EAC Report: Development Aid

Lord Stern of Brentford Excerpts

Monday 22nd October 2012 Lords Chamber

[Lord Stern of Brentford]

My Lords, I begin by thanking the noble Lord, Lord MacGregor, and his committee for their interesting and important report, and I thank the noble Lord for his thoughtful introduction. I declare an interest and an involvement. For more than 40 years, I worked as an academic economist on development issues. I have been directly involved in decision-making in the Africa and Asia committees of Oxfam in the 1970s and 1980s. I was chief economist of the EBRD and then of the World Bank. I also led the writing of the report of the Commission for Africa. That report stands up well in what it anticipated and pointed to with regard to how Africa was changing, in part through collaboration with donors.

I am going to concentrate, as others have done—but a bit more academically, if noble Lords will forgive me—on the effectiveness of aid, because that is crucial. I take it that the need is clear in terms of the deprivation, and I take it that our wealth is clear—we are much better off than we were 40 years ago when the 0.7% target was indicated. The arguments turn on the effectiveness of aid. I want to argue that the conditions for effective aid have never been better. Difficult though they are, institutions, policies and governance in the developing world have improved. That is not to minimise the severe difficulties but those factors are better than they were. We have learnt a great deal from successes and failures over the years, in both developed and developing countries. The collaboration and partnership between institutions, among donors and with developing countries has improved.

How do we tell whether aid has been effective in reducing poverty? We must start by agreeing strongly with the committee that growth and private sector activity are fundamental to poverty reduction. We must also agree strongly with the committee that other capital flows are of great importance. Taken in the developing world as a whole, they are of substantially greater importance than aid. However, if we look particularly at the poorest countries in sub-Saharan Africa, aid is equal to the sum of FDI and remittances. In the poorest parts of the world, aid therefore remains quantitatively an important part of the story. We have to ask whether aid promotes growth and thus, in large measure, poverty reduction. Does it stimulate those other flows? The evidence is strong that, if used well, aid has done so and it can do so.

Perhaps I might describe one way of looking at this issue that is definitely inconclusive—so-called cross-country regression. Noble Lords must forgive me for using this kind of language but I am a professor of economics at the LSE, and that is a method by which people try to tease information out of data. Crudely speaking, you look at variations in growth and try to explain them by variations in aid and other variables. You do that by lumping lots, or a couple of hundred, of countries together, looking at long periods of time and trying to explain changes in growth through changes in the other variables. In my view, it is inconclusive and a dead-end.

The quality of the cross-country data is poor. There are real problems of identification and simultaneous causation; in other words, you hope that aid will reduce poverty, but aid also goes to where poverty is the greatest, and that confounds much of that kind of statistical work. In addition, different kinds of aid are often lumped together. If we look back at the Cold War era, we should see much of that aid as political support, rather than development aid. It would be hard for any of us to pretend—and we certainly should not—that flows to Mobutu’s Zaire had very much to do with development. That was a different time and we can argue whether those things were justified or not, but those kinds of flows are different animals from development aid. Broadly speaking, I do not think that we should expect that kind of cross-country regression, which is extremely popular in my profession, to get very far, and—surprise, surprise—it does not. We should know that if we take out those kinds of more politically motivated flows, the productivity of the others looks much stronger. However, I do not want to lay too much emphasis on the cross-country regression approach.

What I find convincing are case studies of country assistance, programmes and projects. I shall give a few examples, as they matter. Ethiopia, Mozambique, Uganda and Vietnam all grew at more than 7% in the last decade. They were strongly supported by aid as—this is crucial—policies and institutions improved and they came out of conflict. Five million people were lifted out of poverty—according to the conventional World Bank definition—in Ethiopia between 2005 and 2010. Under a similar definition, the percentage of the population affected by poverty in Uganda has fallen from 31% to 25% in the past five or six years, and in Vietnam from 34% to 22% in the past decade.

Of course, we have to look beyond income, as development is about more than that. Over the past decade, infant mortality rates fell in Ethiopia from 139 to 77 per 1,000 births, in Mozambique from 172 to 103, and in Uganda from 141 to 90. Those are enormous changes and they were strongly associated with aid. When policies and institutions improve and resources are there in support, the results can be immense. It is not true that if policies and institutions improve, nothing else matters, but if they improve and are supported, the results can be much stronger. My friend Daron Acemoglu of MIT would, I am sure, agree with that conclusion.

Perhaps I might continue with these successes. Over a longer period, UNICEF has estimated that 14,000 fewer children under the age of five die each day—I repeat: 14,000 fewer each day—compared with the figure 20 years ago, primarily through success in tackling polio, measles and malaria. Again, that is strongly aid-supported. However, 19,000 children under five still die every day from preventable diseases. The need for action is strong—there is so much more to do.

Regarding education in Tanzania, in the past decade the number of boys and girls at primary school went up from 4 million to 8 million and success in passing exams went up by a factor of five in the same period. That is associated with a stronger allocation in Tanzania’s budget but is supported by the work of DfID. By anybody’s standards, this is surely value for money. Speaking as a former senior Treasury official, I believe that it would pass any serious test of value for money in the Treasury.

However—this is an important point—we have to be careful not to claim too much for ourselves. Development is a partnership. It is about supporting policies and programmes conceived inside a country or embraced by a country. If we say that X or Y happened only because of us and if we try to grab the credit, that is not only presumptuous and arrogant but destructive of the kind of partnerships that we need to build. Therefore, we must carry out our analysis with care and ask ourselves whether we have been involved in a partnership that has created success rather than saying that that success has come about only because of us. If we do the latter, we will destroy the process that we are trying to support.

I shall mention two other issues, and I shall be brief because of the pressures of time on this House. Innovation is extremely important. Aid should discover ways of doing things better. In that way, it can be scaled up and multiply. However, we should also recognise that, as we look for innovation, we take risks and there will be failures. Development programmes with no failures at all are probably not as effective as they should be because they are not pushing out those frontiers. I was involved in assessing a smallholder tea project in Kenya in 1969. It was enormously innovatory in bringing to smallholders what had previously been seen as plantation crops. Before long, tea became one of Kenya’s most important exports. The power of example is important in India, too. India is a collection of states. I have worked extensively in Karnataka and we are working with people there on a programme for climate change resilience. If it works well in Karnataka, that can have an effect across India. The power of example is very important, and I believe that working in Indian states is significant in this respect.

The noble Baroness, Lady Falkner, mentioned climate change. I am not going to dwell on that at any length but will note that the opportunities in low-carbon development, as seen by developing countries from Bangladesh to Ethiopia and beyond, are tremendously exciting. There are many ways of people taking charge of their own affairs, for example through solar power electricity, and many developing countries are looking to work strongly in that direction. This is a case where innovation is extremely important and where we have much to do to share in that very important story. We of course gain from this: carbon reduction in Bangladesh, China or India benefits us and the world as a whole.

I will share a few words about DfID. It is an outstanding department of government. I have seen it as chief economist to the World Bank and had the chance to compare it with other institutions. It is outstanding. It recruits the best young people, as I saw as head of the Government Economic Service, and on the whole they want to stay there. There are other parts of government they want to leave, but they do not want to leave DfID. The best people are recruited and they stay. It is a very knowledgeable and important institution. It is not always right, but it is very strong and has been well led politically. Along with one or two other noble Lords, I pay tribute to the work of Andrew Mitchell. I worked with him on the ministerial advisory group, where his contribution was outstanding. His focus on growth, the importance of entrepreneurship, fighting corruption, getting value for money and his robust defence of 0.7% were at the heart of clear, strong and effective leadership.

In conclusion, deprivation is strong and we are wealthier than we were when that promise of 0.7% was made. There have been great advances in the conditions in developing countries—in governance and particularly in institutions. We have learnt a great deal and collaborate better by following the Paris agreement made seven years ago among donor countries. The millennium development goals have given us shared objectives, so that we are clearer about what we are trying to do together. We can use up to and beyond 0.7% very productively, with real value for money. It has gained us respect internationally as a country, and rightly so. It defines what we stand for. The arguments for 0.7% were strong 40 years ago, and are still stronger now.