Owen abroad

Archive for April, 2009

Edinburgh University forces firms to supply cheap medicines to developing world:

Edinburgh is to become the first British university to help make cheap medicines available to the developing world by licensing research to pharmaceutical companies only on condition that poorer communities get life-saving drugs at cost price.

That’s great. Differential pricing is good for everyone. (Here’s why).

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.

The Center for Global Development has a new series of papers on Innovations in Aid.

The first paper, “The End of ODA” by Jean-Michel Severino and Olivier Ray, proposes a new concept of “Global Policy Finance”, to supplement (not replace, as you might think from the title of the paper) the idea of ODA.

ODA is currently defined as:

Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent.

There is both a reactionary and a progressive case for changing the definitions of aid.

The reactionary agenda is to dilute the concept of development assistance, by claiming as “aid” all sorts of other spending such as military aid or commercial loans.  For example, Carol Adelman at the Hudson Institute Center for Global Prosperity likes to include all kinds of flows in her measure of US foreign assistance – including the cost of State Department Diplomats and money sent by workers in the US to their families in developing countries.  She uses this to claim that Americans are the most generous nation (by contrast, on the measure of ODA as a share of national income, the US ranks close to the bottom of industrialised countries).

Measuring these broader flows is interesting, but we should not allow these flows to crowd out foreign aid whose purpose is to improve the lives of the poor.  The unattractive implication of Carol Adelman’s argument is that there is no need for the US to increase its foreign aid, conventionally defined, because on her measure the US is generous in other ways (eg sending military aid), and so she excuses the richest nation on earth for its relatively stingy contribution to feeding the hungry or sending children to school.

There is, however, a progressive case to be made for looking again at the definition of ODA.   In particular, the definition reinforces the notion that there is money we spend on us and money we spend on them.  On this view, ODA is the spare change that we toss the poor as we pass them by.  But this distinction is less and less meaningful.  There is a huge debate at the moment about whether and how spending on climate change adaptation and mitigation should count as aid.  Some of that spending will help people in developing countries, either directly (e.g. flood barriers) or indirectly (e.g. clean burn power stations).  Some will help people in poor countries only (e.g. new crop varieties) and some will help everyone (e.g. investment in renewable energies).  So which of that should count as aid?  Our difficulty in answering that questions alerts us that there is a problem with the increasingly old-fashioned idea that there is a clean distinction between spending for ourselves and spending for others.   When we spend money to prevent or reduce conflict, or to tackle the opium trade, or to help young men in Pakistan to get a good education, we are achieving a variety of objectives at the same time, and it is hard to be sure whether this should or should not count as ODA.

There are other, more technical problems with the definition of ODA. In particular, the 10% discount rate used to calculate whether a loan is sufficiently concessional to count as aid is ludicrously large – with the result that a lot of non-concessional loans can be counted as aid.

My only reservation about the argument put by Severino and Ray is that we may open Pandora’s Box.  There is a queue of people ready to argue that all sorts of other spending should be counted as aid (and hence take donors closer to meeting their commitment to spend 0.7% of GDP on aid).  If we concede that point, then we will lessen the pressure to spend more on aid that makes a difference to the lives of the poor.  But equally, there is a progressive agenda for change.  Severino and Ray argue that we should keep the existing definition of ODA, but supplement it with a broader measure.  That seems to me to be a sensible way forward.