By Tom Arms
This week the British government announced that it planned to cut its overseas aid budget by 0.2 per cent or about $4 billion a year. In 2019 it was $19.3 billion and Britain laid proud claim to being the world’s third-largest aid donor and one of only five countries which had reached the internationally agreed aid donor figure of 0.7 percentage of GDP.
The announcement this week by Chancellor of the Exchequer Rishi Sunak was an emotional short-sighted political decision by a populist government as a knee-jerk response to the economic difficulties created by the coronavirus pandemic. It had no grounding in either humanitarian or economic considerations.
Instead, it caved into the popular conception that charity begins at home without any acceptance of the fact that we live in an increasingly interdependent and interconnected world.
Schools in the developing world will close or not open. Children will go hungry. Unemployment will rise along with political instability. People, lots of them, will die if the proposed cut in British aid goes ahead.
British prestige in the world will also suffer. So will British trade and the British economy. The aid budget has never been an exercise in unadulterated altruism. The fact is that aid flows from the developed to the developing world encourage global economic growth which creates markets for British goods and services. Poor people buy fewer British products. Dead people buy even less.
The aid cut still has to be voted on by parliament, and there is a growing cross-party consensus—including a number of rebel conservative MPs– that the proposal is a mistake and should be rejected. But parliamentary arithmetic—an 80-seat majority for the Johnson government— coupled with the political attraction of a simplistic solution to a complex problem, means that it will probably be approved.
It is, therefore, time to consider alternatives to make up the shortfall. One of them could be a proposal which won an honourable mention in the 2018 Ashdown Prize competition for a “big, bold, radical idea” to tackle Britain’s problems.
The proposal was entitled “Development Bonds”. Boiled down to the bare essentials it called on Britain—and other members of the Developed World—to launch bonds to finance infrastructure development in developing countries. These countries would re-pay the money at a reduced rate of interest which would be attractive to bondholders because the developed countries would give tax relief on the repayments.
The proposed system is basically an international extension of America’s municipal bond system which has played a major role in developing the US infrastructure starting in 1812 with finance raising for the construction of the Erie Canal. At the end of 2019, $3.9 trillion was invested in American municipal bonds.
In the proposal submitted in 2018, each Development Bond starts with a request from a developing country. An African government, for instance, identifies a priority project for funding as part of its national development plans. An example could be a $50 million rural roads programme serving a mix of smallholder and large-scale farmers. Funds are unavailable from the government’s own internal resources. Traditional sources of funding (World Bank [IDA] lending, African Development Bank [AfDB] soft loan, bilateral donor) cannot be programmed within the required timeframe, or for other reasons offer a less attractive option. Commercial funding is too expensive.
As an alternative, the African government approaches donor governments for help in identifying a suitable financial institution prepared to issue Development Bonds to finance the project. Such an institution would typically be an investment bank in a G7 or OECD country.
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A lead donor government carries out a rapid initial appraisal, taking into account political (e.g. human rights and governance record) and economic considerations. The appraisal process is likely to involve coordination between the ministries of foreign affairs, finance, and trade. If a green light is given, a more detailed feasibility study is carried out, including environmental, social, and deeper economic appraisals, to ensure an acceptable rate of return on the investment.
If this also gives the project the go-ahead, the African government invites financial institutions, through a process of international competitive tendering, to submit proposals for organising a bond issue.
Development Bonds are not a complete solution. They do not solve short-term crises such as natural disasters, refugee assistance and food relief. But they can contribute to the development of economies that frees dwindling resources to be more focused on immediate and pressing concerns while financing projects that help developing countries become less aid-dependent. With Britain’s proposed aid cut, it may be a proposal whose time has come.
World Review
Donald Trump hated the State Department. They were the foot soldiers of the liberal internationalism that he wanted to destroy. As a result, the roster of experienced US diplomats is down about 30 per cent from 2016 and US foreign policy lies in tatters on the Oval Office floor. Trump’s top-level appointments were picked from the world of big business and owed their position not to foreign policy experience but to the whims of a mercurial president who could—and did– fire them with a tweet. Joe Biden is old school. His key foreign policy appointments are a team who have worked together in the State Department for many years. Secretary of State-designate Anthony Blinken has been a foreign policy adviser to Biden for 20 years. Linda Thomas Greenfield has been nominated for the post of US Ambassador to the United Nations. She is an internationally acknowledged expert on African affairs and possibly the highest-profile African-American diplomat in America. National Security Adviser-designate Jake Sullivan is a career foreign service officer who was a key adviser to Hillary Clinton and helped negotiate the Iran-Nuclear Deal. All three are “deep state liberal internationalists” with the expert knowledge of the world that Donald Trump despised. That is a plus. But perhaps it might have been useful to temper their government-focused experience with some business knowledge. It is called compromise.
As if the Horn of Africa did not have enough problems, it is now facing a return showing of the Day of the Locusts. Earlier this year, the region experienced the worst locust invasion in 70 years as the pests swept through the Horn of Africa destroying crops and grazing land. Normally, that would be it, but Cyclone Gati has dropped a mass of water on the insects’ breeding grounds. The locusts are starting to return and the predictions are that attack number two will be worse than the first. The manmade Ethiopian civil war exacerbates this natural disaster. Normally the military would be called into play. Armed with insecticides they would lead the fight against infestation and minimise damage. But this time the soldiers are otherwise occupied fighting each other. Meanwhile, Ethiopian Prime Minister Abiy Ahmed has announced that his federal troops are in the final phase of their attack on Tigray. It remains to be seen, however, if this is the end of a short civil war or the beginning of a long guerrilla conflict.
Power, as they say, corrupts. And then they add: “Absolute power corrupts absolutely.” Among the Western democracies, there are few—if any—heads of state who have as much power as the presidents of France’s Fifth Republic. They are effectively elected monarchs. The temptation to hang onto that power and abuse it must be enormous. This week 65-year-old ex-president Nicolas Sarkozy appeared in a Paris court charged with giving into temptation. He is alleged to have offered his co-defendant, Judge Gilbert Azibert, a plum job in Monaco in return for confidential details of an investigation into Sarkozy’s alleged acceptance of illegal payments by L’Oreal heiress Lillian Bettencourt. The trial is expected to last until 10 December, and, if found guilty, Sarkozy could end up behind bars for ten years and paying off a $1 million court fine, not to mention his legal fees. Sarkozy is not the first modern French president to fall foul of the law. Jacques Chirac was given a two-year suspended sentence for embezzlement. A cloud of sorts lingers over the legacy of Valery Giscard d’Estaing over the diamond affair. Jean-Bedel Bokassa, the self-styled Emperor of the Central African Empire/Republic is alleged to have offered Giscard a pair of valuable diamonds in return for favours. Of course, not all French presidents are corrupt. Emmanuel Macron is so far untainted. Pompidou and Mitterrand emerged more or less unscathed. DeGaulle was said to be so scrupulously honest that he personally paid the electricity bill of the Elysee Palace. But then those were the days when the presidency was the ultimate public service route to the prize of world respect. Now it is the path to glory and riches as well.
This weekend is the G20 Summit in Saudi Arabia. And, you may rest assured that the kingdom will be rolling out the red carpet; not only for the 20 heads of government and their extensive political entourages but also for the hundreds of journalists who will be accompanying them. The annual diplomatic bean fest is an opportunity to project an image of a modern, thrusting and dynamic Saudi Arabia which is shedding its cloak of religious and political oppression and joining the rest of the world. Unfortunately, the G20 summit in Riyadh coincides with a trial in Istanbul of 20 Saudi agents who allegedly suffocated and then dismembered journalist Jamal Khashoggi in the Saudi consulate. His crime? He criticised the Saudi regime. The agents are being tried in absentia because Saudi Arabia has refused to extradite them to Turkey. The Saudis have, however, sentenced to death eight Saudi agents for Khashoggi’s murder and imprisoned three others. But, most importantly, they have denied that the kingdom had anything to do with the affair. This has been dismissed by UN observers who described the Saudi trial as a farce and pointed out that two of the convicted were close associates of Crown Prince Mohammed bin Salman. The timing of the trial is no coincidence. The Turks and Saudis are rivals for regional supremacy and Turkish President Recep Tayyip Erdogan is obviously using the Khashoggi affair to embarrass MBS while he is glad-handing world leaders in Riyadh.
There are some jobs I would hate to have at this juncture of history. Top of the list is Treasury Secretary, aka Finance Minister or, in the case of the UK, Chancellor of the Exchequer. This week the British Chancellor Rishi Sunak had to stand up in the House of Commons and deliver the butcher’s bill in the war against coronavirus. It is big, long, frightening and will take a long time to settle. A sea of long faces stared back at the Chancellor as he told them that the cost of fighting covid-19 meant that the British economy was expected to shrink by 11.7 per cent this year; would take another two years to reach pre-pandemic levels and would remain stagnant until at least 2025. Unemployment is expected to rise to 7.5 per cent with 2.5 million out of work, more than double the pre-covid figure. Public sector workers—except the very low paid and those in the National Health Service—will have their pay frozen for at least a year. All this is to pay back the money that the government has had to borrow in the past few months– $365 billion for this year with more to come over the next five years. British borrowing as a percentage of GDP will be in the region of 110 per cent at least until 2025. At the turn of the millennium, it was about 25 per cent. Conspicuous by its absence from Rishi Sunak’s statement was any mention of the economic impact of Brexit. EU-UK negotiations continue to drag on with the end of December deadline looming. The Office of Budget Responsibility warned in 2019 that the British economy could shrink by up to eight per cent if the two sides fail to make a deal. That would be on top of the damage caused by a coronavirus.
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