and market access, banning new protective measures.

With regard to Intellectual Property Rights, TRIPs (Trade Related Aspects of Intellectual Property Rights) grants corporations the right to protect their intellectual property in all WTO countries, and forces WTO member states to apply minimum standards in seven areas of intellectual property, including copyright and trademark protection, patents and industrial designs.

However, the fundamental imbalance in the TRIPs agreement is that developing countries possess very little intellectual property, and they do not possess the resources to develop this sector in the near future. They do, however, contain most of the world 's biodiversity from which many pharmaceutical and agricultural patents are derived.

I am concerned that up to 80 percent of patents for technology in developing countries are held by Transnational Corporations. This imbalance, coupled with concern about the ethical implications of the private ownership of life, has prompted some developing countries to fiercely oppose all forms of life-form patenting during the TRIPs negotiations.

I support the Doha Ministerial Declaration on the TRIPs Agreement and Public Health which confirms that the TRIPs Agreement can and should be interpreted and implemented in a manner supportive of WTO Members' right to protect public health. The Declaration represents a balance between the interests of the research-based industry and Members' public health concerns, and shows that intellectual property rights need not stand in the way of access to medicines in developing countries.

There should be a reassessment of the link between the Agreement on Trade-Related Aspects of Intellectual Property Rights and global agreements to protect biodiversity, recognising that consumers’ rights come before those of business in the field of access to medicines, patenting life forms, biotechnology and biodiversity, and that the rights of farmers in the developing world should also be protected.

Bribery, corruption, and instability are global issues that require global approaches to prevent the problems simply shifing to the next weak link in the chain. I welcome the OECD agreement on an action program to deter bribery in government-supported export credit transactions, with the export credit and export credit insurance agencies of OECD countries now demanding written statements from all companies applying for coverage, stating they have not, and will not pay undisclosed “commissions“. If bribery is established, the agency will deny cover or reject claims for indemnity and will refer the case to the judicial authorities.

Whilst I do not believe that any country should be encouraged to borrow on the basis that its loans will eventually be written off, there is a case for examining debts incurred by corrupt transactions, with a right of repudiation if the lender or his agent knew or ought to have known of the corruption

I support the Santo Domingo declaration of the Africa Caribbean & Pacific (ACP) Heads of State for an International Convention to facilitate the recovery and repatriation of funds illegally appropriated from national treasuries. Such a Convention would assist developing countries which are often frustrated by bank secrecy laws in their efforts to recover funds looted and kept abroad.