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.