The cost of corruption in developing countries

Developing countries lose between $20 billion and $40 billion each year to bribery, embezzlement, and other corrupt practices. Over the past 15 years only $5 billion has been recovered and returned.

More on the Asset Recovery Handbook 2010

Getting investment in infrastructure right

Investment in infrastructure can raise productivity, boost growth, and help reduce poverty. And, lack of infrastructure has been one of the most binding constraints on growth in the developing countries. They need massive investments in infrastructure to connect markets, facilitate trade, reduce transaction and transportation costs, and to facilitate movement of goods and services, among others. But, how to get investment in infrastructure right? Here is brief piece on how to do that.

• Stronger framework for public sector investment decisions (develop a coherent strategy for scaling up infrastructure that directly spur growth; follow through on the investment strategies—strong institutional framework, adequate budget and good governance; seek ideas on how to finance the scaling up—strong revenue base, borrowing to finance investment and not consumption, and debt within payable limits)
• Support for capacity building (seek multilateral agencies’ help in making budgets consistent with infrastructure plans, learn from China’s experiences in infrastructure investment)
• A bigger role for the private sector (private sector investment can work in energy and telecom sectors, incentivize the private sector by offering good tax system, governance and a sound legal framework)

AGOA, exports and value-addition

Lawrence Edward and Robert Z Lawrence argue that while AGOA helped Africa LDCs cope with the shock of the end of MFA and compete with strong performers like China, it also discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. Meanwhile, China moved up the value chain and produced competitive goods.

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Lesotho and other least developed African countries responded impressively to the preferences they were granted under the African Growth and Opportunities Act with a rapid increase in their clothing exports to the US. But this performance has not been accompanied by some of the more dynamic growth benefits that might have been hoped for. In this study we develop the theory and present empirical evidence to demonstrate that these outcomes are the predictable consequences of the manner in which the specific preferences might be expected to work.

The MFA (Multi-fiber Arrangement) quotas on US imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing constrained countries to move into higher quality products. By allowing the least developed African countries to use third country fabrics in their clothing exports to the US, AGOA provided additional implicit effective subsidies to clothing that were multiples of the US tariffs on clothing imports. Taken together, these policies help account for the program’s success and demonstrate the importance of other rules of origin in preventing poor countries from taking advantage of other preference programs.

But the disappointments can also be attributed to the preferences because they discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. When the MFA was removed, constrained countries such as China moved strongly into precisely the markets in which AGOA countries had specialized. Although AGOA helped the least developed countries withstand this shock, they were nonetheless adversely affected. Preference erosion due to MFN reductions in US clothing tariffs could similarly have particularly severe adverse effects on these countries.

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Subsidy Success: Fertilizer in Malawi

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Thanks largely to the subsidy Malawi has had seven years of economic growth, based on agriculture, which has had a major impact on reducing poverty, helping to halve child mortality rates. For me the key point is the huge role a government subsidy like this can play in getting an economy back on its feet and in stimulating (rather than stifling) growth and poverty-reducing private sector development. For many who see government subsidies as anti-private sector this will be counterintuitive. But it is exactly the kind of heterodox approach that will be needed to deliver success in Africa and in other poor countries, where we should leave our economic theory at the door and instead focus on what works empirically.

The Dorward and Chirwa paper is in no doubt that the subsidy has been a significant success. It has led to significant increases in maize production and productivity, which in turn has contributed to ‘increased food availability, higher real wages, wider economic growth and poverty reduction.’ The contribution in the last season was an extra million tonnes of maize, doubling pre-subsidy production levels.

The study shows that some of the non-poor do indeed benefit from the subsidy and that it must be better targeted, for example to more to female-headed households. However, 65% of Malawi’s farmers received the subsidy, and this includes many of the poorest.

The cost to the Malawi government of the subsidy has been around 9% of government spending, or 3.5% of GDP. This is not a trivial amount but it is not unsustainable. In 2008/9 this increased dramatically to 16% of GDP due to the global spike in fertiliser prices, but this has now fallen back to its previous level.

This cost has to be set against two things; the macroeconomic benefits of the subsidy, and the costs to government and the macro-economy of the alternatives.

Low inflation, and strong GDP growth all contribute to government revenues and to lowering the cost of borrowing. The paper concludes that the economic impact of the subsidy has definitely been positive.

At the same time the government has avoided having to make any costly food imports as it had to in the years immediately preceding the subsidy. As a land-locked country food imports are very expensive. The fertiliser subsidy enables farmers to grow more of their own food rather than rely on imported handouts in an increasingly volatile global market. One tonne of imported maize can support 5 families for 96 days, whereas the same sum of money spent on fertiliser could enable them to produce enough food for 10 months.

Whilst use of inorganic fertiliser is in one way environmentally unsound, Malawi’s emissions are near the bottom of the table. And by reducing the risk farmers face with an increasingly variable climate, the subsidy is a large scale adaptation strategy; effectively a form of insurance and stability for farmers that increases their resilience. Lastly by increasing the fertility of existing land, the subsidy helps combat deforestation and soil erosion from increasing use of marginal lands.

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Summary of Dorward and Chirwa’s paper by Max Lawson.

What determines food aid to developing countries?

Nathan Nunn and Nancy Qian argue that food aid is determined by recipient country’s food shortages. But, food aid from some of the largest donors is the least responsive to production shocks in recipient countries. Also, food aid usually goes to counties with colonial ties.

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We examine the supply-side and demand-side determinants of global bilateral food aid shipments between 1971 and 2008. First, we find that domestic food production in developing countries is negatively correlated with subsequent food aid receipts, suggesting that food aid receipt is partly driven by local food shortages. Interestingly, food aid from some of the largest donors is the least responsive to production shocks in recipient countries. Second, we show that U.S. food aid is partly driven by domestic production surpluses, whereas former colonial ties are an important determinant for European countries. Third, amongst recipients, former colonial ties are especially important for African countries. Finally, aid flows to countries with former colonial ties are less responsive to recipient production, especially for African countries.

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Challenges for South-South development cooperation

[Adapted from Ratnakar Adhikari’s article in Trade Insight magazine, vol.6, No.3-4, 2010. p.25-28]

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The history of South-South development cooperation (SSDC) is nearly as old as the history of North-South development aid. However, this issue has come under the scanner of development practitioners only in the recent past due primarily to their increased significance in the backdrop of the global financial crisis, which was feared to result in a global resource squeeze. Although SSDC is not likely to replace traditional development cooperation, it is likely to be of tremendous significance in the days to come—thanks mainly, but not exclusively, to the growing economic prowess of advanced developing countries.

Growing salience

The evolving dynamics of cooperation among Southern countries and its potential to contribute to global prosperity constitute probably the single major reason to discuss the growing salience SSDC. For the least-developed countries (LDCs), handicapped by several supply-side constraints to take advantage of the growing global economic integration, SSDC offers an opportunity over and above traditional official development assistance (ODA). Although the burgeoning SSDC is often ascribed only to the growing economic clout of the emerging economies, there are several factors that have contributed to this phenomenon, some of which are discussed below.

First, SSDC should be seen in a broader context of the increased economic integration among developing countries. While the LDCs were largely reliant on developed countries for trade in the past, there seems to be a trend towards increased flow of South-South trade. For example, South-South trade has nearly doubled between 1995 and 2008 to reach nearly 20 percent.¹ Similarly, South-South flow of foreign direct investment (FDI) has reached 16 percent, up from 12 percent in the 1990s.

Second, there is an expectation among the partner LDCs to learn from the economic and development success of Southern donors. At a general level, the United Nations Economic and Social Council (ECOSOC), for example, argues that many Southern donors have come up with successful development models or practices, which can be more appropriately replicated in other developing countries.²

Third, due to the inability of the traditional donors to live up to their ODA promises, the LDCs have found it necessary to tap into the funding offered by Southern donors. The LDCs find such assistance more practical and efficient in terms of disbursement causing fewer significant delays compared to that of traditional donors.³ SSDC is also presumed to be based on solidarity,⁴ and the principle of equality, as opposed to clientalism that characterizes traditional aid relationship. Some Southern donors are found to be more flexible and responsive to the national priorities of partner countries.⁵

Current status of SSDC

The Reality of Aid Management Committee has compiled the disbursement data of South-South ODA from various sources for 2008 (Table). It is, however, necessary to note that unlike North-South ODA data, which are prepared by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), due to several difficulties associated with the collection of South-South ODA data,⁷ the data presented below should not be considered as authoritative.

Disbursement of selected South-South ODA flows, 2008 (US$ million)
South-South donor	Amount	% of GNI	% of total South-South ODA
Saudi Arabia	5,564	1.5	40
Venezuela	1,166–2,500	0.71–1.52	18
China	1,500–2,000	0.96–0.08	14.4
South Korea	802	0.09	5.8
Turkey	780	0.11	5.6
India	569	0.05	4.1
Taiwan	435	0.11	3.1
Brazil	356	0.04	2.6
Kuwait	283	0.18	2
South Africa	194	0.07	1.4
Thailand	178	0.07	1.3
Israel	138	0.07	1
United Arab Emirates	88	…	0.6
Malaysia	16	0.01	0.1
Argentina	5–10	0.003–0.005	0.07
Chile	2–3	0.003	0.02

Source: Adapted from Reality of Aid Management Committee. 2010. A Challenge to the Aid System? Special Report on South-South-South Cooperation:South Cooperation. Manila: IBON Books.

South-South ODA from the top 16 countries for which data were available reached close to US$14 billion. Four major donors, namely Saudi Arabia, Venezuela, China and India, collectively account for over 76 percent. Saudi Arabia, a major aid donor since 1973 as measured by the ODA-gross national income (GNI) ratio, provided more than US$5.5 billion in development assistance representing 1.5 percent of its GNI. This figure is 40 percent of the total development assistance provided by the top 16 developing-country donors.

Although most assistance provided by the major South-South donors is in the form of project aid, there are also components of technical cooperation, budget support and humanitarian assistance. Among the top four donors, Venezuela’s case is unique in the sense that its oil deals assume the form of balance-of-payments (BoP) support.⁸ However, like Northern donors, the motives behind South-South ODA are not entirely altruistic.

Saudi Arabia’s official aid policy has an explicit objective of promoting its non-oil exports. Chinese commercial interests are mainly reflected in the desire to obtain an uninterrupted supply of energy and raw material resources from partner countries. For example, when providing aid to Angola, China does not directly provide funds to the government but mandates a Chinese construction company to build infrastructure and expects the government of Angola to provide Chinese companies operating in the field of oil the right to extract oil through the acquisition of equity stakes in a national oil company or through the acquisition of licences for production.⁹ Similarly, India’s ODA —particularly for the construction of infrastructure—mainly to Bhutan and to a lesser extent to Nepal is aimed at securing hydroelectricity and energy for itself.¹⁰ India’s pledge of US$500 million in concessional credit facilities to resource-rich African LDCs (Burkina Faso, Chad, Equatorial Guinea, Guinea-Bissau, Ivory Cost, Mail and Senegal) and one developing country (Ghana) shows Indian tendency to follow the Chinese model for resource extraction from Africa.

Similarly, geopolitical interests are reflected in the choice of partner countries. Saudi aid is mostly provided to Arab countries. Venezuelan aid mainly goes to Latin American and Caribbean countries. Indian assistance is targeted predominantly at South Asian countries with Bhutan receiving 46 percent of total aid, and the Maldives and Afghanistan receiving 19 and 16 percent respectively. However, China’s aid is much more diversified, with Asian countries receiving 40 percent, followed by Africa (25 percent), and Latin and Central America (13 percent).¹¹

Saudi Arabia’s support predominantly to the Muslim countries in the Arab region (including relatively better-off countries such as Turkey and Egypt, themselves donors, and Morocco compared to poor countries in sub-Saharan Africa) and two Muslim countries in South Asia (Bangladesh and Pakistan and not to Nepal and Bhutan, despite the latter being LDCs) shows the influence of religious and cultural factors in its country-selection process.¹² Similarly, Brazilian technical cooperation programmes in Portuguese-speaking African countries (77 percent of its total assistance to Africa) and East Timor (96 percent of its total Asian assistance) shows the significance of the language factor.¹³

Solidarity interest, together with geopolitical interest, is seen dominant in the ODA provided by Venezuela, a founder member of Alternativa Bolivariana para las Americas (ALBA). This initiative focuses on integration among Latin American countries, through a “socially-oriented trade bloc”¹⁴ proposed as an alternative to the Free Trade Area of the Americas.

Challenges facing LDCs

While the growing importance of SSDC is a reality the LDCs cannot ignore, SSDC is not free of all the problems that have dogged the issue of development aid in general, and also presents additional challenges.

Tied aid

While traditional donors have made significant progress in untying aid, assistance under SSDC, particularly by the major donors, is primarily tied.¹⁵ For example, in the case of Chinese aid to Africa, 70 percent of the infrastructure construction projects have to be awarded to “approved”, mostly state-owned, Chinese companies. Although the remaining 30 percent contract can be awarded to local companies, they too are mostly established in joint-venture arrangements with Chinese companies.¹⁶ Even the labour component of the contracts is fulfilled by imported Chinese workers in countries as varied as Mauritius, Nepal and Sri Lanka.¹⁷

Similarly, at least 85 percent of the value of South-South concessional loans granted by India under its India Development Initiative was meant to be tied to Indian procurement.¹⁸ Examples include a US$40 million credit line for railway reconstruction in Angola, and a donation to Sierra Leone of US$800,000 for the construction of 400 barracks.¹⁹ Similarly, Venezuelan BoP support is primarily tied to oil imports, and Korean bilateral aid is also predominantly tied.²⁰

Lack of transparency

There is a serious lack of accessible and comprehensive information on South-South ODA. This could be because even the major Southern donors do not have central coordinating agencies to manage and monitor development assistance at the national level. The problem is further compounded by the deliberate secrecy on both sides of the partnership.²¹ This is particularly so in the case of Arab donors and China. For example, sloppy distinctions between Chinese investment, loan and aid on the one hand, and "proposed", "agreed", "under construction", "concluded", "realized", "(un)confirmed" nature of supports on the other, provided by China under China-Africa technical cooperation make it almost impossible to know the exact nature and magnitude of support extended by China.²²

The result is, it is difficult to collect data and make an informed analysis for policy purposes. A more maligned outcome is the difficulty in establishing which Southern donor is funding which institution in which country for what purpose. There is also the question of debt-sustainability since it is difficult to ascertain how much the partner country owes to its donors. The democratic ownership of SSDC is also under question, because such aid tends to be mostly government-to-government with little involvement of the parliament and civil society.²³

Limited ownership

Although SSDC, in theory, tends to promote country ownership at the programme and project development level, it is reported that some Southern donors have preferred to fund the construction of a stadium as opposed to the priority identified by partner countries for the construction of roads. Similarly, the focus of infrastructure development on resource extraction, rather than on building productive capacity at the local level, limited use of local inputs in the process of project implementation, and the lack of a clear mechanism for technology transfer leave much to be desired.

Inadequate monitoring and evaluation

There is little public information available on the monitoring and evaluation (M&E) procedures of Southern donors.However, country experiences suggest that these donors conduct significantly fewer missions to review project progress than Northern donors. Overall, M&E systems of Southern donors seem to be largely concerned with timely project completion.²⁴

Unlike traditional donors, which are bound by the in-built DAC peer review mechanism with a strong M&E component, Southern donors are not subjected to any such M&E mechanism. Although proposals have been made by the Group of 77 countries and non-governmental organizations to strengthen the UN Development Co-operation Forum (DCF) to serve as an alternate platform for aid negotiations to DAC, there is limited progress in this direction, primarily due to the skepticism of the traditional donors and capacity of the under-resourced UN to handle these responsibilities.²⁵

Non-applicability of Paris Declaration

In order to enhance the effectiveness of development aid in general, traditional donors as well as partner countries signed on to the Paris Declaration on Aid Effectiveness (in 2005), which defines a number of commitments, and a set of indicators to measure progress towards 2010. The Declaration is based on five common sense tenets of ownership, alignment, harmonization, result management and mutual accountability.

However, the Declaration is not applicable to SSDC, except for a few Southern donors such as Korea and Turkey which have signed on to it in view of their impending admission to the DAC. Although the Accra Agenda for Action, issued in September 2008, recognizes the important role of SSDC in international development cooperation and considers it as a valuable complement to North-South cooperation, it does not exhort Southern donors to become parties to the Paris Declaration. This effectively means that Southern donors are not even obliged to make efforts to overcome the challenges facing traditional development cooperation.

Issues for UNLDC IV

Since development assistance is a core development agenda for the LDCs, the issue of SSDC needs to be extensively deliberated upon both in the run-up to the Fourth United Nations Conference on the Least Developed Countries as well as during the conference itself. It is indeed surprising that this issue has not so far entered the discussions in the run-up to event. Therefore, based on the challenges discussed above, the following issues are worth taking up.

First, as tied aid does not contribute much to the development of the local economy and local human capital and prevents the partner country from sourcing inputs from competitively priced sources, a target—possibly of 2021—should be set, for the gradual untying of aid by Southern donors.

Second, although project financing has been the preferred mode of funding for Southern donors, they should gradually move towards a sector-wide approach and eventually towards budgetary support.

Third, SSDC should be brought under some global process of discussions, negotiations, target setting, coordination, reporting, and monitoring and evaluation. While there is a near consensus on the need for the same, there is a considerable disagreement between developed countries and developing countries on which platform should be used. As a compromise, it is proposed that a two-track mechanism be adopted whereby DAC would continue to coordinate traditional ODA matters and DCF would be assigned the full responsibility of coordinating issues relating to South-South ODA. DCF should begin its activities by preparing a framework like the Paris Declaration for coordinating and monitoring SSDC

Fourth, partner-country governments, on their part, should commit to use the resources received from Southern donors in a transparent manner and involve all the major stakeholders, including parliament, the private sector and civil society, in the process of programme design, implementation, and monitoring and evaluation.

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Notes
¹ Onguglo, Bonapas. 2010. A More Dynamic & Transformative South–South Trade. International Trade Forum - Issue 2/2010. http://www.tradeforum.org, accessed 04.11.10.
² ECOSOC. 2008. Trends in South-South and Triangular Development Cooperation. Background Study for the Development Cooperation Forum. New York: United Nations Economic and Social Council.
³ ibid, p 29.
⁴ See Reality of Aid Management Committee. 2010. South-South Cooperation: A Challenge to the Aid System? Special Report on South-South Cooperation 2010 of the Reality of Aid. Manila: IBON Books, pp. 1–2.
⁵ For example, Venezuela, Arab donors and India have provided flexible budget and BoP support to select partner countries. (Note 2, p 28).
⁶ ECOSOC. 2008. Note 2.
⁷ ECOSOC. 2009. South-South and Triangular Cooperation: Improving Information and Data. 4 November. New York: Office for ECOSOC Support and Coordination Department of Economic and Social Affairs, United Nations.
⁸ Note 4, p 9.
⁹ Paulo, Sebastian and Helmut Reisen. 2010. Eastern Donors and Western Soft Law: Towards a DAC Donor Peer Review of China and India? Development Policy Review 28 (5): 535–552, p 538.
¹⁰ Reality of Aid Management Committee. 2010. p 12. Note 2.
¹¹ Note 4, p 9.
¹² Note 4, p 11.
¹³ Note 2, p 18.
¹⁴ Note 2, p 20.
¹⁵ Note 2, p 30.
¹⁶ Note 4.
¹⁷ The example of Chinese workers’ involvement in Mauritius is provided by Paulo and Reisen. 2010: 538. (Note 9). The example of Nepal and Sri Lanka is based on the author’s personal observation. See also Note 2, p 32.
¹⁸ Bijoy, C.R. 2010. India: Transiting to a Global Donor. In The Reality of Aid Management Committee. 2010. (Note 4).
¹⁹ ibid.
²⁰ Note 2, p 29.
²¹ Note 4, p15
²² Note 9, p 538.
²³ Note 4, p 16.
²⁴ Note 2.
²⁵ Note 9, p 549.

Generalizing poverty and inequality, and even general policy recommendations!

A new report by UNRISD (Combating Poverty and Inequality: Structural Change, Social Policies and Politics) explores the causes, dynamics and persistence of poverty; examines what works and what has gone wrong in international policy thinking and practice; and lays out a range of policies and institutional measures that countries can adopt to alleviate poverty. The main point of the report is that the existing approaches to poverty often ignore its root causes, and do not follow through the causal sequence. The report argues, “persistent poverty in some regions, and growing inequalities worldwide, are stark reminders that economic globalization and liberalization have not created an environment conducive to sustainable and equitable social development.”

It advocates a pattern of growth and structural change that can generate and sustain jobs that are adequately remunerated and accessible to all-- regardless of income or class status, gender, ethnicity or location. It calls for comprehensive social policies that are grounded in universal rights and that support structural change, social cohesion and democratic politics.

It argues that civic rights, activism and political arrangements should be in place to ensure that states are responsive to the needs of citizens and that the poor have influence over the policies that are intended for their welfare.

Basically, it is criticizing the poverty reduction approaches led by the IMF and the WB (Poverty Reduction Strategy Papers (PRSPs)), some of the social protection programs, and the MDGs. It assets that these approaches push for “discrete social policies that are often weakly related to a country’s system of production and macroeconomic policies.”

Major points about poverty and inequality and policy recommendations:

• Poverty reduction requires growth and structural change that generate productive employment. This can be done by instituting selective and well-managed industrial and agricultural policies that connect agricultural sector more productively to industry and other sectors of the economy; stimulating and maintaining and adequate level of labor demand by expanding domestic demand; investing in infrastructure, education, research, productivity, and mobility of labor; and adopting a macroeconomic framework that avoids pro-cyclical policies or restrictive monetary and fiscal policies during periods of slow growth.
• Comprehensive social policies are essential for successful poverty reduction. This can be done by reinforcing redistributive effects of economic policy; protecting people from income loss and costs associated with unemployment, pregnancy, sickness, chronic illness or disability, and old age; enhancing productive capacities of individuals and communities; and reducing burden of growth and reproduction of society, including care-related work usually unfairly borne by women.
• High levels of inequality are an obstacle to poverty reduction. Redistributive policies can include providing the poor with greater access to productive assets such as land; investing in social infrastructure to reduce drudgery of domestic work; pursuing affirmative action policies for disadvantaged groups; stimulating investment in rural infrastructure, creating PWPs and increasing access to credits; pursuing fiscal reforms that improve tax administration; and creating a stable global economic environment that responds to the needs of low-income countries.
• Poverty reduction requires effective state action. Building state capacity can be done by crafting of political coalitions needed to set and carry out policy; mobilizing resources with which to implement development objectives; and allocating resources to productive and welfare-enhancing sectors and enforcing rules governing their use.
• Politics matters for poverty reduction. Poverty reduction requires ensuing rights for citizens to organize and contest public policies as autonomous actors; including the active participation of poor, women and other disadvantaged groups; bargaining regimes or social pacts to give group voice and influence in holding corporations; and sufficiently competitive to create uncertainties in electoral outcomes, allow for periodic changes in power and prevent ruling parties from becoming complacent.
• There are many paths to poverty reduction. Following heterodox policies is one of them.
• Poverty is reduced when economic and social policies, institutions and political arrangements are mutually supportive.

Although there are specific recommendations and discussions, some of the points are as general (and vague) as they can get. These are easier said than done. There are contradictions as well. For instance, periodic change in power has been seen as one of the political tools to reduce poverty. It assumes that the change in power would bring more pro-poor poverty reduction policies. However, without change in power, there have been so many instances of drastic change in poverty levels (e.g. Japan ruled by LDP for over fifty years, China under one-party rule and Vietnam under similar condition, Singapore evolving similarly after the British left them in the 1970s). Implementing all the poverty-reducing policy recommendations of this report is simply out of the reach of the developing countries due to institutional and resource constraints. Not a really enlightening report as most of the points were already floated out in other papers. What could have been interesting is the near-precise process of attaining the goals set in the policy recommendations. This is missing in literature on poverty and inequality. This report also misses this crucial aspect.