The 2005 G8: Business as usual the morning after?

Two months ago, celebrity campaigner Bob Geldof declared the 2005 G8 Gleneagles summit as a “qualified triumph” in the fight to end poverty. Charles Abugre assesses promises made on debt, aid and trade, in the process questioning the myths that surround much of the development discourse. He concludes that G8 promises are unlikely to translate into delivery and questions whether progressive civil society should legitimise a fundamentally unaccountable global governance arrangement.

It is barely 2 months since the Gleneagles G8 summit - declared by its host, the British Minister, as the “beginning of the end of extreme poverty in our world” and that Bob Geldof pronounced as a “qualified triumph” - and there are ominous signs that once again promises and delivery can be worlds apart.

The Japanese government is reported to have retracted from the promise of substantial new money for aid, the German government is yet to decide where it will get the money from, the French contribution is largely absorbed in past debt relief promises to its former colonies whilst the Bush administration stands little chance of selling a bigger aid budget to its Republican-dominated law makers.

The IMF and World Bank have thrown cold water over the magnitude and pace of debt cancellation expectations. The World Bank claims that only a small portion of the promised debt write off has so far been committed, whilst the “unconditional” aspect of the debt deal is being challenged by some key rich countries. Rather than a triumph, this may well turn out to be the “vastly disappointing result which will not make poverty history”, in Christian Aid’s assessment of the summit’s outcome.

1.0 The G8’s Promises

The G8 promised a doubling of aid to Africa, as part of an overall increase of $48 billion for all developing countries by 2010 (compared to 2004 levels), “which will start to flow immediately” (according to Tony Blair). The European Union promised to increase its aid by an extra $38 billion. Canada promised to double the overall volumes of its aid by 2010 and aid to Africa by 2008/09 compared to the 2003/4 levels. The United States of America promised to double aid to Africa by 2010 whilst Japan pledged an additional $10 billion over the next five years. If the Japanese deliver, this will halt an embarrassing 5-year decline in the volume of Japanese aid. In addition, Germany, Italy, France and the UK confirmed time tables for reaching the much heralded 0.7% of GDP commitment. In contrast, Japan, the United States and Canada remain unwilling to commit to a timetable to reach the 0.7% target. In terms of conditionality, the communiqué contained language to the effect of allowing developing countries to “decide, plan and sequence their economic policies”.

In terms of debt, the G8 announced a 100% cancellation of the multilateral debts of some Highly Indebted Poor Countries (HIPCs) calculated to amount to a total of $55 billion of relief, “$40bn dollars immediately” according to Gordon Brown in a speech to UNICEF and “without conditions” in a speech to his Treasury Select Committee. This debt deal is expected to benefit 18 HIPC countries who have successfully completed their HIPC programmes with the IMF with another 20 countries possibly benefiting with time. In addition, Nigeria stitched a deal estimated to be worth $17bn of debt cancellation including debt stock, described by Nigeria’s finance minister and former World Bank employee as “unprecedented”.

On trade, the G8 agreed to “establish a credible end date for agricultural export subsidies”, “measures to build Africa's capacity to trade” and recognised poor countries' need to determine their own economic and trade policies, i.e. to “decide, plan, and sequence their economic reforms”. This statement is interpreted by some to imply an imminent end to economic conditionality and a potential expansion of the policy space for developing countries, if implemented.

2.0 How Much Progress?

Do these promises constitute a vastly disappointing outcome or a qualified triumph? The answer of course is, it depends on what the standard of comparison is. Compared against the demands of the Make Poverty History Movement which called for more and better aid, debt cancellation for the poorest countries and trade justice in the form of non-reciprocal market access, the end of export subsidies and an end to “forced liberalisation”, the Gleneagles Summit undoubtedly delivered a significant part of this agenda. It is also fair to say that compared to other G8 events the Gleneagles agenda undoubtedly covered the most comprehensive set of issues central to international development – debt, aid and trade – but also conflicts and conflict management in Africa.

If what was asked for was at least substantially delivered, why were the aid agencies generally unhappy? Well, for a start, they were not disappointed to the same degree. Clearly it is hard to say that Comic Relief (whose director, Richard Curtis was the key to the celebrity mobilisation and media imagery) was unhappy to the same degree as War on Want or the World Development Movement when the celebrity star player declared the outcome as a “qualified triumph”. Nor were they disappointed for the same reasons, given that agencies placed different weights on different bits of the MPH agenda. It is not surprising that Bob Geldof declared the summit a triumph and Christian Aid a vastly disappointing result largely because they placed different weights on what was offered. The debt deal may well have delighted some in the MPH coalition who placed much emphasis on the poorest countries, compared to the Jubilee South movement who tends to approach the debt problem as a product of systemic injustice suffered by developing countries.

2.1 The game of numbers

Assessing the adequacy of the aid and debt deals is always a game of numbers. Aid targets being bundled around vary according to whether the estimates relate to resources needed to achieve the minimalist MDGs or more broadly to promote development. They vary according to whether they relate to least developed countries (LDCs) or developing countries generally and the magnitude varies with what is counted as aid and what the cut-off point is. In many cases, the targets and promises are decidedly vague and confusing. The G8 deal for example was vague about how the $48bn global number translates into actual flows year on year up to the 2010 target. The promise of $48bn of additional aid by 2010 may have satisfied the expectation of the Africa Commission Report but falls far short of the expectations of the Millennium Project Report which estimates the additional aid requirements to be in the magnitude of $90bn by 2010. This figure also pales if compared with the $170bn or so equivalence of the 0.7% GDP that rich countries should be providing, and even smaller compared to what developing countries actually need to finance their transition from underdevelopment.

There is an issue of what the actual resource additionality is in the $48bn dollar pledge. First, if the $20bn dollars pledged for HIV/AIDS by 2010 is taken out, only $28bn remains for all other development needs. Second, according to MPH analysis, only about $16bn is new money. The rest are old promises. $16bn, over 10 years, therefore represents “Bob Geldolf’s triumph”. It should also be noted that the $48bn pledge includes the amount required to write off the multilateral debt, according to Gordon Brown, who confirmed this to a Treasury Select Committee.

2.2 The delivery track record

Scale and additionality apart, there is the gap between pledges and delivery. The track record of delivering promises has been singularly appalling. Recall the Millennium Challenge Account announced by the United States in 2002 to provide $5billion dollars to support Africa’s development. Three years later, the United States managed to deliver only $17 million dollars to Madagascar bizarrely in support of land privatisation and the introduction of a cheque-account system in commercial banks. Mr. Applegarth, the man Bush appointed to run the MCA, recently resigned out of frustration and, some say, inefficiency. Post-G8 reports coming out of Japan raise doubts about whether Koizumi’s $10bn additional aid pledge will be delivered. The Japan Network on Debt and Poverty report that following the G8 meeting the Japanese government has subsequently decided that the $10bn promised by Koizumi will not be additional money for international development but will be devoted to fulfilling Japan’s commitments to the cancellation of Iraq debt and debt owed by Tsunami affected countries. Whilst Japanese aid to Africa is expected to increase by $1.6bn for the coming 3 years, this will be achieved through diverting resources from other parts of the existing aid budget.

In truth, the $48bn promise is yet to be fully financed. Germany and France are still exploring the possibility of raising money from aviation taxation and some limited form of Bond transactions along the lines of Gordon Brown’s International Finance Facility. Italy is reported to be signalling that budgetary constraints may adversely affect their ability to fulfil their 0,7% targets. Therefore even the limited additional $16bn dollars – the Geldof triumph – may not be fully forthcoming. The subtle impression created in various announcements that massive new funds will be injected into poverty reduction is in the least disingenuous.

2.3 Aid quality

There is also the issue of quality. The one issue that UK NGOs are united in their excitement about is the statement that throws some cold water over overt conditionality. Is this the beginning of the end of conditionality? Unlikely, for several reasons. First, much of US aid, especially the Millennium Challenge Account (MCA), is conditional upon access by US firms to recipient country markets and on liberalisation generally. It is highly unlikely that the US will change the terms of the MCA based on UK government preference. The rest of US aid is either concentrated in a few countries in pursuit of military and geopolitical interests or provided in the form of food aid. Secondly, although the communiqué says little about how the additional resources will be disbursed, it is reasonable to suppose that the much of it will be channelled through the IFIs.

Indeed, the Communiqué intimated that the judgement of the IFIs will be crucial to deciding whether a country’s policies are growth oriented, pro-poor and support good governance. Given that no specific reform measures were proposed for the IFIs, a business as usual approach will be the norm. Business as usual for the IMF is a continued insistence on a macroeconomic framework grounded on neoliberalism. For the World Bank, this will be an affirmation of the current shift from overt to covert conditionality which they currently enforce through various selectivity mechanisms such as prior actions and the use of rating systems biased in favour of liberalisation for the allocation of badly needed resources to poor countries. Without substantial reform of the core purpose of these institutions and diluting their power, poor countries will continue to be “forced” by aid dependency to liberalise through skewed incentive frameworks. The on-going review of the World Bank’s conditionality framework makes this clear. Whilst overt conditions will reduce in numbers, covert ones will take their place.

But the use of conditionality is not the preserve of the IFIs. Indeed the conditionality approach, including specific instruments used by the IFIs, and their various mutations, have their roots in the OECD-DAC. Some specific conditionalities are “forced” on the IFIs by powerful members in the G7 in pursuit of their domestic interests. An example is the privatization of public infrastructure and basic services which the World Bank enforces through its lending programmes and written into their Private Sector Development Strategy which is believed to have been pushed by the United States against opposition of some senior Bank staff. Procurement is the newest area of battle. Reuters reported that on May 25th, 11 business organisations, including the US Council for International Business, Computing Technology association and US Chamber of Commerce, sent a letter to the World Bank protesting against the Bank’s proposed revision of its procurement rules to permit developing countries to use their own budding rules to award World Bank funded contracts in order to promote their own businesses, and seeking to open up all government procurements to international competitive bidding. Republican Senator Richard Lugar, chairman of the influential Committee on Foreign Relations, raised similar issues in a letter to Paul Wolfowitz, former Pentagon No.2, now World Bank President. This is irrespective of the fact that developing countries have rejected the liberalisation of domestic procurement in the WTO multilateral trade talks. Under these circumstances it will be naïve to believe that economic conditionality is about to come to an end.

2.4 The debt deal

The debt deal has been controversial almost as soon as Gordon Brown announced it following the G7 Finance Minister’s meeting in June. One issue is presentation. Gordon Brown has tended to speak about the deal in language that suggests a 100%, immediate and unconditional debt cancellation for the poorest countries. Brown said to a Unicef meeting that “together and for years we have fought for debt relief, and this year we are finally delivering 100% relief to the poorest countries in the world: a $55bn write off of multilateral debt, $40bn immediately”. In truth, it is a proposal to the Boards of the IMF, the World Bank and the African development Bank to consider cancelling debt owed to them by 18 countries that have completed their HIPC programmes, with the possibility of more countries benefiting from the same arrangement in the future. It is not a 100% debt cancellation as the deal does not affect other categories of debt and is silent on debt owed by the eligible Latin American countries to the Inter-American Development Bank.

Some will argue that even this limited offer is not entirely altruistic but self-serving to a degree – a means to extend the life of a debt management arrangement that has singularly failed to resolve the debt crisis but has served the creditors well. By dangling a new carrot - the prospect of the cancellation of the debt stock owed to the IFIs - the 62 or so low income countries will be encouraged to continue to make good their debt obligations, thereby ensuring that creditors make as much money back as they possibly can on dodgy debts that would otherwise have been defaulted. This strategy has been used for 20 years to minimize disaster rather than solve the debt crisis.

Even this modest, not-so-altruistic debt relief proposal has hit a snag. First, the proposed cancellation of debt owed to the World Bank and the African Development Bank is limited by the caveat that the cancellation will be fully paid for so that these countries will not suffer revenue losses. Yet, the G8 did not commit the full resources needed to achieve this. The World Bank says that the G8 has committed to covering $1.4bn of reflows over 3 years and that this did not “cover all of IDA’s true costs”, meaning it will come at the cost of reduced IDA lending. Geoff Lamb of the World Bank also made it clear that the cancellation will be a drip-feed affair over 40years which he estimates will cost an extra $24bn today (if the debt were to written off today in one swoop), which is the equivalent of a quarter of all global aid flows in 2004. Without full donor financing of the debt relief initiative, “IDA countries will not benefit from the relief, he said. This non-commitment of the full resources for debt cancellation has generated much confusion as whether the deal represents a one-off debt cancellation for the illegible countries or a drip-feed arrangement which will continue for as long as someone commits to the needed resources in the future.

The IMF on the other hand question the “unconditional” principle, arguing alongside some non-G8 key countries like Switzerland, Belgium and the Netherlands that conditionality is central to ensuring the enforcement of the appropriate economic policies. Instead of immediate and unconditional debt cancellation, these countries argue for a compensation framework where countries first pay up and then have the money returned to them in exchange for policy leverage. The conditionality issue is therefore entirely up for grabs at the autumn meeting of the IMF and the World Bank. Besides, the issue of how the IMF debt cancellation will be financed also remains to be resolved. But even if the HIPC debts were fully financed in one way or the other that will leave Africa for example still $200bn in debt and the developing world’s debt in general largely untouched. It leaves developing countries still paying to the rich world over $100mn daily. The choice of only some of the poorest countries for some debt relief is arbitrary (e.g why Uganda and not Kenya, Bangladesh or Ecuador or Haiti) and expedient for rich countries - a humanitarian gesture which goes no distance in tackling poverty and inequality let alone the injustice of the global debt management framework. Most of the poorest people live in the countries by-passed by HIPC debt relief initiatives

2.5 The trade deal

For trade, the G8 agreed to commit nothing. They agreed to agree some time soon on a time table to end export subsidies. Tony Blair hints that a timetable is possible and that a 2010 date is what he has in mind. Trade campaigners jumped at the language to the effect that poor countries be given the space to determine their pace of trade reforms. This language can be interpreted to mean different things, including that they expect poor countries to continue to open up their markets but will accept a slower opening. This undermines the MPH coalition’s implicit demand that there should be explicit recognition that poor countries may have gone too far already in opening their markets and should sensibly reverse gear when necessary. The MPH demand in the WTO negotiations is a principle of non-reciprocity where the rich countries should be expected to open up their markets without requiring poor countries to reciprocate if even less steeply. They got no such signal in the communiqué. There was also no explicit language addressed to the IMF and the World Bank to end the use of debt relief and loans as instruments for promoting unilateral market opening. Given the crisis of production facing African countries in particular, the refusal to reform the unjust trade rules is clearest signal of the double standards of the G8.

3.0 Beyond the MPH’s Agenda.

It is not sufficient to merely assess the extent to which the promises made will be delivered. The bigger issue is how fundamentally the MPH-type agenda tackles the obstacles developing countries face in mobilising resources for development. This cannot be adequately done without questioning various myths and holy grails.

3.1 Rethinking Aid

Aid is one such Holy Grail. The development community tends to ask for more of it largely on the assumption that it does more good than harm. The MPH demand for “better aid” is based on the understanding that aid can do harm if not provided appropriately, with conditionality being the main villain. What remains to be recognised is that even with reformed conditionalities more aid is not necessarily good and there is a point where aid necessarily does more harm than good.

A recent IMF report argues that aid can lead to lower growth if it distorts wages and exchange rates which in turn reduces competitiveness. Some argue that it is the size that matters. When aid exceeds 15% of GDP, it is more likely to do more harm than good because it exerts a negative pressure on absorptive capacity. But there is also political explanation why aid dependency hurts. Higher levels of aid tend to be associated with higher corruption and the erosion of the quality of the bureaucracy. It undermines accountability by prioritising accountability of bureaucracies and the political elite to aid arrangements rather than citizens groups. Aid tends to reinforce the power of the executive over the legislature thereby weakening political checks and balances central to democratic governance. Aid destroys democracy even more when ruling parties see their chance of continued rule in receiving and disbursing aid to buy patronage.

Aid and independence move in different directions Aid is a source and instrument of power – both coercive and discursive. Aid cannot be separated from the ideas it conveys about how societies should be managed. When those ideas are conveyed under conditions where a fair competition of ideas cannot take place or worst still where healthy skeptism cannot be exercised, then aid becomes an instrument of control through ideas. The power exercised through the monopoly of knowledge is discursive power, as opposed to the coercive power conveyed through overt conditionality. Development is impossible with double dependency – on other people’s empathy and on other people’s ideas. It is not surprising that governments in aid-dependent countries tend to sound and act more neoliberal than the godfathers of neoliberalism, parroting the extreme versions of IMF and World Bank ideologies and selling the interest of their people down the tube without noticing. The political and developmental implications of aid and knowledge dependency are issues that aid agencies are yet to address in a serious way.

3.2 Plug the leaks

A progressive agenda will look beyond aid to other ways to finance development that are more empowering. They are several, including taxation which has served developed countries well as a means of redistribution and source of investment capital but which has been undermined through the enforced deregulation which has promoted tax competition, tax avoidance and tax havens. As a result, whereas government revenue from taxation in developed countries average 30% of GDP between 1990 and 2000, in sub-Saharan Africa it averages 17.9% of GDP and is even lower in South Asia, of about 10.54% of GDP. Losses from tax competition have largely benefited multinational corporations whilst the tax burden has been transferred to wage earners and small businesses. The transfer of revenues to tax havens by these corporations and rich individuals further exacerbates the revenue loss. It is estimated that at least $11.5 trillion is currently held in about 74 tax havens – lost to tax authorities – by wealthy individuals. This does not include laundered profits of businesses which operate through tax havens to avoid tax.

Developing countries also bleed from general capital flight. Over the past 30 years Africa has been a net capital exporter (creditor) – transferring several times more capital abroad than they received in aid loans and foreign direct investment. Some estimates suggest that Africa’s accumulated stock of capital transferred abroad between 1970 and 2000 amounted to over $280 bn through balance of payment financing, debt servicing, official reserves held abroad and trade mis-invoicing. Add cumulative losses due to terms of trade of non-oil producing Sub-Saharan African countries estimated by the World Bank to be in the area of $400bn or 120% of combined GDP. Add also losses that African countries have incurred simply by opening up their markets. Africa was made to reduce their rates of protection at a pace 3 times as fast the countries of the OECD. This has left the continent ridiculously open relative to its stage of development. Christian Aid recently calculated that over the past 2 decades, Africa lost in income terms the equivalent of over $270bn from the negative growth effects alone of trade liberalization. This amount alone more than matches the accumulated value of grants, loans and net FDI channelled into the continent. A progressive financing strategy will first seek to plug these leaks.

3.3 Explode the FDI myth

A major reason why developing country governments tacitly or aggressively promote policies that bleed their countries is in expectation of foreign investment – the one magical antidote to underdevelopment. At the heart of the policy of fiscal prudence (pursued at the cost of undermining health and education systems), strict adherence to debt servicing obligations (even when they simply can’t afford it)’ tax holidays and tax concessions (which deny them critical and liberating sources of finance), trade liberalisation and privatization of public assets including services, is the expectation that these create the environment for foreign direct investment – another holy grail for development which has assumed mythical dimensions. Political and business leaders in developing countries are imbued with the myth that they cannot develop without FDI leading the process and that massive incentives serve to invite FDI. This myth was recently exploded by empirical work, which examined FDI in Brazil, China, India and Mexico and concluded that incentives such as tax holidays, free land and subsidised financing of foreign interests only serve to detract value from those investments (The McKinsey Quarterly 2004). Without a fundamental reassessment of this myth, developing countries are unlikely to pay greater attention to the challenges of domestic resource mobilisation and retention critical to their investments needs.

3.4 Developing Countries have unexercised power. Help them to use it

A progressive agenda will approach the issue of debt and trade justice from the view that even poor countries have the ability to force change not simply act as beggars and compliant recipients of empathy and goodwill. The evidence suggests that poor countries get more fundamental change in their favour when they act or threaten to act against the interest of the powerful. Because of the risk of reprisal, poor countries are more likely to be successful when acting together or when acting from a point of economic or moral strength.

Compare the G8 debt deal with the Nigeria debt deal. Nigeria after all got a much better deal (although with significant limitations) because the lower house of the Nigerian Parliament threatened the Paris Club that they would repudiate if after a defined time, the Paris Club did not offer an acceptable deal. Argentina got an even better deal because they unilaterally discounted their debt by close to 70%. The task of progressive civil society is to persuade and support finance ministers to develop the courage that the trade ministers found in Seattle and Doha to lead the walk out that has since fundamentally changed the WTO negotiating dynamics. Beyond repudiation, the real challenge, according to the veteran intellectual and fighter, Samir Amin, is to fight for an international law regulating international debt necessary to regulate both debtors and creditors. But for now, it will be a grave mistake for anyone to rejoice over the poisoned crumbs thrown to a few poor countries.

4.0 So what about the Gleneagles G8?

Was the G8 a success? Yes, if understood as an opportune moment for the MPH’s mobilisation effort. Will the promises, if delivered, Make Poverty History? No. In the first place it is unlikely to deliver much of the little it promised. Yet, it may have provided sufficient bait to buy an extended period of compliance and dependency, especially of African leaders. In any case should progressive civil society be legitimising a fundamentally unaccountable global governance arrangement? A question for another time.

* Charles Abugre is currently the head of policy and advocacy at Christian Aid. He has been a development activist in Ghana and many parts of Africa and Asia

* Please send comments to [email protected]