The budget and the world’s poor

First the good news.  In its Budget today, the UK Government forecast for overseas aid next financial year is unchanged at £9.1 billion, as projected in the Comprehensive Spending Review (CSR) in 2007.  With GDP falling, this represents a bigger share of GDP than was originally expected. Kudos to the Government for resisting the temptation to use this as an excuse for cutting aid.

But now the bad news.  Aid should not be staying the same: it should be going up.  UK Government borrowing will rise from £90 bn last year to £175 bn this year.  Why? Because in a downturn, the government believes that a big injection of money is needed to get the economy going again.    A lot of that increase is automatic – unemployment benefits will rise, tax takings will fall.  And those “automatic stabilizers” have been supplemented with particular measures – such as £1bn for low-carbon industries, and £750m for “emerging technologies and regionally important industries”.

The same logic applies in developing countries.  As Shanta Devarajan pointed out on Monday, Africa is least to blame for the crisis, but may be worst hit.  There are three reasons for this:

  • Developing countries are disproportionately dependent on very volatile resources: earnings from primary commodities, private capital flows, remittances and aid; so a downturn in the world economy will hit their economies hard;
  • Developing countries have the least room for manoeuvre to offset these temporary effects: for example, they are less able to borrow.  How is a cash-strapped developing country, constrained to pursue tight fiscal policies by donor conditions, supposed to respond to the downturn?
  • The effects on the welfare of people in developing countries as a result of these economic problems will be much bigger and more permanent than the corresponding effects on the people in industrialised countries.  Most of them have no insurance or savings to fall back on, no safety net to catch them, nowhere to move to find a new job.  If they cannot send their daughter to school, or sell their ox, the effect may be to plunge an entire generation into a lifetime of poverty.

Thirty years ago the Brandt Report argued that supporting growth in developing countries was good for the world economy just as much as a domestic expansion.  It is good for our own economies for us to have more prosperous trading partners, and it is only through a balanced expansion of economic growth across the world that we can have a sustainable path to prosperity.

The UK Government has been vocal in resisting protectionism, and rightly so; but restricting the fiscal expansion to the domestic economy is also a form of economic nationalism.

I welcome the decision of the UK Government not to cut the aid budget today. But what I really wanted to see was the developing world getting a big part of the fiscal expansion that the Government announced today.

Published by Owen Barder

Owen is Senior Fellow and Director for Europe at the Center for Global Development and a Visiting Professor in Practice at the London School of Economics. Owen was a civil servant for a quarter of a century, working in Number 10, the Treasury and the Department for International Development. Owen hosts the Development Drums podcast, and is the author Running for Fitness, the book and website. Owen is on Twitter and

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9 Comments

  1. I think in the circumstances with spending slowed elsewhere this was not a bad result at all. Furthermore while Shanta Devarajan’s is correct about trade flows, FDI and remittances he doesn’t mention that African banks have actually held up well compared to their Western counterparts and that Africa will be one of the few regions which continues to achieve positive economic growth – indeed the African Development Bank predicted that Uganda (where I live) will continue to grow at around 6% (http://www.newvision.co.ug/D/8/12/678596/african%20development%20bank). Instead of calling for more aid I would like to see African countries react to the credit crunch by increasing trade with each other, be it by lowering import taxes or speeding up the process of an African wide FTA, to which 26 nations have already signed up to in principle.

    1. Joe – In one sense you are right. It could have been a lot worse. But it shows how far we have yet to come in overcoming economic nationalism that we are thinking like that. People in developing countries need aid more than ever, for both macroeconomic reasons and for reasons of human need. I think one lesson we need to learn from this crisis is that unbalanced prosperity is not lasting prosperity. The steps we take to get ourselves out of the crisis would be a good place to start on the path towards a more balanced and sustainable shared future.

  2. Is there not a fourth point? Not only are poorer countries less able to borrow than richer ones, the fact that richer countries are borrowing more makes poorer ones still less able to borrow. There is greater competition amongst borrowers, and the richer countries might crowd out the poorer ones. There was a similar phenomenon with government guarantees for retail bank deposits: once richer countries started to do this, capital was moved from poorer countries to richer ones. To compensate for this crowding out, the richer countries should increase their aid efforts yet further.

  3. Richard – that is absolutely correct and one of the reasons Moyo’s thesis has been undermined by the economic situation. Uganda wanted to take out a Eurobond before Christmas but the rates were now simply too high to make it viable. Furthermore the G20’s boost for the IMF seemed largely aimed at middle-income countries and not those whose trade relationship with the West is still limited.

    Owen – I can see why the current crisis highlights unbalanced prosperity but surely one of the ways we can take a ‘path towards a more balanced and sustainable shared future’ is to remove some of the trade barriers between African countries. It is economic madness that only 1/10th of African exports go to other African states. The potential for improved South-South trade is in my view one of the greatest untapped areas for long-term sustainable economic growth on the continent. It is also surely a more sustainable solution than calling for more aid?

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