What does the Recession mean for the Developing World?

Over the last half century, Africa has received more than $1 trillion from the west and yet, remains in dire straits. And now, the Recession is likely to restrict the level of aid that will be made available from the Developed World. Or, will it?

The value of Aid in the recession of 1990 to 93 fell by 25% and did not recover the same level until 2002. Cafod, the Catholic aid agency, recently estimated that the current crisis and the weakening of sterling could cut $41 billion in real terms out of the UK foreign aid budget over the next seven years and, despite an increase in spending, the Gates Foundation reports a 20% drop in asset value of their Fund.

Where does this leave efforts to transform whole economies and, put in place a framework for sustainable growth where the need is greatest? There are very different views on value for money and, how best to tackle this complex issue …

The debate on Aid has generated a massive literature and, in Development as Freedom, Nobel Prize winning Economist Amartya Sen focusses on Freedoms but highlights narrower views of development such as the growth of GNP or with the rise in personal incomes or technological advance. In the ends and means of development he highlights two general attitudes; first, a fierce perspective that drives a hard bargain and champions dealing with the tough stuff first and the neglect of “soft headed” safety nets for the poor. Second, Sen highlights a more “friendly” process that expands freedoms and deals with all forms of pro-poor social support. In other words, one view is characterised by market fundamentalism and the other by inclusive growth. These notes explore the context within which T L has to work.

In his book The End of Poverty (2005), Jeffrey Sachs highlights the cycle of bad debt, bad health and bad luck that have held back more than one billion people. He challenges our generation with the opportunity to end extreme poverty in the world’s most desperate nations arguing for an increase of Aid from the current $65 to $130 billion by 2015.

Championed by Bono and Geldoff, Sachs leads the UN Millenium Project (See Millenium Goals on this Blog) and likens much of the thinking on development (especially economics) to 18th century medicine – more art than science. He makes the point that for those living on so little there is nothing left over to save and that means no capital is available for growth generating projects.

Sachs, is not impressed by the IMF with their tired prescriptions that offer narrow based one-size-fits all solutions on corruption, budget deficits and state ownership of production overlooking urgent problems involving poverty traps, agronomy, climate, disease, gender and even logistics as disciplines that can provide transformative insight and solutions. 

Sachs is mild in comparison with Joseph Stiglitz whose Globalization and its Discontents is clear: “the problem is not with globalisation but with how it is managed.”  For him, the IMF has paid more attention to ensure that bankers rather than the poor were protected from systemic failure. And his contrast between Russia and China post the fall of the Berlin Wall is a salutary lesson. For example, whilst China promoted bottom up village based productivity initiatives the IMF deemed these to be public enterprises and therefore could not suceed. Meanwhile, the village of Qiatou, from a standing start in a remote region, expanded to produce 60% of the world’s buttons!  The Washington prescription and unfettered markets promoted a market fundamentalism that let the poor down badly.

Sachs moves the Agenda forward with a Plan.  See his differential diagnosis of the priorities for action (p 84). Covering all sorts of issues such as capital (human, business and infrastructure) and cultural barriers – he is paticularily scathing of gender issues –  Sachs argues for a detailed assessment of physical geography and human ecology – ways in which a country responds to its location.

Sachs argues for greater understanding of transport conditions – on average and by sub region. How close is the population to seaports and airports, navigable rivers, paved roads and rail services? He highlights the need to analyse the costs of connectivity and to benchmark this with other regions and countries. These are fundamental tools for the development of a TL perspective. 

This emphasis on Spatial Geography happens to be the theme of the World Development Report 2009 and, is a crucial issue for progress in all developing countries.

There is no better (worse) example of the impact of spatial geography than Africa, where European colonisers substituted geometry for geography creating a political map of forty-six states cutting through 177 ethnic “culture areas”. The Nigeria / Cameroon border cuts through 14. John Readers Biography of the Continent highlights the 15 landlocked countries – more than the rest of the world put together – and the fact that so many states have multiple neighbours exacerbates tensions political tensions and fosters levels of corruption that make the physical movement of goods a complete nightmare.  According to UN and World Bank estimates corruption and transfer pricing cost Africa more than $150 billion a year. For a compelling account of this aspwect of development, have a look at It’s Our Turn to Eat, The Story of a Kenyan Whistleblower by Michela Wong.

One of the loopholes that is often exploited is the sheer scale of International and even domestic cross border tariffs and collection points that act as a mechanism for corruption to exploit. As Sachs work points out, donors such as the World Bank inadvertently contribute to the mess by being so single country focussed and, ineffective with multicountry projects. This makes for poor logistics investment strategies.

Sachs is strong on the need for investment and makes a clear analysis of the real impact of current aid. Total foreign aid from all donors to all developing countries in 2002 was $76 billion. Of that, $11 billion was used to pay off debt and, after all costs are deducted only around $15 billion goes to support basic needs projects. Sachs reckons that Africa needs an estimated $30 billion a year to escape poverty. However, where will that money actually go?

William Easterly of New York University takes the contrary position in his book The White Man’s Burden. He sees $2.3 trillion of Aid in the recent past as a waste; $568 million on Africa alone. Dambisa Moyo, Harvard and Oxford educated and former Head of research on sub Saharan Africa for Goldman Sachs, has joined the debate with her book Dead Aid. These books hammer home the point with questions like – Why is it that Singapore and Ghana had roughly the same income levels in the 1950’s and now poles apart?

Mind you, in my view, Moyos choice of examples trivialises the point with observations such as “Saudi Arabia is rather hot and, of course, Switzerland is landlocked but these factors have not stopped them getting on with it.” Oil and a small population may have had something to do with this in the case of Saudi and, being at the heart of the European financial networks may have helped Switzerland more than Moyo allows.   

Nonetheless, from 1970 to 1998, when aid flows were at their peak, poverty in Africa rose from 11% to a depressing 66% – roughly 600 million people today are trapped in poverty. Corruption has been staggering and wars have killed more than 40 million people over the past 50 years in Africa. “Aid” writes Moyo “has been, and continues to be, an unmitigated political, economic and humanitarian disaster for most parts of the developing world.”  

Moyo makes a clear distinction that there are excellent aid projects. She is not attacking humanitarian or emergency aid, mobilised in response to disasters; neither does she level criticism at charities that solve specific problems with children or, distributing medical supplies.

Moyo focuses the need for local solutions and less of the dependency culture – 70% of the Somalian Budget is based on donated aid – and more on Chinese style projects. China is involved in many African projects, most of which focus infrastructure that can improve market access for raw materials and commotities. Some criticise them for human rights abuses but Moyo emphasises the ways in which they treat their partners as equals. And she uses surveys to emphasise how local people are happier with this model. In the eye of a recessionary storm you can imagine how attractive Moyos thesis will become to those who look for any excuse to cut Aid spending and, the idea of scraping ALL Aid within five years could be suicidal indeed.

Other commentators emphasise the impact of corruption at all levels. For example, in Afghanistan where chronic mismanagement and profligacy are estimated to have wasted up to a third of the $15 billion in funding already donated to the reconstruction effort. Much of this being covered up through endless subcontracting of project activities such that two-thirds of all aid bypasses the government altogether. Another example is Nigeria that has earned billions from oil but, where has the money gone?

By far the best understanding of this issue is Professor Paul Collier of the University of Oxford. In his TED lecture he refers to his book the Bottom Billion and highlights the need for compassion to get started on changing outcomes but enlightened self interest to get serious. He highlights the example of the US after WW II with Marshall Aid and, the shift from protectionist to open trade flows. However, he reserves his major focus on governance.

Using his recent research on commodity booms he explains how fragile the benefits are if good governance is not in place. On scale, he uses Angola where oil revenues were $50 billion in 2007 – this compares with the $34 billion in Aid that went to the bottom 60 economies in the same year. On impact, he highlights how Nigeria would have been better without the oil rush – because of the chaos caused by corruption and bad governance. He suggests a closer look at verified auctions; such  transparency on major Public works being a means to close off the opportunity for corruption.  It is a compelling argument.

In his book, Sachs quotes U.S. Secretary of the Treasury Paul O’Neill: “We’ve spent trillions of dollars on the problems of Africa and we have damn near nothing to show for it.”  Then, Sachs counters all of this with the view that in fact, the sums of investment have been paltry; just $30 per Sub Saharan African from donor countries in 2002 – of which $5 was for consultants from the developed world. In fact, Sachs is arguing for 0.5% of GDP which is lower than the 0.7% of the UN and, against the critics, at least he has a Plan.

Criticism of the developed world does not stop there. Yunus, of the Grameen Bank, has been scathing about the global banking industry now kept afloat by stunning amounts of taxpayers money. “They don’t mind writing off a trillion dollars in sub-prime crisis, but they still shy away from lending $100 to a poor woman for an initiative that can become a self sustaining business.” Yunus is refering to the micro credit business that has grown from humble beginings in the 1970s into a multi billion dollar industry as a means to provide the landless spoor with real chances of working their way out of poverty.   

Then, there are those who champion Creative Capitalism like Bill and Melinda Gates with their Fund. At Davos, they spoke to Financial Times journalist Martin Wolff and responded to those critics who argue that aid is cash down the drain with many examples of progress on the ground. Oxfam carries the same message in their book From Poverty to Power.

Many entries on this Blog highlight the impact of skills – or the lack of –  restricting efforts to achieve sustainable growth. All developing, emerging and fractured economies need the capacity to generate their own skilled labour pool. Failure to do so means a dependency on foreign workers whose high salaries reduce the budget to tackle real issues, create jobs and anchor development capital within the community and the biggest need for skills is in materials handling equipment all along the supply chains that connect the local economy to national and global markets.

Throughout this whole debate there is a real need to grasp the realities of the informal economy and the ways in which it interacts with the formal economy as a whole. A recent piece by Martha Chen covers the ground comprehensively. See: Rethinking the Informal Economy. Linkages with the Formal Economy and the Formal Regulatory Environment.  

Development is a complex issue and there are several positions taken.  However, as Stiglitz makes clear in Making Globalization Work, “Development is about transforming the lives of people , not just transforming economies” and,  we consider that logistics can make a significant contribution to that crucial transformation.  

Any views?

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3 Responses to What does the Recession mean for the Developing World?

  1. rahul says:

    I am a student from the National Institute of Technology, Trichy, (NITT) – Tamil Nadu, India.

    NITT is amongst the premier engineering institutes in India. The Department of Production Engineering had organized a technical symposium called “Prodigy” which served as an active platform for discussion of topics coming under the purview of the industrial world and its economics.

    We had Rob on a conference over Skype to discuss Transformational Logistics and its relevance to developing economies like India.

    Nearly a hundred students were audience to the discussion that included a presentation with down-to-earth examples of TL and its impact on world economies.

    Rob surprised us with his insight and his knowledge about India. It came as a warm surprise to students and the discussion made a lot of sense as Rob was able to relate TL to so many activities in India that go rather unnoticed to the common eye.
    The talk journeyed from the logistics of the Chennai port to the Rajathan carpet weavers to Kerala’s fishermen to Kenya’s bicycle innovations.

    A lot of questions were raised by students during the course of the discussion. Some questioned the relevance of T L, bang in the middle of recession; how T L holds the potential to affect developing economies like India and China; what role do simple innovations like the modified bicycle have to play in T L etc.

    T L is a relatively new topic which does not form a part of the curriculum here in India. I would like to thank Rob for taking time off his schedule to introduce T L to us in a very simplified manner. The topic stirred many questions and created a lot of interest in the students circle. I hope we can have another conference on a bigger scale next time Rob. Thank you so much.

  2. Aditya Varadarajan says:

    Rob. Recession has affected the entire world. Recession started in the US, due to which countries dependent on the US have also been affected.
    I believe that as recession started in the US, recovery too will start from there. Is it true?

    India has not been affected as much as expected, is it because its a savings based economy.?

    Your threads on TL, I believe is the answer to the recession struck countries. What are your comments.?

    • robjbell says:

      Aditya and Rahul on the way out of the Recession…

      First, let me thank you all for the terrific questions. Let’s have another go at the Skype format.

      My take on this is that India has a relatively small Export economy. Leaving aside IT and BPO, there is much to be done to develop light manufacturing and agri processing. China, on the other hand, has a massive export indusyry that has driven growth and has had more to lose as demand in the US and the EU has fallen away.

      As to the role of the USA in a cyclical upturn – yes, it will be signficant. After all, $17 trillion out of $33 trillion global trade is US based. Japan is $4 and China is roughly $3 trillion. However, let us not rule out the role of domestic demand in India and the other BRICs. This could be greatly enhanced by a focus on infrastructure – dealing with the Last Mile in ALL Indian Ports would be a good start – and the trickle down impact of the funds allocated.

      By the way – have a look at the latest Post: Let’s sponsor a Supply Chain.

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