The Economist on G8's aid

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The Economist's generally reliable economic journalism on G8's aid and the poor.

Economic focus: Between hype and hope

THERE are few things a charity likes better than a big cheque. So one might have expected that those behind the campaign to “Make Poverty History” would have welcomed the outcome of the G8 summit in Scotland this month. The Gleneagles communiqué, issued on July 8th, bore a lot of promises to pay and the signatures of eight heads of government. But several charities were reluctant to take it at face value. The Catholic Agency for Overseas Development said that the commitments did not justify the “hope and hype” surrounding the summit. ActionAid bemoaned the “yawning gulf between expectations raised and policy promises delivered.” At the summit's closing press conference, Tony Blair, the host, appeared a little exasperated by the grudging tone of some of the questions he had to field.

Some campaigners complain that the Gleneagles “cheque” is postdated. According to the OECD, the promises will add about $50 billion a year to the $79 billion spent on aid by its 22 biggest donors in 2004. Of that $50 billion, Africa will get about $25 billion, roughly doubling what it receives now. But poor countries must wait until 2010 before aid spending reaches these levels. It is, say some campaigners, too little, too late.

Of course, campaigners never say it is too much, too soon. But even if a doubling of aid overnight were feasible, would it be desirable? Mr Blair's Commission for Africa, whose March report backed calls for more money, also recognised the wisdom of an aid build-up that is “measured in pace”. The commission hoped to double aid to Africa by 2008, but was prepared to settle for a doubling by 2010. “There is a limit to the number of roads, schools, clinics and water points that can be built and serviced effectively in any one year,” it pointed out.

There may even be dangers in premature generosity. In a working paper published on the eve of the Gleneagles summit, Raghuram Rajan and Arvind Subramanian, of the IMF, reawakened fears of so-called “Dutch disease”. Under this affliction, a sudden windfall of foreign exchange bids up a country's exchange rate and crowds out its export industries. One way to inoculate a country is to spend aid dollars in ways that help reduce exporters' costs—building roads to the border, for example. But this takes time. “The world is impatient for the poor to develop,” they acknowledge, but “development, especially when mandated from the outside, may require patience.”

Aid campaigners also complain that the G8 leaders' cheque is written against funds that had already been pledged. Canada's promise to double aid by 2010 was made at the United Nations conference in Monterrey in 2002. In Brussels in May, the European Union's 15 oldest members each agreed to spend at least 0.51% of their national income on aid by 2010, and the EU as a whole set a collective target of 0.56% of their combined income. Taking those vows into account, the OECD calculated that worldwide aid spending in 2010 would be in the region of $125 billion, already $46 billion higher than last year. Only Japan's promise at Gleneagles to spend another $10 billion spread over the next five years caught the OECD's number-crunchers by surprise.

The wild card in all of this has always been America. Unlike other G8 members, it is inherently reluctant to commit fixed shares of its income to aid five or ten years ahead. Rather, its menagerie of aid initiatives, plans and funds must chirp, gobble and squawk each year for whatever crumbs Congress deigns to toss their way.

At Gleneagles, for example, George Bush proposed to double American aid to sub-Saharan Africa (from $3.4 billion in 2004) by 2010. Some of this money will fall due after he leaves office in 2008, and some was already pledged to his emergency plan for AIDS relief. The rest is implied by his long-standing promise to spend $5 billion a year through the Millennium Challenge Account (MCA), which backs projects devised by poor governments that can demonstrate sound policies and honest administration. But in June the House of Representatives agreed to cough up a mere $1.75 billion for the MCA next year.

Promises, promises

It may be that the Brussels promises are more important than those made at Gleneagles. But both are better seen as two events in a sequence dating back to the Monterrey conference and stretching ahead to another big UN conference in September. Taken together, these events have shown some real ambition. The EU's targets, for example, mean that “giving to foreigners” will be the fastest-growing item of public spending in several member states—at a time when all of the European members of the G8 are nursing big budget deficits. Indeed, some observers worry that even current aid-spending levels will be hard to keep up. The $79 billion spent in 2004 was flattered by the falling dollar (which is now rising) and the large sums America has devoted to the reconstruction of Afghanistan and Iraq.

Recent numbers have also been inflated by what Richard Carey of the OECD calls the “debt relief bubble”. More than a third of the rise in aid between 2001 and 2003 was due to debt relief, and the bubble will inflate further in the next couple of years when donors add the full face-value of debts once owed by Iraq. Of course, the forgiveness of debts that were being serviced is a real cost to the donor. But cancelling debts that were not being collected anyway is not a strenuous form of charity. When the bubble bursts, donors may find giving harder than forgiving.

If nothing else, Gleneagles and the campaign leading up to it have helped to build a vocal, pro-aid constituency of voters in rich countries. It will take all their efforts to hold the G8 leaders to their promises so far, let alone to extract more. But the danger is that the “hype and hope” that motivated those voters will be replaced by deflation and despair now that some aid campaigners are branding Gleneagles a disappointment.