Protectionism in aid procurement wastes money, distorts objectives and makes it increasingly difficult to increase effectiveness in international development.
I am pleased to be here today. It is particularly appropriate that this should be at the invitation of the Adam Smith Institute since whatever differences there may be between us, I share the Institute’s commitment to transparency, efficiency and value for money. And I believe we would greatly increase the effectiveness of aid and its contribution to poverty reduction if we could persuade international donors to adhere to these principles.
My purpose today is to look at what needs to be done to speed up economic development and poverty reduction so that the benefits of the great wealth being generated by globalisation reach the poorest countries and in particular the one in four people with whom we share this planet who are living in conditions of abject poverty. In particular I wish to argue that the history of aid and international development efforts has been littered with ulterior motives of both a political and protectionist kind that have decreased the effectiveness of the system and brought it into disrepute with the public.
I believe that with the end of the cold war and the more recent lessons of the failures of excessive reliance on market forces, we have learned major lessons of what works best in development. It is now time to get rid of the inefficiencies that undermine the international development system, and to turn it into a more effective, output driven system which could over the next 20 years generate the biggest reduction in poverty that humanity has ever seen.
The eradication of poverty is in my view the greatest moral challenge facing this generation. At a time of massive growth in material wealth it is intolerable that so many of our fellow citizens live in such poverty. But it is also in our hard headed self-interest to reduce poverty in order to secure a more stable and environmentally sustainable planet. Neither we, nor OECD* countries as a group, can be secure as an island of prosperity in a sea of poverty. Developing countries already account for 80% of the world’s population, and for 95% of world population growth. Whether one looks at the global environment, at disease patterns, at migration levels, or at international crime, it is clear that we need to create a more equitable world if our children – wherever those children live – are to enjoy peace and prosperity.
It may seem a bold statement that we can achieve such a reduction in poverty. But it is not based on naive optimism. There are four particular reasons why it is a perfectly feasible endeavour.
Firstly, looking back, we can see that enormous progress has been made over the last 50 years. Overall, people are living longer and are in better health. Not only that, but in spite of unprecedented population growth, per capita food production and consumption has increased by 20%, and malnutrition rates have declined by almost a third – something which 50 years ago would have seemed unthinkable. Overall in the last 50 years, more people have escaped from poverty than in the previous 500 years. We do not need to prove that development can work: development is working. The problem is that population has grown so fast – partly because more people are surviving – so that there are more poor people than ever before. But the good news is that we know what works and the challenge now is to scale up our efforts.
My second reason for confidence is that we now have a clear international consensus on what we are seeking to achieve. Aid donors and developing countries alike are signed up to a set of challenging but feasible targets, created by the great United Nations summits of the past decade and subsequently endorsed by the Development Assistance Committee of the OECD and by the World Bank and the International Monetary Fund as the objectives around which development work should be focused.
These targets are about how we get the benefit of development to the stubbornly high numbers of people – 1.2 billion at the latest count – who subsist on the equivalent of what one dollar per day can buy in the US. The targets are focused on getting all children into school, with a particular emphasis on early progress on girls’ education, on reduction of maternal and child mortality, and of the reversing of environmental degradation, based on much better focus on sustainable development in every country.
The most significant target is the challenge to reduce by half the proportion of people under this one dollar per day level from a quarter of the world’s population – the level in 1990 – to one eighth by 2015. Latest figures show that the proportion has already decreased to around one in five, but we need to make much more rapid progress, notably in South Asia and in Africa. To achieve the agreed target one billion people need to be lifted out of extreme poverty within 15 years.
My third reason is that we now know much more about conditions that produce rapid development. The experience of East Asia has shown us important lessons, for better and for worse. The critical importance of widening educational opportunities has been a key element underpinning progress made over several decades. The success produced by using the private sector and foreign investors to generate increased production contrasts with failures of the state-led model tried in so many developing countries. Where the East Asia model has proved defective and the central cause of the recent crises has been in critical areas of governance: for example in the lack of transparency, opportunities for cronyism and inadequate regulation of the financial sector.
The international system has learned from this and greatly strengthened its capacity to assist with banking regulations and strengthening legal frameworks. Much has also been learned about the circumstances in which aid programmes are most effective – most importantly that we should invest more in supporting those governments that are implementing sound and sustainable pro-poor policies. World Bank research has demonstrated conclusively the importance of this link between sound policy and aid resources. Without a will to reform, aid transfers – which are always fungible – simply subsidise bad governance. In these circumstances we should offer technical assistance and support to civil society but not large resource transfers.
Finally, the international development community has reached a new consensus on the need to co-ordinate our aid efforts better so that we can support policy reform and invest in pro-poor policy rather than compete with vast numbers of separate organised projects. We have the Comprehensive Development Framework, as proposed by Jim Wolfensohn of the World Bank, the UN Development Assistance Framework, which seeks to rationalise the in-country activities of UN agencies and the recommendations of the Development Assistance Committee of the OECD for more collaborative working.
My particular theme today is how we could make the use of aid more effective by tackling some of the old bad practices. These have to do with the mixture of motives that have littered the history of development.
For example many people still think that aid is all about ‘projects’. For years, donors have supported an amazing number of individual activities in developing countries. These often end up as unsustainable islands of temporary excellence in a sea of decline. Instead of working together to put a country’s health system on a sound footing, donors have too often competed to run up their national flags over a capital city hospital. Instead of working together to get poor children into school, they have competed to put their equipment into technical colleges, or to attract the best students through scholarships to their own countries.
If we are to see sustainable progress towards the targets, we have to think and act much more strategically and much more collaboratively. The question here is whether we want to promote development or short-term political or commercial advantage. Do we want to feel good because we are being ‘charitable’ and ‘compassionate’ or do we wish to use our knowledge and resources effectively to achieve faster and more sustainable development?
We in the UK strongly support the move towards more sector-wide approaches, under which donors club together to support sound programmes for developing whole sectors of the economy, be it health, education, transport or agriculture and do so over the longer term so that sustainable and properly financed systems remain after the initial investment.
However, the attempt to be more ‘joined up’ is inhibited by the persistence of the practice of aid tying, and my principal aim today is to focus on how we can deal with this dinosaur. By tying I mean the practice of insisting that aid is spent on goods and services from the donor country rather than on those who can provide the best quality and service at the best price.
Those who claim to be followers of Adam Smith and I might not find ourselves in full agreement on every subject, but I am convinced that both he and they should be as amazed as I am at the persistence of the policy of the tying of aid as we approach the new millennium.
We know that international industry is globalising to the point where it is virtually impossible to define a British widget and increasingly a British company, and where almost every manufactured item that we buy has components from several countries, often assembled in yet another. We know that most consultants now have a team in every major capital.
We know that government subsidies to industry to export to developing countries will not sustain uncompetitive firms nor maintain jobs in anything other than the shortest term. We know that most other forms of government procurement have been liberalised under World Trade Organisation and European Union agreements. Yet aid remains stuck in the mercantilist past, against which Adam Smith was complaining over two centuries ago.
It is not of course the case that all aid is tied to the goods and services of the donor country. Multilateral aid is in general fully untied, and both we and other donors untie significant parts of our aid programmes already. But all aid donors continue to tie a substantial fraction of both financial assistance and technical co-operation to their own goods and their own nationals. Why does this matter? It matters a great deal, for at least three reasons.
The first is simply value for the taxpayers’ money. The World Bank has estimated that tying reduces the real value of aid by about 25%. A detailed study done in the UK a few years ago suggested that the average costs might be lower than this, but that in specific areas, such as spare parts, high mark-ups were indeed prevalent. Nor is it just a question of money. Developing countries are full of incompatible pieces of equipment provided by different donors, each with separate requirements for spares and back-up. No utility in Britain or in any Western country would dream of having to manage the sheer diversity of equipment that tying forces on their counterparts in developing countries. Aid is a very scarce resource, and we cannot afford the inefficiency that comes with restricting procurement.
Secondly, tying makes effective co-ordination much more difficult. Look at it from the point of view of the developing country that wishes to improve the effectiveness of its health sector. Instead of being able to go out to tender for a full range of supplies or equipment on a countrywide basis, it will have to divide up procurement to fit the differing requirements of maybe half a dozen donors, all of whom have different procurement requirements. Joined-up support for such programmes would be much more easily managed if international procurement was put on a standard basis for the whole donor community.
The third reason is perhaps the most pernicious. Aid tying is a classic case of mixed motives. It signals that donor countries’ major concern is not development, but the next contract. It encourages companies to promote ideas and sell them simultaneously to bilateral donors and officials in developing countries. It encourages corruption, inappropriate technology and a supplier driven mentality. In the case of the last Government, it was the road that led to the shame of Pergau.
I am proud that our Government has made a clean break with the past. We have made clear that the purpose of the aid programme is to eliminate poverty worldwide. We have a budget of £2.2 billion rising to £3.2 billion against the £100 billion we spend on social security at home. We believe that it is foolish to reduce the effectiveness of our development effort by distorting our aid spending when the moral and practical benefits of more successful development are so great. My Department, like all other Departments, is about to embark on a new spending round in which the Treasury will require us to state clearly the outcomes we are seeking to achieve, and how our performance will be measured. Those outcomes will be focused on the international development targets. I want my budget to have the maximum impact on these targets. We will be setting out in a series of papers over the next few months what are the challenges involved in reaching each of the targets, and how we will seek to address them. The continuation of tying distorts and diminishes the effectiveness of the efforts, not just of ourselves, but of all in the donor community, to respond to the challenge.
We set out in our White Paper on International Development two years ago strong support for a multilateral untying initiative, and I and my staff have been working energetically in the OECD Development Assistance Committee since then in order to try to secure an agreement. What is under discussion in the first instance is an agreement on untying all forms of financial assistance and closely related technical assistance to the least developed countries – largely those poor countries most dependent on aid. We, and a large majority of OECD countries, are ready to support an agreement which would untie both financial aid and those forms of technical assistance which might distort procurement decisions if they were tied.
A very small number of countries continues to resist an early agreement, and one or two countries seem particularly anxious to avoid untying technical assistance linked closely to the procurement decision – one can only speculate why.
Officials are meeting in the OECD next week to review the prospects of an agreement. If they cannot resolve matters then, we shall insist that the matter be discussed again at Ministerial level next spring. The Birmingham and Cologne summits have encouraged the early conclusion of such an agreement, and we look to our G8 partners in particular and hope to ensure that this is one subject that we can tick off before the next summit in Okinawa.
Although an agreement in the OECD on the least developed countries would be an important step forward, it should not be the last. We would like to see a wider coverage both by type of aid – for example by including food aid and more forms of technical assistance – and by developing country coverage. But even more important, in my view, is to make early progress within the European Union.
It is remarkable and very strange that member states of the European Union continue to tie their own bilateral aid programmes in large measure, when almost all other forms of procurement within the Community have long since been liberalised. This should apply both to procurement carried out by aid agencies themselves, and to contracts financed by member states where procurement is carried out in the developing country. At the Development Council last month, I requested the Commission to take a much closer interest in this matter. This is required in view of the Commission’s status as guardian of the treaties, regulations and directives, and is squarely in line with their interest in better co-ordination of assistance between the Commission and the member states. We look to them for early action. So do some 900 European non-governmental organisations (NGOs) who, following an initiative by ActionAid, have also taken up this issue with the Commission.
Untying should also be addressed in the World Trade Organisation. The WTO’s Government Procurement Agreement, to which most OECD countries are signatories, is designed to provide a level playing field for public procurement. But it is currently drafted in a way that has allowed members of the Agreement to exclude – of all things – their bilateral aid programmes from its provisions. It is increasingly hard to argue that aid – a very small fraction of any government’s expenditure – should be exempt from the requirements set in the Agreement when other much more significant elements of government procurement are not. We will be working to correct this anomaly. We could do with some allies in this work. More broadly, we hope that under the trade round there will be negotiations on an agreement on transparency of government procurement, which would pave the way to more efficient and effective procurement systems for developing countries. This could help massively to reduce corruption. And we should be clear it is the poor who pay the price of corruption in the consequent poor economic performance.
The other plank of our approach to which I wish to give emphasis is the development benefits of increased procurement in developing countries, whether in the country in which the goods or services will be used, or in neighbouring countries. We take the view that far too little attention has been paid to local procurement in the past, and that action in this area must go hand in glove with the other untying measures we are pushing forward. Sound local procurement gives a substantial development benefit. In addition to the benefits of the programme the donor country is financing, there is also benefit to the local private sector and other local institutions in undertaking works, providing supplies or carrying out services – a version of Keynes’ multiplier. How can we expect the local private sector to thrive if we are systematically depositing our products into their markets on a concessional basis? Additionally local procurement very often brings better value for money: goods that are more appropriate to local needs, services available on the spot, and no shipping costs or airfares to pay.
We have begun to take steps to increase our capacity to carry out local procurement effectively. Earlier this year we appointed a procurement officer to our office in Delhi. We are now following this up by increasing local procurement capacity in our offices in Nairobi, Harare and Pretoria. In a group of countries where we see particular scope for DFID to make greater use of local consultants – East Africa, Southern Africa (including Zimbabwe), India, Nepal and Vietnam – the proportion of consultancies let locally rose from under 5% by value in 1997/98 to over 12% a year later. Our experience already shows that expanding the use of local companies improved not only local participation and appropriateness but also local ownership and leadership. For example, in Andhra Pradesh in India use of local designers and construction companies showed how locally developed construction technologies could result in cost effective, locally styled and highly popular schools, clinics and other buildings.
At the same time we aim to strengthen developing countries’ own capacity for competent and honest procurement. In Tanzania, we are about to appoint a procurement consultant to work closely with the Ministry of Health; another is planned for Ghana’s Forestry Department. And we support the harmonisation of the procurement rules of all the multilateral development banks with a view to simplifying the task that developing countries face.
I hope I have shown that untying and greater use of local goods and I services are squarely in the interest of sustainable development and poverty reduction. Some of you may wonder what they mean more specifically for British firms and institutions that have been major suppliers of goods and services financed through our own bilateral programme. To you, my message is that no competitive firm or institution has anything to fear from the widest possible opening of tied aid procurement. And if you are not competitive you should not get the job. Surely it is clear that of all the people who need efficiency and effectiveness the poorest people should be first in the queue.
The benefit to all of us of real growth in the markets of the developing world is orders of magnitude greater than anything any British company – or French or Japanese or German company – will receive from an inside track on an aid contract.
It is also clear to me that the persistence of tying aid marks a persistence of ulterior motives in aid. No wonder aid is less effective than it would be when so many of the world’s wealthiest countries see it as a way of promoting their own companies rather than assisting the poorest countries to put in place the reforms needed for sustainable economic and social development. If we could get rid of these ulterior motives we could achieve a great increase in effectiveness which would speed up poverty reduction across the world.
We live at a time when those of us concerned in tackling one of the most important moral challenges that we face and those who from enlightened self interest want to expand trading opportunities can work collaboratively and achieve great benefits for the poor of the world. But old fashioned protectionism is alive and well in aid procurement. It wastes money, it distorts objectives and makes more difficult the great increase in effectiveness that an output driven international development system could give us.
I would be very grateful to the Adam Smith Institute for any help you could give in slaying this particular dinosaur
