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Financing 21st Century Development: Once More into the Breach

November 18, 2011

On November 3, Bill Gates presented his case for global development to the G-20 Meeting in Cannes, France, in a report titled: Innovation with Impact: Financing 21st Century Development.  His presence and intent at the G-20, was similar to another figure of world stature, then-Prime Minister Tony Blair who used the 2005 G-8 Meeting in Gleneagles, Scotland as a forum for: Our Common Interest: Report of the Commission for Africa. Its expressed purpose was to seek an endorsement by the G-8 to double aid to Africa by 2015. The former PM proposed to meet this goal through ODA, as well as a new International Finance Facility to “levy legally-binding long term commitments on donors by leveraging money from international capital markets through the issuance of bonds.” By 2015, he projected an annual development account of $75 billion, with $25 billion of that sum being derived from African contributions via tax revenues. Of the funds needed to meet the goals in Mr. Gates’s G-20 report, approximately half would come via ODA, with the remainder a mixture of taxes on international transactions.

It would be instructive, then, to determine how the global community responded with ODA to Tony Blair, and then see how it might impact with Bill Gates’s proposals.

Since 2004, Hudson Institute has published annual reports on the Net U. S. Economic Engagement with the Development World. This includes ODA as well as private resource flows from corporations, foundations, religious organizations, private and voluntary organizations, private capital flows, etc. Beginning with 2005, the date of the G-8 Meeting, through 2009, the U. S. Engagement came to a total of $976.6 billion, of which $128.5 billion was ODA, or 13%. In the base year from which Tony Blair delivered his Report on Africa, ODA was 20% of the U. S. Engagement.

ODA itself is severely compromised by certain members of the OECD using debt forgiveness as a form of aid. In 2005, debt cancellation accounted for more than 20% of ODA from Austria, Germany, Italy, the U. K., France, Japan, and Spain–not a single Euro or Yen left these countries for the developing world.

The report to the G-20 makes several assertions which are difficult to substantiate with evidence. Gates states that in 1960, 20 million children under the age of 5 died. In 2010, fewer than 8 million children died. Mr. Gates attributes this to the use of vaccines. Immunizations are unquestionably the best buy in global health. But is the decline in IMRs due exclusively to ODA? Authoritative studies indicate otherwise. When UNICEF released its report on the dramatic declines in infant mortality in 2009, it credited this progress to immunizations and economic development.  In Bangladesh, its ODA fell from $19 per capita in 1990 to $7 in 2002. Yet, according to a 2004 UN Development  Report, its IMR also continued to fall, from 168/1000 live births in 1985 to 51 in 2002 .  A 2007 study by the IMF on health and infant mortality found that “despite the vast empirical literature considering the effect of foreign aid on growth, there is little systematic empirical evidence on how overall aid affects health, and none (to our knowledge) on how health aid affects health.” Gates comments that “ODA has had a huge impact, and it will continue to play a pivotal role in development”. This addresses the larger question of aid effectiveness. In 2005, over 100 donors and developing countries committed to make aid more effective when they agreed to the Paris Declaration on Aid Effectiveness. Countries committed to 13 targets.

In September, the Brookings Institution held a public session to report on Aid Effectiveness 2005-2010. The results of the 2011 surveys were conducted and published by the OECD/DAC.  At the global level, only one target was met—albeit “by a narrow margin”. None of the targets measured private resource flows.

There can be fewer more passionate and assertive spokespersons for the poor than Mr. Gates. If only aid monies got to them!  An internal audit by the World Bank in 2009 of its $17 billion in expenditures for health, population and nutrition programs revealed that “despite the Bank’s raison d’etre to end poverty that was the specific objective of only 6% of projects and a secondary objective of 7% … much of the spending aids the richest 20% of people”.

Mr. Gates implores donors to “keep their promises by looking for new sources of aid money”. He identifies these at the end of his report as Options for Development and Spending.  The Development sources are, on an annual basis: $80 billion from ODA; $11 billion from tobacco taxes; $9 billion from financial transaction taxes; $16 billion from remittance transfers; $8 billion from an Infrastructure Fund; $4 billion from diaspora bonds; and $37 billion from a global bunker fuel tax.

Against this Development income of $165 billion annually, Mr. Gates proposes spending of: $72 billion to meet the MDGs; $93 billion to meet Africa’s Infrastructure Needs; $5 billion to double tropical agriculture R&D; $3 billion to purchase vaccines for all poor countries; $4 billion to treat all non-resistant TB cases; and $34 billion to respond to climate change adaptation in South Asia and Africa. That total comes to $211 billion annually, or a shortfall of $46 billion of income against expenditures.

Mr. Gates offers no explanation as to how the $46 billion annual shortfall will be covered. Perhaps he means that “by far the largest supply of financing for development will continue to come from developing countries themselves.”  If so, this contravenes the findings of research that his foundation funded through the Institute for Health Metrics and Evaluation at the University of Washington. In 2010, it found that “development assistance for health had increased from $8 billion in 1995 to $26.9 billion in 2010, [but] it had a negative and significant effect on domestic government spending on health, such that for every US$1 of assistance to government, government health expenditures from domestic sources were reduced by $0.43.”  The OECD Aid Effectiveness Report commented that “progress to meet the 2015 health MDGs are being impeded in part due to aid ineffectiveness. As much as $0.28 is lost for every $1 of ODA”.

The Gates Foundation is part of the $37.5 billion in U.S. philanthropy  going to the developing world. This exceeds U.S. official development assistance of $28.8 billion.  It is paradoxical that Gates didn’t use his moment with the G-20 to inform it that non-ODA from the U. S. is substantially larger than ODA, which is only 13% of our total economic engagement with the developing world. When you exclude ODA, the U.S. provides over $197 billion annually in private investment, philanthropy, and remittances to developing countries. This  is larger than the $165 billion per year that Mr. Gates recommends is needed to meet the needs of developing countries.

Mr. Gates mentions the success stories of Brazil, China and South Korea as models for countries “that have seen growth rates rise and poverty rates fall sharply”. But, neither country graduated into a developed status by relying on such modalities as global ‘bunker fuel taxes’ or ‘international transaction taxes’, etc. These taxes require sovereign governments to seek authorities from various governing bodies to enact into enforceable law–a problematic outcome. Even if enacted into law, the funds derived from these taxes would be public—and expended in the governmental sectors of developing economies, where the most exquisite of survey instruments deployed by the OECD/DAC in 2006, 2008 and 2011 were unable to detect aid effectiveness in 78 countries. (here)

There isn’t any evidence that the recommendations of Tony Blair have yielded the resources for Africa that were proposed at the G-8 in 2005, though there is increasing evidence that ODA has since fallen, e.g., Italy, Japan, etc.  Rather than attempt to implement these proposals at the G-20 through questionable international taxing schemes, Mr. Gates might want to start at home by understanding that he and his foundation are an integral component of the large private giving from the U.S. to the developing world. Moreover, it supports his own foundation’s finding in the Institute for Health Metrics and Evaluation report that “development assistance in health to the non-governmental sector had a positive and significant effect on domestic government health spending”.

In ending, Mr. Gates comments that we need “another kind of innovation—a fundamental shift in the way we think about development—will provide amazing opportunities”.

There is much in that comment that rings true, but without recognizing all the resources going to the developing world, including private investment, philanthropy, and remittances, we will never make that fundamental shift in the way we think about development.

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