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  • For sources, you may only use readings assigned in class.
  • Follow instruction
  • and Provide me with plagiarism report
  • Question is attached below

For sources, you may only use readings assigned in class.Follow instruction and Provide me with plagiarism report Question is attached below
DEA D A ID WHY A ID I S N OT W ORK IN G AND H OW T H ER E I S A B ETTER W AY F O R A FR IC A Dam bis a M oyo Farra r, S tr a us a nd G ir o ux New Y ork 3 Conte n ts Fore w ord b y N ia ll Ferg uso n Pre fa ce In tr o ductio n PA RT I The W orld o f A id 1 T he M yth o f A id 2 A B rie f H is to ry o f Aid 3 A id I s N ot W ork in g 4 T he S ile n t K ille r o f Gro w th PA RT I I A W orld w ith out A id The R ep ublic o f Dongo 5 A R ad ic al R eth in k o f th e Aid -D ep en den cy Model 6 A C ap ita l S olu tio n 7 T he C hin ese A re O ur Frie n ds 8 L et’ s T ra d e 9 B an kin g o n t h e Unban kab le Dongo R ev is ite d 10 M ak in g D ev elo pm en t Hap pen 7 Note s Bib lio gra phy Ackn ow le d gem en ts In dex 8 PA RT I The W orld o f A id 18 1. T he M yth o f A id The s ta te o f A fr ic a A d ecad e a g o, i t w as e asy t o p ain t a b le ak p ic tu re o f t h e A fric an c o ntin en t. E co nom ic p ro sp ects w ere g rim , c o rru ptio n w as r a m pan t, s o cia l c ap ita l w as d eb ilita te d , ty ra n nic al s ta te s w ere th e o rd er o f th e d ay , a n d in fra str u ctu re l a y i n r u in s. Over th e p ast fiv e y ears , th ere h av e b een s ig ns th at w arra n t a s liv er o f o ptim is m . M an y A fric an eco nom ie s hav e poste d an nual gro w th ra te s a ro und 5 per cen t, an d a num ber of co untr ie s now host dem ocra tic e le ctio ns. Thre e f a cto rs a re a t t h e c o re o f t h e A fric an r e v iv al. Fir s t, t h e s u rg e i n c o m modity p ric es – o il, c o pper, g old , a n d f o odstu ffs – i n th e la st s e v era l y ears h as fu elle d A fric an e x ports a n d in cre ase d e x port r e v en ue. S eco nd, o n th e b ack o f th e m ark et- b ase d p olic ie s in stitu te d in th e l a te 1980s, A fric an co untr ie s hav e ben efite d fro m a positiv e polic y d iv id en d. T his h as le ft A fric a’s m acro eco nom ic fu ndam en ta ls o n th e u p ( g ro w th o n th e r is e , in fla tio n d ow n, m ore tr a n sp are n t, p ru den t, a n d s ta b le m oneta ry a n d fis c al p erfo rm an ce). A nd d esp ite th e n ew s h ead lin es, th ere h av e b een so m e n ote w orth y im pro vem en ts in so cia l in dic ato rs in so m e c o untr ie s. In K en ya, fo r e x am ple , H IV p re v ale n ce ra te s h av e fa lle n fro m 1 5 p er c en t in 2 001 to 6 p er c en t a t th e e n d o f 2 006. 1 T hir d , th ere h av e b een s o m e n ota b le s tr id es in th e p olitic al la n dsc ap e a cro ss th e c o ntin en t; m ore th an ju st o n p ap er. F or e x am ple , o f f o rty -e ig ht s u b-S ah ara n A fric an c o untr ie s, o ver 5 0 p er c en t h old re g ula r d em ocra tic e le ctio ns th at c an b e d eem ed f re e a n d f a ir . 2 T he o ccu rre n ce o f d em ocra tic e le ctio ns a n d d eclin e i n th e le v els of perc eiv ed co rru ptio n in a num ber of co untr ie s (fo r e x am ple , A ngola , G han a, Sen eg al, T an zan ia , U gan da, an d, yes, ev en N ig eria ) p oin t t o a v astly i m pro ved i n vestm en t c lim ate . If you sim ply belie v e th e m ed ia head lin es, are ta k en in by th e s o undbite s a n d q uip s, y ou w ould a lm ost f o r s u re h av e m is se d o ut o n s o m e k ey m ile sto nes i n A fric a’s f in an cia l d ev elo pm en t. Esta b lis h ed in 1 887, th e J o han nesb urg S to ck E xch an ge is s u b-S ah ara n A fric a’s o ld est sto ck m ark et. Its o pen in g w as fo llo w ed b y B ula w ay o’s e x ch an ge, in w hat w as th en th e c o lo ny o f R hodesia , in 1 896, a n d th en 19 Win dhoek ’s , in pre se n t- d ay N am ib ia , in 1910. 3 T oday six te en A fric an co untr ie s boast fu nctio nin g an d tr a n sp are n t sto ck m ark ets (B ots w an a, Cam ero on, G han a, K en ya, M ala w i, M au ritiu s, M ozam biq ue, N am ib ia , Nig eria , S outh A fric a, S w azila n d, R w an da, T an zan ia , U gan da, Z am bia a n d Zim bab w e), w ith m ark et c ap ita liz atio n in 2 008 (e x clu din g S outh A fric a) aro und U S$200 b illio n ( a ro und h alf o f t h e r e g io n’s G DP). While it is tr u e th at sto ck m ark et liq uid ity – th e e ase w ith w hic h a n in vesto r can buy or se ll sh are s – acro ss m ost A fric an ex ch an ges is re la tiv ely lo w a t a n a n nual tu rn over r a tio o f 6 p er c en t in 2 008 ( v ers u s a n av era g e o f 8 5 p er c en t in m ore -d ev elo ped e m erg in g e co nom ie s su ch a s Bra zil, R ussia , In dia a n d C hin a), b etw een 2 005 a n d 2 006 th e g ro w th in liq uid ity , m easu re d a s tu rn over, w as o ver 5 0 p er c en t. A ll th in gs b ein g eq ual, liq uid ity a cro ss A fric an m ark ets sh ould m ark ed ly im pro ve in th e near t e rm . 4 In th re e o f th e p ast fiv e y ears A fric an sto ck ex ch an ges h av e ra n ked am ong th e b est p la ces to in vest, w ith lis te d s to ck r e tu rn s a v era g in g 4 0 p er cen t. C om pan ie s lik e Z am beef (o ne o f A fric a’s la rg est ag ri- b usin esse s, in volv ed in th e p ro ductio n, p ro cessin g, d is tr ib utio n a n d re ta ilin g o f b eef, ch ic k en s, e g gs, m ilk a n d d air y p ro ducts ) r e tu rn ed 1 50 p er c en t i n r e al U S$ te rm s in 2 007, a n d b etw een 2 005 a n d e arly 2 008 th e N ig eria n b an kin g se cto r h as r e tu rn ed a ro und 3 00 p er c en t. Perfo rm an ce acro ss A fric a’s b ond m ark ets is als o im pre ssiv e. L ocal deb t r e tu rn ed i n vesto rs 1 5 p er c en t i n 2 006, a n d 1 8 p er c en t i n 2 007. I n t h e la st f iv e y ears a v era g e A fric an c re d it s p re ad s h av e c o lla p se d b y 2 50 b asis poin ts . W hat th is m ean s is th at if a c o untr y is su es U S$100 m illio n in d eb t, it is sa v in g its e lf U S$2.5 m illio n p er y ear re la tiv e to w here it w as fiv e years ag o. A nd A fric an P riv ate Equity in vestm en ts h av e h ad a ste ad y re co rd , r e p ute d ly y ie ld in g a ro und 3 0 p er c en t o ver t h e p ast t e n y ears . But, d esp ite t h ese i m porta n t r e cen t s tr id es i n t h e m acro eco nom y a n d t h e politic al l a n dsc ap e, o vera ll th e p ic tu re in te rm s o f tr e n ds in A fric a r e m ain s a c h alle n gin g o ne. With a n a v era g e p er c ap ita in co m e o f r o ughly U S$1 a d ay , s u b-S ah ara n Afric a re m ain s th e p oore st re g io n in th e w orld . 5 A fric a’s re al p er c ap ita in co m e t o day i s l o w er t h an i n t h e 1 970s, l e av in g m an y A fric an c o untr ie s a t le ast as p oor as th ey w ere fo rty y ears ag o. W ith o ver h alf o f th e 7 00 millio n A fric an s liv in g o n le ss th an a d olla r a d ay , s u b-S ah ara n A fric a h as th e h ig hest p ro portio n o f p oor p eo ple in th e w orld – s o m e 5 0 p er c en t o f th e w orld ’s p oor. A nd w hile th e n um ber o f th e w orld ’s p opula tio n a n d pro portio n o f th e w orld ’s p eo ple in e x tr e m e p overty fe ll a fte r 1 980, th e pro portio n of peo ple in su b-S ah ara n A fric a liv in g in ab je ct poverty 20 in cre ase d to a lm ost 5 0 p er c en t. B etw een 1 981 a n d 2 002, th e n um ber o f peo ple in th e co ntin en t liv in g in poverty nearly double d , le av in g th e av era g e A fric an p oore r to day th an ju st tw o d ecad es ag o. A nd lo okin g ah ead , t h e 2 007 U nite d N atio ns H um an D ev elo pm en t R ep ort f o re casts t h at su b-S ah ara n A fric a w ill a cco unt fo r a lm ost o ne th ir d o f w orld p overty in 2015, up fro m one fif th in 1990 (th is la rg ely due to th e dra m atic dev elo pm en ta l s tr id es b ein g m ad e e ls e w here a ro und t h e e m erg in g w orld ). Lif e e x pecta n cy h as s ta g nate d – A fric a is th e o nly c o ntin en t w here lif e ex pecta n cy is le ss th an s ix ty y ears ; to day it h overs a ro und f if ty y ears , a n d in so m e co untr ie s it h as fa lle n b ack to w hat it w as in th e 1 950s (lif e ex pecta n cy in S w azila n d is a p altr y th ir ty y ears ). T he d ecre ase in lif e ex pecta n cy is m ain ly a ttr ib ute d to th e ris e o f th e H IV — AID S p an dem ic . One in s e v en c h ild re n a cro ss th e A fric an c o ntin en t d ie b efo re th e a g e o f fiv e. 6 T hese s ta tis tic s a re p artic u la rly w orry in g in th at ( a s w ith m an y o th er dev elo pin g re g io ns of th e w orld ), ro ughly 50 per cen t of A fric a’s popula tio n i s y oung – b elo w t h e a g e o f f if te en y ears . Adult lite ra cy a cro ss m ost A fric an c o untr ie s h as p lu m mete d b elo w p re – 1980 le v els . Lite ra cy ra te s, health in dic ato rs (m ala ria , wate r-b orn e dis e ase s s u ch a s b ilh arz ia a n d c h ole ra ) a n d in co m e in eq uality a ll r e m ain a cau se f o r w orry . A nd s till a cro ss i m porta n t i n dic ato rs , t h e t r e n d i n A fric a i s not ju st d ow nw ard s: A fric a is (n eg ativ ely ) d eco uplin g fro m th e p ro gre ss bein g m ad e a cro ss th e re st o f th e w orld . E ven w ith A fric an g ro w th ra te s av era g in g 5 p er c en t a y ear o ver t h e p ast s e v era l y ears , t h e A fric a P ro gre ss Pan el p oin te d o ut in 2 007 th at g ro w th is s till s h ort o f th e 7 p er c en t th at need s t o b e s u sta in ed t o m ak e s u bsta n tia l i n ro ad s i n to p overty r e d uctio n. 7 On th e p olitic al s id e, s o m e 5 0 p er c en t o f th e c o ntin en t re m ain s u nder non-d em ocra tic ru le . A cco rd in g to th e P olity IV d ata b ase , A fric a is still hom e to at le ast ele v en fu lly au to cra tic re g im es (C ongo-B ra zzav ille , Equato ria l G uin ea, E ritr e a, G ab on, T he G am bia , M au rita n ia , R w an da, Sudan , S w azila n d, U gan da a n d Z im bab w e). T hre e A fric an h ead s o f s ta te (d os S an to s o f A ngola , O bia n g o f E quato ria l G uin ea a n d B ongo o f G ab on) hav e b een in p ow er sin ce th e 1 970s (h av in g asc en ded to p ow er o n 2 Decem ber 1 967, P re sid en t B ongo h as r e cen tly c ele b ra te d h is f o rtie th y ear in p ow er). F iv e o th er p re sid en ts h av e h ad a lo ck o n p ow er s in ce th e 1 980s (C om pao re of B urk in a Faso , B iy a of C am ero on, C onte of G uin ea, Muse v en i of U gan da an d M ugab e of Z im bab w e). S in ce 1996, ele v en co untr ie s hav e been em bro ile d in civ il w ars (A ngola , B uru ndi, C had , Dem ocra tic R ep ublic of C ongo, R ep ublic of C ongo, G uin ea B is sa u , Lib eria , R w an da, S ie rra L eo ne, S udan a n d U gan da). 8 A nd a cco rd in g t o t h e May 2 008 a n nual G lo bal P eace I n dex , o ut o f t h e t e n b otto m c o untr ie s f o ur 21 Afric an s ta te s a re a m ong th e le ast p eacefu l in th e w orld ( in o rd er, C en tr a l Afric an R ep ublic , C had , S udan an d S om alia ) – th e m ost of an y one co ntin en t. Why i s i t t h at A fric a, a lo ne a m ong t h e c o ntin en ts o f t h e w orld , s e em s t o be lo ck ed in to a cy cle of dysfu nctio n? W hy is it th at out of all th e co ntin en ts i n t h e w orld A fric a s e em s u nab le t o c o nvin cin gly g et i ts f o ot o n th e e co nom ic la d der? W hy in a r e cen t s u rv ey d id s e v en o ut o f th e to p te n ‘fa ile d sta te s’ h ail fro m th at c o ntin en t? A re A fric a’s p eo ple u niv ers a lly more in cap ab le ? A re its le ad ers g en etic ally m ore v en al, m ore ru th le ss, more c o rru pt? Its p olic y m ak ers m ore in nate ly fe ck le ss? W hat is it a b out Afric a th at h old s it b ack , th at s e em s to re n der it in cap ab le o f jo in in g th e re st o f t h e g lo be i n t h e t w en ty -fir s t c en tu ry ? The a n sw er h as i ts r o ots i n a id . What i s a id ? Bro ad ly s p eak in g t h ere e x is t t h re e t y pes o f a id : h um an ita ria n o r e m erg en cy aid , w hic h is m obiliz ed an d d is p en se d in re sp onse to cata str o phes an d cala m itie s – fo r e x am ple , a id in re sp onse to th e 2 004 A sia n ts u nam i, o r monie s w hic h ta rg ete d th e c y clo ne-h it M yan m ar in 2 008; c h arity -b ase d aid , w hic h i s d is b urs e d b y c h arit a b le o rg an iz atio ns t o i n stitu tio ns o r p eo ple on th e g ro und; a n d s y ste m atic a id – th at is , a id p ay m en ts m ad e d ir e ctly to govern m en ts e ith er t h ro ugh g overn m en t- to -g overn m en t t r a n sfe rs ( in w hic h case it is te rm ed b ila te ra l a id ) o r tr a n sfe rre d v ia in stitu tio ns su ch a s th e World B an k ( k now n a s m ultila te ra l a id ). While th ere are obvio us an d fu ndam en ta l m erits to em erg en cy aid , critic is m s c an b e le v elle d a g ain st it a s w ell a s a g ain st c h arita b le g iv in g. Charitie s are ofte n critic iz ed , with so m e ju stif ic atio n, fo r poor im ple m en ta tio n, h ig h ad m in is tr a tiv e co sts an d th e fa ct th at th ey are o n occasio n c o erc ed to d o th eir d onor g overn m en t’ s b id din g – d esp ite th e obvio us la ck o f re le v an ce to a lo cal c o nte x t. F or e x am ple , in 2 005, th e Unite d S ta te s p le d ged U S$15 b illio n o ver f iv e y ears t o f ig ht A ID S ( m ain ly th ro ugh th e Pre sid en t’ s E m erg en cy Pla n fo r A ID S R elie f (P E PFA R) la u nch ed in J a n uary 2 003). 9 B ut th is h ad s tr in gs a tta ch ed . T w o th ir d s o f th e m oney h ad to g o to p ro -a b stin en ce p ro gra m mes, a n d w ould n ot b e av aila b le t o a n y o rg an iz atio ns w ith c lin ic s t h at o ffe re d a b ortio n s e rv ic es o r ev en co unse llin g. A nd nin e m onth s afte r th e 2004 A sia n ts u nam i, fo r whate v er th e re aso n (b ure au cra cy , in stitu tio nal in effic ie n cie s or th e ab se n ce o f s u ita b le o rg an iz atio ns o n th e g ro und to d is b urs e th e m onie s), 22 th e ch arity W orld V is io n h ad sp en t le ss th an a q uarte r o f th e U S$100 millio n i t h ad r a is e d . But th is b ook is n ot c o ncern ed w ith e m erg en cy a n d c h arity -b ase d a id . The s ig nif ic an t s u m s o f t h is t y pe o f a id t h at f lo w t o Afric a s im ply d is g uis e th e f u ndam en ta l ( y et e rro neo us) m in dse t th at p erv ad es th e W est – th at a id , whate v er its f o rm , is a g ood th in g. B esid es, c h arity a n d e m erg en cy a id a re sm all b eer w hen c o m pare d w ith th e b illio ns tr a n sfe rre d e ach y ear d ir e ctly to p oor c o untr ie s’ g overn m en ts . Larg e sy ste m atic cash tr a n sfe rs fro m ric h co untr ie s to Afric an govern m en ts h av e te n ded to b e in th e f o rm o f c o ncessio nal lo an s ( th at is , money le n t at b elo w m ark et in te re st ra te s, an d o fte n fo r m uch lo nger le n din g p erio ds th an o rd in ary co m merc ia l m ark ets ) o r g ra n ts (w hic h is esse n tia lly m oney g iv en f o r n oth in g i n r e tu rn ). There is a s c h ool o f th ought w hic h a rg ues th at r e cip ie n t c o untr ie s v ie w lo an s, w hic h carry th e burd en of fu tu re re p ay m en t, as dif fe re n t fro m gra n ts . T hat t h e p ro sp ects o f r e p ay m en t m ean l o an s i n duce g overn m en ts t o use fu nds w is e ly an d to m obiliz e ta x es an d m ain ta in cu rre n t le v els o f re v en ue c o lle ctio n. W here as g ra n ts a re v ie w ed a s f re e r e so urc es a n d c o uld th ere fo re p erfe ctly s u bstitu te f o r a g overn m en t’ s d om estic r e v en ues. This d is tin ctio n h as le d m an y d onors to p ush fo r a p olic y o f g ra n ts in ste ad o f l o an s t o p oor c o untr ie s. T he l o gic i s t h at m uch o f t h e i n vestm en t th at p oor c o untr ie s n eed t o m ak e h as a l o ng g esta tio n p erio d b efo re i t s ta rts to p ro duce th e k in ds o f c h an ges in G DP g ro w th th at w ill y ie ld th e ta x re v en ues n eed ed to s e rv ic e lo an s. I n deed , m an y s c h ola rs h av e a rg ued th at it w as p re cis e ly b ecau se m an y A fric an c o untr ie s h av e, o ver tim e, r e ceiv ed (flo atin g r a te ) l o an s, a n d n ot g ra n ts , t o f in an ce p ublic i n vestm en ts t h at t h ey becam e s o h eav ily in deb te d , a n d th at a id h as n ot h elp ed th em re ach th eir dev elo pm en t o bje ctiv es. Yet ultim ate ly th e questio n beco m es how str o ngly re cip ie n t govern m en ts p erc eiv e lo an s a s b ein g d if fe re n t f ro m g ra n ts . I f a la rg e s h are of f o re ig n lo an s a re p ro vid ed o n h ig hly c o ncessio nal te rm s, a n d lo an s a re fre q uen tly fo rg iv en , p olic y m ak ers in p oor e co nom ie s m ay c o m e to v ie w th em a s r o ughly e q uiv ale n t to g ra n ts , a n d a s s u ch th e d is tin ctio n b etw een (a id ) lo an s a n d g ra n ts a s p ra ctic ally ir re le v an t. O ver re cen t d ecad es, th e patte rn o f a id to A fric a s e em s to g el w ith th is v ie w o f th e w orld – o ne in whic h l o an s a re n ot s e en a s d is tin ct f ro m g ra n ts . There fo re , f o r th e p urp ose s o f th is b ook, a id is d efin ed a s th e s u m to ta l of both co ncessio nal lo an s an d gra n ts . It is th ese billio ns th at hav e ham pere d , stif le d an d re ta rd ed A fric a’s dev elo pm en t. A nd it is th ese billio ns t h at Dea d A id w ill a d dre ss. 23 2. A B rie f H is to ry o f A id T he ta le o f a id b eg in s in e arn est in th e f ir s t th re e w eek s o f J u ly 1 944, a t a m eetin g h eld at th e M ount W ash in gto n H ote l in B re tto n W oods, N ew H am psh ir e , U SA . A gain st th e b ack dro p o f th e S eco nd W orld W ar, o ver 7 00 dele g ate s fro m so m e fo rty -fo ur co untr ie s re so lv ed to esta b lis h a f ra m ew ork f o r a g lo bal s y ste m o f f in an cia l a n d m oneta ry m an ag em en t. 1 A s d is c u sse d la te r, it is fro m th is g ath erin g th at th e d om in an t fra m ew ork o f a id -in fu se d d ev elo pm en t w ould e m erg e. The o rig in s o f l a rg e-s c ale a id t r a n sfe rs d ate a s f a r b ack a s t h e n in ete en th c en tu ry – w hen e v en in 1 896 th e U S p ro vid ed o vers e as a ssis ta n ce in th e f o rm o f f o od a id . U nder t h e C olo nia l D ev elo pm en t A ct o f 1 929, t h e B ritis h g overn m en t a d m in is te re d g ra n ts fo r in fra str u ctu re p ro je cts a cro ss p oore r c o untr ie s. A id tr a n sfe rs in th ese e arly p erio ds w ere a s m uch a b out d onor l a rg esse a s th ey w ere a b out p olitic al c o ntr o l o ver th e c o lo nia l d om ain , a n d o nly l a te r, i n t h e 1 940 B ritis h C olo nia l D ev elo pm en t a n d W elf a re A ct, w as t h e p ro gra m me e x pan ded t o a llo w f u ndin g o f s o cia l s e cto r a ctiv itie s. Post- w ar a id c an b e b ro ken d ow n i n to s e v en b ro ad c ate g orie s: i ts b ir th a t B re tto n W oods i n t h e 1 940s; t h e e ra o f t h e M ars h all P la n i n t h e 1 950s; t h e d ecad e o f i n dustr ia liz atio n o f t h e 1 960s; t h e s h if t t o w ard s a id a s a n a n sw er t o p overty in th e 1 970s; aid as th e to ol fo r sta b iliz atio n an d str u ctu ra l a d ju stm en t in th e 1 980s; a id a s a b uttr e ss o f d em ocra cy a n d g overn an ce in t h e 1 990s; c u lm in atin g in th e p re se n t- d ay o bse ssio n w ith a id a s th e o nly s o lu tio n t o A fric a’s m yria d o f p ro ble m s. The m ain a g en da o f th e B re tto n W oods c o nfe re n ce w as to re str u ctu re i n te rn atio nal f in an ce, e sta b lis h a m ultila te ra l tr a d in g s y ste m a n d c o nstr u ct a fra m ew ork fo r e co nom ic c o opera tio n th at w ould a v oid a re p eat o f th e G re at D ep re ssio n o f t h e 1 930s. A s t h ey a n tic ip ate d t h e p ost- S eco nd W orld W ar e ra , th e a rc h ite cts o f th e 1944 B re tto n W oods g ath erin g f o re sa w th at i f E uro pe w ere to re g ain a n y se m bla n ce o f so cia l, p olitic al o r e co nom ic s ta b ility , v ast in je ctio ns o f a id w ould h av e to b e p oure d in . T here w as a c le ar re co gnitio n th at in th e post- w ar perio d th e fra ctu re d natio ns of E uro pe w ould n eed a m assiv e cash in je ctio n to sp ur a re tu rn to th eir p re v io us le v els o f d ev elo pm en t. D am ag ed th ough E uro pe w as, th is m oney w as (fo rtu ito usly ) g oin g in to a lr e ad y e x is tin g p hysic al, le g al a n d so cia l i n fra str u ctu re s w hic h s im ply n eed ed f ix in g. 24 Jo hn M ay nard K ey nes, th e p re -e m in en t B ritis h e co nom is t, a n d H arry Dex te r W hite , a t th at tim e th e U S S ecre ta ry o f S ta te , le d th e d is c u ssio ns whic h la id th e f o undatio ns f o r th re e o rg an iz atio ns: th e I n te rn atio nal B an k fo r R eco nstr u ctio n an d D ev elo pm en t (c o m monly know n as th e W orld Ban k), th e I n te rn atio nal M oneta ry F und ( IM F) a n d th e I n te rn atio nal T ra d e Org an iz atio n. At th e tim e o f th eir in cep tio n, th e e x act re sp onsib ilitie s o f th e W orld Ban k a n d th e I M F w ere c le arly d elin eate d . I n v ery b ro ad te rm s, th e W orld Ban k w as d esig ned to f a cilita te c ap ita l in vestm en t f o r r e co nstr u ctio n, a n d in th e a fte rm ath o f th e w ar th e IM F w as to m an ag e th e g lo bal fin an cia l sy ste m . I n l a te r y ears , b oth i n sti tu tio ns w ould c o m e t o o ccu py c en tr e -s ta g e in th e dev elo pm en t dis c o urs e , but th e orig in al man date ta rg ete d re co nstr u ctio n, r a th er t h an d ev elo pm en t p er s e . At its co re , th e re co nstr u ctio n ag en da assu m ed th at th e d em an ds o n post- w ar in vestm en t c o uld n ot b e m et w ith out so m e a d eq uate m ean s o f poolin g th e in vestm en t ris k betw een co untr ie s. There was wid e ack now le d gem en t th at fe w c o untr ie s w ould b e a b le to fu lf il th e ro le o f fo re ig n le n der; an d th e b asic p rin cip le o f th e W orld B an k w as th at n o matte r w hat c o untr y a ctu ally d id th e fo re ig n le n din g, a ll m em ber n atio ns sh ould partic ip ate in underw ritin g th e ris k in volv ed . Early fin an cia l tr a n sfe rs fro m in te rn atio nal in stitu tio ns in clu ded a US$250 m illio n re co nstr u ctio n lo an to Fra n ce sig ned on 9 M ay 1946, fo llo w ed by re co nstr u ctio n lo an s to th e N eth erla n ds, D en m ark an d L uxem bourg in August 1 947. T hese aid tr a n sfe rs w ere u ndoubte d ly at th e h eart o f th e re co nstr u ctio n p ro cess th at a lm ost c erta in ly c o ntr ib ute d to th e e co nom ic pow erh ouse t h at E uro pe h as b eco m e t o day . Alo ngsid e th e W orld B an k, th e IM F w as m an date d w ith th e sp ecif ic re sp onsib ility o f p ro m otin g t h e s ta b ility o f t h e w orld e co nom y. A t t h e t im e it beg an opera tio ns on 1 M arc h 1947, th e IM F w as ch arg ed w ith pro m otin g an d su perv is in g in te rn atio nal m oneta ry co opera tio n am ongst co untr ie s, a n d th us f o re sta llin g a n y p ossib le g lo bal f in an cia l c ris is . B y th e en d o f th e 1 940s a n a id -le d e co nom ic f ra m ew ork w as f ir m ly in p la ce, b ut it w as n ot u ntil la te r in th e d ecad e th at th e f ir s t la rg e-s c ale g overn m en t- to – govern m en t a id t r a n sfe r o ccu rre d . On 5 Ju ne 1 947, at H arv ard U niv ers ity , th e U S S ecre ta ry o f S ta te , Geo rg e C . M ars h all, o utlin ed a r a d ic al p ro posa l b y w hic h A m eric a w ould pro vid e a re sc u e p ack ag e o f u p to U S$20 b illio n (o ver U S$100 b illio n in to day ’s te rm s) fo r a ra v ag ed E uro pe. 2 A s E uro pe em erg ed fro m th e dev asta tio n o f th e S eco nd W orld W ar w ith little to s e ll f o r h ard c u rre n cy , an d e x perie n cin g o ne o f th e w ors t w in te rs o n re co rd , G en era l M ars h all 25 arg ued fo r a n a g gre ssiv e fin an cia l in te rv en tio n b y th e U nite d S ta te s. In re tu rn , E uro pean g overn m en ts w ould d ra w u p a n e co nom ic r e v iv al p la n . Under th e M ars h all Pla n , th e U nite d Sta te s em bark ed on an aid pro gra m me to fo urte en E uro pean co untr ie s w hic h sa w th e tr a n sfe r of assis ta n ce w orth r o ughly U S$13 b illio n t h ro ughout t h e f iv e-y ear l if e o f t h e pla n fro m 1948 to 1952. A m ong th e to p fiv e aid re cip ie n ts fro m th e Mars h all P la n w ere G re at B rita in , w hic h r e ceiv ed t h e l io n’s s h are o f 2 4 p er cen t, a n d F ra n ce, Ita ly a n d G erm an y, w hic h re ceiv ed 2 0, 1 1 a n d 1 0 p er cen t, r e sp ectiv ely . I n p er c ap ita te rm s s m alle r E uro pean c o untr ie s r e ceiv ed more su pport: N orw ay re ceiv ed U S$136 per pers o n, A ustr ia U S$131, Gre ece U S$128 a n d t h e N eth erla n ds U S$111. The id ea th at th e M ars h all P la n is h aile d a s a s u ccess h as r e m ain ed , to a la rg e ex te n t, u nquestio ned . T he p la n w as cle arly su ccessfu l in b rin gin g Weste rn E uro pe b ack o nto a s tr o ng e co nom ic fo otin g, p ro vid in g th e U S with th e v eh ic le to in flu en ce fo re ig n p olic y , w in nin g it a llie s in W este rn Euro pe a n d b uild in g a so lid fo undatio n fo r U S-le d m ultila te ra lis m . A id had re sto re d bro ken in fra str u ctu re . A id had bro ught politic al sta b ility , re sto re d h ope a n d n ot o nly g iv en a f u tu re to d efe ate d p eo ple s, to b an kru pt natio ns an d to b ro ken la n ds, b ut als o b en efite d th e d onor n atio n its e lf , keep in g t h e U S e co nom y a flo at w hile t h e w orld a ro und i t h ad c ru m ble d . More im porta n tly , if a id w ork ed in E uro pe, if it g av e to E uro pe w hat Euro pe n eed ed , w hy c o uld n’t it d o th e s a m e e v ery w here e ls e ? B y th e e n d of th e 1950s, once re co nstr u ctio n in E uro pe w as se en to be w ork in g, atte n tio n tu rn ed to w ard s o th er p arts o f th e w orld , a n d s p ecif ic ally , in th e co nte x t o f a id , A fric a. Afric a w as rip e fo r a id . T he c o ntin en t w as c h ara cte riz ed b y a la rg ely uned ucate d p opula tio n, lo w -s a la rie d e m plo ym en t, a v ir tu ally n on-e x is te n t ta x b ase , p oor a ccess to g lo bal m ark ets a n d d ere lic t in fra str u ctu re . A rm ed with th e id eas a n d e x perie n ce o f th e M ars h all P la n , ric h er c o untr ie s s a w Afric a a s a p rim e t a rg et f o r a id . S o a id b eg an t o a p pear. As th e U S fu nnelle d la rg e s u m s to E uro pe th ro ugh th e M ars h all p la n , World B an k an d IM F re so urc es w ere fre ed u p. M onie s th at h ad b een earm ark ed by th e B re tto n W oods in stitu tio ns fo r postw ar Euro pean re co nstr u ctio n co uld now be dir e cte d to w ard s th e em erg in g (A fric an ) dev elo pm en t a g en da. Perh ap s m ore cru cia lly fo r th e aid -b ase d ag en da th at en su ed , it w as wid ely assu m ed th at p oor co untr ie s la ck ed th e fin an cia l cap ita l to sp ur dev elo pm en t. I n t h e w ak e o f t h e M ars h all P la n s u ccess, i t b ecam e a w id ely accep te d v ie w th at in vestm en t c ap ita l w as c ritic al f o r e co nom ic g ro w th . I n th e a b se n ce o f a n y s ig nif ic an t d om estic s a v in gs a n d la ck in g th e p hysic al 26 an d h um an c ap ita l t o a ttr a ct p riv ate i n vestm en t, f o re ig n a id w as s e en a s t h e only w ay to tr ig ger h ig her in vestm en t, w hic h w ould th us le ad to h ig her eco nom ic g ro w th . A s f a r a s p olic y m ak ers c o uld s e e, th ere w as n o o bvio us alte rn ativ e. There w ere o f c o urs e o th er r e aso ns w hy B rita in , A m eric a a n d t o a l e sse r ex te n t F ra n ce tu rn ed th eir a tte n tio n to A fric a. B y th e m id -1 950s A fric a was u nderg oin g p ro fo und c h an ges – w ith W este rn p ow ers lo ose n in g th e ch ain s o f c o lo nia lis m , m an y c o untr ie s w ere g ain in g th eir in dep en den ce. Countr ie s s u ch a s G han a i n 1 957, K en ya i n 1 963, a n d M ala w i a n d Z am bia in 1964 bro ke fro m th e co lo nia l fo ld to beco m e in dep en den t sta te s betw een 1956 an d 1966; in all, th ir ty -o ne A fric an co untr ie s did so . In dep en den t t h ey may h av e b een o n p ap er, b ut i n dep en den ce d ep en den t o n th e f in an cia l la rg esse o f th eir f o rm er c o lo nia l m aste rs w as th e r e ality . F or th e W est, a id b ecam e a m ean s b y w hic h B rita in a n d F ra n ce c o m bin ed t h eir new -fo und altr u is m w ith a hefty dollo p of se lf -in te re st – m ain ta in in g str a te g ic g eo politic al h old s. F or th e U S, a id b ecam e th e to ol o f a n oth er politic al c o nte st – t h e C old W ar. While th e C old W ar w as p ep pere d w ith o utb re ak s o f p hysic al h ostility (fo r e x am ple , in K ore a), m uch o f th e b attle f o r w orld h eg em ony b etw een th e U S a n d th e U SSR w as fo ught e co nom ic ally a n d o n fo re ig n s o il. T he ch oic e o f w eap on – a id . A fric a s a w m an y s u ch b attle s. A id b ecam e t h e k ey to ol in th e c o nte st to tu rn th e w orld c ap ita lis t o r c o m munis t. T he S ovie t Unio n w as, o f co urs e , a sta u nch su pporte r (a n d fin an cie r) o f so m e o f Afric a’s g re ate st c o m munis ts – P atr ic e L um um ba in C ongo a n d M en gis tu Haile M aria m in Eth io pia . A nd th e U S, by co ntr a st, re w ard ed its su pporte rs , s u ch a s Z air e ’s M obutu S ese S ek o. As su ch , th e aid im pera tiv e to ok on an ad ded dim en sio n: not how dese rv in g a c o untr y m ig ht b e o r th e n atu re o f its le ad ers h ip , b ut r a th er th e willin gness o f a d esp era te ly im poveris h ed c o untr y to a lly its e lf w ith o ne cam p o r a n oth er – b en ev ole n t l e ad er o r v ic io us t y ra n t, a s l o ng a s t h ey w ere onsid e, w hat d id i t m atte r? It is im possib le to k now f o r s u re w hat th e tr u e m otiv atio ns f o r g ra n tin g fo re ig n a id t o A fric a w ere , b ut g ra n te d i t w as. The 1 960s: t h e d eca de o f i n dustr ia liz a tio n By th e b eg in nin g o f th e 1 960s so m e U S$100 m illio n in aid h ad b een tr a n sfe rre d to th e A fric an c o ntin en t. T his w as a m ere tr ic k le c o m pare d to th e a v ala n ch e o f b illio ns o f d olla rs o f a id th at w ould e v en tu ally m ak e its 27 way t o A fric a. The early p art o f th e 1 960s als o sa w th e u nderly in g sh if t to w ard s a gre ate r fo cu s on aid fu ndin g fo r la rg e-s c ale in dustr ia l pro je cts . The pre v ailin g v ie w w as th at b ecau se th ese p ro je cts h ad lo nger-te rm p ay -o ffs (fo r ex am ple , th e fu ndin g o f in fra str u ctu re p ro je cts su ch as ro ad s an d ra ilw ay s), th ey w ere u nlik ely to b e f u nded b y th e priv ate s e cto r. O ne s u ch ex am ple is th e d ouble -c u rv atu re , h ydro ele ctr ic , c o ncre te a rc h K arib a d am th at str a d dle s th e b ord er b etw een Z am bia an d Z im bab w e; it w as b uilt th ro ughout th e d ecad e. T he d am , w hose c o nstr u ctio n b eg an u nder B ritis h co lo nia l r u le in th e m id -1 950s, w as f in ally c o m ple te d a t a c o st o f U S$480 millio n in 1 977. T oday it still ra n ks as o ne o f th e la rg est d am s in th e world . By 1 965, w hen a ro und h alf o f s u b-S ah ara n A fric a’s r o ughly f if ty s ta te s were in dep en den t, aid had alr e ad y re ach ed at le ast U S$950 m illio n. Ghan a, w hic h had w on its in dep en den ce fro m B rita in in 1957, had re ceiv ed as m uch as U S$90 m illio n in aid flo w s. Z am bia , K en ya an d Mala w i, a ll in dep en den t b y 1 964 h ad , o n a v era g e, r e ceiv ed a b out U S$315 millio n e ach b y th e e n d o f th e d ecad e. S ta tis tic al re co rd s fro m th e 1 960s are s c an t, a n d e stim ate s o f th e m ile s o f ta rre d r o ad a n d r a ilw ay tr a ck , th e num bers o f b rid ges a n d a ir p orts , th at a id h elp ed b uild r e m ain u ncle ar. A s su ch , th e tr u e v alu e o f th e s u rfe it o f a id th at h ad g one to A fric a re m ain s open to d eb ate , b ut b y th e b eg in nin g o f th e 1 970s th ere w as s till n ot m uch in fra str u ctu re t o s p eak o f. The f o re ig n a id a gen da o f t h e 1 970s: th e s h ift t o a p overty f o cu s On 1 7 O cto ber 1 973, A ra b s ta te s p la ced a n e m barg o o n o il a s a r e ta lia tio n fo r U S s u pport f o r I s ra el i n t h e Y om K ip pur W ar. I n j u st a f e w m onth s, t h e pric e o f p etr o l q uad ru ple d , s e n din g t h e g lo bal e co nom y i n to t u rm oil. A s o il pric es so are d , o il- e x portin g c o untr ie s d ep osite d th e a d ditio nal c ash w ith in te rn atio nal b an ks, w hic h in tu rn e ag erly s o ught to le n d th is m oney to th e dev elo pin g w orld . L ax e co nom ic a n d fin an cia l p olic ie s (fo r e x am ple , th e lo w a m ounts c en tr a l b an ks r e q uir e d c o m merc ia l b an ks to k eep in r e se rv e) mean t th at th e volu m e of le n din g to ev en th e poore st an d m ost un- cre d itw orth y c o untr ie s a ro und th e w orld w as e n orm ous. T he w all o f f re ely su pplie d m oney le d to ex tr e m ely lo w , an d ev en n eg ativ e, re al in te re st ra te s, an d en co ura g ed m an y p oore r eco nom ie s to sta rt b orro w in g ev en more i n o rd er t o r e p ay p re v io us d eb ts . In A fric a, a s o il p ric es r o se m an y c o untr ie s s a w f o od p ric es r o ck et a n d 28 re cessio n ta k e h old . In 1 975 G han a’s G DP co ntr a cte d b y 1 2 p er cen t, in fla tio n r o se f ro m 3 p er c en t in 1 970 to 3 0 p er c en t in 1 975, a n d s h ot to 116 p er c en t in 1 977. I n C ongo-K in sh asa , in fla tio n r o se f ro m 8 p er c en t in 1970 to 8 0 p er c en t in 1 976, a n d re ach ed 1 01 p er c en t in 1 979. A lm ost in ev ita b ly , f o od a n d c o m modity p ric e s h ock s f u elle d b y r is e s in o il p ric es le d t o t h e s h if t t o w ard s a m ore p overty -b ase d a p pro ach t o d ev elo pm en t. Under R obert M cN am ara , th e W orld B an k v ery p ublic ly re o rie n te d its str a te g ie s to w ard s th is m ore p ro nounced p overty fo cu s. D onor c o untr ie s fo llo w ed s u it: in 1 975 th e U K p ublis h ed its w hite p ap er More A id fo r th e Poore st a n d i n t h e s a m e y ear t h e U S p asse d t h e I n te rn atio nal D ev elo pm en t an d F ood A ssis ta n ce A ct, w hic h s tip ula te d th at 7 5 p er c en t o f its F ood f o r Peace P ro gra m w ould g o t o c o untr ie s w ith a p er c ap ita i n co m e o f l e ss t h an US$300. In pra ctic al te rm s th is mean t re d ir e ctin g aid aw ay fro m la rg e in fra str u ctu re in vestm en t (p ow er, tr a n sp ort, e tc .) , a n d to w ard s p ro je cts in ag ric u ltu re an d ru ra l dev elo pm en t, so cia l se rv ic es (in clu din g housin g, ed ucatio n an d health ), m ass in ocu la tio n pro gra m mes, ad ult lite ra cy cam paig ns, a s w ell a s fo od fo r th e m aln ouris h ed . T he e m phasis w as n ow on th e p oor. B y th e e n d o f th e 1 970s th e p ro portio n o f a id a llo cate d to so cia l s e rv ic es h ad c re p t to o ver 5 0 p er c en t, u p f ro m u nder 1 0 p er c en t in th e p re v io us d ecad e. Alth ough in th e mid -1 970s nearly tw o th ir d s of aid was fo r in fra str u ctu re – r o ad s, r a ilw ay s, w ate r a n d s e w era g e, p orts , a ir p orts , p ow er sta tio ns an d te le co m munic atio ns, th e pro portio n of poverty -o rie n te d le n din g r o se f ro m 5 p er c en t in th e la te 1 970s to 5 0 p er c en t b y th e e arly 1980s. In th e y ear o f th e fir s t o il sp ik e (b etw een 1 973 an d 1 974) th e volu m e of poverty -re la te d aid flo w s in cre ase d th re efo ld ; it m ore th an double d a t th e tim e o f th e se co nd o il ju m p b etw een 1 979 a n d 1 980. It sh ould b e u nders to od th at, lik e th e m ajo rity o f th e in fra str u ctu re a id , m uch of th e p overty -re la te d a id d id n ot c o m e fo r fre e. A id c o sts m oney . A nd unle ss it’ s in th e f o rm o f g ra n ts , it h as to b e p aid b ack , w ith in te re st. T his poin t w ould l a te r c o m e b ack t o h au nt m an y A fric an s ta te s. By th e b eg in nin g o f th e 1 970s th e g ro w th -o rie n te d s tr a te g y w as w id ely belie v ed in p olic y c ir c le s to h av e f a ile d in its m is sio n to d eliv er s u sta in ed eco nom ic gro w th . M ountin g num bers of peo ple liv in g in a sta te of ab so lu te poverty , in cre asin g le v els of unem plo ym en t, ris in g in co m e in eq uality , w ors e n in g b ala n ce o f tr a d e p ositio ns a n d a g ro w in g s e n se th at su sta in ed gro w th – re al su sta in ed gro w th – co uld not occu r w ith out mate ria lly im pro vin g th e liv elih ood o f s o cie ty ’s p oor d em an ded a n ew a id str a te g y. 29 Yet, d esp ite th e a id a im ed a t p overty a lle v ia tio n, re cip ie n ts u nder th e pro gra m me in co untr ie s su ch as Z am bia w ould la te r se e th eir p overty le v els s k yro ck et a n d g ro w th r a te s p lu m met. A noth er s h if t w as u nderw ay i n th e 1 970s. U p u ntil th e e arly p art o f th e d ecad e th e U S g overn m en t ( u nder th e au sp ic es of th e U S A gen cy fo r In te rn atio nal D ev elo pm en t) had dis b urs e d th e la rg est a m ount o f a id to th e d ev elo pin g w orld . T his c h an ged under R obert M cN am ara ’s p re sid en cy o f th e W orld B an k, a n d a fte r its 1973 a n nual m eetin g t h e W orld B an k b ecam e t h e l a rg est a id d onor. The f o re ig n a id a gen da o f t h e 1 980s: th e l o st a ge o f d evelo pm en t By th e e n d o f th e 1 970s A fric a w as a w ash w ith a id . I n to ta l, th e c o ntin en t had am asse d aro und U S$36 billio n in fo re ig n assis ta n ce. W ith th e co m modity boom cre d ito rs w ere only to o hap py to pro vid e lo an s. Alth ough eco nom ic p re ssu re s an d fin an cia l in sta b ility h ad b een la rg ely co nta in ed a fte r th e 1 973 o il c ris is , c o m e th e 1 979 o il s p ik e p re cip ita te d b y th e I ra n –Ira q w ar, i t w as a d if fe re n t s to ry . Fore ig n m oney h ad b een flo w in g n ot o nly to A fric a, b ut a ll a cro ss th e world . Thro ughout th e 1960s an d 1970s Latin A m eric an co untr ie s borro w ed v ast s u m s o f m oney , a ls o t o f in an ce t h eir b urg eo nin g e co nom ie s. Betw een 1 975 a n d 1 982, f o r e x am ple , L atin A m eric an d eb t to c o m merc ia l ban ks in cre ase d at a cu m ula tiv e an nual ra te of 20.4 per cen t. T his heig hte n ed b orro w in g le d L atin A m eric a to q uad ru ple its ex te rn al d eb t fro m U S$75 b illio n in 1 975 to m ore th an U S$315 b illio n in 1 983, o r 5 0 per c en t o f t h e r e g io n’s G DP. The 1979 oil cris is pro duced fin an cia l pre ssu re s of in su rm ounta b le pro portio ns, an d th e offic ia l polic y re sp onse did not help . T he polic y re actio n, p artic u la rly b y m ajo r e co nom ie s s u ch a s t h e U S a n d U K, d if fe re d dra stic ally fro m th e e arlie r a p pro ach o f sim ply d um pin g in m ore a id to sta v e o ff th e im pact o n th e p oor. C en tr a l b an kers in th e in dustr ia liz ed world r e acte d t o t h e s e co nd p ric e s h ock a n d f e ars o f m ountin g i n fla tio n b y tig hte n in g m oneta ry p olic y – th at is , m ain ly r a is in g in te re st r a te s. M ost o f th e b an k lo an s to d ev elo pin g co untr ie s w ere b ase d o n flo atin g in te re st ra te s, s o a s p olic y m ak ers r a is e d in te re st r a te s, s o to o th e c o st o f b orro w in g in cre ase d – o fte n t o l e v els w here d eb t w as u nsu sta in ab le . Afric a’s d eb t s e rv ic e ( in te re st p ay m en ts a n d th e r e p ay m en t o f p rin cip al) re ach ed aro und U S$8 b illio n in 1 982, u p fro m U S$2 b illio n in 1 975. Alm ost in ev ita b ly , th e e n vir o nm en t o f h ig her in te rn atio nal in te re st ra te s le d to w orld w id e re cessio n an d, in tu rn , le ss dem an d fo r dev elo pin g 30 co untr ie s’ ex ports , an d hen ce lo w er fo re ig n ex ch an ge earn in gs. Even tu ally , as em erg in g co untr ie s were unab le to se rv ic e th eir accu m ula te d d eb ts t h ere w as o nly o ne a lte rn ativ e. On 1 2 A ugust 1 982 M ex ic o ’s S ecre ta ry o f F in an ce te le p honed th e U S Fed era l R ese rv e C hair m an , th e U S S ecre ta ry of th e T re asu ry an d th e IM F’s M an ag in g D ir e cto r to in fo rm th em th at M ex ic o w ould b e u nab le to meet its 1 6 A ugust d eb t o blig atio ns to its b an k c re d ito rs . O th er c o untr ie s so on fo llo w ed su it. In A fric a alo ne, so m e ele v en co untr ie s – A ngola , Cam ero on, C ongo, I v ory C oast, G ab on, T he G am bia , M ozam biq ue, N ig er, Nig eria , T an zan ia , a n d Z am bia – d efa u lte d o n t h eir o blig atio ns. 3 The d eb t c ris is th re ate n ed to u n derm in e th e v ery fo undatio ns o f g lo bal fin an cia l s ta b ility . I f e m erg in g n atio ns w ere a llo w ed to d efa u lt u nch eck ed , th is w ould h av e le d to a c o m ple te c o lla p se o f th e in te rn atio nal fin an cia l str u ctu re . T he s u rv iv al o f i n te rn atio nal c re d ito rs , s u ch a s b an ks, w ho r e lie d on g ettin g p aid b ack fo r th e lo an s w as in je o pard y. M uch lik e th e ris k s su rro undin g th e 2 008 s u b-p rim e c re d it c ris is , th is c o uld h av e r e su lte d in a cata str o phic ru n o n th e b an ks, a g lo bal fin an cia l m eltd ow n a n d a ll th at it en ta ils – u nem plo ym en t, g allo pin g i n fla tio n a n d e co nom ic d ep re ssio n. The so lu tio n to th e cris is w as to re str u ctu re th e d eb t. T hus th e IM F fo rm ed th e Str u ctu ra l A dju stm en t Facility – la tte rly , th e Enhan ced Str u ctu ra l A dju stm en t F acility – s p ecif ic ally to le n d m oney to d efa u ltin g natio ns t o h elp t h em r e p ay w hat t h ey o w ed . N ecessa ry t h ough t h is w as, t h e en d r e su lt o nly s e rv ed to in cre ase p oor c o untr ie s’ a id -d ep en den ce a n d p ut th em d eep er i n to d eb t. This in te rv en tio n w as c alle d a r e str u ctu rin g, b ut in r e ality it w as m ere ly a re in carn atio n o f th e a id m odel. In varia b ly , b ecau se in te rn atio nal p riv ate le n din g m ark ets d rie d u p a n d a s c o m merc ia l b an ks w ere n o lo nger w illin g to le n d to p oor c o untr ie s, th e B re tto n W oods in stitu tio ns w ould re cla im th eir c en tr a l p ositio n a s c h ie f l e n ders t o e m erg in g e co nom ie s. Fro m th e h ig h h opes a n d a m bitio ns o f th eir e arly in dep en den ce, m an y Afric an co untr ie s had been re d uced to a sta te of near destitu tio n an d re n ew ed dep en den cy . Facin g fa llin g in co m e fro m tr a d e (p ric es of co m moditie s s u ch a s o il a n d s u gar h ad r e tr e ate d to h is to ric ally lo w le v els : oil fe ll fro m U S$38 a b arre l in 1 980 to U S$15.1 0 in 1 986 (a 6 0 p er c en t dro p i n j u st f o ur y ears ), a n d s u gar f ro m 6 5 c en ts p er p ound t o a l o w o f j u st under 7 cen ts per pound in 1978), w eig hed dow n by en orm ous deb t burd en s, h ig h in te re st ra te s a n d d eclin in g d em an d fo r th eir g oods, it w as dif fic u lt to se e w hat, if an yth in g, h ad b een ach ie v ed in th e p re ced in g tw en ty y ears . B ut a m id st th is fin an cia l c h ao s a ro und th e w orld , a n oth er fu ndam en ta l s h if t in e co nom ic th in kin g w as o ccu rrin g; o ne w hic h w ould 31 ag ain h av e i m plic atio ns f o r a id . Up u ntil t h e 1 980s t h e n otio n t h at g overn m en ts w ere t h e u ltim ate a rb ite r of re so urc e a llo catio n la y a t th e c o re o f e co nom ic p la n nin g, le av in g little ro om fo r a n y so rt o f p riv ate se cto r. G overn m en t- le d e co nom ic p la n nin g had ap peare d to w ork w ell in th e Sovie t U nio n, an d m an y W este rn govern m en ts w ere k een to a v ert a n oth er g re at d ep re ssio n b y c em en tin g th eir i n flu en ce i n e co nom ic m an ag em en t. S ocia lis t p olic ie s t h at h ad p la ced govern m en t a t th e c en tr e o f eco nom ic a ctiv ity a n d n atio naliz ed m uch o f priv ate in dustr y w ere belie v ed to be th e fa ste st ro ute to eco nom ic pro sp erity . T his w as tr u e a cro ss th e d ev elo ped w orld – fo r e x am ple , in Brita in a n d F ra n ce w ell b efo re th e 1 980s – a s w ell a s in m an y A fric an co untr ie s i n t h e p ost- in dep en den ce p erio d. By th e 1980s, how ev er, th ere w as a gro w in g se n se am ong le ad in g polic y m ak ers th at th ere w ere in here n t str u ctu ra l im ped im en ts to th e fu nctio nin g of eco nom ic mark ets . Far fro m bein g a cata ly st fo r dev elo pm en t, e x cessiv e g overn m en t in volv em en t w as v ie w ed a s th e p rim e obsta cle to g ro w th ; r a th er th an f a cilita tin g h ealth y e co nom ic e x pan sio n, it was t h e s o urc e o f e co nom ic d is to rtio n. The 1 980s a ls o sa w th e ris e o f th e n eo -lib era l th in kin g w hic h a rg ued th at g overn m en ts s h ould l ib era liz e t h eir e co nom ie s i n f a v our o f t h e l a is se z- fa ir e para d ig m , w hic h en co m passe d (a n d in deed ack now le d ged th e im porta n ce of) th e priv ate mark et. The ex perie n ce of th e new ly in dustr ia liz in g eco nom ie s of A sia gav e th ese m ark et- b ase d id eas a popula rity b oost in p olic y c ir c le s in th e U nite d S ta te s a n d E uro pe. T he Asia n t ig ers s e em ed t o h av e a ch ie v ed h ig h g ro w th r a te s a n d u npre ced en te d poverty r e d uctio n w ith f re e-m ark et p olic ie s a n d a n o utw ard o rie n ta tio n. A s fre e-m ark et pro ponen ts , M ilto n Frie d m an an d th e C hic ag o Sch ool of Eco nom ic s h ad g re at in flu en ce o n th e p olic ie s an d th in kin g o f th e U S Pre sid en t, Ronald Reag an , an d th e U K’s Prim e M in is te r, M arg are t Thatc h er. T he p olic ie s th at e n su ed (R eag an om ic s a n d T hatc h eris m ) b ore all th e h allm ark s o f a n e co nom ic r e v olu tio n, a n d th ere w as little r o om f o r co m pro m is e ; so to o in A fric a, w here th ese fre e-m ark et polic es w ere pack ag ed a n d s o ld a s t h e n ew d ev elo pm en t a g en da. In A fric a, a s w ith o th er p arts o f th e d ev elo pin g w orld , th is e co nom ic overh au l n ecessita te d tw o n ew a id -b ase d p ro gra m mes: fir s t, s ta b iliz atio n, an d th en str u ctu ra l a d ju stm en t. S ta b iliz atio n m ean t re d ucin g a c o untr y ’s im bala n ces to re aso nab le le v els – fo r ex am ple , th e g overn m en t’ s fis c al positio n an d th e co untr y ’s im port– ex port ra tio . M ean w hile str u ctu ra l ad ju stm en t w as aim ed at en co ura g in g gre ate r tr a d e lib era liz atio n an d re d ucin g pric e an d str u ctu ra l rig id itie s by su ch m ean s as re m ovin g 32 su bsid ie s. Both t h e W orld B an k a n d t h e I M F l a u nch ed a g gre ssiv e a id p ro gra m mes to in stitu te th ese tw o in itia tiv es; th e IM F’s S tr u ctu ra l A dju stm en t an d Enhan ced S tr u ctu ra l A dju stm en t F acilitie s are ex am ple s o f th ese . P oor govern m en ts r e ceiv ed c ash in th e f o rm o f b udgeta ry s u pport, a n d in r e tu rn ag re ed to e m bra ce th e fre e-m ark et s o lu tio ns to d ev elo pm en t. T his w ould en ta il m in im iz in g th e r o le o f th e s ta te , p riv atiz in g p re v io usly n atio naliz ed in dustr ie s, lib era liz in g tr a d e a n d d ra m atic ally re d ucin g th e c iv il se rv ic e. Betw een 1 986 a n d 1 996, fo r e x am ple , s ix A fric an c o untr ie s – B en in , th e Cen tr a l A fric an R ep ublic , G uin ea, M ad ag asc ar, M ali a n d U gan da – s h ed more t h an 1 0 p er c en t o f t h eir c iv il s e rv ic e w ork fo rc e. 4 T he p riv atiz atio n o f Afric an sta te -o w ned en te rp ris e s acro ss all se cto rs (n o se cto r sa cre d – man ufa ctu rin g a n d i n dustr y , a g ric u ltu re , t o uris m , s e rv ic es, t r a d e, t r a n sp ort, fin an cia l, en erg y, m in in g, w ate r, ele ctr ic ity an d te le co m munic atio ns) mean t th e g overn m en t s ta k e o f c o rp ora te e q uity fe ll fro m a lm ost 9 0 p er cen t to ju st 1 0 p er c en t o w ners h ip in six y ears . T he fre e m ark ets g av e Afric an e co nom ie s th e f re ed om to s u cceed , b ut a ls o th e f re ed om to f a il. I n Zam bia , fo r in sta n ce, an ag gre ssiv e priv atiz atio n pro gra m me sa w th e clo su re o f t h e c o untr y ’s n atio nal a ir lin e c arrie r, Z am bia A ir w ay s. 5 Fro m th e sta rt o f th e d eb t c ris is in 1 982, IM F flo w s ro se fro m U S$8 billio n to U S$12 b illio n in 1 983. W ith th e o nse t a n d r e so lu tio n o f th e d eb t cris is in th e 1 980s, p overty -re la te d a id f lo w s s u bsid ed , tiltin g in f a v our o f sta b iliz atio n an d str u ctu ra l ad ju stm en t pack ag es (to geth er know n as pro gra m me a id ). S in ce th e 1 980s th e W orld B an k’s s h are o f a d ju stm en t- re la te d le n din g has av era g ed betw een 20 an d 25 per cen t of its to ta l dis b urs e m en ts . D urin g th e 1980s bila te ra l flo w s als o becam e m ore co ncessio nal i n n atu re a n d b y t h e e arly 1 990s o ver 9 0 p er c en t w ere g ra n ts . Alo ngsid e ris in g govern m en t- to -g overn m en t tr a n sfe rs (b ila te ra l aid ), multila te ra l in stitu tio ns c o ntin ued th eir a g gre ssiv e m arc h to w ard s g ain in g gre ate r im porta n ce – b oth in te rm s o f th e v olu m e o f a id d is b urs e d a n d a s arc h ite cts o f d ev elo pm en t p olic y . B y 1 989, th e W ash in gto n C onse n su s (a sta n dard re fo rm pack ag e of eco nom ic polic y pre sc rip tio ns, m ain ly on moneta ry a n d fis c al p olic y fo r th e c o untr ie s m ost a ffe cte d b y e co nom ic cris is ) b ecam e th e b ack bone of th e d ev elo pm en t s tr a te g y p urs u ed b y th e Wash in gto n D C-b ase d in stitu tio ns (th e IM F, W orld Ban k, an d U S Tre asu ry D ep artm en t) . The f o re ig n a id a gen da o f t h e 1 990s: a q uestio n o f g overn ance 33 By th e e n d o f th e 1 980s, e m erg in g-m ark et c o untr ie s’ d eb t w as a t le ast US$1 tr illio n, a n d th e c o st o f s e rv ic in g th ese o blig atio ns c o lo ssa l. I n deed , th e c o st b ecam e s o s u bsta n tia l th at it e v en tu ally d w arfe d f o re ig n a id g oin g in to p oor c o untr ie s – le ad in g to a n et r e v ers e f lo w f ro m p oor c o untr ie s to ric h t o t h e t u ne o f U S$15 b illio n e v ery y ear b etw een 1 987 a n d 1 989. F ro m a d ev elo pm en t p oin t o f v ie w , th is w as a b su rd . W ere it n ot fo r th e tr a g ic co nse q uen ces, it w ould b e f a rc ic al. A fric a’s e co nom ic g ro w th h ad b een in a s te ad y d eclin e, p overty l e v els w ere o n th e r is e a n d t h e s te n ch o f r a m pan t co rru ptio n w as gro w in g ev er m ore pungen t. (A fte r his m eetin g w ith Pre sid en t R eag an , Z air e ’s P re sid en t M obutu S ese S ek o had ask ed fo r easie r te rm s to s e rv ic e th e c o untr y ’s U S$5 b illio n d eb t; h e th en p ro m ptly le ase d C onco rd e t o f ly h is d au ghte r t o h er w ed din g i n t h e I v ory C oast. 6 This b ack dro p, s e en b y m an y a s th e s p ecta cu la r c ra sh o f th e a id -b ase d dev elo pm en t m odel, s e t t h e t o ne f o r t h e p olic y s h if ts o f m uch o f t h e 1 990s. Hav in g se en th e fa ilu re of fif ty years of co m petin g aid in te rv en tio ns, donors n ow la id th e b la m e fo r A fric a’s eco nom ic w oes at th e d oor o f politic al l e ad ers h ip a n d w eak i n stitu tio ns. While m uch o f A sia a n d L atin A m eric a w as fir m ly b ack o n a g ro w th path , w ith i s su es o f e co nom ic i n sta b ility b eh in d i t, m an y A fric an c o untr ie s sta g nate d , a n d i n s o m e o f t h e w ors t c ase s e co nom ic ally r e g re sse d . It w as a ro und t h is t im e t h at t h e d onor c o m munity c o nverg ed o n t h e i d ea th at govern an ce – good govern an ce, need ed fo r su sta in ab le eco nom ic gro w th – was la ck in g acro ss m uch of su b-S ah ara n Afric a. Good govern an ce was a eu phem is m fo r str o ng an d cre d ib le in stitu tio ns, tr a n sp are n t ru le o f la w a n d e co nom ie s fre e o f ra m pan t c o rru ptio n. A ls o aro und th is tim e, geo politic ally , th e w orld had been underg oin g a tr a n sfo rm atio n o f its o w n, a tr a n sfo rm atio n th at would h av e fa r-re ach in g im plic atio ns f o r A fric a a n d t h e a id a g en da f o r t h e c o ntin en t. Thro ughout th e la tte r h alf o f th e tw en tie th cen tu ry an d u p u ntil th e 1990s, th e C old W ar had pro vid ed ric h er co untr ie s w ith th e politic al im pera tiv e to g iv e a id m onie s e v en to th e m ost c o rru pt a n d v en al d esp ots in A fric a. O ne o f th e f e atu re s o f th e C old W ar w as th e W est’ s a b ility a n d eag ern ess to s u pport, b an kro ll a n d p ro p u p a s w ath e o f p ath olo gic al a n d dow nrig ht d an gero us d ic ta to rs . F ro m I d i A m in in th e e ast, to M obutu S ese Sek o in th e w est, f ro m E th io pia ’s M en gis tu to L ib eria ’s S am uel D oe, th e co m petitio n a m ong th ese le ad ers to b e m ore b ru ta l to th eir p eo ple , m ore sp en dth rif t, m ore in dif fe re n t to th eir c o untr y ’s n eed s th an th eir n eig hbours were , w as m atc h ed o nly b y th e w illin gness o f in te rn atio nal d onors to g iv e th em th e m oney to r e aliz e th eir d re am s. B okassa ’s c o ro natio n a s E m pero r of th e C en tr a l A fric an E m pir e in 1 977 a lo ne c o st U S$22 m illio n. 7 A cro ss 34 man y A fric an s ta te s, c o rru ptio n w as ru nnin g a t e p id em ic le v els . In 1 996, am ong f if ty -fo ur c o untr ie s a ro und th e w orld , N ig eria w as r a n ked th e m ost co rru pt n atio n, s c o rin g a d is m al 0 .6 9 o ut o f 1 0 o n c o rru ptio n r a n kin gs. 8 Desp ite t h is c o rru pt e n vir o nm en t, e v ery one c o ntin ued t o l e n d. I n a n sw er to m ountin g c ritic is m o f ra g in g c ro oked , s h ad y a n d fra u dule n t p ra ctic es, donors offe re d qualif ic atio ns. For ex am ple , th e W orld B an k ple d ged co ntin ued a id s u pport, w ith th e p ro vis o th at a id m onie s m ust a ls o ta rg et govern an ce re fo rm , w ith th e aim of im pro vin g th e civ il se rv ic e an d govern m en t bure au cra cy (th ro ugh te ach in g sk ills , tr a n sp are n cy an d in stitu tio nal r e fo rm ). Govern an ce r e m ain s a t th e h eart o f a id to day . W heth er th is a id s tr a te g y has an y lo ng-te rm effe cts , how ev er, re m ain s an open questio n. H av e Afric an s been tr a in ed in eth ic s an d good govern an ce at W este rn univ ers itie s? Y es. H av e ra d ic al re fo rm s a im ed a t im pro vin g tr a n sp are n cy an d effic ie n cy been im ple m en te d ? Y es, at le ast on pap er. B ut it is deb ata b le w heth er th ese in itia tiv es h av e a n y re al b ite in c o untr ie s w hic h still o pt t o b e d ep en den t o n a id . Alo ngsid e govern an ce em erg ed th e W est’ s gro w in g obse ssio n w ith dem ocra cy fo r th e d ev elo pin g w orld . T he in sta lla tio n o f dem ocra cy w as th e donor’s fin al re fu ge; th e la st- d itc h atte m pt to sh ow th at aid in te rv en tio ns c o uld w ork , w ould w ork , i f o nly t h e p olitic al c o nditio ns w ere rig ht. T he 1 960s’ g ro w th a g en da h ad fa ile d to d eliv er g ro w th a n d re d uce poverty ; a s h ad th e 1 970s’ e m phasis o n th e p oor, a n d th e 1 980s’ f o cu s o n eco nom ic sta b iliz atio n an d ad ju stm en t. S o afte r th re e decad es of aid – cen tr ic d ev elo pm en t m odels , it w as le ft to W este rn d em ocra cy to s a v e th e day . In its esse n ce, d em ocra cy w as p erc eiv ed to b e th e w ay in w hic h co untr ie s co uld gro w an d dev elo p; an d if th e dem ocra tic eth os an d in stitu tio ns w ere tr a n sp la n te d to A fric an s ta te s, th en th ese c o untr ie s w ould fin ally b eg in t o p ro sp er. D em ocra cy w as t h e u ltim ate k ey . Dem ocra cy , re al lib era l d em ocra cy , m ean s p olitic al re p re se n ta tiv es a re ch ose n th ro ugh e le ctio ns th at a re o pen , fre e a n d fa ir ; w here v ir tu ally a ll ad ults p osse ss th e rig ht to v ote ; w here civ il an d p olitic al lib ertie s are bro ad ly p ro te cte d ; an d w here ele cte d au th oritie s are n ot su bje ct to th e tu te la ry c o ntr o l o f m ilita ry o r c le ric al le ad ers . F or th e W est, th e p ro cess o f open a n d f a ir e le ctio ns h ad t a k en c en tu rie s t o e v olv e, b ut t h e h ope w as t h at (c o uple d w ith a id ) sh oe-h orn in g d em ocra cy in to u nderd ev elo ped n atio ns would g uara n te e t h at A fric an c o untr ie s w ould s e e a s u dden c h an ge i n t h eir eco nom ic an d p olitic al fo rtu nes. Y et, as d is c u sse d la te r, it w ould so on beco m e c le ar th at a n y im pro vem en ts in A fric a’s e co nom ic p ro file h av e been l a rg ely a ch ie v ed i n s p ite o f ( n om in al) d em ocra cy , n ot b ecau se o f i t. 9 35 By t h e e n d o f t h e C old W ar i n 1 991, t h e U SSR w as n o l o nger a t a n gib le th re at, an d C hin a had not yet ap peare d as a pro ta g onis t in A fric a’s dev elo pm en t s to ry . S o w here as in th e p ast th e a id p olic y h ad , to a g re at ex te n t, b een g overn ed b y C old W ar d em an ds, W este rn d onors w ere n ow no lo nger b ound b y s u ch p olitic al c o nsid era tio ns. T he S ovie t U nio n h ad , on a v era g e, d is b urs e d U S$300 m illio n a y ear t o A fric a ( 5 8 p er c en t w en t t o Eth io pia ), b ut a fte r th e b re ak -u p o f th e u nio n th is a m ount w ould a lm ost certa in ly h av e fa lle n co nsid era b ly . D onors co uld n ow p ic k an d ch oose , when , w hy a n d t o w hom t h ey d ole d o ut a id – i f a t a ll. Where fo re ig n a id is c o ncern ed , th e 1 990s w ere c h ara cte riz ed b y tw o th em es. F ir s t, t h ere w as t h e d om in an ce o f m ultila te ra l ag en cie s, s u ch a s t h e World B an k a n d t h e U nite d N atio ns D ev elo pm en t P ro gra m me ( U NDP), a s th e le ad in g a id d onors ; th eir s h are o f m ultila te ra l g iv in g r o se f ro m 2 3 p er cen t in th e 1 970s to 3 0 p er c en t in th e e arly 1 990s. M uch o f th e o ffic ia l flo w o f a id w as o n a c o ncessio nal b asis , w ith g ra n ts c o nstitu tin g m ore t h an 90 p er cen t o f to ta l o ffic ia l assis ta n ce b y 1 996 – u p fro m 6 0 p er cen t tw en ty y ears e arlie r. Seco nd, th ere w as th e o nse t o f d onor fa tig ue in th e la tte r p art o f th e decad e. W ith th e g eo politic al r a tio nale f o r g iv in g a id g one, th e a m ount o f aid to A fric a d w in dle d d ra m atic ally . I n th e e arly 1 990s, o ffic ia l d onor a id (e x clu din g em erg en cy aid an d deb t re lie f) to A fric a av era g ed U S$15 billio n a y ear, co m pare d to aro und U S$5 b illio n a y ear in th e 1 970s. Hav in g a cco unte d f o r m ore t h an 6 0 p er c en t o n a v era g e o f t o ta l c ash t o t h e co ntin en t ( n et d is b urs e m en ts ) d urin g th e 1 987–92 p erio d ( p eak in g in 1 990 at 7 0 p er c en t) , th e s h are o f o ffic ia l f o re ig n a id s te ad ily d eclin ed to a little more t h an 3 0 p er c en t o f d is b urs e m en ts b etw een 1 993 a n d 1 997. S im ila rly th e net offic ia l dev elo pm en t assis ta n ce (O DA – th e donors ’ te rm fo r offic ia l a id ) d is b urs e m en ts a s a s h are o f d onor G NP f e ll f ro m 0 .3 8 p er c en t in 1 982 to 0 .2 2 p er c en t in 1 997. F or m an y d ev elo pin g c o untr ie s (m ain ly in A sia a n d L atin A m eric a) p riv ate flo w s h ad la rg ely re p la ced a id flo w s, ris in g f ro m 2 6 p er c en t i n 1 987–92 t o 5 5 p er c en t i n 1 993–7. How ev er, unlik e oth er em erg in g zo nes, su b-S ah ara n A fric a did not witn ess a c o nco m ita n t r is e in p riv ate c ap ita l in flo w s a s a id f lo w s d eclin ed . Desp ite th e declin e in net aid flo w s to A fric a over th e 1990s, net dis b urs e m en ts a t th e e n d o f th e p erio d w ere s till la rg er th an in 1 987, a n d, fu rth erm ore , fo re ig n a id c o ntin ued (a n d c o ntin ues to th is d ay ) to b e th e pre d om in an t so urc e o f fin an cia l re so urc es fo r m uch o f th e c o ntin en t. In so m e c ase s in A fric a, a id s till re p re se n te d a s m uch a s 9 0 p er c en t o f n et dis b urs e m en ts b etw een 1 987 a n d 1 996. So th ere h ad b een a m ark ed u pw ard tr e n d in th e re al v alu e o f fo re ig n 36 assis ta n ce f ro m t h e 1 960s; t h is p eak ed i n 1 992, a n d s in ce t h en a id v olu m es hav e fa lle n . A fric a’s to ta l n et O DA h as d eclin ed fro m a h ig h o f U S$17 billio n t o U S$12 b illio n i n 1 999. Durin g t h e 1 990s a n oth er v ie w w as a ls o e m erg in g a b out A fric a’s f a ilu re to d ev elo p. A sid e fro m a n a b se n ce o f q uality g overn an ce a n d o f fre e a n d fa ir d em ocra tic p ro cess, a n d th e e m erg en ce o f e n dem ic c o rru ptio n, th ere was a s e n se f ro m s o m e q uarte rs th at if o nly A fric a c o uld b e r e le ase d f ro m its y oke o f d eb t i n o ne f e ll s w oop, i t c o uld f in ally a ch ie v e t h at e lu siv e g oal – e co nom ic p ro sp erity . It w as d eb t th at w as h old in g A fric a b ack . A nd in th at s e n se i t w as t h e W est’ s f a u lt, a s i t w as t h e W est t o w hom A fric a o w ed billio ns. M ora lity – W este rn , lib era l, g uilt- tr ip ped m ora lity – s e ep ed in to th e d ev elo pm en t e q uatio n. S oon e v ery one w ould j o in i n . The f o re ig n a id a gen da o f t h e 2 000s: th e r is e o f g la m our a id In 2 000, A fric a b ecam e th e f o cu s o f o rc h estr a te d w orld -w id e p ity , a n d n ot fo r t h e f ir s t tim e. T he N ig eria n h um an ita ria n c ata str o phe o f B ia fra in 1 971 (th e s a m e y ear a s th e B eatle G eo rg e H arris o n’s C oncert fo r B an gla d esh ) had dem an ded th at th e world re sp ond to hum an cata str o phe. Consc io usn ess w as r a is e d s e v era l n otc h es w ith B ob G eld of’s 1 3 J u ly 1 985 Liv e A id Concert w here , w ith 1.5 billio n peo ple w atc h in g, public dis c o urs e b ecam e a p ublic d is c o . Liv e A id h ad n ot o nly b een t r iu m phan t i n b rin gin g A fric a’s p lig ht t o t h e wid er p ublic ; i t a ls o t r u m pete d a n e ra o f m ora lity . I n t h e r u n-u p t o t h e n ew mille n niu m , cru sa d es lik e th e Ju bile e D eb t C am paig n cap ita liz ed on peo ple ’s d esp era te d esir e t o b e a p art o f s o m eth in g t h at w ould g iv e a id a n d dev elo pm en t p olic y a n oth er d im en sio n. A fric an l e ad ers s u ch a s T an zan ia ’s Pre sid en t M kap a la te r e n cap su la te d th e f e elin g o f th e d ay in h is s p eech a t th e Ju bile e D eb t C am paig n C onfe re n ce in F eb ru ary 2005, callin g it a ‘s c an dal th at w e a re f o rc ed to c h oose b etw een b asic h ealth a n d e d ucatio n fo r o ur p eo ple a n d r e p ay in g h is to ric al d eb t’ . Thus, th e w ay w as p av ed f o r th e a rm y o f m ora l c am paig ners – th e p op sta rs , th e m ovie s ta rs , n ew p hila n th ro pis ts a n d e v en P ope J o hn P au l I I – to carv e o ut n ic h es fo r th em se lv es, a s th ey to ok o n th e fig ht fo r m ore , n ot le ss, a id to b e se n t to A fric a, e v en a fte r b illio ns o f d olla rs o f d eb t w ere can celle d – in e sse n ce, c an cellin g deb t o n th e o ne h an d, a n d re p la cin g it with a sw ath e o f n ew a id , a n d th us th e p ro sp ect o f fre sh d eb t a ll o ver ag ain , w ith th e o th er. T he a id c am paig ners c ap ita liz ed o n th e s u ccess o f ra is in g cash fo r em erg en cy aid , an d ex te n ded it to a p la tf o rm to ra is e 37 dev elo pm en t a id ; s o m eth in g e n tir e ly d if fe re n t. In m ore r e cen t t im es, t h e I ris h m usic ia n B ono h as m ad e h is c ase d ir e ctly to t h e U S P re sid en t, G eo rg e B ush , i n a W hite H ouse v is it i n O cto ber 2 005, an d B ob G eld of w as a guest at th e 2005 G 8 m eetin g in G le n eag le s, Sco tla n d, a n d a d vis e d th e U K’s C om mis sio n to A fric a. It w ould a p pear, desp onden t with th eir re co rd of fa ilu re , th at W este rn donors are in cre asin gly l o okin g t o a n yone f o r g uid an ce o n h ow b est t o t a ck le A fric a’s pre d ic am en t. Scarc ely does one se e A fric a’s (e le cte d ) offic ia ls or th ose A fric an polic y m ak ers c h arg ed w ith th e d ev elo pm en t p ortf o lio o ffe r a n o pin io n o n what s h ould b e d one, o r w hat m ig ht a ctu ally w ork to s a v e th e c o ntin en t fro m its re g re ssio n. T his v ery im porta n t re sp onsib ility h as, fo r a ll in te n ts an d p urp ose s, a n d to th e b ew ild erm en t a n d c h ag rin o f m an y a n A fric an , been le ft to m usic ia n s who re sid e outs id e Afric a. One dis a str o us co nse q uen ce o f th is h as b een th at h onest, c ritic al a n d s e rio us d ia lo gue a n d deb ate o n th e m erits a n d d em erits o f a id h av e a tr o phie d . A s o ne c ritic o f th e a id m odel r e m ark ed , ‘ m y v oic e c an ’t c o m pete w ith a n e le ctr ic g uita r’. At th e e n d o f it a ll, it is v ir tu ally im possib le to d ra w o n A fric a’s a id -le d dev elo pm en t ex perie n ce an d arg ue th at aid has w ork ed . T he bro ad est co nse q uen ces o f th e aid m odel h av e b een ru in ous. R w an da’s P re sid en t Pau l K ag am e p ut i t m ost s im ply : ‘ T he p rim ary r e aso n [ th at t h ere i s l ittle t o sh ow f o r t h e m ore t h an U S$300 b illio n o f a id t h at h as g one t o A fric a s in ce 1970] is th at in th e c o nte x t o f p ost- S eco nd W orld W ar g eo politic al a n d str a te g ic riv alr ie s a n d e co nom ic in te re sts , m uch o f th is a id w as s p en t o n cre atin g a n d s u sta in in g c lie n t r e g im es o f o ne t y pe o r a n oth er, w ith m in im al re g ard t o d ev elo pm en ta l o utc o m es o n o ur c o ntin en t.’ 10 Donors , d ev elo pm en t ag en cie s an d p olic y m ak ers h av e, b y an d la rg e, ch ose n to ig nore th e b la ta n t a la rm s ig nals , a n d h av e c o ntin ued to p urs u e th e a id -b ase d m odel e v en w hen it h as b eco m e a p pare n t th at a id , u nder whate v er g uis e , is n ot w ork in g. E ven when a id h as n ot b een s to le n , it h as been u npro ductiv e. T he p ro of o f th e p uddin g is in th e e atin g, a n d e v er s o cle arly th e pre p ondera n ce of ev id en ce is on th is sid e. G iv en A fric a’s cu rre n t e co nom ic sta te it is h ard to se e h ow a n y g ro w th re g is te re d is a dir e ct r e su lt o f a id . I f a n yth in g, t h e e v id en ce o f t h e l a st f if ty y ears p oin ts t o th e re v ers e – slo w er gro w th , hig her poverty an d A fric a le ft off th e eco nom ic l a d der. We m ea nt w ell 38 More th an U S$2 tr illio n o f fo re ig n aid h as b een tr a n sfe rre d fro m ric h co untr ie s t o p oor o ver t h e p ast f if ty y ears – A fric a t h e b ig gest r e cip ie n t, b y fa r. Y et r e g ard le ss o f t h e m otiv atio n f o r a id -g iv in g – e co nom ic , p olitic al o r mora l – aid h as fa ile d to d eliv er th e p ro m is e o f su sta in ab le eco nom ic gro w th a n d p overty r e d uctio n. A t e v ery t u rn o f t h e d ev elo pm en t t a le o f t h e la st f iv e d ecad es, p olic y m ak ers h av e c h ose n t o m ain ta in t h e s ta tu s q uo a n d fu rn is h A fric a w ith m ore a id . Aid h as n ot liv ed u p to ex pecta tio ns. It re m ain s at th e h eart o f th e dev elo pm en t ag en da, desp ite th e fa ct th at th ere are very co m pellin g re aso ns to sh ow th at it perp etu ate s th e cy cle of poverty an d dera ils su sta in ab le eco nom ic gro w th . Pau l K ag am e rig htly als o la m en ts th at ‘W hile m ore th an U S$300 b illio n in a id h as a p pare n tly b een d is b urs e d to our c o ntin en t s in ce 1 970, th ere is little to s h ow f o r it in te rm s o f e co nom ic gro w th a n d h um an d ev elo pm en t.’ 11 Aid i s n ot w ork in g. A nd h ere ’s w hy. 39 3. A id I s N ot W ork in g C onsid er th is : in th e p ast f o rty y ears a t le ast a d ozen d ev elo pin g c o untr ie s h av e e x perie n ced p hen om en al e co nom ic g ro w th . M an y o f th ese , m ostly A sia n , co untr ie s h av e g ro w n b y alm ost 1 0 p er cen t o f G DP p er y ear, s u rp assin g th e gro w th ra te s of le ad in g in dustr ia liz ed eco nom ie s, an d s ig nif ic an tly re d ucin g p overty . In so m e in sta n ces, p oore r c o untr ie s h av e l e ap -fro gged t h e p er c ap ita i n co m e l e v els o f l e ad in g d ev elo ped e co nom ie s, a n d th is tr e n d is s e t to c o ntin ue: b y s o m e e stim ate s, s ta r e m erg in g-m ark et p erfo rm ers s u ch a s B ra zil, R ussia , I n dia a n d C hin a a re p ro je cte d to e x ceed t h e e co nom ic g ro w th ra te s o f n early a ll in dustr ia liz ed e co nom ie s b y th e y ear 2 050. Y et, o ver th e s a m e p erio d, a s m an y a s th ir ty o th er d ev elo pin g c o untr ie s, m ain ly aid -d ep en den t in su b-S ah ara n A fric a, hav e fa ile d to g en era te c o nsis te n t e co nom ic g ro w th , a n d h av e e v en r e g re sse d . Man y re aso ns h av e b een o ffe re d to a cco unt fo r w hy A fric an c o untr ie s a re n ot w ork in g: in p artic u la r, g eo gra p hic al, h is to ric al, c u ltu ra l, tr ib al a n d i n stitu tio nal. W hile e ach o f t h em i s c o nvin cin g i n e x pla in in g A fric a’s p oor s h ow in g, t h ey d o n ot t e ll t h e w hole s to ry . One arg um en t, ad van ced b y g eo gra p hic al d ete rm in is ts su ch as Ja re d D ia m ond in Guns, G erm s a nd S te el ( 1 997), is th at a c o untr y ’s w ealth a n d s u ccess d ep en d o n its g eo gra p hic al e n vir o nm en t a n d to pogra p hy. C erta in e n vir o nm en ts a re e asie r to m an ip ula te th an o th ers a n d, a s s u ch , s o cie tie s t h at c an d om estic ate p la n ts a n d a n im als w ith r e la tiv e e ase a re lik ely to b e m ore p ro sp ero us. A t a m in im um , a c o untr y ’s c lim ate , l o catio n, f lo ra , f a u na a n d t e rra in a ffe ct t h e a b ility o f p eo ple t o p ro vid e f o od f o r c o nsu m ptio n a n d f o r ex port, w hic h ultim ate ly has an im pact on a co untr y ’s eco nom ic g ro w th . Dia m ond note s th at all so cie tie s an d cu ltu re s hav e had a p pro xim ate ly s im ila r a b ilitie s to m an ip ula te n atu re , b ut th e r a w m ate ria ls w ith w hic h t h ey h ad t o s ta rt w ere d if fe re n t. Afric a’s b ro ad e co nom ic e x perie n ce s h ow s th at th e a b undan ce o f la n d a n d n atu ra l re so urc es d oes n ot g uara n te e e co nom ic s u ccess, h ow ev er. In t h e s e co nd h alf o f th e tw en tie th c en tu ry , n atu ra l- re so urc e d ep en den ce h as p ro ved to b e a d ev elo pm en ta l c u rs e , ra th er th an a b le ssin g. F or e x am ple , m an y A fric an c o untr ie s w ere u nab le to c ap ita liz e o n c o m modity w in dfa lls o f th e 1 970s, le av in g th eir e co nom ie s in a s ta te o f e co nom ic d is a ste r ( th e g ood new s is th at at le ast fiv e A fric an co untr ie s – C had , E quato ria l 40 Guin ea, G ab on, N ig eria a n d S udan – h av e h ad th e g ood s e n se th is tim e aro und to esta b lis h sa v in gs fu nds an d to put asid e so m e of th eir co m modity w in dfa lls ). H av in g sq uan dere d m uch o f th eir n atu ra l w ealth th ro ugh q uestio nab le in vestm en t a n d e v en , in s o m e c ase s, o utr ig ht th eft, oil- a n d m in era l- ric h c o untr ie s s u ch a s N ig eria , A ngola , C am ero on a n d t h e Dem ocra tic R ep ublic o f C ongo re co rd ed d is m al e co nom ic re su lts in th is perio d. T hey h ad n oth in g t o s h ow f o r i t. In ‘ A fric a: G eo gra p hy a n d G ro w th ’, a n O xfo rd U niv ers ity a n d e x -W orld Ban k eco nom is t, Pau l Collie r, ad opts a nuan ced ap pro ach to th e en dow m en ts is su e by cla ssif y in g A fric an co untr ie s in th re e gro ups: co untr ie s w hic h are re so urc e-p oor but hav e co astlin e; th ose th at are re so urc e-p oor an d la n dlo ck ed ; an d co untr ie s w hic h are re so urc e-ric h (w here it m atte rs little w heth er th e co untr y is la n dlo ck ed or has a co astlin e). T he th re e g ro ups h av e re m ark ab ly d if fe re n t g ro w th p atte rn s. His to ric ally , o n a n e co nom ic p erfo rm an ce b asis , c o asta l re so urc e-s c arc e co untr ie s perfo rm ed sig nif ic an tly bette r th an th eir re so urc e-ric h co unte rp arts w heth er la n dlo ck ed or co asta l; le av in g th e la n dlo ck ed , re so urc e-s c arc e e co nom ie s a s th e w ors t p erfo rm ers . C ollie r re ck ons th at th ese f a cto rs c o st t h ese e co nom ie s a ro und o ne p er c en ta g e p oin t o f g ro w th . This i s a p atte rn w hic h e x is ts g lo bally a s w ell a s b ein g t r u e f o r t h e A fric an co ntin en t. U nfo rtu nate ly , C ollie r note s, A fric a’s popula tio n is heav ily poole d a ro und t h e l a n dlo ck ed a n d r e so urc e-s c arc e c o untr ie s. Cle arly o ne’s e n vir o nm en t m atte rs , a n d o f c o urs e t h e c o nditio ns i n p arts of A fric a a re h ars h – n ota b ly th e c lim ate a n d te rra in . B ut, h ars h a s th ey may be, th ese asp ects are not in su rm ounta b le . W ith av era g e su m mer te m pera tu re s re ach in g 4 9°C (1 20°F ) S au di A ra b ia is ra th er h ot, a n d, o f co urs e , S w itz erla n d is la n dlo ck ed , b ut th ese f a cto rs h av e n ot s to pped th em fro m g ettin g o n w ith i t. His to ric al f a cto rs , s u ch a s c o lo nia lis m , h av e a ls o o fte n b een p ut f o rw ard as e x pla n atio ns f o r A fric a’s u ndera ch ie v em en t; t h e i d ea b ein g t h at c o lo nia l pow ers d elin eate d n atio ns, e sta b lis h ed p olitic al str u ctu re s a n d fa sh io ned bure au cra cie s t h at w ere f u ndam en ta lly i n co m patib le w ith t h e w ay o f l if e o f in dig en ous popula tio ns. Forc in g tr a d itio nally riv al an d w arrin g eth nic gro ups to liv e to geth er u nder th e sa m e fla g w ould n ev er m ak e n atio n- build in g e asy . T he ill- c o nceiv ed p artitio nin g o f A fric a a t th e 1 885 B erlin Confe re n ce did not help m atte rs . The gath erin g of fo urte en natio ns (in clu din g th e U nite d Sta te s, an d w ith G erm an y, B rita in , Fra n ce an d Portu gal t h e m ost i m porta n t p artic ip an ts ) p ro duced a m ap o f A fric a l itte re d with s m all n atio ns w hose a rb itr a rily d ra w n b ord ers w ould a lw ay s m ak e it dif fic u lt fo r th em to sta n d o n th eir o w n tw o fe et – eco nom ic ally an d 41 politic ally . 1 There is , o f c o urs e , th e la rg ely u nsp oken a n d in sid io us v ie w th at th e pro ble m w ith A fric a is A fric an s – th at c u ltu ra lly , m en ta lly a n d p hysic ally Afric an s a re in nate ly d if fe re n t. T hat, s o m eh ow , d eep ly e m bed ded in th eir psy ch e is a n in ab ility to e m bra ce d ev elo pm en t a n d im pro ve th eir o w n lo t in l if e w ith out f o re ig n g uid an ce a n d h elp . It is n ot th e fir s t tim e in h is to ry th at c u ltu ra l n orm s, so cia l m ore s o r re lig io us belie fs hav e been cite d as th e re aso ns fo r dif fe re n ces in dev elo pm en t b etw een d if fe re n t p eo ple s. T he G erm an p olitic al e co nom is t an d s o cio lo gis t M ax W eb er a rg ued t h at a P ro te sta n t w ork e th ic c o ntr ib ute d to th e s p eed o f te ch nolo gic al a d van cem en t a n d e x pla in ed th e d ev elo pm en t se en i n i n dustr ia l B rita in a n d o th er E uro pean n atio ns. In h is m in d th ere w ere tw o b ro ad g ro ups: th e C alv in is ts , w ho b elie v ed in p re d estin atio n an d, d ep en din g o n th eir lo t, m ay o r m ay n ot acq uir e wealth ; a n d th e b elie v ers in th e P ro te sta n t w ork e th ic w ho c o uld a d van ce th ro ugh th e sw eat o f th eir b ro w . A s w ith W eb er, A fric a’s d ev elo pm en t quan dary o ffe rs tw o r o ute s: o ne in w hic h A fric an s a re v ie w ed a s c h ild re n , unab le t o d ev elo p o n t h eir ow n o r g ro w w ith out b ein g s h ow n h ow o r m ad e to ; a n d a n oth er w hic h o ffe rs a s h ot a t s u sta in ab le e co nom ic d ev elo pm en t – but w hic h r e q uir e s A fric an s b e tr e ate d a s a d ults . T he tr o uble w ith th e a id – dep en den cy m odel is , o f c o urs e , th at A fric a is fu ndam en ta lly k ep t in its perp etu al c h ild lik e s ta te . Anoth er arg um en t posite d fo r Afric a’s eco nom ic fa ilu re s is th e co ntin en t’ s d is p ara te tr ib al g ro upin gs a n d e th no-lin guis tic m ak eu p. T here are ro ughly 1 ,0 00 tr ib es a cro ss s u b-S ah ara n A fric a, m ost w ith th eir o w n dis tin ct la n guag e a n d c u sto m s. N ig eria w ith a n e stim ate d p opula tio n o f 150 m illio n p eo ple h as a lm ost 4 00 t r ib es; a n d B ots w an a w ith j u st o ver o ne millio n in hab ita n ts h as a t le ast e ig ht la rg e tr ib al g ro upin gs. T o p ut th is in co nte x t, a ssu m in g N ig eria ’s r a tio , i m ag in e B rita in w ith i ts p opula tio n o f 6 0 millio n div id ed in to so m e 160 eth nic ally fra g m en te d an d dis tin ct gro upin gs. At le ast tw o p ote n tia l c o ncern s f a ce n atio ns w ith s tr o ng tr ib al d iv is io ns. The m ost o bvio us is th e r is k th at e th nic r iv alr y c an le ad to c iv il u nre st a n d str if e , so m etim es cu lm in atin g in fu ll- b lo w n civ il w ar. In co nte m pora ry tim es th e ghastly ex am ple s of B ia fra in N ig eria (1 967–70) an d th e eth nic ally m otiv ate d g en ocid e i n R w an da i n t h e 1 990s l o om l a rg e. Pau l C ollie r p ostu la te s th at th e m ore a c o untr y is e th nic ally d iv id ed , th e gre ate r th e p ro sp ect o f c iv il w ar. T his is w hy, it is a rg ued , A fric a h as a much h ig her in cid en ce o f c iv il w ar th an o th er d ev elo pin g r e g io ns s u ch a s South A sia in th e la st th ir ty y ears . V ery little c an r iv al a c iv il w ar w hen it 42 co m es to e n su rin g a c o untr y ’s (a n d p ote n tia lly its n eig hbours ’) d eclin e – eco nom ic ally , so cia lly , m ora lly . In pure fin an cia l te rm s C ollie r has estim ate d t h at t h e t y pic al c iv il w ar c o sts a ro und f o ur t im es a n nual G DP. I n Afric a, w here s m all c o untr ie s e x is t in c lo se p ro xim ity w ith o ne a n oth er, th e n eg ativ e s p illo ver c o st o f w ar o nto n eig hbourin g c o untr ie s c an b e a s much a s h alf o f t h eir o w n G DP. Even d urin g p eacefu l tim es, e th nic h ete ro gen eity c an b e s e en to b e a n im ped im en t to e co nom ic g ro w th a n d d ev elo pm en t. A cco rd in g to C ollie r, th e d if fic u lty o f r e fo rm in e th nic ally d iv ers e s m all c o untr ie s m ay a cco unt fo r w hy A fric a p ers is te d w ith p oor p olic ie s fo r lo nger th an o th er re g io ns. Eth nic ally div ers e so cie tie s are lik ely to be ch ara cte riz ed by dis tr u st betw een dis p ara te gro ups, m ak in g co lle ctiv e actio n fo r public se rv ic e pro vis io n d if fic u lt. T his i s p artic u la rly t r u e i n ( e v en n om in ally ) d em ocra tic so cie tie s, w here th e pro sp ect of ach ie v in g polic y co nse n su s am ongst fra ctio us eth nic ally sp lit gro ups can be ch alle n gin g. In varia b ly , w here th ere is in fig htin g, a n im passe o r s p lit a cro ss e th nic lin es s lo w s d ow n th e im ple m en ta tio n o f k ey p olic ie s th at c o uld s p ur e co nom ic g ro w th . K en ya’s tu rb ule n t d em ocra tic e le ctio ns in 2 008 a re a re cen t e x am ple w here tr ib al te n sio ns b etw een th e p re sid en tia l in cu m ben t M wai K ib ak i ( a K ik uyu) a n d Raila O din ga (a L uo) se ep ed in to a n d in fe cte d th e p olitic al p ro cess a n d in stitu tio ns (th e c o m pro m is e w as a c o alitio n g overn m en t m ad e fro m th e tw o g ro upin gs). No o ne c an d en y t h at A fric a h as h ad i ts f a ir s h are o f t r ib al f ra cas. B ut b y th e s a m e to ken it is a ls o tr u e th at th ere a re a n um ber o f A fric an c o untr ie s where dis p ara te gro ups hav e m an ag ed to co ex is t perfe ctly peacefu lly (B ots w an a, G han a, Z am bia , to n am e th re e). In th e q uest fo r a s o lu tio n to Afric a’s e co nom ic w oes, it is f u tile to c ite e th nic d if fe re n ces a s a n e x cu se – b orn a Z ulu , a lw ay s a Z ulu . B ut Z ulu s, lik e p eo ple f ro m a n y o th er tr ib e, can a n d d o in te rm arry ; t h ey liv e, w ork a n d p la y in i n te g ra te d c itie s. I n f a ct peo ple in A fric an c itie s liv e in a m ore in te g ra te d w ay th an y ou m ig ht f in d in o th er c itie s – th ere a re n o e th nic z o nes s u ch a s e x is t in B elf a st, L ondon or N ew Y ork , fo r th at m atte r. B esid es, once lo ck ed in to th e eth nic arg um en t th ere is n o o bvio us p olic y p re sc rip tio n: it’ s a d ead e n d. B ette r to lo ok to a w orld w here a ll c itiz en s c an fre ely p artic ip ate in a c o untr y ’s eco nom ic p ro sp erity , a n d w atc h t h e d iv is iv e r o le o f e th nic ity e v ap ora te . Yet an oth er ex pla n atio n put fo rw ard fo r A fric a’s poor eco nom ic sh ow in g is th e ab se n ce of str o ng, tr a n sp are n t an d cre d ib le public in stitu tio ns – c iv il s e rv ic e, p olic e, j u dic ia ry , e tc . In The W ea lth a nd P overty o f N atio ns , D av id L an des a rg ues th at th e id eal gro w th an d dev elo pm en t m odel is one guara n te ed by politic al 43 in stitu tio ns. Secu re pers o nal lib erty , priv ate pro perty an d co ntr a ctu al rig hts , en fo rc ed ru le of la w (n ot necessa rily th ro ugh dem ocra cy ), an om budsm an -ty pe o f g overn m en t, in to le ra n ce to w ard s p riv ate r e n t- s e ek in g an d o ptim ally s iz ed g overn m en t a re m an dato ry . In Em pir e : H ow B rita in M ade t h e M odern W orld , N ia ll F erg uso n p oin ts to t h e c o m mon-la w s y ste m a n d t h e B ritis h -ty pe c iv il a d m in is tr a tio n a s t w o in stitu tio ns th at p ro m ote d d ev elo pm en t. F erg uso n a ls o n ote s th at it is a co untr y ’s u nderly in g le g al a n d p olitic al in stitu tio ns th at m ak e it c o nduciv e to in vestm en t (a n d c o unte r-d is in vestm en t th ro ugh le ss c ap ita l flig ht) a n d in novatio n. T his necessa rily in clu des en fo rc em en t of th e ru le of la w , av oid an ce o f e x cessiv e g overn m en t e x pen ditu re s a n d c o nstr a in ts o n th e ex ecu tiv e. In tu rn , th is y ie ld s a tr a n sp are n t fis c al s y ste m , a n in dep en den t moneta ry a u th ority a n d a r e g ula r s e cu ritie s m ark et t h at f o ste r t h e g ro w th i n siz e a n d n um ber o f c o rp ora tio ns. Pro fe sso r D an i R odrik fro m H arv ard U niv ers ity is e q ually a d am an t in arg uin g th at in stitu tio ns th at p ro vid e d ep en dab le p ro perty rig hts , m an ag e co nflic t, m ain ta in l a w a n d o rd er, a n d a lig n e co nom ic i n cen tiv es w ith s o cia l co sts a n d b en efits a re th e fo undatio n o f lo ng-te rm g ro w th . In h is b ook In Sea rc h o f P ro sp erity , R odrik p oin ts to C hin a, B ots w an a a n d M au ritiu s a s ex am ple s o f c o untr ie s w hic h la rg ely o w e th eir e co nom ic su ccess to th e pre se n ce (o r c re atio n) o f in stitu tio ns th at h av e g en era te d m ark et- o rie n te d in cen tiv es, p ro te cte d th e p ro perty rig hts o f c u rre n t a n d fu tu re in vesto rs , an d d ete rre d so cia l an d p olitic al in sta b ility . (B ots w an a h ad a G DP p er cap ita o f U S$8,1 70 in 2 002, m ore th an f o ur tim es th e s u b-S ah ara n -A fric a av era g e, U S$1,7 80, m uch o f its su ccess attr ib ute d to th e p ro bity o f its politic al i n stitu tio ns.) 2 Convers e ly , h e s u ggests , I n donesia a n d P ak is ta n a re c o untr ie s w here , in th e ab se n ce of good public in stitu tio ns, gro w th has been dif fic u lt to ach ie v e on a su sta in ed basis . Even when gro w th has occu rre d in te rm itte n tly it h as b een fra g ile (a s in p ost- 1 997 In donesia ) o r in cap ab le of d eliv erin g h ig h le v els o f so cia l o utc o m es in a re as su ch a s h ealth o r ed ucatio n (a s in th e case of P ak is ta n ). R odrik ’s estim ate s im ply th at ch an ges in in stitu tio ns c an c lo se a s m uch a s th re e q uarte rs o f th e in co m e gap b etw een t h e n atio ns w ith t h e b est a n d t h ose w ith t h e w ors t i n stitu tio ns. While public in stitu tio ns – th e ex ecu tiv e, th e le g is la tu re an d th e ju dic ia ry – ex is t in so m e fo rm or fa sh io n in m ost A fric an co untr ie s (a rte fa cts o f th e c o lo nia l p erio d), a p art fro m th e o ffic e o f th e p re sid en t th eir r e al p ow er i s m in im al, a n d s u bje ct t o c ap ric io us c h an ge. I n s tr o ng a n d sta b le e co nom ic e n vir o nm en ts p olitic al in stitu tio ns a re th e b ack bone o f a natio n’s d ev elo pm en t, b ut in a w eak s e ttin g – o ne in w hic h c o rru ptio n a n d 44 eco nom ic g ra ft r e ig n s u pre m e – t h ey o fte n p ro ve w orth le ss. Afric a’s fa ilu re to gen era te an y m ean in gfu l or su sta in ab le lo ng-ru n gro w th m ust, oste n sib ly , be a co nflu en ce of fa cto rs : geo gra p hic al, his to ric al, c u ltu ra l, tr ib al a n d in stitu tio nal. In deed , it w ould b e n aiv e to dis c o unt o utr ig ht a n y o f th e a b ove a rg um en ts a s c o ntr ib utin g to A fric a’s poor g ro w th h is to ry . H ow ev er, it is a ls o fa ir to s a y th at n o fa cto r s h ould co ndem n A fric a to a p erm an en t fa ilu re to g ro w . T his is an in dic tm en t Afric a d oes n ot d ese rv e. W hile e ach o f th ese fa cto rs m ay b e p art o f th e ex pla n atio n in d if fe rin g d eg re es, in d if fe re n t c o untr ie s, fo r th e m ost p art Afric an c o untr ie s h av e o ne t h in g i n c o m mon – t h ey a ll d ep en d o n a id . Does a id w ork ? Sin ce th e 1 940s, a p pro xim ate ly U S$1 tr illio n o f a id h as b een tr a n sfe rre d fro m ric h co untr ie s to A fric a. T his is n early U S$1,0 00 fo r ev ery m an , wom an a n d c h ild o n th e p la n et to day . D oes a id w ork ? P ro ponen ts o f a id poin t t o s ix p ro ofs t h at i t c an . The M arsh all P la n Fir s t, th ere is th e M ars h all P la n . A s d is c u sse d e arlie r, b etw een 1 948 a n d 1952 th e U nite d S ta te s tr a n sfe rre d o ver U S$13 b illio n (a ro und U S$100 billio n in to day ’s te rm s) to a id in th e r e co nstr u ctio n o f p ost- S eco nd W orld War E uro pe. B y m ost his to ric al acco unts th e M ars h all Pla n w as an overw helm in g su ccess in re b uild in g th e e co nom ie s o f w ar-to rn E uro pe. The M ars h all P la n n ot o nly g uara n te ed e co nom ic s u ccess, b ut m an y c re d it th e p ro gra m me w ith t h e r e -e sta b lis h m en t o f p olitic al a n d s o cia l i n stitu tio ns cru cia l f o r Weste rn E uro pe’s o n-g oin g p eace a n d p ro sp erity . A lth ough th e id ea o f a id to A fric a w as b orn o ut o f th e s u ccess o f th e M ars h all P la n in Euro pe, i n p ra ctic al te rm s th e tw o a re c o m ple te ly d if fe re n t. P oin tin g to th e Mars h all P la n ’s ach ie v em en ts as a b lu ep rin t fo r a sim ila r o utc o m e fo r Afric a t o m orro w i s s im ply w ro ng. Why? For o ne th in g, E uro pean c o untr ie s w ere n ot w holly d ep en den t o n a id . Desp ite th e ra v ag es o f w ar, W este rn E uro pe’s eco nom ic re co very w as alr e ad y u nderw ay , a n d its e co nom ie s h ad o th er r e so urc es to c all u pon. A t th eir p eak , M ars h all P la n f lo w s w ere o nly 2 .5 p er c en t o f th e G DP o f th e la rg er r e cip ie n ts l ik e F ra n ce a n d G erm an y, w hile n ev er a m ountin g t o m ore th an 3 per cen t of G DP fo r an y co untr y fo r th e fiv e-y ear lif e of th e 45 pro gra m me. I n m ark ed c o ntr a st, A fric a h as a lr e ad y b een f lo oded w ith a id . Pre se n tly , A fric a re ceiv es d ev elo pm en t assis ta n ce w orth alm ost 1 5 p er cen t o f its G DP – o r m ore th an f o ur tim es th e M ars h all P la n a t its h eig ht. Giv en A fric a’s p oor e co nom ic p erfo rm an ce in th e p ast fif ty y ears , w hile billio ns o f d olla rs o f a id h av e p oure d in , it is h ard to g ra sp h ow a n oth er sw ath e o f b illio ns w ill s o m eh ow tu rn A fric a’s a id e x perie n ce in to o ne o f su ccess. The M ars h all Pla n w as als o fin ite . T he U S had a goal, co untr ie s accep te d th e te rm s, s ig ned o n th e d otte d lin e, m oney f lo w ed in , a n d a t th e en d o f fiv e y ears th e m oney sto pped . In c o ntr a st to th e M ars h all P la n ’s sh ort, s h arp in je ctio n o f c ash , m uch o f A fric a h as r e ceiv ed a id c o ntin ually fo r a t le ast fif ty y ears . A id h as b een c o nsta n t a n d re le n tle ss, a n d w ith n o tim e lim it to w ork a g ain st. W ith out th e in built th re at th at a id m ig ht b e c u t, an d w ith out th e se n se th at one day it co uld all be over, A fric an govern m en ts vie w aid as a perm an en t, re lia b le , co nsis te n t so urc e of in co m e a n d h av e n o re aso n to b elie v e th at th e flo w s w on’t c o ntin ue in to th e in defin ite fu tu re . There is no in cen tiv e fo r lo ng-te rm fin an cia l pla n nin g, n o r e aso n t o s e ek a lte rn ativ es t o f u nd d ev elo pm en t, w hen a ll y ou hav e t o d o i s s it b ack a n d b an k t h e c h eq ues. Cru cia lly , th e c o nte x t o f th e M ars h all P la n a ls o d if fe re d g re atly fro m th at in A fric a. A ll th e w ar-to rn E uro pean n atio ns h ad h ad th e re le v an t in stitu tio ns in p la ce in th e ru n-u p to th e S eco nd W orld War. T hey h ad ex perie n ced civ il se rv ic es, w ell- ru n busin esse s, an d effic ie n t le g al an d so cia l in stitu tio ns in p la ce, a ll o f w hic h h ad w ork ed . A ll th at w as n eed ed afte r th e w ar w as a c ash in je ctio n to g et th em w ork in g a g ain . M ars h all Pla n aid w as, th ere fo re , a m atte r of re co nstr u ctio n, an d not eco nom ic dev elo pm en t. H ow ev er d am ag ed , E uro pe h ad an ex is tin g fra m ew ork – politic al, e co nom ic a n d p hysic al; w here as d esp ite th e le g acy o f c o lo nia l in fra str u ctu re A fric a w as, e ffe ctiv ely , u ndev elo ped . B uild in g, ra th er th an re b uild in g, p olitic al a n d so cia l in stitu tio ns re q uir e s m uch m ore th an ju st cash . A n in flu x o f b illio ns o f d olla rs o f a id , u nch eck ed a n d u nre g ula te d , will actu ally hav e help ed to underm in e th e esta b lis h m en t of su ch in stitu tio ns – a n d su sta in ab le lo nger-te rm g ro w th . In a sim ila r v ein , th e re cen t a n d s u ccessfu l e x perie n ce o f Ire la n d, w hic h re ceiv ed v ast s u m s o f (m ain ly E uro pean ) aid , is in n o w ay ev id en ce th at aid co uld w ork in Afric a. F or, lik e p ost- w ar E uro pe, Ire la n d to o h ad a ll th e in stitu tio ns a n d politic al in fra str u ctu re re q uir e d fo r aid to be m onito re d an d ch eck ed , th ere b y t o m ak e a m ean in gfu l e co nom ic i m pact. Fin ally , w here as M ars h all P la n a id w as la rg ely (s p ecif ic ally ) ta rg ete d to w ard s p hysic al in fra str u ctu re , aid to A fric a p erm eate s v ir tu ally ev ery 46 asp ect o f th e e co nom y. In m ost p oor c o untr ie s to day , a id is in th e c iv il se rv ic e, aid is in p olitic al in stitu tio ns, aid is in th e m ilita ry , aid is in health care a n d e d ucatio n, a id i s i n i n fra str u ctu re , a id i s e n dem ic . T he m ore it i n filtr a te s, t h e m ore i t e ro des, t h e g re ate r t h e c u ltu re o f a id -d ep en den cy . The I D A g ra duate s Aid p ro ponen ts p oin t t o t h e e co nom ic s u ccess o f c o untr ie s t h at h av e i n t h e past re lie d o n a id , b ut n o lo nger d o s o . T hese c o untr ie s a re k now n a s th e In te rn atio nal D ev elo pm en t A sso cia tio n (ID A) g ra d uate s. T hey c o m pris e tw en ty -tw o of so m e of th e m ost eco nom ic ally su ccessfu lly em erg in g co untr ie s of re cen t tim es – in clu din g, C hile , C hin a, C olo m bia , S outh Kore a, T haila n d an d T urk ey , w ith only th re e fro m A fric a: B ots w an a, Equato ria l G uin ea (its im pro vem en ts m ain ly s p urre d b y its o il fin d) a n d Sw azila n d. 3 Supporte rs of aid su ggest th at th ese co untr ie s hav e mean in gfu lly lo w ere d poverty , in cre ase d in co m es an d ra is e d th eir sta n dard s o f l iv in g, t h an ks t o l a rg e-s c ale a id -d riv en i n te rv en tio ns. How ev er, a s in th e c ase o f th e M ars h all P la n , th eir a id f lo w s h av e b een re la tiv ely sm all – in th is in sta n ce, gen era lly le ss th an 10 per cen t of natio nal in co m e – an d th eir dura tio n sh ort. B ots w an a, w hic h is ofte n to ute d a s a p rim e e x am ple o f th e I D A g ra d uate s u ccess s to ry , d id r e ceiv e sig nif ic an t f o re ig n a ssis ta n ce ( n early 2 0 p er c en t o f th e c o untr y ’s n atio nal in co m e) in th e 1 960s. It is tr u e th at b etw een 1 968 a n d 2 001 B ots w an a’s av era g e re al p er cap ita eco nom ic g ro w th w as 6 .8 p er cen t, o ne o f th e hig hest g ro w th r a te s in th e w orld . H ow ev er, a id is n ot r e sp onsib le f o r th is ach ie v em en t. B ots w an a vig oro usly purs u ed num ero us m ark et eco nom y optio ns, w hic h w ere k ey to th e c o untr y ’s su ccess – tr a d e p olic y le ft th e eco nom y o pen to c o m petitio n, m oneta ry p olic y w as k ep t sta b le a n d th e co untr y m ain ta in ed fis c al d is c ip lin e. A nd c ru cia lly , b y 2 000, B ots w an a’s aid s h are o f n atio nal in co m e s to od a t a m ere 1 .6 p er c en t, a s h ad ow o f th e pro portio n it c o m man ds in m uch o f A fric a to day . B ots w an a s u cceed ed b y ceasin g t o d ep en d o n a id . With c o nditio nalitie s Aid s u pporte rs a ls o b elie v e in c o nditio nalitie s. T his is th e n otio n th at th e im positio n o f r u le s a n d r e g ula tio ns s e t b y d onors to g overn th e c o nditio ns under w hic h aid is dis b urs e d can ultim ate ly dete rm in e its su ccess or fa ilu re . I n t h e 1 980s c o nditio nalitie s a tta ch ed t o A fric an a id p olic ie s w ould 47 beco m e t h e m an tr a . The n otio n o f a q uid p ro q uo a ro und a id w as n ot n ew . M ars h all P la n re cip ie n ts h ad b een r e q uir e d to a d here to a s tr ic t s e t o f c o nditio ns im pose d upon th em b y th e U S. T hey h ad a c h oic e . . . y ou ta k e it o r y ou le av e it. Afric an c o untr ie s f a ced t h e s a m e c h oic e. Donors h av e te n ded to tie a id in th re e w ay s. F ir s t, it is o fte n tie d to pro cu re m en t. C ountr ie s t h at t a k e a id h av e t o s p en d i t o n s p ecif ic g oods a n d se rv ic es w hic h o rig in ate d f ro m th e d onor c o untr ie s, o r a g ro up s e le cte d b y th em . T his e x te n ds to s ta ff a s well: d onors e m plo y th eir o w n c itiz en s e v en when s u ita b le c an did ate s f o r th e jo b e x is t in th e p oor c o untr y . S eco nd, th e donor c an r e se rv e th e r ig ht to p re se le ct th e s e cto r a n d/o r p ro je ct th at th eir aid w ould s u pport. T hir d , a id flo w s o nly a s lo ng a s th e re cip ie n t c o untr y ag re es t o a s e t o f e co nom ic a n d p olitic al p olic ie s. With sta b iliz atio n a n d str u ctu ra l a d ju stm en t in v ogue, th e a d optio n o f mark et- b ase d p olic ie s b ecam e th e re q uir e m en t u pon w hic h a id w ould b e gra n te d . A id w ould b e co ntin gen t o n A fric an co untr ie s’ w illin gness to ch an ge fro m sta tis t, c en tr a lly p la n ned e co nom ie s to w ard s m ark et- d riv en polic ie s – r e d ucin g t h e c iv il s e rv ic e, p riv atiz in g n atio naliz ed i n dustr ie s a n d re m ovin g tr a d e b arrie rs . L ate r d em ocra cy an d g overn an ce w ould m ak e th eir w ay o nto t h e l is t, i n t h e h ope o f l im itin g c o rru ptio n i n a ll i ts f o rm s. On p ap er, c o nditio nalitie s m ad e s e n se . D onors p la ced r e str ic tio ns o n t h e use of aid , an d th e re cip ie n ts w ould ad here . In pra ctic e, how ev er, co nditio nalitie s fa ile d m is e ra b ly . P ara m ount w as th eir fa ilu re to c o nstr a in co rru ptio n a n d b ad g overn m en t. A W orld B an k stu dy fo und th at a s m uch a s 8 5 p er c en t o f a id flo w s were use d fo r purp ose s oth er th an th at fo r w hic h th ey w ere in itia lly in te n ded , v ery o fte n d iv erte d to u npro ductiv e, if n ot g ro te sq ue v en tu re s. Even a s f a r b ack a s t h e 1 940s, i n te rn atio nal d onors w ere w ell a w are o f t h is div ers io n r is k . I n 1 947, P au l R ose n ste in -R odin , th e D ep uty D ir e cto r o f th e World B an k E co nom ic s D ep artm en t, r e m ark ed t h at ‘ w hen t h e W orld B an k th in ks it is fin an cin g an ele ctr ic p ow er sta tio n, it is re ally fin an cin g a bro th el’ . But th e p oin t h ere is th at c o nditio nalitie s w ere b la ta n tly ig nore d , y et a id co ntin ued to flo w (a n d a g re at d eal o f it) , e v en w hen th ey w ere o pen ly vio la te d . In o th er re se arc h , S ven sso n fo und ‘n o lin k b etw een a c o untr y ’s re fo rm e ffo rt o r fu lf ilm en t o f c o nditio nality a n d th e d is b urs e m en t ra te o f aid fu nds’, p ro vin g o nce ag ain th at th ough a cen tr a l p art o f m an y aid ag re em en ts , c o nditio nalitie s d id n ot s e em t o m atte r m uch i n p ra ctic e. 48 Aid s u ccess i n g ood p olic y e n vir o nm en ts Faced w ith m ountin g e v id en ce th at a id h as n ot w ork ed , a id p ro ponen ts hav e a ls o a rg ued th at a id w ould w ork , a n d d id w ork , w hen p la ced in g ood polic y e n vir o nm en ts , i.e . c o untr ie s w ith s o und fis c al, m oneta ry a n d tr a d e polic ie s. In o th er w ord s, a id w ould d o its b est, w hen a c o untr y w as in esse n tia lly good w ork in g ord er. This arg um en t w as fo rm aliz ed in a se m in al p ap er p ublis h ed b y W orld B an k e co nom is ts B urn sid e a n d D olla r in 2 000. (Q uite w hy a c o untr y in w ork in g o rd er w ould n eed a id , o r n ot se ek o th er b ette r, m ore tr a n sp are n t fo rm s o f fin an cin g its e lf , re m ain s a myste ry .) Donors s o on la tc h ed o nto th e B urn sid e– D olla r r e su lt a n d w ere q uic k to put th e fin din gs in to p ra ctic e. In 2 004, fo r e x am ple , th e U S g overn m en t la u nch ed its US$5 billio n M ille n niu m Challe n ge Corp ora tio n aid cam paig n m otiv ate d b y th e id ea th at ‘e co nom ic d ev elo pm en t a ssis ta n ce can be su ccessfu l only if it is lin ked to so und polic ie s in dev elo pin g co untr ie s’. 4 In la te r e m pir ic al w ork , th e B urn sid e– D olla r re su lt fa ile d to sta n d u p to s c ru tin y, a n d it s o on lo st its a llu re . I t w as n ot lo ng b efo re th e wid er e co nom ic c o m munity c o nclu ded th at th e B urn sid e– D olla r fin din gs were te n uous a n d c erta in ly n ot ro bust; p erh ap s e v en tu ally c o m in g to th e obvio us c o nclu sio n th at c o untr ie s w ith g ood p olic ie s – lik e B ots w an a – would te n d to m ak e p ro gre ss u nassis te d , a n d th at a k ey p oin t o f a id is to help c o untr ie s w ith b ad o nes. B ut e v en se ttin g a sid e e m pir ic al a n aly sis , th ere are , as d is c u sse d la te r, v alid co ncern s th at, fa r fro m m ak in g an y im pro vem en t, a id c o uld m ak e a g ood p olic y e n vir o nm en t b ad , a n d a b ad polic y e n vir o nm en t w ors e . On th e su bje ct of good polic y en vir o nm en ts , aid su pporte rs are co nvin ced th at aid w ork s w hen it ta rg ets dem ocra cy , becau se only a dem ocra tic e n vir o nm en t c an j u m p-s ta rt e co nom ic g ro w th . F ro m a W este rn pers p ectiv e, d em ocra cy p ro m is e s t h e l o t. There are , in fa ct, good re aso ns fo r belie v in g th at dem ocra cy is a le ad in g d ete rm in an t o f e co nom ic g ro w th , a s a lm ost in varia b ly th e b ody politic ble ed s in to eco nom ic s. Lib era l dem ocra cy (a n d th e politic al fre ed om s i t b esto w s) p ro te cts p ro perty r ig hts , e n su re s c h eck s a n d b ala n ces, defe n ds a fre e pre ss an d guard s co ntr a cts . P olitic al sc ie n tis ts su ch as Dougla ss N orth h av e lo ng a sse rte d d em ocra cy ’s e sse n tia l lin ks w ith a ju st an d e n fo rc eab le l e g al f ra m ew ork . Dem ocra cy , th e arg um en t goes, giv es a gre ate r perc en ta g e of th e popula tio n a ccess to th e p olitic al d ecis io n-m ak in g p ro cess, a n d th is in tu rn en su re s c o ntr a ct e n fo rc em en t th ro ugh a n in dep en den t ju dic ia ry . N ot o nly 49 will dem ocra cy pro te ct you, but it w ill als o help you bette r yours e lf . Dem ocra cy p ro m is e s th at b usin esse s, h ow ev er sm all, w ill b e p ro te cte d under th e d em ocra tic ru le o f la w . D em ocra cy als o o ffe rs th e p oor an d dis a d van ta g ed th e o pportu nity to re d re ss an y u nfa ir d is tr ib utio n v ia th e sta te . It is a fte r a ll u nder d em ocra tic g overn m en ts , th e A m eric an e c o nom is t an d s o cia l s c ie n tis t M an cu r O ls o n p osite d , th at th e p ro te ctio n o f p ro perty rig hts an d th e se cu rity of co ntr a cts , cru cia l fo r stim ula tin g eco nom ic activ ity , w ere m ore lik ely . In esse n ce, dem ocra cy en gen ders a peace div id en d, in tr o duces a f o rm o f p olitic al s ta b ility th at m ak es it a p re cu rs o r fo r eco nom ic g ro w th . In O ls o n’s w orld , d em ocra tic re g im es en gag e in activ itie s th at a ssis t p riv ate p ro ductio n in tw o w ay s: e ith er b y m ain ta in in g a fra m ew ork (re g ula to ry , le g al, etc .) fo r p riv ate activ ity o r b y d ir e ctly su pply in g in puts w hic h are n ot effic ie n tly d eliv ere d b y th e m ark et (fo r ex am ple , a ro ad co nnectin g a sm all re m ote v illa g e to a la rg er tr a d in g to w n). B y th eir v ery n atu re , d em ocra cie s h av e an in cen tiv e to p ro vid e public g oods w hic h b en efit e ach a n d e v ery one, a n d w ealth c re atio n i s m ore lik ely under dem ocra tic re g im es th an non-d em ocra cie s, su ch as, sa y , au to cra tic o r d ic ta to ria l r e g im es. Under th is sk y, dem ocra cy is se en as A fric a’s eco nom ic sa lv atio n: era sin g co rru ptio n, eco nom ic cro nyis m , an d an tic o m petitiv e an d in effic ie n t p ra ctic es, a n d r e m ovin g o nce a n d f o r a ll th e a b ility f o r a s ittin g in cu m ben t to cap ric io usly se iz e wealth . Dem ocra cie s purs u e m ore eq uita b le a n d tr a n sp are n t e co nom ic p olic ie s, th e ty pes o f p olic ie s th at a re co nduciv e t o s u sta in ab le e co nom ic g ro w th i n t h e l o ng r u n. More o ver, th e N obel Lau re ate A m arty a Sen arg ues th at becau se dem ocra tic ally e le cte d p olic y m ak ers r u n th e r is k o f lo sin g p olitic al o ffic e, th ey a re m ore v ig ila n t a b out a v ertin g e co nom ic d is a ste rs . 5 A m ong m ain ly dev elo pin g eco nom ie s an oth er stu dy fo und th at dem ocra tic ally acco unta b le g overn m en ts m et t h e b asic n eed s o f t h eir c itiz en s b y ‘ a s m uch as 7 0 p er c en t m ore ’ th an n on-d em ocra tic s ta te s. 6 B ut, p erh ap s m ost o f a ll, donors a re c o nvin ced th at a cro ss th e p olitic al sp ectr u m d em ocra cy (a n d only d em ocra cy ) i s p ositiv ely c o rre la te d t o e co nom ic g ro w th . Alth ough th e p ote n tia l p ositiv e a sp ects o f d em ocra cy h av e d om in ate d dis c o urs e (a n d aid polic y ), W este rn donors an d polic y m ak ers hav e esse n tia lly ch ose n to ig nore th e pro te sts of th ose w ho arg ue th at dem ocra cy , a t t h e e arly s ta g es o f d ev elo pm en t, i s i r re le v an t, a n d m ay e v en be harm fu l. In an aid -d ep en den t en vir o nm en t su ch vie w s are easy to en vis a g e. A id -fu nded d em ocra cy d oes n ot g uard ag ain st a g overn m en t ben t o n a lte rin g p ro perty r ig hts f o r its o w n b en efit. O f c o urs e , th is lo w ers 50 th e i n cen tiv e f o r i n vestm en t a n d c h okes o ff g ro w th . The unco m fo rta b le tr u th is th at fa r fro m bein g a pre re q uis ite fo r eco nom ic gro w th , dem ocra cy can ham per dev elo pm en t as dem ocra tic re g im es f in d i t d if fic u lt t o p ush t h ro ugh e co nom ic ally b en efic ia l l e g is la tio n am id riv al p artie s a n d jo ck ey in g in te re sts . In a p erfe ct w orld , w hat p oor co untr ie s a t t h e l o w est r u ngs o f e co nom ic d ev elo pm en t n eed i s n ot a m ulti- party d em ocra cy , b ut i n f a ct a d ecis iv e b en ev ole n t d ic ta to r t o p ush t h ro ugh th e r e fo rm s r e q uir e d to g et th e e co nom y m ovin g ( u nfo rtu nate ly , to o o fte n co untr ie s e n d u p w ith m ore d ic ta to r a n d le ss b en ev ole n ce). T he W este rn min dse t e rro neo usly e q uate s a p olitic al s y ste m o f m ulti- p arty d em ocra cy with h ig h-q uality in stitu tio ns ( fo r e x am ple , e ffe ctiv e r u le o f la w , r e sp ecte d pro perty rig hts a n d a n in dep en den t ju dic ia ry , e tc .) . B ut th e tw o a re n ot sy nonym ous. One only has to lo ok to th e his to ry of A sia n eco nom ie s (C hin a, In donesia , K ore a, M ala y sia , S in gap ore , T aiw an a n d T haila n d) to s e e h ow th is is b orn e o ut. A nd e v en b ey ond A sia , P in och et’ s C hile a n d F ujim ori’ s Peru a re e x am ple s o f e co nom ic s u ccess in la n ds b ere ft o f d em ocra cy . T he re aso n fo r th is ‘a n om aly ’ is th at e ach o f th ese d ic ta to rs , w hate v er th eir fa u lts (a n d th ere w ere m an y), w as ab le to en su re so m e se m bla n ce of pro perty rig hts , fu nctio nin g in stitu tio ns, gro w th -p ro m otin g eco nom ic polic ie s (fo r ex am ple , in fis c al an d m oneta ry m an ag em en t) an d an in vestm en t clim ate th at b uttr e sse d g ro w th – th e th in gs th at d em ocra cy pro m is e s t o d o. T his i s n ot t o s a y t h at P in och et’ s C hile w as a g re at p la ce t o liv e; it d oes, h ow ev er, d em onstr a te th at d em ocra cy is n ot th e o nly r o ute to eco nom ic t r iu m ph. ( T han ks t o i ts e co nom ic s u ccess C hile h as m atu re d i n to a fu lly fle d ged d em ocra tic sta te , w ith th e ad ded acco la d e o f, in 2 006, in sta llin g S outh A m eric a’s f ir s t w om an P re sid en t – M ic h elle B ach ele t.) The o bvio us q uestio n to a sk is , h as f o re ig n a id im pro ved d em ocra cy in Afric a? T he a n sw er to th is is y es – c erta in ly in te rm s o f th e n um ber o f Afric an co untr ie s th at hold ele ctio ns, alth ough still m an y of th em are illib era l (p eo ple go th e polls , but in so m e pla ces th e pre ss re m ain s re str ic te d , a n d t h e r u le o f l a w f ic k le ). The re al q uestio n to a sk is , h as th e in se rtio n o f d em ocra cy v ia fo re ig n aid e co nom ic ally b en efite d A fric a? T o th is q uestio n th e a n sw er is n ot s o cle ar. T here a re d em ocra tic c o untr ie s in A fric a th at c o ntin ue to s tr u ggle to post c o nvin cin g g ro w th n um bers (S en eg al, a t ju st 3 p er c en t g ro w th in 2006), a n d th ere a re a ls o d ecid ed ly u ndem ocra tic A fric an c o untr ie s th at are s e ein g u npre ced en te d e co nom ic g ro w th ( fo r e x am ple , S udan ). What is c le ar is th at d em ocra cy is n ot th e p re re q uis ite fo r e co nom ic gro w th th at aid pro ponen ts m ain ta in . O n th e co ntr a ry , it is eco nom ic 51 gro w th th at is a p re re q uis ite fo r d em ocra cy ; a n d th e o ne th in g e co nom ic gro w th d oes n ot n eed i s a id . In ‘W hat M ak es D em ocra cie s E ndure ?’ P rz ew ors k i et al. offe r th is fa sc in atin g in sig ht – ‘a d em ocra cy c an b e e x pecte d to la st a n a v era g e o f ab out 8 .5 y ears in a c o untr y w ith a p er c ap ita in co m e u nder U S$1,0 00 p er an num , 1 6 y ears i n o ne w ith i n co m e b etw een U S$1,0 00 a n d U S $ 2,0 00, 3 3 years b etw een U S$2,0 00 a n d U S$4,0 00 a n d 1 00 y ears b etw een U S$4,0 00 an d U S$6,0 00 . . . A bove U S$6,0 00, d em ocra cie s a re im pre g nab le . . . [th ey a re ] c erta in to s u rv iv e, c o m e h ell o r h ig h w ate r.’ I t is th e e co nom y, stu pid . No o ne is d en yin g th at d em ocra cy is o f c ru cia l v alu e – it’ s ju st a m atte r of t im in g. In th e e arly s ta g es o f d ev elo pm en t it m atte rs little to a s ta rv in g A fric an fa m ily w heth er th ey c an v ote o r n ot. L ate r th ey m ay c are , b ut fir s t o f a ll th ey n eed f o od f o r to day , a n d th e to m orro w s to c o m e, a n d th at r e q uir e s a n eco nom y t h at i s g ro w in g. Aid e ffe ctiv en ess: a m ic ro — macro p ara dox There ’s a m osq uito n et m ak er in A fric a. H e m an ufa ctu re s a ro und 5 00 n ets a w eek . H e e m plo ys te n p eo ple , w ho (a s w ith m an y A fric an c o untr ie s) each h av e to su pport u pw ard s o f fif te en re la tiv es. H ow ev er h ard th ey work , th ey can ’t m ak e en ough nets to co m bat th e m ala ria -c arry in g mosq uito . Ente r v ocif e ro us H olly w ood m ovie sta r w ho ra llie s th e m asse s, an d goad s W este rn g overn m en ts to c o lle ct a n d s e n d 1 00,0 00 m osq uito n ets to th e a ic te d re g io n, a t a c o st o f a m illio n d olla rs . T he n ets a rriv e, th e n ets are d is tr ib ute d , a n d a ‘ g ood’ d eed i s d one. With th e m ark et flo oded w ith fo re ig n n ets , h ow ev er, o ur m osq uito n et mak er is p ro m ptly p ut o ut o f b usin ess. H is te n w ork ers can n o lo nger su pport t h eir 1 50 d ep en dan ts ( w ho a re n ow f o rc ed t o d ep en d o n h an douts ), an d o ne m ustn ’t f o rg et t h at i n a m ax im um o f f iv e y ears t h e m ajo rity o f t h e im porte d n ets w ill b e t o rn , d am ag ed a n d o f n o f u rth er u se . This is th e m ic ro –m acro p ara d ox. A s h ort- te rm e ffic acio us in te rv en tio n may h av e fe w d is c ern ib le , su sta in ab le lo ng-te rm b en efits . W ors e still, it can unin te n tio nally underm in e w hate v er fra g ile ch an ce fo r su sta in ab le dev elo pm en t m ay a lr e ad y b e i n p la y . Certa in ly w hen v ie w ed in c lo se -u p, a id a p pears to h av e w ork ed . B ut vie w ed in its en tir e ty it is ob vio us th at th e overa ll situ atio n has not 52 im pro ved , a n d i s i n deed w ors e i n t h e l o ng r u n. In nearly all case s, sh ort- te rm aid ev alu atio ns giv e th e erro neo us im pre ssio n of aid ’s su ccess. B ut sh ort- te rm ev alu atio ns are sc arc ely re le v an t when tr y in g to ta ck le Afric a’s lo ng-te rm pro ble m s. Aid effe ctiv en ess sh ould be m easu re d ag ain st its co ntr ib utio n to lo ng-te rm su sta in ab le g ro w th , a n d w heth er it m oves th e g re ate st n um ber of p eo ple out o f p overty in a s u sta in ab le w ay . W hen s e en th ro ugh th is le n s, a id is fo und t o b e w an tin g. That sa id , th e a p pro ach to fo od a id (la u nch ed a t th e 2 005 F ood A id co nfe re n ce in K an sa s C ity 7 ) h as tr ie d to p ush a id in a n ew d ir e ctio n, o ne whic h c an p ote n tia lly h elp A fric an fa rm ers . T he p ro posa l w ould a llo w a quarte r o f th e fo od a id o f th e U nite d S ta te s F ood F or P eace b udget to b e use d to b uy fo od in p oor c o untr ie s, ra th er th an b uyin g o nly A m eric an – gro w n f o od th at h as to th en b e s h ip ped a cro ss o cean s. I n ste ad o f f lo odin g fo re ig n m ark ets w ith A m eric an fo od, w hic h puts lo cal fa rm ers out of busin ess, t h e s tr a te g y w ould b e t o u se a id m oney t o b uy f o od f ro m f a rm ers with in th e c o untr y , a n d th en d is tr ib ute th at fo od to th e lo cal c itiz en s in need . I n t e rm s o f t h e m osq uito n et e x am ple , i n ste ad o f g iv in g m ala ria n ets , donors c o uld b uy f ro m l o cal p ro ducers o f m ala ria n ets t h en s e ll t h e n ets o n or d onate th em lo cally . T here n eed s to b e m uch m ore o f th is ty pe o f th in kin g. Betw een 1 950 a n d th e 1 980s, th e U S is e stim ate d to h av e p oure d th e eq uiv ale n t o f a ll th e c o m bin ed a id g iv en to fif ty -th re e A fric an c o untr ie s betw een 1 957 a n d 1 990 in to ju st o ne c o untr y , S outh K ore a. S om e h av e alle g ed th at th is is th e kin d of fin an cia l lif t th at A fric a w ill need ; esse n tia lly a n e q uiv ale n t o f i ts o w n M ars h all P la n . Advocate s o f a id a rg ue th at a id w ork s – it’ s ju st th at ric h er c o untr ie s hav e not giv en en ough of it. T hey arg ue th at w ith a ‘b ig push ’ – a su bsta n tia l in cre ase in a id ta rg ete d a t k ey in vestm en ts – A fric a c an e sc ap e its p ers is te n t p overty tr a p ; th at w hat A fric a n eed s is m ore a id , m uch m ore aid , i n m assiv e a m ounts . O nly t h en w ill t h in gs s ta rt t o t r u ly g et b ette r. In 2 000, 1 89 c o untr ie s s ig ned u p to th e M ille n niu m D ev elo pm en t G oals (M DG). 8 T he eig ht- p oin t actio n pla n w as aim ed at health , ed ucatio n, en vir o nm en ta l s u sta in ab ility , c h ild m orta lity , a n d a lle v ia tin g p overty a n d hunger. In 2 005, th e p ro gra m me w as c o ste d . A n a d ditio nal a id b oost o f US$130 b illio n a y ear w ould b e n eed ed to a ch ie v e th e M DG in a n um ber of c o untr ie s. T w o y ears a fte r th e M DG p le d ge th e U nite d N atio ns h eld a n in te rn atio nal co nfe re n ce on F in an cin g fo r D ev elo pm en t in M onte rre y , Mex ic o , w here d onors p ro m is e d t o i n cre ase t h eir a id c o ntr ib utio ns f ro m a n av era g e o f 0 .2 5 p er c en t o f t h eir G NP t o 0 .7 p er c en t, i n t h e b elie f t h at t h is 53 ad ditio nal US$200 billio n an nually would fin ally ad dre ss Afric a’s co ntin uin g p ro ble m s. In p ra ctic e, m ost o f th e d onor p le d ges h av e g one unm et a n d p ro ponen ts o f a id h av e la tc h ed o n to th is fa ilu re to m eet th e ple d ged c o m mitm en ts a s a r e aso n f o r w hy A fric a h as b een h eld b ack . B ut th e b ig -p ush th in kin g b ru sh es o ver o ne o f th e u nderly in g p ro ble m s o f a id , th at it is fu ngib le – th at m onie s se t asid e fo r one purp ose are easily div erte d to w ard s a n oth er; n ot ju st a n y o th er p urp ose , b ut a g en das th at c an be w orth le ss, if n ot d etr im en ta l, to g ro w th . P ro ponen ts o f a id th em se lv es hav e a ck now le d ged t h at u nco nstr a in ed a id f lo w s a lw ay s f a ce t h e d an ger o f bein g eg re g io usly co nsu m ed ra th er th an in veste d ; o f g oin g in to p riv ate pock ets , in ste ad o f th e p ublic p urs e . W hen th is h ap pen s, a s it so o fte n does, n o re al p unis h m en ts o r s a n ctio ns a re e v er im pose d . S o m ore g ra n ts mean m ore g ra ft. One of th e m ost dep re ssin g asp ects of th e w hole aid fia sc o is th at donors , polic y m ak ers , govern m en ts , acad em ic ia n s, eco nom is ts an d dev elo pm en t sp ecia lis ts k now , in th eir h eart o f h earts , th at aid d oesn ’t work , h asn ’t w ork ed a n d w on’t w ork . C om men tin g o n a t le ast o ne a id donor, th e C hie f E co nom is t at th e B ritis h D ep artm en t of T ra d e an d In dustr y r e m ark ed t h at ‘ th ey k now i ts c ra p , b ut i t s e lls t h e T -s h ir ts ’. 9 Stu dy, a fte r stu dy, a fte r stu dy (m an y o f th em , th e d onors ’ o w n) h av e sh ow n th at, a fte r m an y d ecad es a n d m an y m illio ns o f d olla rs , a id h as h ad no ap pre cia b le im pact on dev elo pm en t. For ex am ple , C le m en s et al. (2 004) co nced e no lo ng-te rm im pact of aid on gro w th . H ad jim ic h ael (1 995) a n d R eic h el (1 995) fin d a n eg ativ e re la tio nsh ip b etw een sa v in gs an d a id . B oone ( 1 996) c o nclu des th at a id h as f in an ced c o nsu m ptio n r a th er th an in vestm en t; an d fo re ig n aid w as sh ow n to in cre ase unpro ductiv e public c o nsu m ptio n a n d f a il t o p ro m ote i n vestm en t. Even th e most c u rs o ry lo ok a t d ata su ggests th at a s a id h as in cre ase d over tim e, A fric a’s g ro w th h as d ecre ase d w ith a n a cco m pan yin g h ig her in cid en ce o f p overty . O ver th e p ast th ir ty y ears , th e m ost a id -d ep en den t co untr ie s h av e e x hib ite d g ro w th ra te s a v era g in g min us 0 .2 p er c en t p er an num . For m ost c o untr ie s, a d ir e ct c o nse q uen ce o f th e a id -d riv en in te rv en tio ns has b een a d ra m atic d esc en t i n to p overty . W here as p rio r t o t h e 1 970s m ost eco nom ic in dic ato rs h ad b een o n an u pw ard tr a je cto ry , a d ecad e la te r Zam bia la y in eco nom ic ru in . B ill E aste rly , a N ew Y ork U niv ers ity pro fe sso r an d fo rm er W orld B an k eco nom is t, note s th at had Z am bia co nverte d a ll th e a id it h ad r e ceiv ed s in ce 1 960 in to in vestm en t, a n d a ll o f th at in vestm en t to g ro w th , it w ould h av e h ad a p er c ap ita G DP o f a b out US$20,0 00 b y th e e arly 1 990s. 10 In ste ad , Z am bia ’s p er c ap ita G DP w as 54 lo w er th an in 1 960, u nder U S$500. I n e ffe ct, Z am bia ’s G DP s h ould h av e been a t le ast th ir ty tim es w hat it is to day . A nd b etw een 1 970 a n d 1 998, when a id f lo w s t o A fric a w ere a t t h eir p eak , p overty i n A fric a r o se f ro m 1 1 per cen t to a sta g gerin g 66 per cen t. T hat is ro ughly 600 m illio n of Afric a’s b illio n p eo ple t r a p ped i n a q uag m ir e o f p overty – a t r u ly s h ock in g fig ure . The e v id en ce a g ain st a id is s o s tr o ng a n d s o c o m pellin g th at e v en th e IM F – a le ad in g p ro vid er o f a id – h as w arn ed a id s u pporte rs a b out p la cin g more h ope in a id a s a n in str u m en t o f d ev elo pm en t th an it is c ap ab le o f deliv erin g. The IM F has als o cau tio ned govern m en ts , donors an d cam paig ners t o b e m ore m odest i n t h eir c la im s t h at i n cre ase d a id w ill s o lv e Afric a’s p ro ble m s. I f o nly t h ese a ck now le d gem en ts w ere a c ata ly st f o r r e al ch an ge. What i s p erh ap s m ost a m azin g i s t h at t h ere i s n o o th er s e cto r, w heth er i t be b usin ess o r p olitic s, w here s u ch p ro ven f a ilu re s a re a llo w ed t o p ers is t i n th e f a ce o f s u ch s ta rk a n d u nassa ila b le e v id en ce. So th ere w e h av e it: s ix ty y ears , o ver U S$1 tr illio n d olla rs o f A fric an aid , a n d n ot m uch g ood to s h ow f o r it. W ere a id s im ply in nocu ous – ju st not d oin g w hat it c la im ed it w ould d o – th is b ook w ould n ot h av e b een writte n . T he p ro ble m is th at a id is n ot b en ig n – it’ s m alig nan t. N o lo nger part o f th e p ote n tia l s o lu tio n, it’ s p art o f th e p ro ble m – in fa ct a id is th e pro ble m . 55 4. T he S ile n t K ille r o f G ro w th I n 2 004, th e B ritis h e n voy to K en ya, S ir E dw ard C la y , c o m pla in ed a b out r a m pan t co rru ptio n in th e co untr y , co m men tin g th at K en ya’s co rru pt m in is te rs w ere ‘e atin g lik e g lu tto ns’ an d v om itin g o n th e sh oes o f th e f o re ig n d onors . In F eb ru ary 2 005 (p ro dded to m ak e a p ublic a p olo gy fo r h is sta te m en ts giv en th e politic al m aels tr o m his earlie r co m men ts had m ad e), h e a p olo giz ed – sa y in g h e w as so rry fo r th e ‘m odera tio n’ o f h is l a n guag e, fo r u ndere stim atin g th e sc ale o f th e lo otin g a n d fo r fa ilin g to s p eak o ut e arlie r. 1 If th e w orld h as o ne p ic tu re o f A fric an sta te sm en , it is o ne o f ra n k c o rru ptio n o n a stu pen dous sc ale . T here h ard ly se em an y le ad ers w ho h av en ’t cro w ned th em se lv es in gold , se iz ed la n d, han ded over sta te b usin esse s to re la tiv es an d frie n ds, div erte d billio ns to fo re ig n ban k a cco unts , a n d g en era lly tr e ate d th eir c o untr ie s a s g ia n t p ers o naliz ed c ash d is p en se rs . A cco rd in g to T ra n sp are n cy I n te rn atio nal, M obutu is e stim ate d t o h av e lo ote d Z air e to th e tu ne o f U S$5 b illio n; r o ughly th e s a m e a m ount w as sto le n fro m N ig eria b y P re sid en t S an i A bach a a n d p la ced in S w is s p riv ate b an ks ( la te r U S$700 m illio n o f th e lo ot w as r e tu rn ed to N ig eria ). 2 I t’ s n ot, o f c o urs e , ju st o ne p ers o n w ho h as ta k en th e m oney . T here a re m an y peo ple , at m an y dif fe re n t le v els of th e bure au cra cy , w ho hav e f u nnelle d a w ay b illio ns o f d olla rs o ver th e y ears . C orru ptio n is a w ay o f l if e . The lis t o f c o rru pt p ra ctic es in A fric a is a lm ost e n dle ss. B ut th e p oin t a b out c o rru ptio n i n A fric a i s n ot t h at i t e x is ts : t h e p oin t i s t h at a id i s o ne o f i ts g re ate st a id es. T his is n ot to s a y th at th ere a re n ot o th er fa cilita to rs o f c o rru ptio n. In A fric a, n atu ra l- re so urc e w in dfa lls , s u ch a s o il, h av e te n ded t o b e m ore o f a c u rs e t h an a b le ssin g. L ik e a id , t h ey a re s u sc ep tib le t o t h eft a n d h av e p ro vid ed p ra ctic ally u nlim ite d o pportu nitie s f o r p ers o nal w ealth a ccu m ula tio n a n d s e lf -a g gra n diz em en t. The cru cia l dif fe re n ce betw een fo re ig n aid an d natu ra l- re so urc e e n dow m en ts is , o f c o urs e , th at a id is a n a ctiv e a n d d elib era te p olic y a im ed a t d ev elo pm en t. C ountr ie s d on’t h av e m uch o f a c h oic e a s to w heth er o r n ot th ey e n d u p w ith a n o il e n do w m en t; a lth ough o f c o urs e th ey d o h av e a c h oic e o n h ow w in dfa lls a re d ealt w ith . W ith m ountin g p re ssu re f o r g re ate r t r a n sp are n cy i n t h e o il, g as a n d m in in g s e cto rs , f ro m o rg an iz atio ns l ik e t h e 56 Extr a ctiv e In dustr ie s T ra n sp are n cy In itia tiv e (E IT I), 3 th e d ay s o f b la ta n t lo otin g a n d c o rru ptio n in th ese se cto rs a re su re ly n um bere d . B ut d onors co ntin ue to s it in c o m fo rta b le a ir -c o nditio ned ro om s in th e W est a n d p en th e t r a g ic f a te o f c o untr ie s t h ey o ste n sib ly s e ek t o h elp . The v ic io us c ycle o f a id With a id ’s h elp , c o rru ptio n f o ste rs c o rru ptio n, n atio ns q uic k ly d esc en d i n to a vic io us cy cle of aid . Fore ig n aid pro ps up co rru pt govern m en ts – pro vid in g th em w ith fre ely usa b le cash . These co rru pt govern m en ts in te rfe re w ith th e ru le of la w , th e esta b lis h m en t of tr a n sp are n t civ il in stitu tio ns a n d th e p ro te ctio n o f c iv il lib ertie s, m ak in g b oth d om estic a n d fo re ig n in vestm en t in poor co untr ie s unattr a ctiv e. G re ate r opacity an d fe w er in vestm en ts re d uce eco nom ic gro w th , w hic h le ad s to fe w er jo b opportu nitie s an d in cre asin g poverty le v els . In re sp onse to gro w in g poverty , d onors g iv e m ore a id , w hic h c o ntin ues th e d ow nw ard sp ir a l o f poverty . This is th e v ic io us c y cle o f a id . T he c y cle th at c h okes o ff d esp era te ly need ed in vestm en t, in stils a c u ltu re o f d ep en den cy , a n d f a cilita te s r a m pan t an d s y ste m atic c o rru ptio n, a ll w ith d ele te rio us c o nse q uen ces fo r g ro w th . The cy cle th at, in fa ct, perp etu ate s underd ev elo pm en t, an d guara n te es eco nom ic f a ilu re i n t h e p oore st a id -d ep en den t c o untr ie s. Corru ptio n a nd g ro w th Ultim ate ly , A fric a’s g oal is lo ng-te rm , s u sta in ab le e co nom ic g ro w th , a n d th e alle v ia tio n o f p overty . T his can not o ccu r in an en vir o nm en t w here co rru ptio n is rif e . T here are , o f co urs e , an y n um ber o f w ay s in w hic h co rru ptio n r e ta rd s g ro w th . In a co nte x t of hig h deg re es of co rru ptio n an d uncerta in ty , fe w er en tr e p re n eu rs (d om estic or fo re ig n) w ill ris k th eir m oney in busin ess ven tu re s w here co rru pt offic ia ls can la y cla im to its pro ceed s, so in vestm en t s ta g nate s, a n d f a llin g i n vestm en t k ills o ff g ro w th . Dev elo pm en t ag en cie s w ould h av e u s b elie v e th at aid h elp s b uild a la stin g, cre d ib le an d str o ng civ il se rv ic e. In deed , th e W orld Ban k re co m men ds t h at b y p ro vid in g m ore a id r ic h c o untr ie s a ctu ally a ssis t i n t h e fig ht a g ain st c o rru ptio n. T han ks to a id , p oor g overn m en ts c an a ffo rd to su pport eth ic s tr a in in g, in cre ase th e sa la rie s of th eir public -s e cto r em plo yees (p olic e, ju dges, m ed ic al s ta ff, ta x c o lle cto rs ), th ere b y lim itin g 57 th e n eed fo r c o rru ptio n. M ore o ver, h ig her s a la rie s w ill a ttr a ct c o m pete n t an d h ig her-q uality e m plo yees t o t h e c iv il s e rv ic e. Unfo rtu nate ly , unfe tte re d m oney (th e pro sp ect of siz eab le ill- g otte n gain s) is ex cep tio nally co rro siv e, an d m is a llo cate s ta le n t. In an aid – dep en den t en vir o nm en t, th e ta le n te d – th e bette r-e d ucate d an d m ore – prin cip le d , w ho s h ould b e b uild in g t h e f o undatio ns o f e co nom ic p ro sp erity – beco m e unprin cip le d an d are dra w n fro m pro ductiv e w ork to w ard s nefa rio us a ctiv itie s th at u nderm in e th e c o untr y ’s g ro w th p ro sp ects . T hose who re m ain p rin cip le d are d riv en aw ay , eith er to th e p riv ate se cto r o r ab ro ad , le av in g th e p osts th at re m ain to b e fille d b y th e re la tiv ely le ss- ed ucate d , a n d p ote n tia lly m ore v uln era b le t o g ra ft. Endem ic c o rru ptio n a ls o t a rg ets p ublic c o ntr a cts . I n t h ese e n vir o nm en ts , co ntr a cts w hic h s h ould b e a w ard ed to th ose w ho c an d eliv er o n th e b est te rm s, in th e b est tim e, a re g iv en to th ose w hose p rin cip al a im is to d iv ert as m uch a s p ossib le to th eir o w n p ock ets . W hat e n su e a re lo w er-q uality in fra str u ctu re p ro je cts , a n d e n fe eb le d p ublic s e rv ic es, to th e d etr im en t o f gro w th . Sim ila rly , th e allo catio n of govern m en t sp en din g su ffe rs as co rru pt offic ia ls a re lik ely to c h oose p ro je cts le ss o n th e b asis o f p ublic w elf a re an d m ore o n t h e o pportu nitie s f o r e x to rtin g b rib es a n d d iv ertin g f u nds. T he big ger th e p ro je ct, th e g re ate r th e o pportu nity . P ro je cts w hose e x act v alu e is d if fic u lt to m onito r p re se n t lu cra tiv e o pportu nitie s f o r c o rru ptio n – it is easie r to sip hon m oney fro m la rg e in fra str u ctu re pro je cts th an fro m te x tb ooks o r t e ach ers ’ s a la rie s. So h ow b ad ly d oes c o rru ptio n a ctu ally a ffe ct g ro w th ? Every year, sin ce 1995, T ra n sp are n cy In te rn atio nal has publis h ed a Corru ptio n Perc ep tio ns In dex (C PI). Usin g su rv ey s re fle ctin g th e perc ep tio ns o f b usin ess p eo ple a n d c o untr y a n aly sts , th e C PI ra n ks o ver 100 c o untr ie s, f ro m 0 t o 1 0, t h e m ost c o rru pt t o t h e l e ast. Usin g t h e T ra n sp are n cy I n te rn atio nal C PI, G ra f L am bsd orff f o und t h at a one-p oin t i m pro vem en t i n a c o untr y ’s c o rru ptio n s c o re w as c o rre la te d w ith an in cre ase in p ro ductiv ity o f 4 p er c en t o f G DP. T his im plie s th at w ere Tan zan ia ( p la ced a t 3 .2 o ut o f 1 0 o n th e 2 007 T ra n sp are n cy I n te rn atio nal in dex ) to im pro ve its c o rru ptio n s c o re to th e le v el o f th e U K (ra n ked 8 .4 out o f 1 0), its G DP c o uld b e m ore th an 2 0 p er c en t h ig her, a n d n et a n nual per c ap ita i n flo w s w ould i n cre ase b y 3 p er c en t o f G DP. Jo el K urtz m an fo und th at ev ery one-p oin t in cre ase in a co untr y ’s opacity in dex (th e d eg re e to w hic h a co untr y la ck s cle ar, accu ra te an d easily dis c ern ib le pra ctic es govern in g busin ess, in vestm en t an d govern m en t) c o rre la te d to a lo w er p er c ap ita in co m e b y U S$986 a n d a 1 58 per cen t d ecre ase in n et fo re ig n d ir e ct in vestm en t as a sh are o f G DP. 4 More o ver, c o rru ptio n w as a ls o re la te d to a 0 .5 p er c en t in cre ase in th e co untr y ’s a v era g e b orro w in g r a te , a n d a 0 .5 p er c en t in cre ase in its r a te o f in fla tio n. Aid a nd c o rru ptio n The donor co m munity is public ly air in g co ncern s th at dev elo pm en t assis ta n ce e arm ark ed f o r c ritic al s o cia l a n d e co nom ic s e cto rs i s b ein g u se d dir e ctly or in dir e ctly to fu nd unpro ductiv e an d co rru pt ex pen ditu re s (U NDP’s H um an D ev elo pm en t R ep ort, 1 994). A t a h earin g b efo re th e Unite d Sta te s Sen ate C om mitte e on Fore ig n R ela tio ns in M ay 2004, ex perts a rg ued th at th e W orld B an k h as p artic ip ate d ( m ostly p assiv ely ) in th e c o rru ptio n o f ro ughly U S$100 b illio n o f its lo an fu nds in te n ded fo r dev elo pm en t. 5 W hen th e co rru ptio n asso cia te d w ith lo an s fro m oth er multila te ra l- d ev elo pm en t b an ks is in clu ded , th e fig ure ro ughly d ouble s to US$200 b illio n. O th ers e stim ate th at o f th e U S$525 b illio n th at th e W orld Ban k h as le n t to d ev elo pin g co untr ie s sin ce 1 946, at le ast 2 5 p er cen t (U S$130 billio n) has been m is u se d . V ast su m s of aid not only fo ste r co rru ptio n – t h ey b re ed i t. Aid s u pports r e n t- s e ek in g – th at is , th e u se o f g overn m en ta l a u th ority t o ta k e a n d m ak e m oney w ith out tr a d e o r p ro ductio n o f w ealth . A t a v ery basic le v el, a n e x am ple o f th is is w here a g overn m en t o ffic ia l w ith a ccess to a id m oney se t a sid e fo r p ublic w elf a re ta k es th e m oney fo r h is o w n pers o nal u se . O bvio usly , th ere c an not b e r e n t- s e ek in g w ith out a r e n t. A nd becau se fo re ig n aid (th e re n t) is fu ngib le – easily sto le n , re d ir e cte d o r ex tr a cte d – it fa cilita te s c o rru ptio n. W ere d onor c o nditio nalitie s re m ote ly effe ctiv e, th is w ould not be th e case . B ut, as desc rib ed pre v io usly , co nditio nalitie s c arry l ittle p unch . In ‘D o C orru pt G overn m en ts R eceiv e L ess F ore ig n A id ?’, A le sin a a n d Wed er c o nclu de t h at a id t e n ds t o i n cre ase c o rru ptio n. S ven sso n s h ow s h ow aid fo ste rs co rru ptio n by re d ucin g public sp en din g; th at by in cre asin g govern m en t r e v en ues, a id l o w ers t h e p ro vis io n o f p ublic g oods ( th in gs t h at ev ery one b en efits fro m , b ut n o o ne w an ts to p ay fo r – fo r in sta n ce, a la m ppost) . In a s im ila r v ein , fo re ig n a id p ro gra m mes, w hic h te n d to la ck acco unta b ility a n d c h eck s a n d b ala n ces, a ct a s s u bstitu te s f o r t a x r e v en ues. The ta x re ceip ts th is re le ase s a re th en d iv erte d to u npro ductiv e a n d ofte n waste fu l p urp ose s ra th er th an p ro ductiv e p ublic e x pen ditu re (e d ucatio n, health in fra str u ctu re ) f o r w hic h th ey w ere o ste n sib ly in te n ded . I n U gan da, 59 fo r ex am ple , aid -fu elle d co rru ptio n in th e 1 990s w as th ought to b e so ra m pan t th at o nly 2 0 c en ts o f e v ery U S$1 d olla r o f g overn m en t s p en din g on e d ucatio n r e ach ed t h e t a rg ete d l o cal p rim ary s c h ool. 6 Aid g oes t o c o rru pt c o untr ie s If i t i s s o o bvio us, a s i t m ust b e t o e v ery one i n volv ed , t h at a id i s v uln era b le to s u ch b la ta n t m an ip ula tio n, w hy i s i t t h at d onors c o ntin ue t o d onate ? Witn ess th e occu rre n ces in 1978 afte r th e IM F ap poin te d Irw in Blu m en th al to a p ost in th e c en tr a l b an k o f w hat w as th en Z air e , n ow th e Dem ocra tic R ep ublic o f C ongo. B lu m en th al re sig ned in le ss th an a y ear, writin g a m em o w hic h s a id th at ‘ th e c o rru ptiv e s y ste m in Z air e w ith a ll its wic k ed m an if e sta tio ns’ is s o s e rio us th at th ere is ‘ n o ( re p eat n o) p ro sp ect fo r Z air e ’s c re d ito rs t o g et t h eir m oney b ack ’. S hortly a fte r t h e B lu m en th al mem o, th e I M F g av e Z air e th e la rg est lo an it h ad e v er g iv en to a n A fric an co untr y a n d o ver th e n ex t te n y ears P re sid en t M obutu ’s k le p to cra cy h ad re ceiv ed a n a d ditio nal U S$700 m illio n f ro m t h e F und. More re cen tly , re fe rrin g to Z am bia ’s fo rm er P re sid en t C hilu ba (w ho was in p ow er b etw een 1 991 a n d 2 002) in a p arlia m en ta ry a d dre ss in 2 002, Zam bia ’s c u rre n t P re sid en t, L ev y M wan aw asa , a lle g ed e m bezzle m en t a n d th eft of up to U S$80 m illio n. Y et durin g th e perio d w hen th e th efts occu rre d Z am bia h ad r e ceiv ed u pw ard s o f U S$1.5 b illio n f ro m th e W orld Ban k. M uch o f th e m oney w as g iv en u nder th e a u sp ic es o f th e H eav ily In deb te d P oore st C ountr y (H IP C ) d eb t re lie f p ro gra m me, a p ro gra m me th at r e q uir e d i ts b en efic ia rie s t o b e c o rru ptio n-fre e. More gen era lly , th e acad em ic Larry Dia m ond obse rv es th at dev elo pm en t ag en cie s co ntin ue to giv e aid to th e m ost co rru pt an d unacco unta b le A fric an sta te s, w ith know n au th orita ria n an d co rru pt govern m en ts . H is lis t in clu des C am ero on, A ngola , E ritr e a, G uin ea an d Mau rita n ia , e ach re ceiv in g a id e q uallin g o r e v en e x ceed in g th e A fric an av era g e o f U S$20 p er c ap ita . T here i s n o e n d t o i t. Why g iv e a id i f i t l e a ds t o c o rru ptio n? Giv en w hat w e know ab out fo re ig n aid , an d how it en co ura g es an d su sta in s c o rru ptio n, w hy d o W este rn g overn m en ts in sis t o n p arc ellin g o ut aid to p oor co untr ie s? B ey ond th e m otiv atio ns fo r aid -g iv in g d is c u sse d earlie r – eco nom ic , p olitic al an d m ora l – th ere are tw o o th er p ra ctic al ex pla n atio ns w hy. 60 Fir s t, th ere is sim ply a pre ssu re to le n d. T he W orld B an k em plo ys 10,0 00 p eo ple , th e IM F o ver 2 ,5 00; a d d a n oth er 5 ,0 00 fo r th e o th er U N ag en cie s; a d d to th at th e e m plo yees o f a t le ast 2 5,0 00 re g is te re d N GOs, priv ate c h aritie s a n d th e a rm y o f g overn m en t a id a g en cie s: ta k en to geth er aro und 500,0 00 peo ple , th e popula tio n of S w azila n d. S om etim es th ey mak e lo an s, s o m etim es th ey g iv e g ra n ts , b ut th ey a re a ll in th e b usin ess o f aid ( th e t o ta l o f c o ncessio nal l o an s – t h ose w hic h c arry a s m all i n te re st r a te – a n d g ra n ts – e ffe ctiv ely f re e m oney ), s e v en d ay s a w eek , f if ty -tw o w eek s a y ear, a n d d ecad e a fte r d ecad e. Their liv elih oods d ep en d o n a id , ju st a s th ose o f th e o ffic ia ls w ho ta k e it. F or m ost d ev elo pm en ta l o rg an iz atio ns, s u ccessfu l le n din g is m easu re d alm ost e n tir e ly b y t h e s iz e o f t h e d onor’s l e n din g p ortf o lio , a n d n ot b y h ow much of th e aid is actu ally use d fo r its in te n ded purp ose . A s a co nse q uen ce, th e in cen tiv es built in to th e dev elo pm en t org an iz atio ns perp etu ate th e c y cle o f le n din g to e v en th e m ost c o rru pt c o untr ie s. D onors are s u bje ct to ‘ fis c al y ear’ c o ncern s: ‘ th ey f e are d th e c o nse q uen ces w ith in th eir a g en cie s o f n ot re le asin g th e fu nds in th e fis c al y ear fo r w hic h th ey were sla te d ’ (R av i K an bur). A ny non-d is b urs e d am ounts in cre ase th e lik elih ood th at th eir s u bse q uen t a id p ro gra m mes w ill b e s la sh ed . W ith th e ad ded c o ro lla ry , o f c o urs e , t h at t h eir o w n o rg an iz atio nal s ta n din g i s p la ced in j e o pard y. For m an y d onor ag en cie s th e d ecis io n to le n d to le ss th an re p uta b le govern m en ts is c o uch ed in th e v ie w th at if th ey d id n’t, th e poor w ould su ffe r, h ealth a n d e d ucatio n b udgets w ould n’t b e m et, a n d c o untr ie s w ould fa lte r. T he r e ality is , th e p oor a re n ’t g ettin g th e m oney a n d, b esid es, e v en under t h e a id r e g im e, A fric an c o untr ie s a re f a lte rin g a n yw ay . Donors h av e th e a d ded f e ar th at w ere th ey n ot to p um p m oney in , p oor co untr ie s w ould n ot b e a b le to p ay b ack w hat th ey a lr e ad y o w e, a n d th is would affe ct th e donors ’ fin an cin g th em se lv es. T his cir c u la r lo gic is ex actly w hat k eep s t h e a id m erry -g o-ro und h um min g. The in sa tia b le need to le n d is yet an oth er re m in der of w hy th e co nditio nalitie s im pose d o n p oor co untr ie s are w orth n o m ore th an th e pap er th ey a re w ritte n o n. A 1 9 92 s tu dy c o nducte d b y th e W orld B an k’s Opera tio ns Evalu atio n D ep artm en t co nclu ded th at th e re le ase of aid tr a n ch es w as c lo se t o 1 00 p er c e n t, e v en w hen c o untr y c o m plia n ce r a te s o n co nditio ns w ere b elo w 5 0 p er c en t. A noth er W orld B an k s tu dy, in 1 997, sh ow s th at b etw een 1 980 a n d 1 996 7 2 p er c en t o f th e a id th e W orld B an k allo cate d to a d ju stm en t le n din g w en t to c o untr ie s w ith p oor tr a ck re co rd s on c o m plia n ce w ith c o nditio nality . I n th e d onor’s d esp era te q uest to le n d, an d m ain ta in th e le n der– borro w er se e-s a w , th e aid re la tio nsh ip tip s in 61 fa v our o f th e c o rru pt g overn m en t. A lm ost to th e a b su rd p oin t w here th e donor h as a g re ate r n eed f o r g iv in g t h e a id t h an t h e r e cip ie n t h as f o r t a k in g it. Seco nd, d onors a re a p pare n tly u nab le to a g re e o n w hic h c o untr ie s a re co rru pt an d w hic h are not. A cla ssic ex am ple of th is occu rre d on 26 Novem ber 2 002, w hen th e New Y ork T im es p ublis h ed a n a rtic le e n title d ‘B ush P la n T ie s F ore ig n A id to F re e M ark et a n d C iv ic R ule ’. T he a rtic le tr u m pete d W ash in gto n’s a id in itia tiv e a n d w en t o n to o utlin e th e d eta ils o f a W hite H ouse p ro posa l to s e t u p a c o m petitio n a m ong th e p oore st w orld eco nom ie s, w here th e ‘ w in ners ’ w ould b e a p portio ned a s lic e o f th e U S$5 billio n f o re ig n a id f u nd. Curio usly , a m ong th e lis t o f p ossib le q ualif y in g c o untr ie s w as M ala w i. Only w eek s prio r to th e B ush an nouncem en t, M ala w i’ s M in is tr y of Agric u ltu re h ad b een e m bro ile d in a v ery p ublic a lte rc atio n w ith th e I M F. Gra in co nsig nm en ts had gone m is sin g, an d a siz eab le perc en ta g e of Mala w i’ s p opula tio n w as f a cin g s ta rv atio n. T o m ak e m atte rs w ors e , a to p Mala w ia n o ffic ia l a t th e s ta te -ru n g ra in m ark etin g b oard w ho w as to b e a key w itn ess in th e tw o c o rru ptio n c ase s ‘m yste rio usly d is a p peare d ’. 7 Y et ev en w ith t h ese a lle g atio ns o f c o rru ptio n t h e U S g overn m en t d id n ot s e e f it to r e m ove M ala w i f ro m t h e q ualif y in g M ille n niu m C halle n ge A cco unt l is t. On t h e o th er h an d, T an zan ia w as o m itte d f ro m t h e s a m e U S M ille n niu m Challe n ge A cco unt lis t (a p pare n tly fo r re aso ns of co rru ptio n). But biz arre ly it h ad b een h aile d a s a m odel o f g ood g overn an ce in N ovem ber 2001 b y th e B ritis h g overn m en t’ s S ecre ta ry o f D ev elo pm en t a t th e tim e, Cla re S hort, w ho p ro m ptly a n nounced th at T an zan ia w ould b en efit f ro m a new p ilo t a id p ro gra m me. Who w as r ig ht? Thus, it w ould a p pear th at r e g ard le ss o f w ho y ou a re , a n d w hat y ou’v e done (o r h av en ’t fo r th at m atte r), y ou’ll g et th e c ash fro m s o m ew here . In th e M ala w i m aiz e s c an dal, th e I M F r e su m ed its le n din g p ro gra m me to th e govern m en t w ith n o c le ar r e so lu tio n o f t h e c ase . Corru ptio n: p ositiv e o r n eg ativ e? May be it w ould n’t b e s o b ad if A fric an le ad ers , lik e s o m e o f th eir A sia n co unte rp arts , r e in veste d s to le n m oney d om estic ally , in ste ad o f s q uir re llin g it a w ay i n f o re ig n b an k a cco unts . This n otio n o f ‘ p ositiv e’ c o rru ptio n g oes a lo ng w ay to e x pla in in g w hy man y A sia n c o untr ie s, p erc eiv ed t o h av e h ig h l e v els o f c o rru ptio n ( in s o m e 62 case s, su ch as In donesia , ex ceed in g th ose o f A fric a), n ev erth ele ss p ost en via b le le v els o f e co nom ic g ro w th . F or e x am ple , d esp ite r a n kin g ju st 3 .5 out o f 1 0 o n T ra n sp are n cy In te rn atio nal’ s C orru ptio n P erc ep tio ns In dex (2 007), C hin a c o ntin ues to a ttr a ct th e g re ate st a m ount o f fo re ig n d ir e ct in vestm en t (U S$78 b illio n in 2 006, a cco rd in g to th e IM F’s In te rn atio nal Fin an cia l Sta tis tic s), w hic h undoubte d ly has co ntr ib ute d to its ste lla r gro w th . S im ila rly , alth ough in th e 1980s T haila n d re g is te re d a str o ng eco nom ic p erfo rm an ce, in th e s a m e d ecad e it w as r a n ked th e m ost c o rru pt co untr y i n t h e w orld . In s ta rk c o ntr a st, c o rru ptio n a n aly sts e stim ate a t le ast U S$10 b illio n – nearly h alf o f A fric a’s 2 003 fo re ig n aid re ceip ts – d ep art A fric a ev ery year. 8 It is th is ‘n eg ativ e c o rru ptio n’ w hic h b le ed s A fric a’s p ublic p urs e dry , a n d d oes n oth in g t o a d dre ss t h e c o ntin en t’ s d esp era te n eed s. I t i s t r u ly tr a g ic th at w hile s to le n a id m onie s s it a n d e arn in te re st in p riv ate a cco unts ab ro ad , th e c o untr ie s fo r w hic h th e m oney w as d estin ed h av e s ta g nate d , an d e v en r e g re sse d . The co rn ers to ne o f d ev elo pm en t is an eco nom ic ally re sp onsib le an d acco unta b le g overn m en t. Y et, i t r e m ain s c le ar t h at, b y p ro vid in g f u nds, a id ag en cie s (in ad verte n tly ?) p ro p u p c o rru pt g overn m en ts . B ut c o rru ptio n is not th e o nly p ro ble m e m an atin g fro m a id . T he d ele te rio us e ffe cts o f a n y new a id f lo w s w ould b e b oth s o cia l a n d e co nom ic . Aid a nd c iv il s o cie ty Afric a n eed s a m id dle cla ss: a m id dle cla ss th at h as v este d eco nom ic in te re sts ; a m id dle c la ss in w hic h in div id uals tr u st e ach o th er ( a n d h av e a co urt to g o to if th e tr u st b re ak s d ow n) a n d th at re sp ects a n d d efe n ds th e ru le o f la w ; a m id dle cla ss th at h as a sta k e in se ein g its co untr y ru n sm ooth ly a n d u nder a tr a n sp are n t le g al fra m ew ork ; a m id dle c la ss (a lo ng with th e r e st o f th e p opula tio n) th at c an h old its g overn m en t a cco unta b le . Above a ll, a m id dle c la ss n eed s a g overn m en t t h at w ill l e t i t g et a h ead . This is n ot to im ply th at A fric a d oes n ot h av e a m id dle c la ss – it d oes. But in a n a id e n vir o nm en t, g overn m en ts a re le ss in te re ste d in fo ste rin g en tr e p re n eu rs a n d th e d ev elo pm en t o f th eir m id dle c la ss th an in f u rth erin g th eir o w n fin an cia l in te re sts . W ith out a str o ng e co nom ic v oic e a m id dle cla ss is p ow erle ss to ta k e its g overn m en t to ta sk . W ith e asy a ccess to c ash a govern m en t re m ain s all- p ow erfu l, acco unta b le only (a n d only th en nom in ally ) t o i ts a id d onors . I n hib ite d i n i ts g ro w th , t h e m id dle c la ss n ev er re ach es th at critic al m ass th at his to ric ally has pro ven esse n tia l fo r a 63 co untr y ’s e co nom ic a n d p olitic al s u ccess. In m ost f u nctio nin g a n d h ealth y e co nom ie s, th e m id dle c la ss p ay s ta x es in re tu rn fo r govern m en t acco unta b ility . F ore ig n aid sh ort- c ir c u its th is lin k. B ecau se th e g overn m en t’ s fin an cia l d ep en den ce o n its c itiz en s h as been r e d uced , i t o w es i ts p eo ple n oth in g. A w ell- fu nctio nin g c iv il so cie ty a n d p olitic ally in volv ed c itiz en ry a re th e b ack bone o f lo nger-te rm s u sta in ab le d ev elo pm en t. T he p artic u la r ro le of s tr o ng c iv il s o cie ty is to e n su re th at th e g overn m en t is h eld a cco unta b le fo r its actio ns, th ro ugh fu ndam en ta l civ il re fo rm s oth er th an sim ply hold in g e le ctio ns. H ow ev er, fo re ig n a id p erp etu ate s p overty a n d w eak en s civ il so cie ty by in cre asin g th e burd en of govern m en t an d re d ucin g in div id ual f re ed om . An a id -d riv en e co nom y a ls o le ad s to th e p olitic iz atio n o f th e c o untr y – so th at ev en w hen a m id dle cla ss (a lb eit sm all) ap pears to th riv e, its su ccess o r f a ilu re is w holly c o ntin gen t o n its p olitic al a lle g ia n ce. S o m uch so , a s B au er p uts it, th at a id ‘d iv erts p eo ple ’s a tte n tio n fro m p ro ductiv e eco nom ic activ ity to politic al lif e ’, fa ta lly weak en in g th e so cia l co nstr u ctio n o f a c o untr y . Aid a nd s o cia l c a pita l: a m atte r o f t r u st Socia l c ap ita l, b y w hic h is m ean t th e in vis ib le g lu e o f re la tio nsh ip s th at hold s b usin ess, e co nom y a n d p olitic al lif e to geth er, is a t th e c o re o f a n y co untr y ’s d ev elo pm en t. A t its m ost e le m en ta l le v el, th is b oils d ow n to a matte r o f t r u st. As dis c u sse d earlie r, am ong dev elo pm en t pra ctitio ners th ere is in cre asin g a ck now le d gem en t th at ‘s o ft’ fa cto rs – s u ch a s g overn an ce, th e ru le of la w , in stitu tio nal quality – pla y a critic al ro le in ach ie v in g eco nom ic p ro sp erity a n d p uttin g c o untr ie s o n a s tr o ng d ev elo pm en t p ath . But t h ese t h in gs a re m ean in gle ss i n t h e a b se n ce o f t r u st. A nd w hile t r u st i s dif fic u lt to d efin e o r m easu re , w hen it is n ot th ere th e n etw ork s u pon whic h d ev elo pm en t d ep en ds b re ak d ow n o r n ev er e v en f o rm . Fore ig n a id d oes n ot str e n gth en th e so cia l c ap ita l – it w eak en s it. B y th w artin g a cco unta b ility m ech an is m s, e n co ura g in g r e n t- s e ek in g b eh av io ur, sip honin g off sc arc e ta le n t fro m th e em plo ym en t pool, an d re m ovin g pre ssu re s to r e fo rm in effic ie n t p olic ie s a n d in stitu tio ns, a id g uara n te es th at in th e m ost a id -d ep en den t re g im es so cia l c ap ita l re m ain s w eak a n d th e co untr ie s th em se lv es p oor. I n a w orld o f a id , th ere is n o n eed o r in cen tiv e to tr u st y our n eig hbour, a n d n o n eed f o r y our n eig hbour to tr u st y ou. T hus 64 aid e ro des t h e e sse n tia l f a b ric o f t r u st t h at i s n eed ed b etw een p eo ple i n a n y fu nctio nin g s o cie ty . Aid a nd c iv il w ar Acco rd in g t o t h e S to ck holm I n te rn atio nal P eace R ese arc h I n stitu te , ‘ A fric a is th e m ost c o nflic t rid den re g io n o f th e w orld , a n d th e o nly re g io n in whic h th e n um ber o f a rm ed c o nflic ts is o n th e in cre ase .’ D urin g th e 1 990s th ere w ere s e v en te en m ajo r a rm ed c o nflic ts in A fric a a lo ne, c o m pare d to te n ( in to ta l) e ls e w here in th e w orld . A fric a is a ls o th e r e g io n th at r e ceiv es th e la rg est am ount o f fo re ig n aid , re ceiv in g m ore p er cap ita in o ffic ia l dev elo pm en t a ssis ta n ce t h an a n y o th er r e g io n o f t h e w orld . There are th re e fu ndam en ta l tr u th s ab out co nflic ts to day : th ey are mostly born out of co m petitio n fo r co ntr o l of re so urc es; th ey are pre d om in ate ly a fe atu re o f p oore r e co nom ie s; a n d th ey a re in cre asin gly in te rn al c o nflic ts . Whic h is w hy fo re ig n aid fo m en ts co nflic t. T he p ro sp ect o f se iz in g pow er a n d g ain in g a ccess to u nlim ite d a id w ealth is ir re sis tib le . G ro ssm an arg ues th at th e u nderly in g p urp ose o f re b ellio n is th e c ap tu re o f th e s ta te fo r fin an cia l a d van ta g e, a n d th at a id m ak es s u ch c o nflic t m ore lik ely . In Sie rra L eo ne, th e le ad er of th e re b el R ev olu tio nary U nite d F ro nt w as offe re d th e v ic e-p re sid en tia l p ositio n in a p eace d eal, b ut r e fu se d u ntil th e offe r w as c h an ged to in clu de h is c h air m an sh ip o f th e b oard c o ntr o llin g dia m ond-m in in g i n te re sts . S o n ot o nly w ould i t a p pear t h at a id u nderm in es eco nom ic g ro w th , k eep in g c o untr ie s in s ta te s o f p overty , b ut it is a ls o , in its e lf , a n u nderly in g c au se o f s o cia l u nre st, a n d p ossib ly e v en c iv il w ar. While a ck now le d gin g th at th ere a re o th er r e aso ns f o r c o nflic t a n d w ar – fo r e x am ple , th e p ro sp ect o f c ap tu rin g n atu ra l re so urc es su ch a s o il, o r tr ib al c o nflic t ( w hic h , o f c o urs e , c an h av e i ts r o ots i n e co nom ic d is p arity ) – in a cash -s tr a p ped /r e so urc e-p oor en vir o nm en t th e pre se n ce of aid , in whate v er f o rm , i n cre ase s t h e s iz e o f t h e p ie t h at d if fe re n t f a ctio ns c an f ig ht over. F or e x am ple , M are n b la m es S om alia ’s c iv il w ars o n c o m petitio n f o r co ntr o l o f l a rg e-s c ale f o od a id . Furth erm ore , in a n in dir e ct m an ner, b y lo w erin g a v era g e in co m es a n d slo w in g d ow n e co nom ic g ro w th ( a cco rd in g to C ollie r, b oth in th em se lv es pow erfu l p re d ic to rs o f c iv il w ars ), a id i n cre ase s t h e r is k o f c o nflic t. 9 I n t h e past f iv e d ecad es, a n e stim ate d 4 0 m illio n A fric an s h av e d ie d in c iv il w ars sc atte re d a cro ss t h e c o ntin en t; e q uiv ale n t t o t h e p opula tio n o f S outh A fric a (a n d t w ic e t h e R ussia n l iv es l o st i n t h e S eco nd W orld W ar). 65 Bey ond p olitic iz atio n o f th e p olitic al e n vir o nm en t, a id f o ste rs a m ilita ry cu ltu re . C iv il w ars a re b y th eir v ery n atu re m ilita ry e sc ap ad es. W hoev er win s sta y s in p ow er th ro ugh th e alle g ia n ce o f th eir m ilita ry . T hus, th e re ig nin g in cu m ben t, a n xio us to h an g o n to p ow er, a n d m an ag e c o m petin g in te re st g ro ups a n d fa ctio ns, fir s t d ir e cts w hat re so urc es h e h as in to th e pock ets o f h is a rm y, i n t h e h ope t h at i t w ill r e m ain p lia n t a n d a t b ay . The e co nom ic l im ita tio ns o f a id Any la rg e in flu x o f m oney in to a n e co nom y, h ow ev er ro bust, c an c au se pro ble m s. B ut w ith th e re le n tle ss flo w of unm itig ate d , su bsta n tia l aid money , th ese p ro ble m s a re m ag nif ie d ; p artic u la rly in e co nom ie s th at a re , by th eir v ery n atu re , p oorly m an ag ed , w eak an d su sc ep tib le to o uts id e in flu en ce, over w hic h dom estic polic y m ak ers hav e little co ntr o l. W ith re sp ect to aid , poor eco nom ie s fa ce fo ur m ain eco nom ic ch alle n ges: re d uctio n of dom estic sa v in gs an d in vestm en t in fa v our of gre ate r co nsu m ptio n; in fla tio n; d im in is h in g e x ports ; a n d d if fic u lty in a b so rb in g su ch l a rg e c ash i n flu xes. Aid r e d uces s a vin gs a nd i n vestm en t As f o re ig n a id c o m es i n , d om estic s a v in gs d eclin e; t h at i s , i n vestm en t f a lls . This is n ot to g iv e th e im pre ssio n th at a w hole p opula tio n is a w ash w ith aid m oney , a s i t o nly r e ach es r e la tiv ely f e w , v ery s e le ct h an ds. W ith a ll t h e te m ptin g aid m onie s o n o ffe r, w hic h are n oto rio usly fu ngib le , th e fe w sp en d it on co nsu m er goods, in ste ad of sa v in g th e cash . A s sa v in gs declin e, lo cal b an ks h av e le ss m oney to le n d fo r d om estic in vestm en t. Eco nom ic s tu die s c o nfir m t h is h ypoth esis , f in din g t h at i n cre ase s i n f o re ig n aid are c o rre la te d w ith d eclin in g d om estic s a v in gs r a te s. Aid h as a n oth er e q ually d am ag in g c ro w din g-o ut e ffe ct. A lth ough a id is mean t to en co ura g e priv ate in vestm en t by pro vid in g lo an guara n te es, su bsid iz in g in vestm en t ris k s an d su pportin g co fin an cin g arra n gem en ts with p riv ate in vesto rs , in p ra ctic e it d is c o ura g es th e in flo w o f s u ch h ig h- quality fo re ig n m onie s. In deed , in s o m e e m pir ic al w ork , it is s h ow n th at priv ate fo re ig n c ap ita l a n d in vestm en t fa ll a s a id ris e s. T his m ay in p art re fle ct th e fa ct th at priv ate in vesto rs te n d to be unco m fo rta b le ab out se n din g t h eir m oney t o c o untr ie s t h at a re a id -d ep en den t, a p oin t e la b ora te d on l a te r i n t h e b ook. An o utg ro w th o f th e c ro w din g-o ut p ro ble m is th at h ig her a id -in duced 66 co nsu m ptio n le ad s to a n e n vir o nm en t w here m uch m ore m oney is c h asin g fe w er g oods. T his a lm ost in varia b ly le ad s to p ric e ris e s – th at is , h ig her in fla tio n. Aid c a n b e i n fla tio nary Pric e p re ssu re s are tw ofo ld . A id m oney le ad s to in cre ase d d em an d fo r lo cally pro duced goods an d se rv ic es (th at is , non-tr a d ab le s su ch as hair c u ts , r e al e sta te a n d f o odstu ffs ), a s w ell a s i m porte d ( tr a d ed ) g oods a n d se rv ic es, s u ch a s tr a cto rs a n d T V s. I n cre ase d d om estic d em an d n eed n’t b e harm fu l i n i ts e lf , b ut a d is ru ptiv e i n je ctio n o f m oney c an b e. There a re m ultip le k nock -o n e ffe cts . F or e x am ple , ta k e th is v ery b asic an d s im plis tic s to ry . S uppose a c o rru pt o ffic ia l g ets US$10,0 00. H e u se s so m e o f th e c ash to b uy a c ar. T he c ar s e lle r c an n ow a ffo rd to b uy n ew clo th es, w hic h p la ces c ash i n t h e h an ds o f t h e c lo th es t r a d er, a n d s o o n a n d so fo rth d ow n th e lin e, a t e ach p oin t p uttin g m ore p re ssu re o n d om estic pric es a s th ere a re n ow m ore p eo ple d em an din g m ore c ars , c lo th es, e tc . This is at le ast an ex am ple of positiv e co rru ptio n. B ut in a poor en vir o nm en t, th ere a re n ’t a n y m ore c ars , th ere a re n ’t a n y m ore c lo th es, s o with in cre ase d d em an d p ric es g o u p. E ven tu ally , th ere m ay b e m ore c ars an d th ere m ay b e c lo th es, b ut b y th at tim e in fla tio n w ill h av e e ro ded th e eco nom y, a ll th e w hile w ith e v en m ore a id c o m in g in . P erh ap s ir o nic ally , becau se o f th e d ete rio ra tin g in fla tio nary e n vir o nm en t m ore a id is p um ped in t o ‘ s a v e t h e d ay ’; w e’re b ack o n t h e c y cle a g ain . As if th at w as n ot b ad e n ough, in o rd er to c o m bat th e c y cle o f in fla tio n, dom estic polic y m ak ers ra is e in te re st ra te s. B ut, at a very basic le v el, hig her i n te re st r a te s m ean l e ss i n vestm en t ( it b eco m es t o o c o stly t o b orro w to in vest) ; le ss in vestm en t m ean s fe w er jo bs; fe w er jo bs m ean m ore poverty ; a n d m ore p overty m ean s m ore a id . Aid c h okes o ff t h e e xp ort s e cto r Tak e K en ya. S uppose it h as 1 00 K en yan s h illin gs in its e co nom y, w hic h are w orth U S$2. S udden ly , U S$10,0 00 w orth o f a id c o m es in . N o o ne c an sp en d dolla rs in th e co untr y , becau se sh opkeep ers only ta k e th e le g al te n der – K en yan sh illin gs. In o rd er to sp en d th e a id d olla rs , th ose w ho hav e it m ust c o nvert it to K en yan s h illin gs. A ll th e w hile th ere a re o nly still 1 00 sh illin gs in th e e co nom y; th us th e v alu e o f th e fre ely flo atin g sh illin g r is e s a s p eo ple tr y to o fflo ad th e m ore e asily a v aila b le a id d olla rs . 67 To th e detr im en t of th e K en yan eco nom y, th e now str o nger K en yan cu rre n cy m ean s th at K en yan -m ad e goods fo r ex port are m uch m ore ex pen siv e in th e in te rn atio nal m ark et, m ak in g th e tr a d ed goods se cto r unco m petitiv e (if w ag es in th at se cto r do not ad ju st dow nw ard s). A ll th in gs b ein g e q ual, t h is c h okes o ff K en ya’s e x port s e cto r. This p hen om en on is k now n a s D utc h d is e ase , a s its e ffe cts w ere fir s t obse rv ed w hen n atu ra l g as re v en ues flo oded in to th e N eth erla n ds in th e 1960s, d ev asta tin g th e D utc h e x port s e cto r a n d in cre asin g u nem plo ym en t. Over th e y ears e co nom ic th in kin g h as e x te n ded b ey ond th e sp ecif ic s o f th is o rig in al s c en ario , s o th at a n y la rg e in flo w o f ( a n y) f o re ig n c u rre n cy is se en t o h av e t h is p ote n tia l e ffe ct. Even in an en vir o nm en t w here th e dom estic cu rre n cy is not fre ely flo atin g, b ut ra th er its ex ch an ge ra te re m ain s fix ed , th e D utc h d is e ase phen om en on can occu r. In th is case , th e in cre ase d av aila b ility of aid money e x pan ds d om estic d em an d, w hic h a g ain c an le ad to in fla tio n. A id flo w s s p en t o n d om estic g oods w ould p ush u p th e p ric e o f o th er r e so urc es th at a re in lim ite d s u pply d om estic ally – s u ch a s s k ille d w ork ers – m ak in g in dustr ie s (m ain ly th e ex port se cto r) th at fa ce in te rn atio nal co m petitio n an d d ep en d o n th at re so urc e m ore u nco m petitiv e, a n d a lm ost in ev ita b ly th ey c lo se . The I M F h as s ta te d t h at d ev elo pin g c o untr ie s t h at r e ly o n f o re ig n c ap ita l are m ore p ro ne to th eir c u rre n cie s s tr e n gth en in g. A cco rd in gly , a id in flo w s would s tr e n gth en t h e l o cal c u rre n cy a n d h urt m an ufa ctu rin g e x ports , w hic h in tu rn re d uces lo ng-ru n g ro w th . IM F eco nom is ts h av e arg ued th at th e co ntr ib utio n o f aid flo w s to a co untr y ’s ris in g ex ch an ge ra te w as o ne re aso n w hy a id h as fa ile d to im pro ve g ro w th , a n d th at a id m ay v ery w ell hav e co ntr ib ute d to p oor p ro ductiv ity in p oor eco nom ie s b y d ep re ssin g ex ports . In o th er w ork , th eir re se arc h fin ds s tr o ng e v id en ce c o nsis te n t w ith a id underm in in g th e co m petitiv en ess of th e la b our-in te n siv e or ex portin g se cto rs (fo r e x am ple , a g ric u ltu re su ch a s c o ffe e fa rm s). In p artic u la r, in co untr ie s th at re ceiv e m ore a id , e x port s e cto rs g ro w m ore s lo w ly re la tiv e to c ap ita l- in te n siv e a n d n on-e x porta b le s e cto rs . Aid in flo w s h av e ad vers e effe cts o n o vera ll co m petitiv en ess, w ag es, ex port s e cto r e m plo ym en t ( u su ally in th e f o rm o f a d eclin e in th e s h are o f th ose in th e m an ufa ctu rin g s e cto r) a n d u ltim ate ly g ro w th . G iv en th e fa ct th at m an ufa ctu rin g e x ports a re a n e sse n tia l veh ic le fo r p oor c o untr ie s to sta rt g ro w in g (a n d ach ie v in g su sta in ed g ro w th ), an y ad vers e effe cts o n ex ports s h ould prim a f a cie b e a c au se f o r c o ncern . More o ver, b ecau se th e tr a d ed -g oods se cto r c an b e th e m ain so urc e o f 68 pro ductiv ity i m pro vem en ts a n d p ositiv e s p illo vers a sso cia te d w ith l e arn in g by d oin g th at f ilte r th ro ugh to th e r e st o f th e e co nom y, th e a d vers e im pact of a id o n its c o m petitiv en ess r e ta rd s n ot ju st th e e x port s e cto r, b ut a ls o th e gro w th o f t h e e n tir e e co nom y. In t h e m ost o dd t u rn o f e v en ts , t h e f a ct t h at a id r e d uces c o m petitiv en ess, an d th us th e tr a d ed s e cto r’s a b ility to g en era te f o re ig n-e x ch an ge e arn in gs, mak es c o untr ie s e v en m ore d ep en den t o n f u tu re a id , l e av in g t h em e x pose d to all th e ad vers e co nse q uen ces of aid -d ep en den cy . W hat is m ore , polic y m ak ers k now th at p riv ate -to -p riv ate flo w s lik e re m itta n ces d o n ot se em to c re ate th ese a d vers e a id -in duced ( D utc h d is e ase ) e ffe cts , b ut th ey la rg ely c h oose t o i g nore t h ese p riv ate c ap ita l s o urc es. As a fin al p oin t, in o rd er to m itig ate th e D utc h d is e ase effe cts (a n d dep en din g on th eir eco nom ic en vir o nm en ts ), polic y m ak ers in poor co untr ie s g en era lly h av e tw o c h oic es. T hey c an (in a fix ed e x ch an ge ra te re g im e) eith er ra is e in te re st ra te s to co m bat in fla tio n to th e in ev ita b le detr im en t o f t h e e co nom y, o r t h ey c an ‘ s te riliz e’ t h e a id i n flo w s. Ste riliz atio n i m plie s t h at t h e g overn m en t i s su es b onds o r I O Us t o p eo ple in th e e co nom y, a n d in r e tu rn th ey g et th e c ash in th e e co nom y. T hro ugh th is p ro cess t h e g overn m en t c an m op u p th e e x cess c ash t h at a id b rin gs i n . But, a s d is c u sse d l a te r, e v en s te riliz atio n h as i ts c o sts . Aid c a use s b ottle n ecks: a bso rp tio n c a pacity Very o fte n , p oor c o untr ie s c an not a ctu ally u se th e a id flo w s g ra n te d b y ric h g overn m en ts . A t e arly sta g es o f d ev elo pm en t (w hen c o untr ie s h av e re la tiv ely u nderd ev elo ped fin an cia l an d in stitu tio nal str u ctu re s) th ere is sim ply n ot en ough sk ille d m an pow er, o r th ere are n ot en ough siz eab le in vestm en t o pportu nitie s, to p ut th e v ast aid w in dfa lls e ffe ctiv ely to w ork . Eco nom ic re se arc h ers hav e fo und th at co untr ie s w ith lo w fin an cia l dev elo pm en t do not hav e th e ab so rp tiv e cap acity fo r fo re ig n aid . In co untr ie s w ith w eak f in an cia l s y ste m s, a d ditio nal f o re ig n r e so urc es d o n ot tr a n sla te i n to s tr o nger g ro w th o f f in an cia lly d ep en den t i n dustr ie s. What h ap pen s to th is a id m oney th at c an ’t b e u se d ? I n th e m ost h onest of outc o m es, if th e govern m en t did noth in g w ith th e aid in flo w , th e co untr y w ould still hav e to pay in te re st on it. B ut giv en th e polic y ch alle n ges o f la rg e in flo w s d is c u sse d earlie r (fo r ex am ple , in fla tio nary pre ssu re , D utc h d is e ase e ffe cts ), p olic y m ak ers i n t h e p oor c o untr y m ust d o so m eth in g. S in ce th ey c an not p ut a ll th e a id flo w s to g ood u se (e v en if th ey w an te d to ), it is m ore lik ely th an n ot th at th e aid m onie s w ill b e 69 co nsu m ed r a th er t h an i n veste d ( a s b efo re , t h ere b y r a is in g t h e r is k o f h ig her in fla tio n). To a v ert t h is s h arp s h ock t o t h e e co nom y, A fric an p olic y m ak ers h av e t o mop u p th e ex cess cash ; b ut th is co sts A fric an s m oney . In ad ditio n to hav in g t o p ay th e i n te re st o n t h e a id t h e c o untr y h as b orro w ed , t h e p ro cess of ste riliz in g th e a id flo w s (a g ain , is su in g lo cal- c o untr y d eb t in o rd er to so ak u p th e e x cess a id f lo w s in th e e co nom y) c an im pose a s u bsta n tia l h it to th e g overn m en t’ s b otto m lin e. U gan da o ffe rs a te llin g e x am ple o f th is . In 2 005, th e U gan dan c en tr a l b an k is su ed su ch a id -re la te d b onds to th e tu ne of U S$700 m illio n; th e in te re st pay m en ts alo ne on th is co st th e Ugan dan t a x pay er U S$110 m illio n a n nually . Natu ra lly , th e p ro cess o f m an ag in g a id in flo w s is p artic u la rly p ain fu l when th e in te re st c o sts o f th e d eb t th e g overn m en t p ay s o ut a re g re ate r th an t h e i n te re st i t e arn s f ro m h old in g a ll t h e m opped -u p a id m oney . Aid a nd a id -d ep en den cy Corru ptio n, in fla tio n, th e ero sio n of so cia l cap ita l, th e w eak en in g of in stitu tio ns a n d th e re d uctio n o f m uch -n eed ed d om estic in vestm en t: w ith offic ia l a id to th e c o ntin en t a t 1 0 p er c en t o f p ublic e x pen ditu re , a n d a t le ast 1 3 p er c en t o f G DP fo r th e a v era g e co untr y , A fric a’s c o ntin ual a id – dep en den cy t h ro w s u p a h ost o f o th er p ro ble m s. Aid e n gen ders la zin ess o n th e p art o f th e A fric an p olic y m ak ers . T his may in p art e x pla in w hy, a m ong m an y A fric an le ad ers , th ere p re v ails a kin d of in so ucia n ce, a la ck of urg en cy , in re m ed yin g A fric a’s critic al woes. B ecau se aid flo w s are v ie w ed (rig htly so ) as p erm an en t in co m e, polic y m ak ers h av e n o in cen tiv e to lo ok f o r o th er, b ette r w ay s o f f in an cin g th eir c o untr y ’s lo nger-te rm d ev elo pm en t. A s d eta ile d la te r in th is b ook, th ese optio ns, lik e fo re ig n dir e ct in vestm en t an d accessin g th e deb t mark ets , offe r m ore -d iv ers if ie d an d gre ate r pro sp ects fo r su sta in ab le dev elo pm en t. Rela te d ly , in a w orld o f a id -d ep en den cy , p oor c o untr ie s’ g overn m en ts lo se th e n eed to p urs u e ta x r e v en ues. L ess ta x atio n m ig ht s o und g ood, b ut th e ab se n ce of ta x atio n le ad s to a bre ak dow n in natu ra l ch eck s an d bala n ces b etw een th e g overn m en t a n d its p eo ple . P ut d if fe re n tly , a p ers o n who is le v ie d w ill a lm ost c erta in ly e n su re th at th ey a re g ettin g s o m eth in g fo r th eir ta x es – th e Bosto n te a party ’s ‘N o ta x atio n with out re p re se n ta tio n’. Besid es, an y ra tio nal g overn m en t sh ould b e th in kin g ab out d if fe re n t 70 fo rm s o f ta x atio n a s a w ay o f ru nnin g th eir a ffa ir s . In to day ’s c u ltu re o f aid -d ep en den cy , w ere aid to dis a p pear (a s unlik ely as it se em s), a co untr y ’s ta x -ra is in g m ech an is m s w ould hav e atr o phie d to a poin t of in cap acity . Larg e su m s o f aid , an d a cu ltu re o f aid -d ep en den cy , als o en co ura g e govern m en ts to su pport la rg e, u nw ie ld y an d o fte n u npro ductiv e p ublic se cto rs – ju st a n oth er w ay to re w ard th eir c ro nie s. In h is re se arc h , B oone (1 996) f in ds t h at a id d oes i n cre ase t h e s iz e o f t h e g overn m en t. The n et r e su lt o f a id -d ep en den cy is th at in ste ad o f h av in g a f u nctio nin g Afric a, m an ag ed by A fric an s, fo r A fric an s, w hat is le ft is one w here outs id ers a tte m pt to m ap its d estin y a n d c all th e s h ots . G iv en th e s ta te o f affa ir s , it is h ard ly su rp ris in g th at, th ough o ste n sib ly h ig h o n th e g lo bal ag en da, th e A fric a d is c o urs e h as b een u su rp ed b y p op s ta rs a n d W este rn politic ia n s. R are ly , if e v er, a re th e A fric an s e le cte d b y th eir o w n p eo ple heard f ro m o n th e g lo bal s ta g e. A nd e v en th ough, a s d is c u sse d e arlie r, th e bala n ce o f p ow er may h av e sh if te d su ppose d ly in fa v our o f th e A fric an polic y m ak ers , it is still th e d onors w ho a re in th e p olic y m ak in g d riv in g se at (w hic h m ig ht help ex pla in why, over th e la st fiv e decad es, in dep en den t A fric an polic y m ak in g an d natio nal eco nom ic m an ag em en t hav e dim in is h ed co nsid era b ly ). So aid -d ep en den cy only fu rth er underm in es th e a b ility o f A fric an s, w hate v er th eir sta tio n, to d ete rm in e th eir o w n b est e co nom ic a n d p olitic al p olic ie s. S uch is th e a ll- p erv asiv e cu ltu re o f a id -d ep en den cy th at th ere is little o r n o re al d eb ate o n a n e x it str a te g y f ro m t h e a id q uag m ir e . Aid o bje ctio ns Dea d Aid is not th e fir s t critiq ue to be le v elle d ag ain st aid as a dev elo pm en t to ol. O ne o f th e e arlie st c ritic s o f a id w as a H ungaria n -b orn London S ch ool o f E co nom ic s e co nom is t, P ete r B au er. A t a tim e w hen th e pro -a id m odel e n jo yed w id e s u pport, B au er w as a lo ne d is se n tin g v oic e, man y o f h is w ritin gs d ra w in g o n h is p ers o nal ex perie n ce as a co lo nia l offic er s tu dyin g th e r u bber in dustr y in M ala y sia a n d N ig eria . H e s a w w hat sh ould h av e b een f lo uris h in g i n dustr ie s w re ck ed b y h uge a id s u bsid ie s t h at ra re ly r e ach ed t h e i n dig en t i n t h e r e cip ie n t c o untr y . Aid , B au er a rg ued , in te rfe re d w ith d ev elo pm en t a s th e m oney a lw ay s en ded u p i n t h e h an ds o f a s m all c h ose n f e w , m ak in g a id a ‘ fo rm o f t a x in g th e p oor in th e w est to e n ric h th e n ew e lite s in fo rm er c o lo nie s’. B au er arg ued m ost str o ngly th at aid -b ase d th eo rie s an d p olic ie s w ere w holly 71 in co nsis te n t w ith so und eco nom ic re aso nin g an d, in deed , w ith re ality . Alth ough he w as a fa v ourite of th e B ritis h P rim e M in is te r, M arg are t Thatc h er ( s h e g av e h im a p eera g e 10 ), a t th e tim e o f h is d eath in 1 992 P ete r Bau er w as a n o utc ast f ro m th e s ta te -le d s o cia lis t d ev elo pm en t a g en da a n d his critiq ue of th e aid -b ase d dev elo pm en t str a te g y re m ain ed la rg ely ig nore d . More re cen tly , th e au th or an d fo rm er W orld B an k eco nom is t B ill Easte rly h as p ro vid ed n um ero us c ase s tu die s o n th e f a ilu re s o f a id p olic ie s acro ss th e d ev elo pin g w orld . I n The B otto m B illio n , Pau l C ollie r c ritic iz es th e b la n ket o ne-s iz e-fits -a ll a id a p pro ach a s p ay in g n o h eed to th e u niq ue cir c u m sta n ces o f in div id ual c o untr ie s, a n d th us p ro pose s a m ore n uan ced ap pro ach t o a id -d riv en p ro posa ls , a n d o nly w here t h ey a re n eed ed . Perh ap s w here a ll th is lite ra tu re f a lls d ow n s o m ew hat is th at it d oes n ot ex plic itly o ffe r A fric a a m en u o f a lte rn ativ es t o a id . B ut, m ore i m porta n tly , th e p eo ple w ho a ctu ally a n d a ctiv ely im ple m en t th e a id a g en da a re y et to be c o nvin ced . T hese a re th e p eo ple w ho a re s o w ed ded to a id th at th ey a re unab le t o s e e A fric a a s a n yth in g b ut h elp le ss w ith out a id i n te rv en tio n. What f o llo w s is a d is c u ssio n o f o th er, b ette r w ay s f o r A fric a to f in an ce its e co nom ic d ev elo pm en t; w ay s th at h av e b een tr ie d a n d te ste d in p la ces as f a r-flu ng a s I n dia , R ussia a n d C hile , a n d e v en , c lo se r to h om e, in S outh Afric a. 72
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Copyright © 2019 by Intan Suwandi All Rights Reserved Library of Congr ess Cataloging-in-P ublication Data available from the publisher ISBN paper : 978-158367-781-0 ISBN cloth: 978-1-58367-782-7 Typeset in Minion P ro and Br own MONTHL Y REVIEW PRESS, NEW YORK monthlyr eview.org 5 4 3 2 1 Contents Preface 1. The Hidden Abode of Global P roduction 2. Labor -V alue Commodity Chains: Power and Class R elations in the W orld Economy 3. Flexibility and Systemic Rationalization: Contr ol in Labor – Value Commodity Chains 4. “ W e ’ re Just a Seamstr ess ” : Case Studies of Two Indonesian Companies 5. The New Economic Imperialism: L ooking thr ough the Eyes of the Global South Appendix 1: Statistical Notes Appendix 2: Notes on the Methodology for the Case Studies Notes Inde x To K eagan Arkatedja, my fiery Red Preface AS A CHILD LIVING IN JAKAR TA , Indonesia, in the late 1980s, I was familiar with the blatant inequalities that characterized the city . Mansions built right next to the slums wer e something familiar, although I lived in neither . The presence of poverty was everywher e. I remember vividly seeing an old man ridden with lepr osy pulling a cart full of blocks of ice, every single mor ning on my way to school. Or a classmate, sitting right ther e next to me, wearing socks that wer e full of holes and a unifor m with faded colors companies that are catering to multinational corporations in labor -value chains, I wish to deliver an analysis of such chains by adopting the str engths of the various appr oaches I have discussed so far. 4 — “ We ’ re Just a Seamstr ess ” : Case Studies of Two Indonesian Companies I know that the sales department is supposed to service customers, but we also need to educate them, so that our company can run smoothly . This way, it ’ s not always the case when a customer tells us to do A, we do A. If they want B, we give them B. As it is now, we only follow their lead, and because we have a lot of customers, we have to run all over the place. — S TAR I NC . E XECUTIVE That ’ s why, in management, we can ’ t affor d to be vague. We ’ re not supposed to . We must be strict. If yes, say yes. Be clear … . It ’ s not easy to manage human resour ce … . We must be car eful; if we mak e a mistak e in our decision, that ’ s it. All would go to shambles. Work ers would become uncomfortable, and finally, they would reach out to a thir d party, to a labor union. Then [chaos] would ensue. — S TAR I NC . E XECUTIVE IN A 2016 ARTICLE WRIT TEN BY an Asian Development Bank economist, Indonesia is hailed as a country with “ dynamic, youthful labor ” that has become “ a magnet for for eign investment ” and “ a driver of economic growth ” over the last twenty years. Indeed, as mentioned previously, Indonesia has been a hotbed for dir ect for eign investment, with FDI net inflows generally showing an upwar d trend for a few decades af ter the 1970s, with only a few downtur ns, especially following the 1997 crisis. And when there was a decr ease, such as the recent one that occur red in 2018, the Indonesian gover nment quickly responded by enhancing incentives for investors with an objective of attracting mor e foreign investments, such as revamping the “ tax holiday scheme ” by lowering the limit for eligibility in corporate income tax e xemptions, including mor e industrial sectors that would be eligible for the incentives, and providing a “ speedier application process ” for such incentives. 1 In addition to FDI, Indonesia holds the thir d place — “ defeated ” only by China and India, although the percentage is much lower than these two countries — in shar e of all jobs in global commodity chains. This suggests that Indonesia has also become a destination for the Low-Cost Country Strategy, or global labor arbitrage, wher e local companies produce materials or products as suppliers for for eign-based companies, including multinational corporations. Nik e Corporation is an example. It moved its pr oduction from South Kor ea to Indonesia in the 1980s, befor e it pulled out and moved to China, in its relentless quest to find the lowest unit labor costs. 2 Several points can be evaluated her e. The first is in relation to the claim pr oposed by systemic rationalization scholars and by Har rison regar ding the heightened competition that is said to drive the emer gence of production networks or commodity chains. The so -called competition is not in the for m of what these scholars imply in their discussions: it is not based on a system wher e everybody — big and small firms in both Global North and Global South — is engaged in fighting amid competition. Dependent suppliers in labor -value chains, due to their small size and lack of power, may have to face such a heightened competition to get “ high-class ” multinational customers, for e xample, but it is a differ ent story for these very high- class customers themselves. Even though it may be true that the world remains competitive for corporations in some respects, “ the goal is always the cr eation [or] perpetuation of monopoly power — that is, the power to generate persistent, high, economic pr ofits thr ough a mark up on prime production costs. ” 86 Systemic rationalization and lean, fle xible production are not mer ely new management strategies to be more economical, just as global labor arbitrage is not only an imperative to sear ch for efficiencies needed for survival. Viewing it within the conte xt of the oligopolistic nature of monopoly capital, it is an attempt to extract surplus fr om work ers in places wher e they can be superexploited. In the conte xt of labor-value chains, these ar e mostly work ers from the Global South. But the classic example of Indonesian low-wage work ers, mostly women, sewing clothes or assembling electr onics for multinationals in sweatshops located in Export Processing Zones, is not the only way that Global South countries ar e incorporated into globalized pr oduction. Some variations exist; among them ar e the two Indonesian companies that are the subjects of case studies her e, Java Film and Star Inc. 3 Both ar e B2B (business-to -business) companies that are often refer red to as companies that belong to the “ capital-intensive ” category, as opposed to “ labor -intensive ” industries such as textiles and electr onics, although the number of workers varies accor ding to different segments of their production. Java Film is a plastic manufactur er. Their plastic, known as film, is usually sold as a material for “ fle xible pack aging ” used for a variety of FMCG (fast-moving consumer goods, also known as consumer -packaged goods) products, from cigar ette wrappers to shampoo labels to food packages. Their customers can be (1) the companies that produce cigar ettes, shampoo, and food varieties, to which they sell the film directly; or (2) companies that serve as converters, that is, converting companies that put logos, texts, etc. on the plain film and transfor m them into labels used for packaging. Star Inc. is an example of this latter type. They buy materials fr om companies lik e Java Film and custom- print them. Depending on the customers ’ or ders, sometimes the finished goods produced by Star Inc. are in the for m of printed plastic film, or pack aging “ bags, ” such as standing pouches for cooking oil. So it is possible that Java Film and Star Inc. have the same customers, and they of ten do . Included in their list of customers are several giant multinational corporations. Most of them are based in the triad — the United States, Wester n Europe, and Japan — wher e they export their goods dir ectly (or, in a very few cases, to their subsidiaries in neighboring Southeast Asian countries). This portion of their production is a straightforwar d example of these companies ’ participation in labor -value chains. They supply to multinational corporations in the Global North by e xporting the pack aging materials used by the brands owned by these multinationals, to be consumed in the home mark et. In addition, there are variations in the destinations of these pr oducts once they are finished. Most of the finished goods (appr oximately 70 per cent for each company) are sent to other factories, also in Indonesia, that pr ocess the final products, wher e they fill the packaging with the appropriate content. There are variations in this portion as well. If the customers are local (some of their customers are big Indonesian conglomerates), the finished pack aging is sent to their customers ’ factories. If the customers are multinationals, it is sent to the multinational subsidiary in Indonesia. After the pack aging is filled with their products, these multinational brands are then exported somewher e else, including to their home market, by the subsidiaries. A large portion of these brands, however, are sold dir ectly to retail within the national mark et. The executives I interviewed told me that this practice — selling the pr oducts wher e they are pr oduced — is a common strategy for giant multinational corporations, in an effort to minimize the risks and cut production costs. Obviously, it is a much mor e cost- efficient option compar ed to producing these products in the countries wher e the multinationals are located and then exporting them to their mark ets abroad. Export orders are deemed important and significant for these two companies. Although the shar e of exports in their pr oduction output is not as lar ge as the domestic component, they assign special managers — whom I also interviewed — to deal with exports. R egar dless of this fact, even though Java Film and Star Inc. do not e xclusively engage in dir ect exports and their pr oducts are also consumed in Indonesia, as we shall see, the main customers who or der these pr oducts include big multinationals and, due to that, the companies deal with many issues related to fle xible production driven by dominant multinationals, even when the multinationals are repr esented by their subsidiaries. The operating procedur es are the same in their pr oduction of pack aging for multinationals, whether the goods are for export or for the local mark et. Their business arrangement with multinationals is key her e, and it is their relationship with their multinational clients that will be the focus of this chapter . Regar dless of the differ ence in the final destination of their production output, these companies are still subject to the same processes that characterize systemic rationalization and fle xible production. They are thir d-party subcontractors that supply to multinationals, while they also have their own suppliers, both national- and foreign-based. In this sense, they tak e the role of dependent companies within labor -value chains. The case studies of these companies ar e not meant to serve as a generalization, but rather as a complementary analysis that can help pr ovide a concr ete pictur e of what actually happens at the factory plants where commodities are pr oduced. Though ther e are alr eady plenty of academic analyses as well as jour nal reports on how factories in the Global South ar e run and how this affects their work ers, in this study I present the viewpoint of management of two dependent companies to examine their relationship with multinational customers as well as with their workfor ce amid the processes of systemic rationalization and fle xible production that gover n this relationship. Their views give us a window onto the companies ’ position within labor -value chains: as a r epr esentative of Global South capital, which, on the one hand, is subor dinate to Global North – based multinationals but, on the other hand, is exploitative of its own labor . C ONTROL OF T ECHNOL OGY Technology is a central component of pr esent-day labor – value chains. The development of technology, particularly information technology, allows production to be done outside the cor e companies but with contr ol largely exer cised by them. Both systemic rationalization and fle xible production theories reject the idea that the supposed decentralized pr oduction networks or commodity chains offer a mor e egalitarian envir onment for small firms. This, of course, holds true on the global level as well. Examples from Java Film and Star Inc. illustrate this situation. As dependent suppliers, they lack contr ol of many aspects of their operations, as we will see. One of the most important aspects is technology . Viewed thr ough a critical lens, even when the companies see technology as their way to excel in their respective industries, their business relationship with their customers, especially multinationals, suggests that at the end of the day the contr ol over technology is still held by the latter . Thus, it would be very difficult for dependent companies to have significant autonomy in terms of their technological development and innovation. Java Film and Star Inc. ar e not the gar ment, sneak ers, or electronics factories depicted in various studies, journals, or campaigns about the devastating impact of globalized production on assembly work ers, mostly women. Most of their executives differ entiated their companies from those in labor -intensive industries and emphasized their technological and R & D (Resear ch and Development) components. Inside their factories — except in the few segments of their pr oduction sites wher e some form of assembly lines still exist (although they ar e nothing lik e what one would find in Fo xconn plants, for e xample) — you would only find lines of machines working automatically, with a few work ers here and ther e across the shop floors, the majority of them men. 4 These machines are operated remotely fr om a room filled with computers. Of course, labor still plays a major role in these two companies, and labor pr ocesses are subject to contr ol and working conditions can be problematic. But seen from “ outside, ” what comes to mind is the idea of high- tech, moder n factories that are neat and clean. One Java Film e xecutive even told me, “ I can confidently say, we ar e the cleanest [factory] in Indonesia alr eady … . When our machine suppliers ’ technicians visited us from Ger many, they said, ‘ Wow, you ’ re really clean. ’ ” A t the Star Inc. plant, one can visit their R & D office and find a moder n laboratory equipped with high-tech tools. The point is not only that these factories can be consider ed exceptional in ter ms of their cleanliness — these two factories produce plain film or pack aging materials for a lot of food companies, so it follows that hygiene is an important factor — but also that top management claims that their companies excel in technology and R & D. In fact, both Java Film and Star Inc. see themselves as players in the niche mark et of their respective industries, a specialty that focuses on “ high-end, ” “ high-mar gin ” products. In the case of Java Film, this means that, with very few e xceptions — in cases wher e they produce low-end products “ just to keep the relationship going with certain customers ” — they do not pr oduce what they call “ commodity products ” lik e plastic bags. They only produce specialized products, lik e plain plastic film that serves as material for cigar ette packages or food products (such as snacks or tea bo xes), or laminating material for magazine covers or smartphone bo xes. These pr oducts are consider ed high-end for at least two reasons, accor ding to the Java Film e xecutives: either (1) their specifications cannot be easily pr oduced by just any plastic company, or (2) even though the specifications are not that special, the pr oducts are designed specifically to fit well with their customers ’ machines. For Star Inc., “ high-end ” (or “ middle-high ” ) pr oducts are related to the comple xities of the product materials; for example, pack aging that is made from aluminum foil, a material that is appar ently difficult to handle. For both companies, focusing their pr oduction on such highend products is above all a strategy to survive the competition within their respective industries, thus reducing the scope of their competition. Java F ilm e xecutives of ten expr essed their inability to compete with Chinese and Indian plastic manufactur ers due to their scale. As one of them said, “ A lot of the big Indian and Chinese manufacturers that are our competitors, they have a lot of lines, lik e 15, 16 machines, big ones. But they sell very basic film, like plastic bags … . We don ’ t compete on that. We try to have our own niche mark et. So niche market means … price is stable, doesn ’ t fluctuate much. That ’ s the kind of market we want. ” The case is similar for Star Inc., which “ prefers ” to compete with a few of the established converting companies that also produce middle-high products instead of competing with a bunch of other companies, big and small, that still produce low-end products such as candy wrappers. With this, Star Inc. does not have to wor ry about the emer gence of many new, smaller converting plants, since they do not consider them as threatening competitors. When I talk ed to the executives in both companies, “ innovation ” seemed to be the buzzwor d. Because they played in the niche market, they told me, innovation and resear ch became their focus. Some executives would say that “ innovation is key, ” and their emphasis on pr oduct diversification, wher e they produce various specialty film (for Java Film) or pack aging materials (for Star Inc.), follows from this idea. Again, with the aim of reducing competition, a Java F ilm e xecutive ar gued that they had to “ mak e use of the technology and product development techniques ” they had at the time so that they did not have to face competition from the big plastic manufactur ers with giant plants. This notion was also entertained at Star Inc. One executive e xpr essed this in terms of being a leader in the converting industry : “ We used to be a follower, but now we want to be a leader . That ’ s why we must look for new innovations — new technology, the latest innovations, and top-of-the-line machinery . ” Some seemed more optimistic than others about this issue, but ther e was a consensus among the executives at the two companies that they wer e at least “ forced ” to be mor e “ technology -minded ” than other, similar companies because they were playing in the niche mark et. On the surface, this situation seems to correspond with the “ thriving of small fir ms ” idea that Bennett Har rison rejects: smaller -size firms lik e Java Film and Star Inc. could e xcel because they focus on the niche mark et center ed on technological development. 5 But once we dig deeper, things are not as they seem. As I elaborated further on the issue of technology and R & D, it became clear that the executives wer e awar e that they had limited autonomy and contr ol in technology, among other problems. Ther e are, of course, some kinds of “ innovative ” application of technology in both companies. At Star Inc., for example, they try to apply the most efficient printing techniques, which in general cr eate better results for their pr oducts. But the technology comes from mor e developed companies in the industries, often from cor e capitalist countries, and then lear ned and adopted by Star Inc. technicians. At Java Film, they try to e xcel, for e xample, in their choosing of perfect materials, including the use of better additives (materials that ar e not the main raw materials such as resin) that can incr ease the quality of their products. They also made small innovations, such as creating materials for window envelopes that do not requir e adhesives. But most of the time, for these two companies, what is consider ed innovation is often nothing mor e than meeting a customer ’ s need, namely finding a product mix that better suits the customer. For e xample, a pack aging product that is designated for liquid shampoo whose shelf life is five years is differ ent than a packaging product that is designated for a food product whose shelf life is only six months. In addition, they need to think about climate. What kind of material is suitable for storing goods in a humid Indonesian climate, or suitable for the climate of the countries they ship their goods to, in the case of exports? A t Star Inc., they of ten have to test a new material composition in or der to cor rectly cater to the specification given by a customer . Not long before the interviews, Star Inc. had to develop a packaging for cooking oil that would pass the “ drop test ” of two meters. They had to find the optimal composition for this pack aging, based on specifications given by the customer . For e xample, how many micr ons should be applied for the thickness? Or what is the ideal ratio of the raw materials, that is, how much nylon and how much low-density polyethylene should be used? These are common practices at Star Inc. The discussion is divided into thr ee sections. The first section examines how dominant multinational companies contr ol the technological knowledge in labor-value chains, depriving the dependent companies of their autonomy . The second section focuses on the issue of flexibility, especially in ter ms of the specific processes demanded by multinationals from their suppliers, and the thir d examines how such pr ocesses enable various for ms of contr ol over labor and the labor process. That issue aside, the studies of systemic rationalization and flexible production are particularly useful in placing the significant question of contr ol into the realm of commodity chains, bridging the abstract workings of the world capitalist economy and the concr ete processes that happen between firms as well as inside the firms (labor -management relations and the labor pr ocess). But ther e is a caveat. They are useful as long as we are able to reconte xtualize the issue within the frame of the workings of exploitation and capital accumulation under monopoly capitalism. Customers of ten do, however, ask for suggestions when it comes to cost reduction. Multinational customers ar e good at this. And sometimes this phenomenon is conflated with the idea of “ innovation, ” per haps influenced by the rhetoric of the customers themselves, in which they push their dependent suppliers to “ innovate ” to accommodate their need to cut costs. One common request fr om multinationals is for Java Film and Star Inc. to pr ovide materials that are as thin as possible that can still work for their specifications and do not reduce their quality by much. An e xample was given by a member of the Star Inc. mark eting team, who told me that a Europe-based multinational customer was “ very eager to ask us to innovate — what kinds of cost cutting can you give us? ” Every year, this customer invites Star Inc. repr esentatives to attend their innovation seminar . “ We have to come up with ideas, to contribute to the development of pr oduct specifications, either ones that are initiated by them or by us. [We have to tell the customer] oh, we have a new machine now, we can do this or that now . They suggest that we give them an update every three months. ” For the e xecutives of dependent suppliers whose companies lack contr ol of technology, sometimes this order to innovate is translated into an opportunity to lear n. What is important in their minds is that their companies have access to the know-how of multinationals and use it to their own advantage. It is common for multinational customers to ask Java Film and Star Inc. to reduce the thickness of their materials — such as by reducing the micr ons or the layers — in a quest for cost reduction, as illustrated in this e xample: [P rospective clients fr om a Eur ope-based multinational] told us to come and meet them. They said, “ We want to mak e this pack aging product. ” Let ’ s say, it used to be 12 micr ons [in thickness], now they wanted it to be 8 microns only. And then, they asked us to shar e, “ How much can you save? How much savings can you offer if you used such-and-such materials? ” It was to the point that they called the supplier of that 8-micr ons material to come meet us so that Star Inc. could buy from them. If then our factory pr oduces too much waste, they would tell us to come again. They demanded that we fix the problem … . But pack aging like that, ther e ’ s a lot of development surrounding it. That ’ s why, actually, one of the benefits of having multinationals as customers is that they always cr eate trends, they have innovations. And since we are alr eady their prefer red supplier, we will be the one who will be given the opportunity, befor e others, to [learn from them]. W e must grab this opportunity . This encouragement to innovate from customers lik e this often creates conflicts and misunderstanding within Java Film and Star Inc. management. When mark eting relays such a message to the R & D team, the for mer expects the latter to engage in gr oundbr eaking innovation. As expr essed by another executive at Star Inc.: “ This is wher e the mark eting team misunderstands. They demand that our R & D develop a material that is, say, better than that of our competitors. That ’ s difficult for us. We do not have the facility to manipulate materials. What we can do is mer ely changing one material with another — from another supplier, I mean. ” But even plastic manufactur ers like Java Film have very limited abilities to innovate gr oundbr eaking materials. They, too, just like Star Inc., are occupied by the demands given by their own customers, especially multinational ones. A Java Film e xecutive told me, “ [Multinationals] of ten request to us, ‘ Can you mak e this and that? ’ … Well, they have better technology, so what they alr eady know, we don ’ t, that ’ s why they give us a lot of requests. F or the local customers, it ’ s the other way ar ound … we can say to them, ‘ Why don ’ t we change it this way, isn ’ t it better? ’ ” Multinationals may well be a role model for dependent suppliers who can only wish they could achieve such status, especially in terms of resear ch and development. Even when people from the R & D or pr oduction departments are willing to engage in efforts to contribute to meaningful innovations, their attempts are often halted by executives fr om other departments, especially those who focus on the fle xibility of the company, such as those from the mark eting or finance departments. As a Star Inc. executive said, it is actually possible to mak e an effort, “ but the problem is, are we willing to spend the money? Resear ch needs funding … . If we look at multinationals, they always have a budget for their R & D, and it ’ s huge. ” Another Star Inc. executive concludes that at least for a while his company “ would still be a follower, ” because the technology they have, “ it all came fr om outside! ” The best thing they can do, accor ding to another Star Inc. executive, is to copy this technology : “ The knowledge is there, it ’ s being shar ed. You cannot say that you can build your own without the help of the U.S. or [Eur ope], because basically they are everywher e now. They can develop the technology, but you can buy this technology . This is what China has been doing. They developed it, China copied it … . So it ’ s up to us to grab those resour ces and make use of them. ” Such a cheery tone, however, hides an important concer n by many of the executives, a fear that they ar e really dependent on the dominant companies that feed them. Although not everyone shar ed this feeling, a certain term was well known among the executives I interviewed: seamstress . Conversations going on among them expr essed the fear that they wer e mer ely tailoring in accor dance with specifications given by their customers without having any significant agency or autonomy . The relationship between them and their multinational customers, in particular, is clearly not equal. This was e xpr essed succinctly by a Star Inc. executive: “ The way I see it, as a converting company, when we deal with multinationals, it feels that we ’ re just a seamstr ess. That ’ s what we are. ” In Indonesian, the wor d “ seamstr ess ” ( tukang jahit ) denotes a person who accepts various orders from people at his or her house or little shop. Unlik e a distinguished skilled tailor, a seamstr ess often accepts menial jobs such as fixing pants that ar e too big, sewing buttons to a shirt, etc. This is how they see themselves as companies. They must accept or ders from powerful customers who dictate to them what to do in the pr ocess. All the examples above illustrate the fate of dependent companies. As downstr eam suppliers of dominant companies, they do not have the capacity to engage in meaningful innovations that can allow them to catch up in the intricate web of labor-value chains. The knowledge, the know-how, is tightly contr olled by dominant companies through various means, including steering the way resear ch and development is done within dependent firms. The dr eam of Java Film and Star Inc. to become leaders may well remain a dr eam. The technology they have is mostly technology given to them by their customers — the intr oduction to new materials for certain product specifications; the application of certain processes in accor dance with customers ’ needs; the manipulation of product mix es to accommodate cost-r eduction imperatives of their customers; and so on. Core multinational companies — with their top-notch facilities and firsthand access to innovative technologies in their first-world headquarters — are most lik ely to remain at the top of the hierar chies. Their “ global reach, ” bor rowing the ter m used by radical scholars Richar d Barnet and Ronald M ü ller, enables them to also contr ol where their technological knowledge goes and how it should be applied. 6 As expr essed by a Star Inc. executive: “ Multinationals usually ar e ahead in ter ms of technology because they are worldwide in scope. What the world is doing, they would be the first at the scene to understand it, compar ed to [us] local companies. That ’ s the difference. Their technology is much advanced. But that forces us to keep impr oving our own technology, our R & D. ” The problem is, as implied above, such efforts by dependent suppliers to impr ove their technological knowledge or autonomy is often aborted by the constant demands of multinational customers to do things in ways that cater to, and only to, their needs. Systemic rationalization has allowed dominant companies to transfer their responsibilities in most aspects of pr oduction to their dependent suppliers. In ter ms of technology, the imperative to cut costs is given to their suppliers thr ough various requests. But as we shall see below, technology is not the only means by which dominant companies try to sustain and enhance control in labor-value chains. Fle xible production has given birth to myriad “ rational mechanisms ” that systematically allow dominant companies to gover n these chains. These companies are not mer ely a seamstr ess in the sense of their lack of control of technology, but also in other areas. D EMANDED F LEXIBILITY Indonesia: Where Production Happens and the Market Is Targeted In some cases, the tar geted mark et is the one in which production occurs. Nik e, for example, not only relocated pr oduction to China, but it also took advantage of the mark et potential of the most populated country in the world. As Walter LaF eber writes: “ For if cheap labor pr ovided lar ge profit mar gins, 1.5 billion Chinese consumers could provide net profits beyond imagination. ” 9 Indonesia, the fourth most populated country, with mor e than 260 million people and growing, is another case of this. Not only is its workfor ce targeted, but thr ough their subsidiaries in Indonesia, multinationals compete against each other to captur e this targeted mark et. Expressed through the views of Java Film and Star Inc. e xecutives based on the or ders that came from customers, the mark et outlook seems good for the flexible pack aging business. Many of my interviewees cited a high growth in pack aged goods consumption in Indonesia as a reason for the booming of their cur rent business and their optimism for the near futur e. One Java Film e xecutive who holds a high position in the management hierar chy expr essed this clearly . Citing information gained from a Eur ope-based giant multinational client with hundr eds of brands around the world, he said: “ I think, you know, this country [Indonesia] is booming. At a ridiculous rate. FMCG gr owth, [our multinational customer] told me, it ’ s 30 per cent year to year . From the past thr ee years to the next ten years, it ’ s crazy you know, 30 per cent. ” The same interviewee also cited the incr eased capacity of their top local conglomerate customer as a positive indicator that business is doing well. When I later interviewed management executives of Star Inc. in 2015, the mark et story was not quite as optimistic, with some personnel citing a slowdown in demand in the Indonesian market in the last six months. Accor ding to them, it was a strange anomaly, and it had happened across industries, including automobile, textile, and FMCG industries — a patter n that affected their customers as well. 10 One executive ar gued that it was lar gely influenced by the devaluation of the Indonesian rupiah. What they did not cite was that Indonesia ’ s economic growth as a whole, as documented in an OECD report that year, had in fact “ moderated in recent years, reflecting weak er international demand and slow investment growth. ” 11 Most important, average wage growth “ has been slow, ” as an Asian Development Bank review showed in 2016, “ rising at less than 2 percent a year in real ter ms over the last five years. ” 12 Not to mention the annual per capita income of mer ely US$9,300 in purchasing power parity terms, and a rising Gini coefficient (a measur e of inequality, of income, for example) in the last decade. 13 But this bad news on the macr o level did not seem to significantly affect Star Inc. The factors that influence it may vary, including a big strike that occur red at their main competitor ’ s plant, for cing those customers to go to Star Inc. instead. Or, as one executive who knows the company ’ s financial situation well stated, Star Inc. is “ not widely affected ” by slowdowns because of their customers ’ pr ofiles: “ Our top twenty customers are at the top in their business. These customers, most of their pr oducts are the top brands in Indonesia. ” Although it is not clear if the same characteristics can be applied to Java Film, the fact that some of the company ’ s major customers ar e cigar ette companies — local and multinational companies that cater to both local and foreign mark ets, including one of the biggest players in the industry, a leading U.S.-based cigarette company, which in the last decade or so has acquir ed one of the major Indonesian cigarette companies — means that a small slowdown in growth in other products can be offset by relatively stable demand for cigar ettes, accor ding to one Java Film e xecutive who constantly monitors the P ur chasing Managers Inde x. This faith in the promising patter n of FMCG growth rate was also cited as the reason for the two companies ’ expansion. During my interviews, while Java Film was adding a pr oduction line in their factory, Star Inc. was building an additional factory comple x. As expr essed by another Java Film e xecutive: “ Why do we e xpand? Because ther e are needs to do so . Of course, befor e the expansion, our mark eting team resear ched it. They saw that the converting industry, the packaged food industry — their growth has never slowed down. Just look at [a top local customer], we can monitor them. Every time they added their machines, we knew . [These big customers] alone have taken a lot of our [production] capacity … . If their capacity incr eased, of course we need to increase ours as well. ” Java Film is not the only fir m within the commodity chain that studies its mark et. What is more inter esting is how the dominant companies at the end of the chains, such as multinationals, study targeted mark ets like Indonesia. Companies that sell daily car e products such as soap or shampoo, for example, or that sell food such as coffee or snacks, adjust the size and pack aging of their products in accor dance to market prefer ences. This knowledge seems to be well known across management teams at Star Inc. They told me that a large segment of Indonesian consumers show a patter n of “ unique ” behaviors. One particular characteristic is that their lower purchasing power leads to buying in small quantities. As a Star Inc. executive puts it: Indonesia is still relatively poor . So, in the advanced countries, it is probably difficult to find shampoo pack aged in small sachet bags. You cannot buy one sachet of shampoo, or a sachet of seasoning for cooking. They prefer buying in bottles, which are actually cheaper [considering what you get for the price]. I can use the whole bottle of shampoo for a month. But her e, buying in bottles is often consider ed too expensive. So they buy only one sachet. It is actually in the end mor e expensive, but since they have limited amount of money to spend, they can only buy it that way . Who is benefitting from this behavior? W ell, indir ectly, pack aging suppliers like us. Whether or not the success of these kinds of small pack aging in Indonesia is indeed caused by the socioeconomic status of Indonesian consumers, the above quote implies that this kind of flexibility in product design was sought after by dominant companies because selling pr oducts in small pack ages is deemed more profitable (at the expense of customers). So, at the end of the day, such buying behaviors ar e indeed beneficial for suppliers lik e Star Inc., which experience an incr ease in orders from dominant companies that compete to captur e a market with such distinctive characteristics. As a result, not only do dominant companies pr oduce hundr eds of brands but varieties within the same brand. In Indonesia, you can have many types of SKU (Stock Keeping Unit) of, say, a particular anti-dandruff shampoo brand. The bottles will be mostly sold in the gr ocery stor es, but the sachets will be sold in warung , tiny stores in the neighbor hoods that sell everything from salt and sugar to daily car e products. The question is how this “ good for business ” strategy is actually implemented in labor-value chains, and what the consequences ar e for companies lik e Star Inc. to be the executor of such pr oduction processes. Systemic rationalization enables dominant companies to shif t the dynamic demands of the mark ets “ in a flexible manner and within incr easingly tighter schedules to the dependent companies and segments of the production chain. ” 14 In other wor ds, the responsibility to engage in such fle xible processes is transfer red to the suppliers, namely the dependent companies in the Global South, lik e Java Film or Star Inc. 15 As we will see later in this chapter, not only does such rationalization affect the or ganization of work within dependent fir ms — including pr oblems created by a “ fle xible appr oach ” in production processes — but it also affects the labor process that is embedded in this organization of work. “ We Offer Higher Flexibility ” : What Dependent Suppliers Must Do to Survive One of the main selling points of Java Film is that they always aim to pr ovide quality products and excellent service to meet customers ’ needs. They call this “ mark et oriented. ” The idea of being “ market oriented ” has aspects of flexible production, including the company ’ s willingness to engage in “ fle xible appr oaches ” in dealing with customers ’ demands. At Star Inc. fle xibility is even mor e pronounced. It is indeed one of their main selling points. All of the Star Inc. executives I interviewed wer e fully rehearsed in this understanding, and the idea of fle xibility seemed to gover n their organization of work as a whole. Sometimes, ther e is room for suggestions, wher e Java Film and Star Inc. ’ s R & D departments would suggest several pr oduct developments to their customers. One inter esting example is the use of oxo -biodegradable materials. Java Film was able to adopt this technology fr om outside and then suggested it to some multinational customers that pr oduced pack aged snacks such as potato chips with packaging that was not biodegradable. The customers refused the suggestion, citing that the price was too high, as well as the lack of guarantee of safe storage practices. As told by a Java F ilm e xecutive: “ Customers don ’ t want to pay a higher price for that one. And then the storage condition. Indonesia is quite differ ent. Direct exposur e to sunlight. When you have a biodegradable film, it will deteriorate after some [e xposur e] to sunlight and oxygen. So it ’ s difficult, since the supply -chain management in Indonesia is still chaotic. ” What needs to be noted here is that flexibility seems to be a strategy undertak en by Java Film and Star Inc. to survive amid competition fr om other converting companies in Indonesia and those located in neighboring countries. Sometimes the competition is about who can offer lower prices, especially from other countries, but companies lik e Star Inc. seem to wor ry mor e about competing with strong competitors on the national level, because these domestic competitors target the same big customers. Especially with their claimed focus on playing within the niche mark et by producing high-end products, Star Inc. wor ries mor e about the competitors in the same league that can offer good- quality products. One of them is an established multinational in the converting industry, Sun Printing (a pseudonym). Once a role model to follow, Sun P rinting has now become mor e of a rival of almost equal quality, accor ding to Star Inc. executives. In the converting industry, it is a common practice that fle xible pack aging companies like Star Inc. do not serve as single suppliers to their customers. Customers prefer having multiple suppliers, in particular for safety reasons, in case one of their suppliers cannot deliver a shipment on time. But competition among dependent suppliers is still pr esent and alive, especially in ter ms of being able to tak e the lion ’ s shar e of customers ’ orders. Sun Printing is well known for its e xceptional quality, but they ar e also infamous among their customers, accor ding to the Star Inc. executives, for their rigidity . Due to their established system of production, Sun Printing requir es all customers to follow their rules. For e xample, ther e is no exception to the delivery time; everything has to be done in accor dance to their Standar d Operating Procedur e (SOP). The Star Inc. executives I interviewed seemed to agr ee on one thing: Sun Printing could survive with such a rigid system because they ar e a big multinational that alr eady has bargaining power and a strong base of customers, many of whom are from the same country in which this company is based. Star Inc. would not be able to experience the same fate, accor ding to its executives, even when the quality of their pr oducts are up to par with that of Sun Printing. Star Inc. has no choice other than to offer fle xibility . As voiced by one executive: “ [Fle xibility] cannot be eliminated. I don ’ t think so. If we want to grow big, considering the scale that we ’ re in now, we do need to sell fle xibility . That ’ s a challenge. ” Another executive emphasized the competition aspect: “ W e ar e trying to be a ‘ strategic supplier, ’ one who can be relied on by our customers. Fle xibility leads us to opportunities, so that what can ’ t be gained by our competitors can be our gain … . Whatever our competitors cannot supply due to unr easonable time constraints, we must be able to take over . ” Similar reasons wer e given by the executives at Java Film. One of their biggest national competitors, Techno Plastic (a pseudonym), is not as fle xible as they are. If customers ask for a rush delivery, or faster than what was originally agr eed upon, Java Film is willing to accommodate it. “ W e ar e mark et-oriented, ” said one of the executives. “ W e ar e fle xible in meeting our customers ’ needs. Meaning, if they want us to deliver the product faster, we can do that, as long as they infor m us in advance. Techno Plastic, not so much. Because to accommodate such changes, the machine settings need to be reset, and they ’ re not willing to do that. At Java Film, we can manage such a thing. That ’ s why we ’ re gr eat. Or so I hear d. ” Flexibility is one of the major characteristics in today ’ s labor -value chains. And one for m of flexibility, as Har rison points out, is functional flexibility, wher e dominant companies within the chains adopt new technologies and other means that allow them to engage in rapid product design or changes in the instruments of production. 7 This “ necessity ” to engage in fle xible production is often driven by the “ fluctuating and changing ” demands of the mark et. 8 In the conte xt of monopoly capitalism, such demands drive oligopolistic dominant companies, such as Europe- or U.S.- based multinationals, to compete against each other in product innovations and mark eting strategies aimed at capturing increased mark et share. Flexibility can mean several things for these companies, but some of its common aspects include the ability to deliver on demands and to anticipate a certain amount of incr ease or decr ease in shipping, as well as a willingness to accept rush orders. A Star Inc. executive who of ten deals dir ectly with customers told me: “ For e xample, the regular lead time is 30 days. So, af ter we receive our pur chasing order, say, today, we will deliver the goods 30 days from now . But for certain cases, we can help mak e it faster, less than 30 days. ” This often means that the pr oduction team needs to halt whatever projects they are doing and change the settings on some of their machines to accommodate the new or der . After this rush or der is done, they need to go back and continue the disrupted process. (All of these aspects will be discussed in the ne xt subsection.) What is inter esting is that, even though both kinds of customers are consider ed high-class, the way business is done with the privileged local customers is not the same as with the multinationals. This is where the characteristics of labor -value chains can be seen clearly . While giant local customers may have more leeway, say, in getting a rush order done due to their owners ’ personal connection to the bosses at Java Film or Star Inc., or solely because they have established a good relationship with the company due to their stable flows of repeat or ders, the way multinationals exert contr ol and push for flexibility are done thr ough systemic rationalization. In this conte xt, the power relations ar e clearly unequal — the pr ocesses involved in systemic rationalization are reflected thr ough the ability of multinationals to exert contr ol over their dependent suppliers. And hardly any executives e xpr essed eager ness in dealing with multinationals. On the contrary, many of the interviewees expr essed their prefer ence to deal with local customers instead of multinationals. The question is, then, what is the most irresistible benefit of having multinationals as customers? That is, other than big volumes, which some e xecutives cited as one of the main reasons why multinationals ar e consider ed desirable customers. One answer is, of course, that the more high-class customers you get, the better . But behind this obvious reason is another, mor e subtle, factor : multinationals, according to these executives, ar e an important sour ce of some kind of a “ guarantee seal. ” Once you can gain the trust of a (giant) multinational company with worldwide operations and engage in business with them, you will gain a name in the industry . A Java Film e xecutive called this “ brand equity . ” “ Let ’ s say I supply to this customer A, which is a well-known [multinational]. W e can tak e that as brand equity . Then we can use it as a refer ral: we have supplied to customer A. ” Another Java Film e xecutive gave a specific e xample about how difficult it was to win the heart of a leading U.S.-based cigar ette multinational company in an effort to be their supplier, an effort that was worth it in the end since the multinational had since become their regular customer : “ It was not easy to get them. Tests, trials, all of that, almost two years. But once we got in, [we ’ re set], because they do not easily change their supplier … . I hear d from people at the mark eting department that if our film is bad, [their production] would automatically be [disrupted]. I hear d that [their machines] could wrap 600 packs of cigar ettes in one minute. It means 10 packs in one second. Can you imagine the speed? If our film is bad, I ’ m sure all those cigar ettes would become waste. ” The point here is that the cigar ette multinational company would not risk changing their supplier if they were not sure about the quality of the film, along with its technical compatibility with their machines. These executives took the benefit of having multinational customers seriously, believing that they had helped boost their companies ’ business, especially in eliminating competitors and gaining stability in incoming orders. This view was expr essed clearly by a Star Inc. executive, who also stated that the top twenty customers of Star Inc. ar e “ pr obably the mark et leaders in their field ” : So, like last month, when we had a meeting with our creditors, I ask ed, “ How are our competitors doing, and how do you compar e us with our competitors, considering the economy slowdowns and the depreciation of the USD? ” And they said, “ You ar e differ ent. We cannot compar e you with your competitors. ” I asked, “ Why? ” “ It ’ s because of your customers ’ profiles. ” So, if you see [Eur ope-based giant multinationals], even though we have a slowdown, they continue doing their expansion. They have a budget of mor e than 8 trillion rupiah [appr oximately US$600 million] for 2010 – 15, and they haven ’ t stopped doing this e xpansion. They have several factories in differ ent areas in Indonesia, and [this multinational] is the number one customer of Star Inc. This strategy to open opportunities, however, is not applicable to every single customer . I later learned that the mor e “ high-class ” the customer is, the more flexible these companies can be. Ther e is a consensus among executives, both at Java Film and at Star Inc., that “ high-class ” customers consist of basically two gr oups: (1) big local conglomerates who are leaders in their mark ets, and (2) multinational companies. Each group has its own benefits for these companies — the for mer may be higher in numbers than the latter, but multinationals give orders in big volumes. In addition, the owners of some companies that belong to the first gr oup are friends with the owners of Java Film and Star Inc., and that automatically gives them some privileges. But in one way or another, these two gr oups are consider ed high-class because they offer these factors: high profit mar gins and stable volumes. This prestige, however, comes with a high price, payment of which can be seen thr ough various demands that Java Film and Star Inc. must meet in or der to please their big multinational customers. Some executives claiming, “ to be honest, ” they would otherwise pr efer local customers because often their price is actually better . This is partly influenced by a form of bur eaucratic contr ol exer cised in systemic rationalization pr ocesses called open- cost systems. It is common for multinationals to demand that their potential suppliers reveal their cost structur e, often as a requir ement for participating in a bid for orders. This enables multinationals to have access to the detailed structur e of their potential suppliers ’ costs (including material costs, labor costs, compression costs, and expected pr ofit). Sometimes advertised as a practice that can reinfor ce a clean and transpar ent business, this system allows multinationals to evaluate the costs according to their own price benchmark and control their suppliers ’ costs to reduce their own. 16 It is also not uncommon for multinationals to apply an international benchmark for the price, as stated by one Java Film e xecutive: “ Mostly a multinational would squeeze your price until the end. Because they have the bar gaining power, you know . They have [the information on] global purchasing and procur ement, so they know which areas give them the best [price]. With that, they then know how to apply a benchmark … . So they will use the [lower] Indian price as a benchmark to get the [higher] Indonesian quality, for instance, or Chinese price to get our service. ” This can create challenges for the two companies, especially when they ar e pitted against competitors from the neighboring countries that can offer a much lower price. Even competition within the niche mark et itself can still be alarming at times. For Java Film, Thai plastic manufactur ers are tough competitors, while for Star Inc., it is the Malaysian companies: “ Many of my customers import from Malaysia. And their price is indeed good. I don ’ t know how they do it, to be honest. Their price doesn ’ t even cover our total cost! ” Even the suppliers ’ pr ofit mar gins are contr olled. As a Star Inc. executive reveals, “ So [these multinationals] just say, ‘ OK, your over head costs should be this much, X percent. And this X percent should already contain your profit. ’ Yes, they can even go that far! … W e can ’ t fool them, saying, oh this material, for example, costs 20 cents, while it ’ s actually 10. They would tell us to change our cost structur e. How do they know? They compare it to the other suppliers ’ costs. That ’ s how cunning they are! ” As another Star Inc. executive puts it, “ If they only gave you a 20 per cent mar gin, well, that ’ s how much you get: 20 percent. ” If multinationals feel like some costs, say, raw material costs, in the list are too high, they will, in the wor ds of yet another Star Inc. executive, “ help their suppliers impr ove ” by suggesting “ how to reduce our material costs. ” This may include technical suggestions about how to reduce waste, or suggestions about wher e to buy the materials, a suggestion that is often difficult to follow because Star Inc. alr eady has regular suppliers. Ther e are also times when the kind of contr ol exerted by multinationals is reduced to its simplest for m. Highlighting the unequal bar gaining power between them, a Star Inc. executive who deals a lot with customers e xplains how local subsidiaries of big multinationals of ten offer business opportunities accompanied by thr eats: They always threaten us, “ Can you help us or not? If you can ’ t [fulfill these demands], we ’ ll go to someone else. And once we ’ ve done it, don ’ t you dar e beg us for orders! ” I ’ ve been treated that way by them. Another time, they told me to come and challenged me, “ You want this or der? Two weeks completion — can you do that? ” I said, “ W e can ’ t, Ma ’ am. ” She was furious, saying, “ I gave you the opportunity and you refused! ” … W ell, that ’ s multinational for ya. If you tak e their offer, that ’ s it, you have to serve them till death, and sacrifice your other customers … . All their demands, we have to meet them. They act as if they ’ re kings! When I ask ed a Java Film e xecutive who also e xpr essed her concer n about the pressur e to succumb to their multinational customers ’ demands why their company continued to succumb, she responded with a laugh, followed by a short answer : “ Because the big fish always eats the small ones. ” On many occasions, this feast is hidden behind a series of demands and rationalization processes that dependent suppliers lik e Star Inc. comply with in order to survive the competition on the “ small fish ” level. The following further elaborates on these contr ol mechanisms within labor-value chains. Just-in- Time Delivery and Other Problems In chapter 3 , I addressed several means by which dominant firms contr ol the dependent ones, including their suppliers, made possible by development in information technologies. Among them are delivery on demand systems, which is often refer red to as the JIT (just-in-time) delivery system. Systemic rationalization pr ocesses also enable dominant companies to demand other aspects of fle xible production, especially in ter ms of functional flexibility, including incr eased speed in the completion of purchase orders, an ability to accommodate rapid changes in pr oduct designs and varieties, and other aspects. Although both local and multinational customers can demand these things from Java Film and Star Inc., e xamples given by their executives when it comes to this subject revolve ar ound their multinational customers. Given their emphasis on the importance of multinationals for their business and their pr estige, it is possible that they are mor e willing to accept such demands from their multinational customers. But the mor e probable reason is that, unlik e the more traditional relationship between these companies with their local customers, their relationships with multinational customers ar e mor e regulated thr ough systemic rationalization, wher e practices like JIT delivery are integral to their business pr ocesses. Sometimes this understanding is expr essed in simpler terms, wher e many executives see multinationals as “ very demanding ” customers, if compar ed to their local counterparts. And the demand for flexible delivery tak es a large shar e of their concer n. Delivery on demand systems are one of the cor e practices in lean production, and it is often associated with the Japanese management mantra, kaizen , which can roughly be translated as “ continuous impr ovement. ” The JIT system was originally developed by the Toyota Motor Company, and thus is of ten refer red to as the T oyota P roduction System. A ccor ding to Japanese management guru Masaaki Imai — who popularized the term kaizen in management and wrote two books on the subject, Kaizen and Gemba Kaizen , as well as founding the K aizen Institute — JIT is “ a system designed to achieve the best possible quality, cost, and delivery of products and services by eliminating all kinds of muda [waste; non- value-adding activities] in a company ’ s inter nal processes and deliver products just-in-time to meet customers ’ requir ements. ” Further, Imai states, JIT aims to achieve a “ lean pr oduction system fle xible enough to accommodate fluctuations in customer needs … . JIT dramatically reduces cost, delivers the pr oduct in time, and greatly enhances company profits. ” 17 Putting it another way, JIT is how dominant companies put pr essur e on and transfer responsibility to dependent companies thr ough a series of delivery demands. As the online Investopedia blatantly states, it is an inventory strategy that “ companies employ to incr ease efficiency and decr ease waste by receiving goods only as they ar e needed in the pr oduction process, ther eby reducing inventory costs. This method requir es producers to for ecast demand accurately . ” This often means that dependent suppliers must deal with inventory pr oblems, often resulting fr om missed for ecasts, which their multinational customers try to avoid by implementing the JIT system. From the viewpoint of systemic rationalization theories, systems such as JIT “ impact the working situations in upstr eam and downstr eam companies. In these areas hectic everyday manufacturing operations offer neither scope nor capacity to deal with such additional demands. In many instances this results in a considerable intensification of work and a concur rent e xtension of working hours. ” 18 But the problems created by the JIT delivery system ar e not always created by missed for ecasts. Sometimes, delivery on demand is done solely to help dominant companies save inventory costs. Another Java Film e xecutive e xplained that they had to accommodate customers ’ demand of fle xible delivery because many companies had alr eady adopted this system to “ save as much inventory cost as possible. ” He continued: “ So, some customers would say, ‘ OK, I ’ ll order 200 tons from you, but I need you to ship it to me every other day . ’ We try to meet such needs. ” The request is not always that simple, however, and Star Inc. knows this very well. Of ten the JIT system is set to transfer responsibilities of dealing with the consequence of missed for ecasts to dependent companies. The issues include how the management of Star Inc. has to deal with the “ buffering ” problem. Due to the delivery on demand procedur e, suppliers like Star Inc. must implement a buffering policy, which means it is imperative that they get their finished goods ready and stor e them in their warehouses, to be sent only when their customers need them. Not only do these goods have to be shipped whenever the customers demand them, but the supplier also must be ready to accommodate any sudden incr ease or decr ease in product demands missed in the customer ’ s initial for ecast. At Star Inc., they cr eated a policy to accommodate up to 20 per cent incr ease or decr ease of their top customers ’ needs. As told by a Star Inc. executive who was involved in pr oduction planning: OK, for example, we have these two big [Eur ope-based] multinational customers. One of them put in a big order for the pack aging of this seasoning brand [let ’ s call it B]. When I first joined the company, there were pressing issues — they said that the customer was scr eaming at us so many times, and that we wer e struggling with the time requir ements needed to send B. Once, the customer made a mistak e in their planning and finally came to us for help, and we helped them by shipping the goods on a Sunday! I was told that they at least appreciated it. Our mark eting team always reminds us that “ we have agr eed that we need to buffer up to 20 per cent. ” But the order for B is humongous. The amount needed to supply B in a month is almost equivalent to one war ehouse. On the one hand, [it ’ s a problem to anticipate a 20 per cent incr ease] by storing all of the goods ther e. It ’ s impossible. But on the other hand, we also must be ready to anticipate a decr ease by 20 percent out of what they promised us to tak e in the following month. It ’ s like that. Storing the finished goods is not the only problem created by the JIT pr ocedur e. Flexibility in delivery and the responsibility to anticipate missed for ecasts also affect the other end of production: planning for the pur chase and storing of raw materials. As a Star Inc. executive who deals with suppliers for their materials explains, the readjustments of delivery have a significant impact on the situation at the pur chasing end: For ecasts can also miss. Even after the pur chasing order was finalized. For e xample, a customer had a thr ee- month pur chasing order, 10,000 [rolls] in September, 20,000 in October, 30,000 in November . The planning department has calculated, right? And we have received that calculation. But in the pr ocess, the customer can say, “ Oh, our war ehouse is full for September, ” and they only want to receive 8,000. It means that we have a surplus of 2,000 rolls. The planning department will forwar d this info to [the purchasing department]. And we need to readjust. Or say in September the customer asks us to deliver 15,000 instead of 10,000. W e need to readjust as well. That ’ s how we work. But sometimes the materials we pur chase are alr eady on their way . If they are imported, we cannot cancel … . Or [for domestic suppliers], even after we tried to be adamant about postponing the shipping, they ar e not willing to do it. Lik e it or not, our storage will have to accommodate them. Precisely because multinationals ar e awar e of the prestige gained by their suppliers when working with them, they play the game well. They know that many will “ line up ” to get orders from them. On the contrary, suppliers lik e Java Film and Star Inc. have to abide by an unwritten rule that they cannot work with oligopolistic multinationals that are the competitors of their (also) oligopolistic multinational customers. One of Star Inc. customers is one such multinational. During my visit, this customer ’ s toughest competitor, another multinational that was also a mark et leader, started to “ knock on their door ” for a business deal. But Star Inc. was hesitant to accept the offer, claiming that they “ had to be careful ” about it, since they fear ed the wrath of their current customer, whose shar e in their production output was too big to risk. This issue also shows that companies lik e Star Inc. not only deal with their customers, but also with their suppliers. But unlik e multinationals who can exert pr essur e on and make unreasonable demands of their suppliers, dependent companies cannot do the same thing to the upstr eam companies that supply their materials. To an e xtent, Star Inc. ’ s notable gr owth has gained them some status in front of their material suppliers, but it is not comparable to that of multinationals who ar e their customers. Constrained by various factors such as limited availability of certain materials and the domestic monopoly of certain industries that pr oduce the needed materials, Star Inc. is quite powerless. Mor eover, unlik e the multinational customers who can demand flexibility from Star Inc., the U.S.-based multinationals that become Star Inc. ’ s suppliers ar e often infle xible in their business. Per haps, accor ding to the same executive quoted above, “ because their bur eaucracy is already so structur ed and organized. ” If ther e are options available, Star Inc. prefers to buy their imported materials from other companies, lik e South Kor ean suppliers. But mor e often than not, ther e are no other options. In general, both Java Film and Star Inc. e xecutives, especially those who deal dir ectly with production and planning, prefer mor e limited forms of flexibility, precisely because they create pr oblems, and are often at odds with the pr oduction goals of incr eased productivity and efficiency, including the decr ease in waste. 19 In a 1992 article about systemic rationalization, Dieter Sauer and his colleagues argue, “ The ‘ new type of rationalization ’ pursues contradictory goals: the incr ease of flexibility in company administration and manufacturing processes in order to better fulfill constantly changing mark et requir ements with respect to quality and quantity, and the achievement of a mor e cost-effective production system under conditions of fier cer competition. ” 20 In a sense, then, flexible production provides contradictory processes for these two companies. On the one hand, they have to offer fle xibility to meet the “ needs ” of their customers and to get ahead of their competitors, which will result in gr eater profit. On the other hand, the imperative of capital accumulation for ces them as firms to incr ease productivity and efficiency thr ough cost-r eduction strategies and other means. Flexible production, however, often results in inefficient and wasteful pr oduction. Let us e xamine this contradiction first. Both Java Film and Star Inc. have limited capacities in their pr oduction, and they have to work with this limitation to accommodate a variety of products order ed by their customers. When they offer flexibility to their customers, these varieties become mor e comple x and create challenges for pr oduction. People fr om the pr oduction and planning department would say that they prefer “ long-run ” orders, for which they can run one article in their machines for a long time, without inter ruption, until the order is finished. This requir es only one-time preparation, wher e they set the machines, and so on, at the beginning of each process. This kind of production process would enable production teams to easily ensur e higher efficiencies and the reduction of waste. But such an ideal pr ocess is difficult to achieve. Due to the functional fle xibility demanded by their customers, they often must inter rupt production processes to fulfill rush orders due to fluctuating mark et demands that their customers aim to meet. One of the simplest examples of this pr oblem was explained by a Java Film e xecutive, who claimed that long- run or ders are har d to come by because many customers demand just-in-time delivery . When a customer demands Java Film to ship pr oducts only twice a week, they have to divide the production several times into smaller orders, even though the pr oduct was order ed in a large quantity . Otherwise, they would not be able to use the machines for other orders from other customers. This cr eates pr oblems because it requir es the production department to engage in multiple programming changes for their machines, among others, which is bad for efficiency and risks the incr ease of waste. Sometimes the Java Film sales department can sell the wasted film for a cheaper price to other companies, but that alone does not serve as a sufficient remedy for the waste issue. This practice illustrates what P aul Baran and Paul Sweezy call the “ interpenetration of the sales effort and pr oduction process. ” They note that sales efforts such as product variations no longer serve as a mer e addition to production under monopoly capitalism; instead, these sales efforts now reach back into the pr ocess of production. They “ incr easingly invade factory and shop, dictating what is to be produced accor ding to criteria laid down by the sales department and its consultants and advisers in the advertising industries. ” This interpenetration has made the two processes (sales efforts and production) so indistinguishable that it causes a “ profound change in what constitutes socially necessary cost of production as well as in the natur e of the social product itself . ” 21 For the supplier who actually mak es the products, the product variations strategy requir es a high degree of flexibility . Multinational customers that deploy such a strategy can demand flexible production depending on what is highly demanded in the mark et. So, rather than sticking with what was agreed in the SOP and expr essed in their pur chase order, this customer can change the order in the middle of pr oduction. If the customer sees that the Spider man packaging sells more dearly one month, they would ask Star Inc. to send only the Spider man the following month, regar dless of what the original order was. Or, in the case of brand B, as explained by the executive, “ If all of a sudden, say, because of certain pr omotional periods, this customer would suddenly change plans: ‘ This week I need you to send me the 20 grams one instead of the 7 grams one. ’ If you ’ re a rigid supplier, you would definitely say no, because it would disrupt the whole pr oduction process … . They have to reprint stuff, everything. Most converting companies would refuse to do this, because it would cr eate inefficiencies and plenty of waste. ” Though this executive claimed that Star Inc. started to try limiting these kinds of or ders, they still could not get away from it. And this got on their collective nerves, as management had to face conflicts every time. W eekly meetings become inter -departmental “ battlegr ounds, ” where differ ent teams would argue back and forth about which orders needed to be prioritized, and which orders could be postponed, and how much disruption could be tolerated on the shop floor . While the mark eting department would push for flexibility to get mor e orders from their top customers, those in pr oduction and other departments would try to resist this tr end because their efficiencies would suffer . At the same time, both fle xibility and efficiencies are demanded by the company ’ s owners. The same executive quoted above e xpr essed this concer n: “ We have yet to for mulate good management policies on how to do this … . Now, everything seems vague. Production teams would say, ‘ W e ’ ve told you that we ar e pr essur ed to reduce the variant waste by such-and-such amount! ’ But the other party [mark eting teams] faces pressur es to increase [sales]. So what would you do? ” From what I gather ed from my interviews, the winner seemed to be fle xibility . As a member of the production team told me, “ We sometimes have to mak e sacrifices, meaning, we allow the waste to be high, because we have to cut the ongoing production of a certain product in order to fit in a differ ent product. ” The important question now becomes: who bears the bur den of such a contradiction in systemic rationalization processes? Sur ely the executives I interviewed had to deal with the customers and all the chaotic consequences of their demands for fle xibility, but in the end, the ones who deal dir ectly with production are the dir ect producers of the commodities these companies mak e: work ers. In the next section, I will examine how the mechanisms described above influence the or ganization of work that creates contr ol over the labor process. M ANAGEMENT AND C ONTROL OVER THE L ABOR P ROCES S Another example was pr ovided by a Star Inc. executive. Multinationals, accor ding to my interviewees, often engage in a pr oduct variation strategy in an effort to captur e the dynamic (both domestic and export) mark et demands and defeat their competitors (other big multinationals). This is where they create several types (or SK Us) of pack ages for a certain product. Sometimes the SK Us are in the for m of differ ent designs. For e xample, a juice drink brand mark eted for kids has a few variations of packaging with cartoon characters: Spider man, Elsa from the Disney movie Frozen , Belle from Beauty and the Beast , etc. But mor e often, the pr oduct is also pack ed in differ ent sizes, each with its own design variations. Let us go back to pr oduct B, a seasoning brand owned by a Eur opean multinational that is one of the main pack aging customers of Star Inc. This seasoning brand has multiple SKUs, each with a differ ent volume: 7 grams, 20 grams, and so on. The 7 grams one is packaged as a simple sachet, wher e you can throw it away once it is used, while the 20 grams one is pack aged in a standing pouch and designed for multiple uses. Star Inc. then has to apply a differ ent product design for each SK U, and each SKU has to be manufactur ed separately. Even though the executives of both companies would pr efer to see their companies as “ high-tech ” oriented, or even refer to them as “ capital-intensive, ” they could not dismiss the fact that labor and the labor pr ocess wer e issues that kept showing up again and again. This was especially pr ominent among the executives in the human resour ce and production departments, because they wer e the ones who managed labor on a daily basis. And when it came to the discussion of wages and unions, our conversations sometimes became heated. When I visited Java Film in 2012, they were in the middle of bargaining with the labor unions with minimum wage the main issue on the table. The provincial gover nment had just issued an increase in the minimum wage, but vagueness related to categories of wages based on types of industry, along with other factors in relation to this incr ease, led to a series of tough bargaining sessions. In addition, ther e had been many protests in the industrial comple x where they were located. At a Japanese automobile factory, pr oduction was disrupted for about a week due to a labor strik e. The combination of protest thr eats by their own work ers and a suspected “ infiltration ” by a militant labor union at their own plant made the management nervous. Although they did not expose these sensitive issues in the management meetings I attended, during those meetings, the issue of pr oductivity and efficiency was discussed a lot, partly in an effort to offset the inevitable rising labor costs. When I visited Star Inc. in 2015, their main competitor, Sun Printing, e xperienced a major strik e at their plant, a strike that led them to terminate employment of mor e than a thousand work ers and caused their production to halt. Star Inc. was afraid that the same thing would happen to them, for good reasons. The main factor that caused the strik e was a regulation on overtime imposed by a standar dized rule applied by Sun Printing ’ s multinational customers, some of which wer e also customers of Star Inc. Although this rule already had been issued by the Indonesian gover nment in 2003 through federal labor laws, only then did it become a major problem, since the biggest multinationals, thr ough a thir d-party evaluation system called URS A (Understanding the Responsible Sour cing Audit), requir ed their suppliers to comply with the overtime rule. 22 If not, suppliers would not pass the audit and the business between them and their multinational customers would be terminated. The rule states that work ers can only work overtime for a maximum of three hours a day, fourteen hours a week. Sun Printing work ers were not happy about it. Work ers with low wages often had to depend on other factors such as ear nings from overtime work, so the possibility of losing these extra ear nings was a serious concer n. Before the rule was imposed, the way work was organized at plants such as Sun Printing and Star Inc. of ten depended on their work ers ’ overtime labor, especially when rush orders wer e involved. Ther e might be more to the cause of the strik e, but that alone forced Star Inc. management to reor ganize their incentive system in a way that would compensate the loss from the new overtime rule. W ork ers would still get the same amount of ear nings through the new incentive system without having to work overtime, but they would be forced to work mor e efficiently and productively . At a glance, this case seems lik e a common strategy by the company ’ s management to fix things and avoid further problems, but if we look closely, what happened her e is an example of how management or ganizes work to extract surplus value fr om their work ers, driven by systemic rationalization processes imposed by their multinational customers. For ecasts ar e trick y to begin with, especially when dealing with FMCG (which, true to its name, involves “ fast- moving ” goods) and unpr edictable mark ets like Indonesia. A Java Film e xecutive addr essed this specific issue as one of the most difficult challenges in his company : “ The biggest challenge [in] Indonesia, for me, is forecasting. We manufactur e plastic. So I sell a lot of food packaging, liquid shampoo packaging. The tough part is getting forecasts. A lot of goods are sold on the str eet, on bicycles. Unlik e in the United States, you can ’ t actually ask your distributors to give you accurate figures of sales and so on. So we deal with fluctuations … meaning that today this customer can have no order, tomor row ten tons, and the ne xt day a hundr ed tons. ” Even though Java Film and Star Inc. do not fit the ster eotypical image of factories in the Global South, the issues of labor and the labor process are still central to their pr oduction. Out of appr oximately 800 employees of Java Film and 1,500 of Star Inc., a majority of them work on the shop floors. Certain segments of pr oduction are mor e labor – intensive than others, with the majority of shop-floor workers placed in the finishing area at Java Film and in the bag-making ar ea at Star Inc. And although the rest of the segments ar e mainly computerized (automatic), labor still plays an important role. In both plants, the responsibility for monitoring machines, checking defects, and other related pr ocesses is held by work ers. Sometimes these tasks are done manually . As an example, when I observed the Java Film plant, I saw that a work er had to stand still next to a running machine to mak e sure that the product did not have any stains or other defects in it. This work er had to immediately notify others if he saw any defects. First, as a part of the outsour cing process, transfer ring production to dependent suppliers in the Global South does not mer ely gain multinationals lower unit labor costs, but it also serves as a means to transfer responsibilities for and criticisms of possible labor violations to such suppliers. 25 Thr ough the application of these inter national certifications, multinationals can have their ammunition ready : since audits have been done by the third party, the suppliers are supposed to comply with the rules. Thus, if ther e are violations, the responsibility is on the suppliers, not on them. Second, for the suppliers themselves, the well-being of work ers is not the main reason why they bother to get these certifications, the pr ocess for which, accor ding to my interviewees, is really complicated and tak es a lot of their time. Without these certifications, however, these suppliers would not be able to do business with the big multinational corporations. As Har ry Braver man writes, “ the humanization of work ” has never been the focus of management “ habituated to carrying the labor processes in a setting of social antagonism and … has never known it to be otherwise ” — instead, it is always about costs and contr ols. 26 Third, as systemic rationalization theories show, such evaluation criteria imposed by dominant companies are one of the strategies aimed at increasing the overall productivity of the entir e production chain. It is a means for dominant companies to for ce their dependent suppliers to reevaluate and, if necessary, change their or ganization of work in ways that are deemed mor e productive and efficient. But, as explained in the pr evious chapter, productivity is not the main goal; it is lower unit labor costs. Thr ough the enfor cement of more productive and efficient ways to work, multinationals aim for a reduction in pr oduction costs by their suppliers. With the open-costing system discussed above, suppliers have very little room to mark up their costs — this ability to easily contr ol suppliers ’ costs and profits means that, when suppliers ’ costs are lower, their selling price is lower, too . During my interview period in 2013 at Java Film, not long af ter they passed an audit for yet another inter national certification, a big banner was displayed in front of the factory . It read: “ Safe and Healthy W ork Is a Mandatory Condition for an Incr ease in Productivity and Efficiency . ” This saying, although it appears as a mere slogan, actually reflects what such certifications mean for capital within labor -value chains. When an or ganization of work is highly structur ed and everybody follows the rules — say, in the name of work safety or a healthy environment — it leads to an increase in productivity and efficiency, and productive and efficient work leads to a reduction in pr oduction costs. Accidents, for example, cr eate distractions at the shop floor . As this executive e xplains: We had this one accident in 2011. Until today, that employee can ’ t work at his pr evious position. We had to move him to an administrative position. That was af ter a year of [sick leave]. So, how pr oductive is he in his cur rent position? T wo years, zer o. His pr oductivity is zer o … . Until today he has back problems, and that really interfer es with his productivity . Not to mention the employee who, due to his own carelessness, fell in the elevator … luckily it was not bad. But we lost another person. And what does that mean for HR? HR needs to ask the other employees to do overtime, or find new employees, right? Obviously, safety matters for productivity . And then health issues. Well, if we have a lot of employees who ar e sick, even with pr oper medical notes — say an employee calls in sick — either the productivity at his section [within his department] will go down, or we need to hir e a replacement. Mor eover, the imposed rule about overtime, for example, is not mer ely a means to mak e sure that work ers do not overwork (and, as the case of Sun Printing suggests, when overwork pay is given, work ers prefer to do overtime so that their ear nings incr ease), but to mak e sure that they work mor e productively and efficiently . If we refer to K arl Mar x ’ s law of value, when the possibility of lengthening the working day, as part of the capitalists ’ effort to increase absolute surplus value, is small, then the options are to incr ease absolute surplus value elsewher e, through incr easing the intensity of labor — in which nonpr oductive “ pores ” in the working day are minimized, amounting to an implicit incr ease in the length of the working day — and to increase relative surplus value thr ough incr easing the productiveness of labor, which is “ the quantity of products yielded by the same quantity of labor in a given time. ” 27 As a Java Film e xecutive told me, “ W e ar e trying a lot of things right now — revitalizations, relocations [of work], so that pr oductivity can be incr eased, so that our overtime rate would not be like in 2012. Our tar get is that overtime should be reduced by a minimum of 30 per cent. ” One characteristic of systemic rationalization is the use of evaluation criteria that dominant companies impose on their dependent suppliers. 23 In global commodity chains, such certifications bear many names, each with its own claimed measur ements aimed at evaluating suppliers ’ compliance with rules regar ding safe working conditions, hygienic envir onments (especially for food-r elated industries), wages and overtime, whistleblower protections, etc. Among them are URS A (as mentioned above), the many versions of Inter national Organization for Standar dization (ISO 9001, ISO 14001, ISO 18001, ISO FSSC 22000), and Sede x. Both Java Film and Star Inc. had to under go several of these audits in their attempt to get big multinational customers. The audits were done by a third party that would then issue the certificates and report it to their pr ospective customers, or publish the reports that could be accessed by pr ospective customers. While certifications lik e this certainly affect work ers positively in some areas, the reason behind such certifications is not always workers ’ well-being. One can argue that this is a for m of bur eaucratic contr ol where the labor process is subject to the firm ’ s law rather than dir ect supervisor ’ s contr ol, as Richar d Edwards proposed. 24 In this case, however, the scope is global, wher e the firm ’ s law itself is affected by inter national regulations that become an integral part of pr oduction networks led by multinationals. Star Inc. ’ s reor ganization of their incentive system can also illustrate this point. The reduction of the number of overtime hours led management to cr eate a “ better ” system in which work could be car ried out mor e productively, and this created an impact on the labor pr ocess. The incentive system is applied for work ers who are below the supervisor level. Production work ers (work ers who are involved dir ectly in production) get full incentives, while non-pr oduction workers (such as administrative staff) get less. But within each of these segments, incentives are distributed evenly to the work ers. The evaluation that becomes the basis of how much incentives are ear ned by work ers is based on three criteria: production output, variant waste, and retur ns (how much goods are retur ned by customers due to defects). All three are related to pr oductivity and efficiency . Production output is connected to the speed of work ers. This “ technical contr ol ” of the labor process by the mechanism of machines is applied to lar ge segments of the Star Inc. plant and influences the production flow as a whole. 28 But the simplest one to understand is the process in the printing division. To get maximum pr oductivity, the printing machine has to be set to the highest speed, and work ers have to keep up with this speed. This criterion is related to the second one, variant waste. V ariant waste means the differ ence between the projected (allowed) waste and the actual waste produced. Inter estingly, this factor also influences output. If your goal is only to reduce waste, then your pr oductivity can also slow down. For e xample, they can set the machine to the lower speed just to reduce waste. So, in this case, work ers are expected to juggle the speed of their work and the attention to waste reduction. As Braver man writes, “ Machinery offers to management the opportunity to do by wholly mechanical means that which it had previously attempted to do by organizational and disciplinary means. ” 29 For Braver man, machines can be controlled and paced in accor dance to “ centralized decisions ” by management stationed in the office, suggesting that control can be removed fr om the site of pr oduction. In this case, machines wer e also a means to contr ol the labor process away from the shop floor, but its execution is mediated by the incentive system, designed by management to dir ect the labor process in ways that can incr ease production output and minimize waste at the same time. In addition, work ers also must make sure that defects can be minimized, since the “ retur ns ” criterion is measur ed by this aspect. On the one hand, workers can get more earnings with the incentive system, but on the other, their labor process is subject to an invisible contr ol, namely the possibility of losing their extra ear nings. For management, this system allows them to avoid conflicts due to the loss of overtime ear nings and, at the same time, receive a “ bonus ” — the pr oductivity and efficiency incr ease expected by their customers. Also in a continuous effort to cut costs, Java Film tried to maintain the practice of hiring outsour ced workers through employment agencies for certain positions such as security and cleaning services — a kind of “ numerical flexibility . ” 30 This was done amid pressur es from labor unions, as a part of their ongoing bar gaining, to hire these outsour ced workers as permanent employees. However, the company had already started doing this and, due to the hirings, the incr ease in labor cost was inevitable, even though they tried to push down the increase during the bargaining with the labor unions. Although some of the executives denied that this wage incr ease matter ed for them (since the company is not consider ed “ labor intensive ” and that labor costs only make up a fraction of their total costs), others expr essed their concer ns. Especially for the human resour ce department, this was quite a big deal, since certain segments of production — namely the “ finishing ” segments — still needed many work ers. This was further influenced by the companies ’ multinational customers ’ refusal to consider buying at a higher price in accor dance with the rising labor cost. When asked whether Java Film could incr ease selling prices due to minimum wage increases, an executive told me that sometimes they could, since the open-costing system allowed them to incorporate such incr eases in their calculation of total cost. “ But a lot of times, ” he said, “ such increases cannot be passed on to the clients, to be honest with you. It ’ s not easy . Especially multinationals, they would say, ‘ Yes, true, wages have gone up, but your efficiencies need to be incr eased as well! ’ So they would try to offset it that way . It ’ s up to negotiating. Differ ent results per customer . ” Thus, the means to increase productivity was dir ected towar d tightening the control of the labor process instead. These means include differ ent forms of contr ol. During my interviews at Java Film, the company was just beginning to develop a perfor mance-based incentive system, utilizing new Key Perfor mance Indicators (KPI), aimed at creating “ continuous impr ovement ” or kaizen . During that period, the executives wer e all about kaizen , since they were actively pursuing Japanese customers. These customers flew directly from Japan to visit the factory and demanded they mak e changes, including installing an air shower, and inspected minor details to suggest impr ovements. In his second book on kaizen , Imai stresses the importance of managers ’ involvement on the shop floor (or what he calls gemba , “ wher e real action occurs ” ). One of the main ar guments that Imai offers is that once managers are reluctant to be involved in gemba affairs, “ management has lost contr ol of the workplace. ” 31 Taking inspiration fr om the concept of kaizen , Java Film e xecutives cr eated specific measur ements of workers ’ perfor mance that included discipline factors, such as how many sick leaves, days when workers arrive late (measur ed in minutes), absence without notice, warning letters received, and so on. Each department would also set their own measur ements of workers ’ perfor mance, based on their own indicators. Examples given include the volume of product retur ns, operation perfor mance, as well as customer complaints. Similar to Star Inc. ’ s incentive system, this is a way for management to control the labor process — discipline thr ough the promise of rewar ds. Other strategies take many forms, from reconfiguring work-shif t schedules (such as eliminating long shifts to reduce overtime) to reinfor cing discipline, to cutting energy use in the office space. Reducing overtime was done despite the risk of labor unr est. I was told that work ers were expr essing their dissatisfaction, but management refused to back down and instead used the issue of overtime as a bar gaining chip. One executive told me: “ I just told [the work ers], ‘ I ’ ll be blunt with you. You want this much incr ease [in wages], OK, fine, but I will eliminate all your overtime! ’ I would take that measur e. If necessary, I will change the three work-shif ts to four, so there won ’ t be any overtime. ‘ Very sor ry, ’ I said. ” However, aside from the influence of certification systems on the or ganization of work, the contradiction that was bor n out of the demands for flexibility and for increasing productivity does in the end affect work ers and their labor process. The bur eaucratic contr ol imposed by multinationals is just one means among others. What cannot be controlled by management, such as waste and other productivity aspects that are lost due to the changing priorities of customers in their pursuit of fle xibility, as well as the incr ease in the minimum wage, is offset by a relentless effort to incr ease productivity and efficiencies in other areas. As someone from the Java Film human resour ce department said about the increase in minimum wage, “ It naturally follows that the challenge is how to increase employees ’ productivity . What we don ’ t want to happen is that this wage increase is not accompanied by an increase in productivity — or that the productivity goes down instead! ” A similar sentiment was expr essed by Star Inc. executives: “ If [work ers] want to be paid more, I need to know how high their labor productivity is, per hour . It needs to be measur ed first. ” Although many of my interviewees recognized that wages should incr ease following inflation and other factors, in the end, these increases were never “ free. ” When ask ed whether they would prefer robots or robotic equipment than human labor, many interviewees said “ yes ” without hesitation. This reflects a global patter n of automation, where manufactur ers in North America and Wester n Europe see the move to the use of robots and other automated systems as a viable option to “ reduce labor costs, enhance quality contr ol, and improve throughput. ” 32 At Star Inc. in particular, ther e were talks within management circles to implement a new war ehouse system equipped with robotic components. A Star Inc. e xecutive told me, “ W e ’ ve done it several times — laying off employees because we adopted new technology . What was done manually before, it is now automated. ” These executives ar gued that, with robots, the quality is mor e consistent, the errors can be minimized or eliminated altogether, the pr oductivity is higher, and waste can be detected early . Citing another executive fr om another company, an interviewee said, “ And machines never complain. ” However, some also expr essed that the human role in their pr oduction processes cannot be eliminated. They still need human decisions and labor in operating the system, even on the lowest level at the plant. This is in line with what systemic rationalization scholars argue to begin with, that “ the development of system technology did not aim for total automation since a system of this size and comple xity would demand the presence of several operators. ” 33 The human role remains important in the company ’ s pursuit of fle xibility . As expr essed by another Star Inc. executive, “ If all is done by an automated system, we won ’ t be able to continue being fle xible. If the order was given today and then, with 30-days ’ lead time, ” if ther e are changes in delivery time or or der priority, “ we will need a human being to intervene so an exception to the system can be authorized. ” And considering how fle xible their company tries to be, he said, “ it is likely that our exceptions e xceed the nor mal, ongoing setting. ” For other e xecutives, the consideration is related to the ability to invest in e xpensive technology . If the implemented technology is not too expensive, such as the automatic reject system in the bag-making segment on the shop floor, it is lik ely that management would do it. But unlik e North American or European manufactur ers who are eager to invest in such technology, companies with weak er capital do not have an equivalent ability to execute their plans whenever they please. 34 Thus, if the investment is deemed too e xpensive, they think twice: “ W e ’ ve been talking about this, putting robots in the war ehouse — how many people can we cut? … How much is the cost? And I want to compar e to the investment cost, is it beneficial or not? I want to know whether, if our labor, at this moment and for the next five or ten years, would not be as expensive as it is in the U.S. or in China, would it still be really beneficial for me to invest in technology? So I need to know, I need to see first. Because if I look at our labor cost now and compar e it to our investment cost of having this, you know, huge investment, it ’ s not that [good]. ” Another Star Inc. executive told me the importance of implementing “ awar eness ” to workers about the value they added to the company ’ s products: “ Whenever we have an employee gathering, we tell them, ‘ Ther e ’ s your stamp on this product. ’ Then we also relay our customers ’ complaints to our employees. ‘ See, if you don ’ t work well, this is the result. ’ That way they can understand. ” This r hetoric is especially important for managers who lead pr oduction teams. As one of them said, they always told the work ers on the shop floor that “ added value originates from our department … If we talk about engineering, planning, or quality contr ol, they ’ re just supporting elements. The added value, the converter in a converting company, is located within pr oduction. ” Ironically, this awar eness about the importance of workers ’ labor in production — the value work ers added to and embedded in the finished goods — is used as an instrument of contr ol, with the illusion that workers perfor m skilled labor to produce these goods and are not in any way separated from the pr oduct of their labor . The line of reasoning her e is that, since work ers are the ones contributing to the pr oduction of these goods, they need to car e mor e about the products. It does not matter that these work ers have almost no contr ol over the direct production of use values, or that their labor has been degraded, unskilled to the point that it is relatively easy to replace. Other times, management applies the “ home ” r hetoric to pacif y workers. As someone from the human resour ce team told me, “ We mak e it clear to our work ers, ‘ Remember, this is our home . The company wher e we work is the paddy field whose soil we plow. We work together her e to build … . If our business grows, if the results ar e good, we get our shar e [of this success]. ’ ” Similarly, this rhetoric pr ovides an illusion that work ers have shared ownership in the means of production, though in reality, work ers lose contr ol over their own labor once their employer buys their labor power . Also, this rhetoric is a way to curb union activities at the plant. In an effort to push labor unions out, management at Star Inc. encourages their work ers to see the company and its management as “ a family ” that they can turn to whenever ther e are pr oblems. In 2015, Star Inc. had only one union, and it was the company ’ s inter nal union, which was only affiliated with, but was not a subsidiary of, an outside labor union independent of the company . The management was eager to keep things as they wer e. They wanted to avoid the problems and headaches that executives in companies lik e Java Film e xperienced (in 2013, Java Film had thr ee unions) every time they had to deal with the “ unruliness, ” as a Star Inc. executive called it, cr eated by the pr esence of independent unions. But such motivational rhetoric does not always work or does not work on its own. T o k eep things “ safe, ” Star Inc. e xecutives instructed their supervisors and superintendents — who led daily factory briefings at the beginning of each work-shif t — to always watch out for rumors of gatherings or meetings organized by “ infiltrating ” unions. They also trained their supervisors and superintendents about what to do should such things happen. In the meantime, when manual labor is still involved, the management can only enfor ce stricter discipline or apply a more structur ed organization of work practices to better control the labor process and hence reduce the chance of human er rors. A few Star Inc. e xecutives e xpr essed their concer ns about how difficult it was to enforce discipline on the shop floor. One of them, who was involved in the production team and helped develop the incentive system at the company, told me that everybody should “ do their best, ” down to the work ers in the lowest position. Inspir ed by the concept of gemba kaizen , he emphasized the importance of management control on the shop floor: “ It ’ s not as simple as I say, of course. Even after being encouraged by the incentive system, ther e ’ s no guarantee that they can work well. That ’ s why we need management ’ s presence. Every single deviation needs to be evaluated. If, at one point, ther e are employees who need to be reprimanded, or even given a war ning letter — we have to do that to provide some deter rent effect. ” The same e xecutive told me later that “ discipline is the most important thing for Indonesia ” and e xpr essed his opinion about the virtue of military training as an instrument in shaping one ’ s discipline habits. These simple forms of contr ol complement the other forms of contr ol discussed previously . Braverman writes that the labor process was subject to contr ol even befor e Taylorism pr evailed. But Taylor “ raised the concept of contr ol to an entirely new plane when he asserted as an absolute necessity for adequate management the dictation to the worker of the precise manner in which work is to be performed . ” 36 Even though Tayloristic work may not be as pervasive and omnipresent in the era of systemic rationalization, some forms remain, as illustrated in the discussion above. And at its cor e, Tayloristic or ganization of work “ drastically reduced the skill and discr etion of work er in the labor process. ” 37 On the shop floor at Java Film or Star Inc., work ers who occupy low positions are not requir ed to have meaningful skills. Any significant training that could actually increase skills is reserved for work ers who are in certain strategic positions, especially if being gr oomed to be managers. 38 For the rest of the workfor ce, they need a capacity to obey and follow orders. This was expr essed clearly by a Java Film e xecutive: “ [Machine] operators ’ work is repetitive: this, that, this, that … . I think the skills needed to operate those machines ar e minimal. It ’ s not lik e operators of the CNC machine [used in other types of manufacturing], who always need to have an updated knowledge of the sof twar e. Our machines just requir e repetitive tasks. ” The work is “ simple ” not mer ely because it is the natur e of the job or the machine per se, as the executive above seems to imply, but because the or ganization of work has been structur ed in such a way that enables deskilling to happen. “ This is the pivot upon which all modern management turns, ” writes Braver man, “ the control over work through the contr ol over the decisions that are made in the course of work. ” 39 Taylorism and the practice of moder n management revolves ar ound the “ dissociation of the labor pr ocess from the skills of the work ers ” through means such as “ the separation of conception from execution ” that, in tur n, reflects the use of “ monopoly over knowledge to contr ol each step of the labor process and its mode of execution. ” 40 In this conte xt, the majority of workers on the shop floors, especially the “ operators ” or those who only operate the machines, are divor ced from any knowledge regar ding the technological know-how of production. They mer ely execute but ar e not involved in any conception of pr oduction itself, which is done in the management cir cle, at the offices, away from the shop floors. The executives I interviewed possess the knowledge of the technology and have the power to contr ol the extr emely expensive machines, the same machines that “ do not requir e any skills ” from the work ers who operate them on the shop floor. As they told me themselves, it took a lot of time and plenty of trial-and-er ror for them to figur e out many things in relation to how the machines work and how to mak e them work well. What they relayed to their work ers was merely a list of strict procedur es about what to do and, especially, what not to do, in order to avoid lost output caused by mistak es in the operation of the machines. Obviously, the machines are not so simple. It is the detachment of knowledge from the work perfor med by these operators that makes it meaningless. And it is the decisions contr olled by management, influenced largely by the contr ol exerted on them by their multinational customers, that enable the degradation of work to happen. W HAT C AN B E L EARNED? Since Java Film management could not really do much with some segments on the factory floor, which ar e computerized and requir e only a small amount of manual labor, they focused instead on what they refer to as “ finishing ” segments. Manual labor is still applied in these segments because it is still difficult to mechanize the tasks. Why is it difficult? A Java F ilm e xecutive tried to e xplain: “ Because each customer has differ ent requests. Some ask for such-and-such size, the pr oduct has to be this way, one roll of plastic has to be this long, even up to the requir ement of how hard the bundling should be, and a lot of other things. That mak es it difficult to mechanize. So in the end, we still requir e a lot of labor. ” This difficulty of managing labor seemed to be perceived as a persistent problem, both at Java Film and Star Inc. The top e xecutives at the factories wer e trying to design a mor e cost-effective system that would reduce er rors in pr oduction and thus reduce unnecessary rework. Of ten, then, mechanization is preferable whenever it is possible. Thus efforts wer e taken to reduce the number of work ers in every task, such as implementing new machines that can automatically detect errors. Mor e direct and simple for ms of contr ol like this are utilized not only in relation to pushing unions out, but also in the general pr ocess of production. Of ten, simple contr ol is justified by a stereotypical view of Indonesian work ers, namely that they are either lazy or intellectually challenged and thus difficult to manage. As a Star Inc. executive said, “ You know, Indonesians. You always need to monitor them. ” A Java F ilm e xecutive e xpr essed the same concer n. He even claimed that with machine operators it was really hopeless. What you can do, he said, is to focus on impr oving the skills and disciplines of the supervisors: “ If the supervisors are all right, then the operators will be too . ” But at least, he continued, “ Indonesians can still obey orders if you watch their back. ” David Gor don refers to this use of simple for ms of contr ol as the “ stick strategy, ” where firms “ exer cise contr ol with the armies of supervisory staff. ” Mockingly channeling management ’ s voice, Gor don writes: “ Can ’ t trust your work ers when left to their own devices? Peer over their shoulders. W atch behind their backs. Recor d their movements. Monitor them. Supervise them. Boss them. Above all else, don ’ t leave them alone. ” 35 The third characteristic of production in the two companies, in which they produce multinational brands for the local mark et — even though it does not quite fit the common case of global labor arbitrage — illustrates yet another form of participation by Global South companies in labor -value chains. R ather than dir ectly exporting their pr oducts to the tar geted mark ets outside of where these multinationals are based, this particular system is deemed much mor e effective as a means to cut costs. In this conte xt, multinationals target huge mark ets like Indonesia, dir ectly invest in the country, and build their subsidiaries so that production can be done close to the mark et itself and, in the process, outsour ce parts of their production processes to thir d-party suppliers. Thus, even though it involves intra- firm trade relations by multinationals thr ough their subsidiaries, it does not precisely illustrate “ producer -driven ” chains — which are solely characterized by for eign direct investment — because these chains also involve arm ’ s length contracting practices in which multinational subsidiaries outsour ce the production of their pack aging materials to third-party suppliers. 41 In the conte xt of all three of these characteristics, Java Film and Star Inc. serve the role of dependent companies in labor -value chains, driven by the sear ch for low unit labor costs by Global North capital that seeks to captur e value from Global South labor, which is realized in the price of the commodities consumed in the home mark et or in Indonesia. The price of multinational goods sold in Indonesia may be lower than that in the North, but this does not translate into lower profits for multinationals. Instead, with the interpenetration of the sales effort and production process, such as a mark eting strategy that involves many product diversifications of a specific item (including cases in which end consumers have to pay a higher price by buying the product in tiny pack ages), it is very reasonable to assume that the pr ofit rate is high. What is important is that mechanisms of both systemic rationalization and fle xibility are applied, and these are practices by multinationals that captur e value at the end of the chain, since a large shar e of the profits (or the surplus value extracted fr om the exploitation of work ers that make their products) that results fr om these practices goes to multinationals in the North. The sear ch for low unit labor costs is the main drive behind the decision to move production outside of Wester n Europe, the United States, or Japan. And it is due to this attainment of low unit labor costs that such multinationals are able to reduce their total pr oduction costs. We know from the interviews that multinational corporations have — and indeed, contr ol — the knowledge and technological know-how of flexible pack aging in their area. Those I interviewed expr essed that they wer e often genuinely surprised that their customers “ actually knew better about pack aging ” than their own best experts. Thr ough this kind of contr ol, multinationals maintain their monopoly over knowledge and use it to dictate and direct the production of their pack aging materials in ways that are absolutely beneficial for them. It follows, then, that other than additional practical reasons, multinationals, even those that dir ectly invest in the country thr ough having their subsidiaries and factories ther e, are reluctant to deal with their own pr oduction of pack aging, not because they do not know how to do it, nor because they do not have the resour ces needed to execute it, but because it helps them mark up their prime pr oduction costs — an effort to perpetuate and enhance their monopoly power, as discussed previously . In a way, there is an inter esting and rather complicated combination of how surplus is extracted. For e xample, not only do multinationals perfor m extraction at their subsidiaries ’ plants in the South thr ough the attainment of low unit labor costs, but they also do it at their thir d-party suppliers ’ plants. The latter involves arrangements that hide mor e aspects of the unequal capital-labor relations on the global scale — e xecuted thr ough systemic rationalization and flexible production mechanisms. The main goal of such mechanisms that is clear thr oughout the case studies presented in this chapter is the externalization of costs , a process that is per haps most clearly seen when companies like Java Film and Star Inc. pr oduce pack aging materials directly for exports to the multinationals ’ home countries. But whether gear ed towar d export or the local mark et, multinationals outsour ce their production to exter nalize the costs resulting fr om fle xible production to accommodate fluctuating mark et demands. In this way their profit rate is not at risk. Java Film and Star Inc. bear the responsibility for fulfilling fle xibility that is problematic for productivity and efficiency measur es. Multinationals do not want to place the totality of this burden on their own subsidiaries, since that way they must pay the price, so they transfer a large part of this bur den to their suppliers. Waste management becomes a major issue in Java Film and Star Inc., both waste of pr oducts and waste of labor created from the customer demands of pr oduct variations and a fle xible delivery system that requir es them to buffer in cases where forecasts are missed or sales projections alter ed. This fact alone disrupts their productivity and efficiency, and as a result, they have to constantly face conflicts within their own management cir cles, as well as change their organization of work in ways that can offset the loss resulting fr om this wasteful pr oduction. Materials and ener gy use make up the two highest components in their production costs — and the requir ement to be flexible leads to considerable waste in relation to these two factors. Many parts of the pr ocess of fle xible production cannot be contr olled; no matter how efficient their planning is in the face of flexibility demands, ther e would still be plenty of materials and ener gy wasted in the process. In the end, the main thing they can do is to contr ol the labor process of their work ers through a series of reor ganizations of work that aims to cut costs in places that can still be manipulated by management. This is another responsibility that is transfer red to them by their multinational customers, who mak e sure that they can avoid their own responsibility by requiring that their suppliers pass thir d-party audits and inter national certifications. Then, the rest follows: the contr ol over the labor process is enhanced in the era of systemic rationalization and fle xible production. Confir ming what the theories discussed in chapter 3 suggest, the case studies presented her e show that moder n management has not been largely characterized by the elimination of alienation of labor, a trend towar d professional and skilled work, or an extensive “ humanization of work ” in general, as authors like Robert Blauner, Michael Pior e, and Charles Sabel claim. 42 Tayloristic or ganization of work still pr evails, and is even enhanced, especially in the periphery wher e production happens and the global reserve ar my of labor is lar ge. This occurs within layers of unequal capital-labor relations in which dominant multinationals based in the North can find numer ous ways to exploit work ers in the South through the former ’ s contr ol over the dependent companies where the latter is employed, often without dir ect involvement or visible traces. 5 — The New Economic Imperialism: Looking Thr ough the Eyes of the Global South An important part of the modus operandi of imperialism is in the intellectual domain, wher e it promotes incor rect theories of trade and of unemployment combined with illogical methods of measuring poverty to show a decline when deprivation is actually on the rise. — U TS A P ATNAIK AND P R ABHA T P ATNAIK , A T HEORY OF I MPERIALISM THE CLAIM THA T THE ENTIRE CONCEPT of imperialism as a political-economic reality should not be car ried over into the twenty -first century, that it should, in fact, be abandoned, proposed not only by conservative think ers but also by some on the left, is tempting to entertain, as it
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léonce ndikumana and James k. boyce Africa’s odious debts how foreign loans and capital flight bled a continent Zed Books london | new y ork in association with International African Institute Royal African Society Social Science Research Council Contents Fig ures and tables | viii Photographs | ix Abbreviations | x Acknowledgements | xi Map | xiii Introd uction . . . . . . . . . . . . . . . . . 1 1 T ales from the shadows of international finance . . . . . . . . . . . . . . . . . . . 12 2 Measuri ng African capital flight . . . . . . . . 38 3 The revolving door . . . . . . . . . . . . . . 60 4 The human costs . . . . . . . . . . . . . . 74 5 The way for ward . . . . . . . . . . . . . . . 84 Appendix 1 Tables . . . . . . . . . . . . . .101 Appendix 2 Senior policy seminar on capital flight in sub-Saharan Africa . . . . . . . . . .106 Notes | 113 Bibliography | 121 Index | 131 viii Figures and tables Figures 1.1 Examples of tombstones announcing syndicated loans to Gabon . . . . . . . . . . . . . . . . . . . . . . . 31 1.2 Total debt stock, thirty-three sub-Saharan countries . . . . 32 1.3 De bt by creditor in sub-Saharan Africa, 2008 . . . . . . . 33 1.4 External debt ser vice payments . . . . . . . . . . . . . 35 1.5 Net transfer . . . . . . . . . . . . . . . . . . . . . . 35 2.1 Annual capital flight from thirty-three sub-Saharan African countries, 1970–2008 . . . . . . . . . . . . . . . . . . 46 2.2 Wealth of Africa’s high net worth individuals . . . . . . . 47 2.3 Capital flight and tax revenue . . . . . . . . . . . . . . 57 3.1 Cumu lative capital flight and external debt, 1970–2008 . . . 63 4.1 Infant mortality and public health expenditure, 2005–07 . . 80 4.2 Pu blic health expenditure and debt ser vice . . . . . . . . 81 5.1 Types of sovereign debt . . . . . . . . . . . . . . . . 89 Tables 1.1 Examples of syndicated loans . . . . . . . . . . . . . . 26 1.2 External debt: the top ten . . . . . . . . . . . . . . . 34 2.1 Measuri ng capital flight . . . . . . . . . . . . . . . . 44 2.2 African capital flight: the top ten . . . . . . . . . . . . 48 2.3 Adjustments for trade misinvoicing and remittance discrepancies . . . . . . . . . . . . . . . . . . . . . 51 3.1 Linkages between foreign borrowing and capital flight . . 61 4.1 Infant mortality . . . . . . . . . . . . . . . . . . . . 78 4.2 Pu blic health expenditure . . . . . . . . . . . . . . . 79 A.1 External debt, 2008 . . . . . . . . . . . . . . . . . . 101 A.2 Capital flight by countr y . . . . . . . . . . . . . . . .102 A.3 Infant mortality, public health expenditure and debt ser vice by countr y . . . . . . . . . . . . . . . . . . . 104 ix Photographs 1 Zai re’s president Joseph Mobutu was the first African head of state to be received by President George H. W. Bush in the White House, in June 1989 . . . . . . . . . . . . . . . . .3 2 R epublic of Congo’s President Denis Sassou Nguesso welcomed French President Nicolas Sarkozy to Brazzaville in 2009 . . . . . . . . . . . . . . . . . . . . . . . . 19 3 Frenc h president Valér y Giscard d’Estaing received Gabon’s president Omar Bongo in Paris in November 1977 . . . . . 21 4 Citibank chairman Walter Wriston offered the assurance that ‘sovereign nations don’t go bankrupt’ . . . . . . . . . 29 5 ‘ The main teaching hospital here is in such disrepair that many patients have to pay freelance porters for pigg yback rides up and down the stairs to get X-rays. It costs $2 a flight, each way,’ the New York Times reported from Brazzaville in December 2007 . . . . . . . . . . . . . . . . . . . . . 75 6 The revolving door between foreign borrowing and capital flight has left the African people paying debt ser vice on loans from which they did not bene fit . . . . . . . . . . . . . 87 x Abbreviations AfDB African Development Bank AU African Union BNP Banq ue Nationale de Paris BoP bal ance of payments DRC Democratic Republic of the Congo GDF Global Development Finance GDP gross domestic product HIPC heavily indebted poor countr y HNWI high net worth individual IFAD International Fund for Agricultural Development IFI international financi al institution IMF International Monetar y Fund LIC low-income countr y MDG Millenni um Development Goal OECD Org anisation for Economic Co-operation and Development UNECA United Nations Economic Commission on Africa UNICEF United Nations International Children’s Emergency Fund xi Acknowledg ements We incurred a number of debts in writing this book. Quite unlike the odious debts of our title, we are pleased to acknowl- edge them. We thank Stephanie Kitchen of the International African Institute, Ken Barlow of Zed Books and Alex de Waal and Richard Dowden, the editors of the African Arguments series, for valuable advice and encouragement; Robert Molteno and Lawrence Lifschultz, who first suggested that we write this book; and Elizabeth Asiedu, Mwangi wa Githinji, Frank Holmquist, Isaac Kanyama, Roger King and Floribert Ngaruko for comments on earlier drafts. The usual caveats apply. We thank Kaouther Abderrahim, Leila Davis, Grace Chang and James Garang for superb research assistance, and Judy Fogg of the Political Economy Research Institute at the University of Massachusetts, Amherst, among other things for her help in obtaining the photograph rights. We also thank Hippolyte Fofack, who organized the Senior Policy Seminar on Capital Flight in Sub-Saharan Africa held in Pretoria in November 2007, as well as the seminar’s partici- pants for their insights and encouragement. Last, but not least, we thank the many individuals in Africa and abroad who are striving to build a world free of injustice, impunity and financi al chicaner y. Abuse is not sancti fied by its duration or abundance; it must remain susceptible to question and challenge, no matter how long it takes. – Chinua Achebe, Home and Exile, 2000 To our families 1 Introduction As the Concorde lifted off the Gbadolite runway in June 1989, Joseph Mobutu had reasons to feel happy. Backed by generous international patronage, above all from the United States, he was one of the longest-ser ving heads of state in the world. His rule had brought impressive changes to Gbadolite, his home village in the far north of Zaire: his opulent palace, an airport big enough for the supersonic aircraft to come and go, an electric power plant to ser vice them both. His rule had also brought great wealth to Mobutu himself. In a classi fied memo, the US State Department had estimated his fortune at $5 billion. 1 Mobutu publicly claimed a more conser vative $50 million. Whatever the true number – most likely, somewhere in between – it was an impressive haul in a countr y where the average person lived on 60 cents a day. In Washington, DC, where the Concorde was carr ying him, Mobutu would meet his old friend George Bush, the new president of the United States. He would be the first African ruler to be received by Bush in the White House. The diplomatic grapevine reported that Bush’s way ward son, George W., was starting to take an interest in politics. Maybe one of Mobutu’s sons would take note and follow suit. But Mobutu had reasons to feel just a little anxious, too. The Cold War was drawing to a close, and without it America might have less use for one of its ‘oldest and most solid friendships in Africa’, as President Reagan so graciously put it during Mobutu’s 1986 visit to the White House. 2 To placate his tiresome critics in the US Congress – those whose goodwill could not be purchased with lavish hospitality in his Gbadolite palace, including wine flown in from Paris at a cost of $400 a bottle 3 – Mobutu was being pressed to ease political repression at home. This would entail risks. But the risks would be greater for his opponents, 2 should they mistake his forbearance for liberty, than for Mobutu himself. Mobutu’s more pressing worries were financi al. Zaire’s exter- nal debts now amounted to $9 billion. The countr y’s creditors, alarmed by the dismal state of the economy and the disarray in public finances, were loath to lend more. Payments on past loans were overdue. If the International Monetar y Fund (IMF), headquartered in Washington, could be persuaded to come to the rescue with a new loan, this would not only clear Zaire’s IMF arrears but also provide the seal of approval that would convince other creditors to reschedule, too. Getting a new IMF loan wouldn’t be easy. A decade before, the Fund had installed its own staff members at the Bank of Zaire. The journal Foreign Affairs called this unusual step an effort to ‘limit the hemorrhage of capital occurring both through the Zairian politico-commercial class as well as foreign mercantile groups’, and predicted rightly that it would ‘inevitably bring the group into conflict with the powerful political figures who are involved in capital flight’. 4 The results had not been happy. Er win Blumenthal, the German central banker who led the IMF team, produced a scathing report that concluded that the ‘impossibility of control over frauds’ meant that there was ‘not any – I repeat any – chance on the horizon that the numerous creditors of Zaire will recoup their funds’. 5 In 1987, the IMF nevertheless approved a new loan to Zaire under pressure from the US government, over strong objections by senior staff and a rare dissenting vote by three members of the Fund’s twenty-four-member executive board. This was among the decisions that prompted the resignation of David Finch, director of the IMF’s exchange and trade relations department, who publicly decried ‘the intrusion of political factors’ into Fund lending and warned that ‘balance-of-payments assistance in such conditions is indistinguishable from political support’. 6 Last year, no less a personage than Michel Camdessus, the managing director of the IMF, told a newspaper that much of the debt problem of developing countries was due to corruption. Intr 1 Zai re’s president Joseph Mobutu was the first African head of state to be received by President George H. W. Bush in the White House, in June 1989 (George Bush Presidential Librar y and Museum) 4 ‘There are people there whose limitless egoism pushes them to deposit their money overseas,’ he declared, ‘which incurs a terrible flight of capital.’ Mobutu denounced such criticism as ‘scandal- ous’, offering his own investments in Gbadolite as evidence that African leaders keep their money at home, not in foreign bank accounts. 7 Despite these annoyances, Mobutu still had friends in high places. In addition to President Bush he could count on his long-time con fidant, Jacques de Groote, now an executive direc- tor at the IMF and World Bank. 8 Earlier in the year Mobutu had enlisted the ser vices of Washington lobbyist Edward van Kloberg III, paying him a retainer of $300,000 a year to secure favourable press coverage of Mobutu as a reliable US ally and to belittle his increasingly vocal American detractors as ‘a cabal of left-wing extremists and homosexuals’. 9 In the end, Mobutu’s Washington visit was a resounding suc- cess. At the White House, President Bush lauded him as ‘one of our most valued friends’ on the entire continent of Africa, and announced that Zaire had taken ‘the constructive step of sign- ing an economic policy reform agreement with the International Monetar y Fund’. 10 The IMF came through with $187 million in fresh lending. The World Bank chipped in $87 million more, lifting Zaire’s cumulative debt to the Bank to more than $900 million. § While Mobutu was once again shaking the money tree in Wash- ington, one of this book’s authors, Léonce Ndikumana, a junior university lecturer in Burundi, Zaire’s neighbour, was witness- ing historic changes in his countr y. The ‘wind from the West’ was invigorating long-standing popular demands for democratic opening in Burundi and across Africa. In September 1988, Léonce joined twenty-six Burundian intellectuals in signing an open letter to President Pierre Buyoya, urging the government to stop army killings of civilians in the northern communes of Ntega and Marangara, and to begin a transition to democratic rule. This seemingly simple exercise in democracy was deemed an offence to the nation, and it earned Léonce and six other signatories Intr 5 five months of solitar y con finement in the notorious maximum- security prison of Mpimba. The open letter, which cited well-documented facts about in- discriminate killings in the north of the countr y and suggested positive ways to find solutions to ethnic conflict by addressing its root causes, threw the government off balance. It attracted atten- tion in the resident diplomatic community and internationally, being seen as an opportunity to launch a national debate to initiate a transition towards an open and inclusive political system. The government came under pressure to release the jailed signataires. In the books of international human rights organizations, such as Amnesty International, Léonce joined the ranks of those referred to as ‘prisoners of conscience’. This attention helped to secure his release from prison in Februar y 1989. Léonce emerged from prison with an enhanced thirst to better understand the relationships between development and politics in African countries. He wished to better understand the role of the Western powers in Africa’s economy and politics. Above all, he wanted to understand why the people of countries like neighbouring Zaire, a darling of the Western aid donors, could remain so poor while their countr y was so rich. Upon his release, Léonce was appointed Chief Finance Officer and then Director of Finance and Administration at the University of Burundi. He won a fellowship from the US Agency for Interna- tional Development to pursue doctoral studies in economics at Washington University in St Louis in the United States. This was an opportunity to pursue his quest for greater understanding of African development challenges. He seized it, and left Burundi in August 1990. § At the time of Mobutu’s rewarding trip to Washington, DC, the second author of this book, James Boyce, was writing a book on the development strateg y that had been pursued in the Philippines under Ferdinand Marcos. Like Mobutu, Marcos was an authoritarian ruler backed for many years by the United States – until his overthrow by the ‘People’s Power’ revolution Intr 6 of Februar y 1986. His regime, like Mobutu’s, ran up enormous debts to foreign creditors. When Marcos was airlifted into his Hawaiian exile aboard a US Air Force jet, he left behind a Philippine external debt of more than $28 billion. This foreign borrowing ostensibly had been undertaken to advance the countr y’s economic development, but in practice it had done little to improve the well-being of ordinar y Filipinos. Average incomes remained virtually stagnant during his two-decade rule, and many of the poorest Filipinos saw their real incomes decline. 11 Meanwhile, Marcos and his cronies accumu- lated fortunes. Millions of dollars in looted funds were eventually traced to bank accounts in Switzerland and other havens, but the best indicator of the scale of the looting came in 1988 when Marcos, his health deteriorating, reportedly offered $5 billion to the new government to be allowed to return to the Philippines to die. 12 His offer was refused. Not all of the money borrowed by the Marcos regime was siphoned into foreign bank accounts. The biggest single item in the Philippine debt, for instance, was a nuclear power plant built at a cost of more than $2 billion, including interest, a price that the Marcos government’s own Secretar y of Industr y charac- terized as ‘one reactor for the price of two’. 13 Loans to finance the reactor came from the US Export-Import Bank and from a private bank syndicate led by Citibank and American Express. 14 The price tag was inflated by multimillion-dollar kickbacks – more politely termed ‘commissions’ – paid to Marcos associates on contracts to build the reactor. In the end the nuclear plant never produced a kilowatt of electricity, among other reasons because it turned out to have been built in a seismic zone with a high earthquake risk. From the standpoint of the national economy, the project was a colossal waste of borrowed money. But from the standpoint of those who pocketed the kickbacks, the project was a brilliant success. The useless nuclear power plant was simply a social transaction cost of pursuing their personal objective: the transformation of public debts into private assets. In an effort to better understand the linkages between foreign Intr 7 loans and capital flight in the Philippines, Boyce used statisti- cal methods that had recently been developed by researchers at the World Bank and elsewhere to estimate the total amount of capital flight from the Philippines in the Marcos era. He arrived at a staggering result: $13 billion (in 1986 dollars); more than $19 billion if imputed interest earnings on flight capital were included in the total. By the latter measure, capital flight was equivalent to roughly two-thirds of the countr y’s total foreign debt. Investigating the relationship further, Boyce analysed the cor- relations between year-to-year variations in capital flight and year- to-year variations in foreign borrowing. He found that one dollar of additional foreign borrowing was associated with 54 cents of additional capital flight in the same year. He concluded that a ‘revolving door’ linked debt to capital flight in the Philippines, and that a substantial fraction of borrowed funds had quickly exited the countr y. Boyce presented his findi ngs in a monograph published in 1990 by the Philippine Institute of Development Studies, an agency of the countr y’s planning ministr y. 15 The study helped to fuel debate in the Philippines over how to deal with the foreign debt legacy of the Marcos era. The Freedom from Debt Coalition, a Philippine civil society organization, argued that debts arising from loans that had been diverted to illegitimate uses ought to be repudiated. Some senior government officials, including the countr y’s planning minister, agreed. Others, including the central bank governor, maintained that the government should seek to remain in the good graces of international creditors by ser vicing all the inherited debts. 16 Boyce cited precedents in international law for the repudiation of ‘odious debts’, and suggested that if the government adopted such a strateg y it could greatly ease its debt burden. But the Philippine government opted instead for the strateg y of dutiful debt ser vice, spending vast sums in the ensuing years to ser vice foreign debts incurred in the Marcos era. § The collaboration that produced this book began in the mid- 1990s at the University of Massachusetts, Amherst, where both Intr 8 of the authors were teaching. Ndikumana, having completed his doctorate in economics at Washington University, had joined the UMass faculty; Boyce was chairing the economics department. In Zaire, the Mobutu regime was coming to its bitter end. Mobutu’s relationships with his external backers had deterio – rated after his 1989 visit to Washington. Calling for an end to US assistance to the regime in March 1991, US Congressman Stephen Solarz, a member of the House subcommittee on Africa, declared that Mobutu ‘has established a kleptocracy to end all kleptocracies, and has set a new standard by which all future international thieves will have to be measured’. 17 US develop – ment assistance, apart from food aid, was terminated in June 1991. 18 The IMF issued an official declaration of non-cooperation in Februar y 1992, making Zaire ineligible for further borrowing, and suspended the countr y’s voting rights in 1994. 19 At home, the war to succeed Mobutu and to seize control of the countr y’s rich mineral resources was under way. 20 Over the next decade it would claim as many as five million lives – more than any other conflict since the Second World War. 21 Mobutu fled his homeland in May 1997, as rebel forces closed in on the capital, Kinshasa. Four months later he died in exile in Morocco. The countr y he left behind was in economic ruin, political turmoil, and facing a massive humanitarian crisis. He also left behind a foreign debt that by that time, counting interest arrears, had swollen to $14 billion. As the regime unravelled, we began to investigate the relation- ship between Zaire’s debt and the capital flight the countr y had experienced under Mobutu’s rule. In an article titled ‘Congo’s odious debt’, published in the journal Development and Change in 1998, we estimated that capital flight from Zaire during the Mobutu regime amounted to $12 billion, a sum nearly equivalent to the total external debt passed to the successor government of the Democratic Republic of the Congo (DRC), as the countr y was renamed after Mobutu’s overthrow. In the article, we provided documentar y evidence that the creditors knew, or should have been aware, that a large fraction of their loans had gone into Intr 9 the pockets of Mobutu and his coterie rather than bene fiting the Congolese people. Expanding our investigation of capital flight to other sub- Saharan African countries, we then wrote a second piece, ‘Is Africa a net creditor?’, which appeared in the Journal of Development Studies in 2001. We found that capital flight from twenty- five low-income African countries over the 1970–96 period amounted to $193 billion (and to $285 billion including imputed interest earnings). Comparing this to the $178 billion external debt of the same set of countries, we concluded that Africa was a net creditor to the rest of the world: the external assets of these countries exceeded their external debts. The key difference between the two, of course, is that the assets are in the hands of private individuals, whereas the debts are public, a liability of the African people through their governments. We were grati fied when this article won the Dudley Seers Memorial Prize, named after the distinguished British economist. In a third piece, ‘Public debts and private assets’, published in World Development in 2003, we extended our estimates to thirty African countries and statistically analysed the relationship bet ween outflows of capital and inflows of external borrowing. We found that for ever y dollar of loan inflows, as much as 80 cents flowed back out as capital flight in the same year. These findi ngs suggested that, to a substantial extent, African capital flight has been debt fuelled. Some of the policy implications of our findi ngs were spelled out in ‘Africa’s debt: who owes whom?’, published in 2005 in a book edited by Gerald Epstein, Capital Flight and Capital Controls in Developing Countries. There we made the case that African countries have compelling ethical, economic and legal grounds for invoking the doctrine of odious debt and repudiating liabilities that cannot be demonstrated to have bene fited the populace. In 2007, we made a keynote presentation at the Senior Policy Seminar on Capital Flight from Sub-Saharan Africa organized by the Association of African Central Bank Governors, the Reser ve Bank of South Africa, and the World Bank, in Pretoria, South Intr 10 Africa. In this presentation we extended our quantitative analysis up to the year 2004, and discussed the case for selective repudia- tion of debts that financed capital flight – a policy proposal that has now moved from the ‘radical fringe’ to gain a hearing in the corridors of power both in Africa and in the international financi al institutions. 22 Papers based on our presentation subsequently appeared in the International Review of Applied Economics and the African Development Review. 23 § Drawing upon more than a decade of research, this book updates our analysis of the relationship between foreign loans and capital flight. We have tried to present our findi ngs in language that is accessible to lay readers. Readers interested in more technical treatments can refer to the scholarly publications mentioned above and listed in the bibliography. Our analysis is based on the experience of sub-Saharan Africa during the last four decades, but the issues we address in this book are not exclusive to Africa. The parallels between the Philip- pines under Marcos and Zaire under Mobutu already have been suggested above. The revolving door linking foreign loans to capital flight has spun widely throughout the developing world. Writing on Latin America, economist Manuel Pastor described cases where ‘an investor could draw a publicly-guaranteed external loan cheaply, and ship his/her own resources abroad to acquire foreign assets’. 24 James Henr y, the former chief economist for the international consulting firm McKinsey & Company, obser ved that in some cases borrowed funds were deposited directly into private accounts in the same foreign banks that initiated the loan: ‘the entire cycle is completed with a few bookkeeping entries in New York’. 25 In Chapter 1, we provide examples that illustrate the role of foreign banks both as lenders of funds diverted abroad and as safe havens for flight capital. We examine the parallel between foreign loans in Africa and the ‘liar loans’ in US mortgage markets that precipitated the 2008 financi al meltdown. And we document the magnitude of the negative net transfers that occur when debt Intr 11 ser vice payments by African countries surpass the inflow of new money from fresh loans. Chapter 2 traces the statistical detective work that is required to measure capital flight, and presents evidence that Africa is a net creditor to the rest of the world in that its external assets exceed its external debts. The assets are private, while the debts are public. Wealthy individuals hold the assets. The African people as a whole hold the debts through their governments. Chapter 3 examines linkages between foreign loans and capital flight, and presents quantitative evidence that much of Africa’s capital flight has been debt fuelled; that is, loans from foreign creditors to African governments wound up as private assets held abroad by individual Africans. In Chapter 4, we document some of the human cost of this phenomenon, analysing the impact of debt ser vice payments on public health expenditures and thereby on health outcomes such as infant mortality. In Chapter 5 we conclude by discussing what can be done. We make the case for new policies and institutions, building upon the legal doctrine of odious debt, that would lift the current burden of ser vicing debts from which the public derived no bene fit, and would change incentive structures in the international financi al architecture so as to promote responsible behaviour by lenders and borrowers in the future. We seek to demonstrate in this book that the diversion of foreign borrowing into capital flight is not simply a matter of misdeeds by a few corrupt officials, abetted by a few complacent or complicit bankers. Rather it is the product of systemic flaws in the international financi al arrangements that govern borrowing and lending. The problem cannot be cured simply by identify- ing bad actors and weeding them out. The solution will require fundamental reforms that change the framework of incentives and opportunities in global finance. Intr 12 1 | T ales from the shadows of inter national finance In the simpli fied world of introductor y economics textbooks, credit markets provide a valuable and straightfor ward ser vice: they move money from savings into investments. The savers lend their money and are rewarded with interest. The investors borrow money on the expectation that the returns to their investment will cover the cost of interest payments. Banks connect the sup- ply and demand sides of the credit market, and for this ser vice, known as financi al intermediation, they earn remuneration in two forms: fees, and the spread between the interest rates they pay on deposits and receive on loans. In this textbook world, all is what it seems. Borrowers act in good faith, taking loans only when their expected bene fits exceed expected costs. Bankers exercise due diligence, issuing loans only when they expect the borrower to repay. And no one would lend hundreds of millions of dollars to the Mobutu regime in 1989. In the real world, matters are not so simple. Mobutu was a particularly flamboyant exemplar of a much broader class of individuals who have spun debts contracted in the name of the state into personal wealth, much of it stashed abroad. These individuals are aided and abetted by bankers who are willing and eager to make loans to governments with few questions asked, while at the same time courting deposits from ‘high net worth individuals’ who skim the borrowed funds into private accounts. In the shadows of international finance, large sums of money routinely slip across borders, beneath the surface of officially recorded transactions and outside the box of the standard eco- nomics textbooks toolkit. To understand the realities of African development and underdevelopment, we must peer into these shadows. 13 Masters of disasters When compelled to acknowledge the diversion of public loans into private pockets, international creditors sometimes seek solace in the thought that at least a fraction of their loans was used legitimately. ‘If you take the amount of 30 percent loss,’ a sen- ior World Bank official told political scientist Jeffrey Winters, ‘it means 70 cents [on the dollar] got used for development after all. That’s a lot better than some places with only 10 cents on the dollar.’ In testimony before the US Senate Committee on Foreign Relations in 2004, Winters explained that ‘places with only 10 cents on the dollar’ was a reference to ‘certain Bank clients in Africa where nearly all of the loan funds are misallocated, diverted, unaccounted for, or simply stolen’. 1 If these loans vanished without a trace, they would simply bypass the vast majority of Africans, with no impact on their well-being. From their perspective the loss would merely be what economists call an ‘opportunity cost’, forgone development that could other wise have been financed with the missing money. But the costs to the people of Africa go well beyond missed oppor tunities. The use of foreign loans for illegitimate private gains distorts both the politics and the economies of African countries. It bolsters the power of corru pt elites, and in so doing enhances their ability to manipulate government policies to advance their interests above those of their countr ymen. And because these are loans, not grants or outright gifts, they leave behind a legacy of debt-ser vice obligations that often persist long after the individuals who pro fited from the deals have departed from the scene. The outcome is disastrous for African development. But it is lucrative for individual players on both sides of the credit market. As a result, private incentives are not aligned with the public good. A few examples will illustrate how this disjuncture has revealed itself in Africa. Nigeria: the price of soft financial management The decade from 1984 to 1994 saw ‘the most rampant corruption and governmental dysfunction in Nigeria’s histor y’, in the words of Steve Berkman, T 14 former lead investigator in the World Bank’s anti-corruption and fraud investigation unit. The World Bank ought to know: it loaned Nigeria $4.6 billion during this period. 2 One of the recipients of World Bank loans was Nigeria’s National Electric Power Authority (NEPA), the government agency responsible for generating and delivering electricity throughout the countr y. NEPA nominally had 4,700 megawatts of power- generati ng capacity by 1989, but its peak load was less than half that amount at 1,900 megawatts. Even that load could not be delivered on a reliable basis, forcing many firms and households to invest in their own backyard generators. Nigerians joked that NEPA stood for ‘No Electric Power Anytime’ (its successor, the Power Holding Company of Nigeria, or PHCN, was quickly re- branded ‘Problem Has Changed Name’). Berkman explains why NEPA nevertheless chose to expand further its generating capacity: A new power-generating station can cost hundreds of millions of dollars, and that translates into large kickbacks for those in government who can facilitate contract awards and smaller kickbacks for those involved in super vising the civil works and procuring supplies and equipment. It can also result in lucra- tive subcontracts for shell companies owned by government officials, their relatives, and close associates – subcontracts in which payments are received for ser vices not rendered or for material and equipment supplied at grossly inflated prices. 3 In addition to bid-rigging and kickbacks, Berkman describes other practices that were commonplace in Nigeria: the procure- ment of unnecessar y goods and ser vices ‘for the sole purpose of facilitating these activities’; the parking of funds in accounts from which interest earnings were then siphoned; and the creation of ‘phony documents to cover up the diversion of funds from government accounts to private accounts’. 4 Procedural safeguards for disbursement of World Bank project loans could be ‘easily breached’, Berkman reports, ‘through the submission of fraudu- lent documents to support the withdrawal applications’. In the case of ‘structural adjustment loans’, which were not tied One 15 to speci fic projects but rather ser ved as carrots for implementation of economic policy reforms prescribed by the Bank, there were even fewer controls on where the money went. Berkman wr yly characterizes such loans as ‘an excellent device to move a lot of money with a minimum of effort and without any accountability after ward’. 5 These problems persisted under General Sani Abacha, who ruled Nigeria from 1993 to 1998. Abacha accumulated personal wealth estimated by the World Bank at $2 billion to $5 billion. 6 Nigerian president Olusegun Obasanjo would subsequently charge that Abacha ‘siphoned $2.3 billion from the Treasur y, awarded contracts worth $1 billion to front companies, and took $1 billion in bribes from foreign contractors’. 7 A 2007 World Bank review of public expenditure management in Nigeria finds that financi al reporting and monitoring remain a ‘ver y weak area’, leaving the government ‘open to diversion of funds and outright corruption’. The review concludes that this state of affairs is not accidental, but instead is the result of deliberate decisions: ‘These de ficiencies are not technical so much as environmental, insofar as for many years “soft” financi al management has been part of how the Federal Government has wanted to run its affairs.’ 8 Soft financi al management afflicted Nigeria’s use of both for- eign loans and oil revenues. ‘Nigeria owes $34 billion, much of it in penalties and compound interest imposed on debts that were not paid by the militar y dictatorships of the 1980s and early 1990s,’ finance minister Ngozi Okonjo-Iweala obser ved in Januar y 2005. ‘We make annual debt repayments of more than $1.7 billion, three times our education budget and nine times our health budget.’ Terming this situation ‘unsustainable’, Okonjo-Iweala called for debt cancellation. 9 Two months later, the Nigerian House of Representatives passed a resolution calling for a halt to external debt-ser vice payments on the grounds that the countr y’s economy had been ‘devastated by a series of militar y regimes from 1984 to 1999 who stole billions of dollars from state coffers’. 10 In October 2005, spurred by the outcr y in Nigeria, the Paris T 16 Club of creditor countries agreed to write off $18 billion of the $30 billion debt owed by the government to official lenders, led by the governments of Britain, France, Germany and Japan. As part of the deal, the government agreed to repay the other $12 billion, or roughly 40 cents on the dollar. Since the debt by that time included $4 billion in interest arrears, this was equivalent to 46 cents per dollar on the original loan amounts. If it is true that ‘only 10 cents on the dollar’ went into bona fide development, the Nigerian people did not get an enviable bargain. In Januar y 2006, eighteen US Congressmen called on the US Export-Import Bank and the US Agency for International Devel- opment to waive repayment of the $400 million they were still owed under the Paris Club deal. ‘Much of Nigeria’s debt can be considered odious,’ they wrote to the US Treasur y Secretar y, ‘given the fact that the original loans were made to authoritar- ian regimes – many of which were then looted while interest and penalties accumulated.’ 11 Nigerian critics expressed similar reser vations about the deal. But buoyed by high oil prices, the Nigerian government paid the final instalment of the $12 billion in April 2006, thereby completing the largest single transfer of wealth to foreign creditors in African histor y. Congo-Brazzaville: oil-backed loans Some African petroleum- exporting countries and creditors have forged an even tighter nexus between foreign loans, capital flight and oil. In 1979 the Republic of Congo (Congo-Brazzaville) took its first ‘oil-backed loan’ – a loan collateralized by a lien on future oil exports. The creditor was Elf, the French oil company. In the years that followed, oil-backed loans, often carr ying much higher-than-average interest rates, became popular among private creditors, oil companies and African rulers. To circumvent IMF strictures against this irregular borrowing, as well as to facilitate transfers into private accounts, oil-backed loans are often concealed by routing them through offshore enti- ties. French researcher Maud Pedriel-Vassière describes the modus operandi: One 17 The scheme is substantially the same in ever y case. First, one or several offshore companies receives a loan at preferential inter- est rates from a bank or buyer of crude oil. Then, these offshore companies lend to the sovereign state at signi ficantly higher rates. The difference between the interest rates is ultimately collected by the original creditor, while the representatives of the regime and their close associates receive a juicy commis- sion, as do various other middlemen. 12 Banks that have provided oil-backed loans to the Republic of Congo include Crédit Agricole, Crédit Lyonnais and Banque Paribas. 13 The exorbitant interest rates on oil-backed loans in effect mean that creditors are able to obtain crude oil at a cost considerably below the world market price. In 1993, desperate for cash to pay state salaries as its oil exports were going to ser vice its earlier oil-backed loans, Congo’s government took a fresh $150 million loan from the US-based firm Occidental Petroleum, to be repaid with 50 million barrels of oil: a price of $3 per barrel at a time when the world market price was $17 per barrel. 14 Political instability, exacerbated by the government’s chronic fiscal crisis, soon spiralled into a civil war that claimed thousands of lives. Arms for both sides were financed through oil-backed loans. ‘Rather than contributing to the welfare of the Congolese population,’ an unpublished 2001 IMF report obser ved, ‘the pro- ceeds from oil-collateralized borrowing may have been used to finance combat operations during the civil war.’ 15 In the words of the former head of Elf, ‘Thousands of Congolese died, and now the sur vivors must pay for the arms that killed their loved ones.’ 16 Ver y little of Congo-Brazzaville’s oil revenue – which accounts for 70 per cent of national income – has trickled down to the countr y’s ordinar y citizens. But the ruling elite has enjoyed a lavish lifestyle. Global Witness, the London-based organization that investigates abuses in the exploitation of natural resources, has documented the European shopping sprees of Denis Christel Sassou Nguesso, the son of Congo’s president and head of the state agency that sells the countr y’s oil. He spent thousands of T 18 dollars per month at shops like the Parisian fashion house Louis Vuitton, billing his expenses to offshore companies that ‘appear to have received, with other shell companies, money related to Congo’s oil sales’. 17 Mr Sassou Nguesso’s shopping tabs became public information as a result of litigation by creditors known as ‘vulture funds’, which specialize in buying ‘distressed debt’ on secondar y markets at a steep discount from its face value. These creditors, which are often hedge funds, then pursue legal actions in an effort to recover the face value, or something closer to it, with the aim of netting a handsome pro fit.18 In this case, the creditors were seeking to prove that the government was concealing oil revenues that instead could have been used to repay the debts. Since 1990 private creditors have extracted more than $500 million in settle- ments and court judgments from the Republic of Congo. 19 As of 2008, Congo-Brazzaville’s external debt stood at almost $5.5 billion. In a nation of 3.6 million people, this amounted to more than $1,500 per person. That same year, according to World Bank data, 74 per cent of the countr y’s population lived on less than $2 per day. 20 Gabon: The Bongo system In Libreville, the capital of Gabon, elegant glass and marble palaces line Omar Bongo Triumphal Boulevard. These edi fices were constructed at a cost of $500 mil- lion by President Omar Bongo, who ruled the countr y for four decades until his death in a Barcelona hospital in 2009. 21 A few months after wards a New York Times reporter visiting Libreville described the grim scene behind the palaces – ‘shacks and shanties stretching to the horizon, dirt roads and street vendors eking out a living selling cigarettes and imported vegetables’. The extreme juxtaposition of wealth and poverty in Gabon is a legacy of what its people call the ‘Bongo system’, succinctly de fined by the Times as ‘forsaking roads, schools and hospitals for the sake of Mr. Bongo’s 66 bank accounts, 183 cars, 39 luxur y properties in France and grandiose government constructions in Libreville’. 22 In response to a legal complaint filed by three non- governmental One 2 R epublic of Congo’s President Denis Sassou Nguesso welcomed French President Nicolas Sarkozy to Brazzaville in 2009 (Associated Press) 20 organizations, in 2007 the French police identi fied multiple bank account s held by Bongo at BNP Paribas and Crédit Lyonnais. The police enquiries also revealed that Bongo’s wife had purchased a luxur y automobile at a cost of 326,000 euros (nearly half a million dollars), drawing the funds directly from the Gabonese treasur y. 23 Eight years earlier, in 1999, the US Senate Permanent Sub – committee on Investigations revealed that Bongo also held multiple personal accounts in the international private banking unit of New York-based Citibank. More than $130 million had passed through these accounts – located in the Channel Islands, New York, London, Paris, Luxembourg and Switzerland – in the preceding fifteen years. 24 Citibank responded to these revelations by closing the Bongo accounts, explaining to the Subcommittee on Investigations that it did so ‘because of the cost of answering questions about them, rather than because of speci fic concerns about the source of funds or the reputational risk’. 25 During Bongo’s rule, Gabon – or more accurately, the countr y’s political elite – received billions of dollars in revenues from oil exports. Remarkably little of this windfall was invested in the countr y’s development. Today Gabon has more kilometres of oil pipelines than it does of paved roads. 26 Gabon’s oil revenues were supplemented by foreign loans, notably in the late 1970s and 1980s when the 650-kilometre trans-Gabon railway was constructed at a final cost of roughly $4 billion. 27 The World Bank refused to lend money to build the railway on the grounds that the project was economically unviable. Declaring that ‘even if we have to deal with the devil, we will deal with the devil’, Bongo turned instead to commercial creditors, who were happy to lend the money at market rates. 28 Together with the Inga-Shaba hydroelectric project in Mobutu’s Zaire, the trans-Gabon railway became one of Africa’s most famous white elephants – costly schemes ‘stimulated by desire for political prestige and ready access to foreign financi ng’, in the words of a former US aid official, resulting in ‘massive external debt for little development impact’. 29 White elephant projects have attractions apart from vanity: One 3 Frenc h president Valér y Giscard d’Estaing received Gabon’s president Omar Bongo in Paris in November 1977 (Agence France Press) 22 they create opportunities for some serious graft. Gabon’s budget allocations for transportation and other public ser vices were im- pressive. ‘But in reality, it was actually about 20 per cent of what was on paper,’ an aid official con fided to the New York Times. ‘The rest was embezzled.’ 30 The commercial banks that provided loans to Gabon’s govern- ment included Banque Nationale de Paris (BNP), Crédit Lyonnais and Citibank – banks in which Bongo himself held personal ac- counts. 31 BNP chaired the steering committee of Gabon’s ‘London Club’ of commercial bank creditors, and Citibank ser ved as the group’s agent bank. 32 Citibank loans to Gabon helped to finance the purchase of equipment for the trans-Gabon railway as well as the purchase of aircraft for the national airline. 33 At the time of the US Senate hearings in 1999, the chief compliance officer for Citibank Private Bank stated, ‘The Private Bank never has had a strateg y to link efforts to get or retain a head of state’s personal business in order to develop other business in that countr y.’ 34 He neglected to mention whether there was any link in the reverse direction, whereby lending to a government opened the door to private banking for the same government’s senior officials. As of 2008, Gabon’s external debt stood at almost $2.4 billion. In a nation with a population of 1.4 million, this amounted to more than $1,600 per person. According to the World Health Organization, 77 Gabonese children per 1,000 die before reaching their fifth birthday – triple the rate in Botswana, a countr y with roughly the same per capita national income. 35 Subprime Africa Why did creditors make billions of dollars in loans to regimes whose leaders put their personal economic interests ahead of their countries’ economic development? Why did they fail to exercise due diligence by seeking to ensure that their loans were used for bona fide purposes, invested in projects whose returns would enable borrowing countries to pay them back with interest? If the answer were simply incompetence on the part of some One 23 lenders who were duped by irresponsible borrowers, we would expect to see differential outcomes, not systemic failures. Creditors who made unsound loans would lose their money, and either learn their lessons or exit the business. Over time, the invisible hand of the market would relentlessly weed out incompetence, and productive loans would be the rule rather than the exception. The fact that Africa’s public debts piled up, year after year, even as capital flight drained African economies and made timely and full repayment of these debts an impossibility, tells us that the problem was not simply creditor ignorance or ineptitude. These were transactions among consenting adults. The creditors were not naive babes in the woods. They included sophisticated international financi al institutions (IFIs), such as the World Bank and the International Monetar y Fund, the world’s most pow- erful governments, and the world’s biggest commercial banks. The creditors knew, or should have known, the score. And they continued to lend. To understand why, we need to look into the structure of incentives on the lender side of credit markets. In both official in- stitutions and private banks, these incentives elevated short-term lending targets above long-term repayment prospects. The result was a phenomenon known as ‘loan pushing’. 36 What counted was the quantity of loans, not their quality. Within the official lending institutions – the IFIs and the bilateral aid agencies and export credit agencies – there were (and still are) powerful incentives for loan officers to move the money. In part this stems from the use-it-or-lose-it syndrome in government agencies that are subject to annual budget cycles: failure to use appropriated funds by the end of the fiscal year may trigger reduced appropriations the following year. But even at the IFIs, which are to some extent insulated from the vagaries of legislative calendars, individual staff members know that their performance will be judged above all by their success in making loans. A loan officer who delays loans, or withholds them alto- gether from a willing borrower owing to concerns about leakage of the money into private pockets, is not on the fast track to a T 24 promotion. On the contrar y, such recalcitrance is certain to annoy borrower governments, and their complaints may reach the ears of one’s superiors. In 1992, an internal evaluation by the World Bank’s Portfolio Management Task Force (known as the ‘Wapenhans report’ after its leader) found that 37.5 per cent of Bank projects completed in 1991 could be categorized as failures, up from 15 per cent a decade before. Wapenhans concluded that the presence of an ‘approval culture’ at the Bank contributed to this trend. 37 Obser ving that subsequent evaluations at the African De- velopment Bank, Asian Development Bank and Inter-American De velopment Bank had all reached similar conclusions, the 1998 World Bank study Assessing Aid frankly summed up the situa- tion: ‘Securing loan approvals was a more powerful motivator for staff than working to ensure project success or larger develop- ment goals.’ 38 Disbursements of funds are ‘easily calculated and tended to become a critical output measure’, the study’s authors explained. ‘Agencies saw themselves as being primarily in the business of dishing out money, so it is not surprising that much went into poorly managed economies – with little result.’ 39 A further motive for lending by official creditors – a motive that again is independent of the loan’s productive impact in the borrowing countr y – is export promotion. In the case of export credit agencies (ECAs) such as the US Export-Import Bank, this is, in fact, the explicit primar y objective. But it has also been a signi ficant motive in bilateral official development assistance, the importance of which is reflected in correlations between the aid disbursements and donor exports. 40 Multilateral creditors are also aware of the political salience of export contracts: the World Bank, for example, maintains state-level procurement records in the USA ‘in order to facilitate lobbying of Congress by corpora- tions winning Bank contracts’. 41 Similar incentives propelled lending by commercial banks, with the added spark of the pro fit motive. Much private credit took the form of syndicated loans, a financi al innovation dating from petrodollar recycling in the wake of the OPEC oil price One 25 increases of the 1970s. Syndicated loans drew funds from groups (‘syndicates’) of banks that were organized on a loan-by-loan basis by lead banks, typically headquartered in New York, London or Paris. Many of these loans had floating interest rates indexed to the London Interbank Offered Rate (Libor), the rate at which banks lend to each other. Some examples of syndicated loans are given in Table 1.1. The spread – the difference between the interest rate charged to the borrowing countr y and Libor – brought pro fits to the syn- dicate participants over the term of the loan. But more immediate grati fication came upfront in the form of loan origination fees. These could be booked as pro fits in the same financi al quarter that the loan was issued. A 1.5 per cent fee on a $100 million loan would amount to $1.5 million, a tidy sum. This was taken off the top from the money disbursed to the borrower. The lead banks passed a slice of this upfront money – formally known as a ‘participation fee’ – to other syndicate members, the percent- age slice var ying with the size of their commitment. 42 Bankers informally called these participation fees ‘juicers’. In Selling Money, an illuminating account of his experiences as an international loan officer for regional American banks in the 1970s and early 1980s, S. C. Gw ynne recalls receiving a stream of telexes from lead banks seeking to ‘sell down’ participation in syndicated loans. ‘The volume of such telexes at Cleveland Trust was astonishing in those years,’ he recalls. ‘It was common to arrive at the office and find a pile of “bedsheet” telexes covering my desk, offering millions of dollars in loan participations, all wanting quick replies.’ 43 ‘Many of the participating banks’, according to syndication expert Robert P. McDonald of Chase Manhattan, ‘had no firm underst anding of whom they were lending to; ver y few performed any type of credit analysis and practically none had a tactical and/ or strategic marketing plan delineated by geography.’ 44 ‘Volume’, Gw ynne remarks, ‘was all that mattered.’ 45 Export promotion entered into lending decisions by commer- cial banks, too, when the exporters who stood to bene fit from T table 1.1 Examples of syndicated loans Countr y Year Amount Lead and manager banks Zaire 1974 $22,264,043 American Express International Banking Corporation Crédit Commercial de France Sudan 1974 $200,000,000 Crédit Commercial de France Banq ue Nationale de Paris Banq ue Arabe et Internationale d’Inv estissement Gabon 1976 $20,000,000 American Express International Banki ng Corporation Citicorp International Bank Ltd Wells Fargo Bank International Côte 1976 $50,000,000 Citicorp International Bank Ltd d’Ivoire Brandt s Ltd Chase Manhattan Ltd Amex Bank Ltd Bank of Montreal First Chicago Ltd Merrill Lynch International Bank Ltd Kenya 1979 $200,000,000 National Westminster Bank Group Bank of Montreal Bank of Tokyo Ltd Barc lays International Group Chase Manhattan Banking Group Citicorp International Group Deut sche Bank Compagnie Financière Luxembourg First Chicago Ltd Fuji Bank Ltd Manufact urers Hanover Ltd Midl and Bank Ltd Royal Bank of Canada Standard Chartered Bank Nigeria 1981 $308,000,000 Midl and Bank Ltd BankAmerica International Group Barc lays Bank Group Croc ker National Bank Fuji Bank Ltd Mit sui Trust and Banking Company Ltd Orion Royal Bank Ltd Source : Tombstones appearing in Euromoney, June 1974, pp. 45, 74; May 1976, p. 71; August 1976, p. 3; August 1979, p. 54; December 1981, p. 125 27 the loan were important bank customers. For example, Gw ynne recounts how the Cleveland Trust Company was drawn into the international lending business: ‘As a big-league corporate bank, Cleveland Trust had big-league corporate clients, and most of these clients had signi ficant overseas operations.’ These clients ‘not only needed but expected the bank to finance their inter- national trade’. 46 As long as juicy fees were flowing freely, few bankers worried much about future repayment difficulties. Citibank chairman Walter Wriston assured his fellow bankers that ‘sovereign nations don’t go bankrupt’. 47 Meanwhile, successful young loan officers moved from bank to bank, leapfrogging up the salar y scale. If the quality of loans eventually turned out to be a problem, they could rest easy in the knowledge that by that time it would be someone else’s problem. The per verse incentives for pushing loans to Africa and other developing countries in Latin America and Asia sound eerily fam – iliar in the wake of the 2008 subprime mortgage meltdown in the United States, which triggered the world’s worst economic crisis since the depression of the 1930s. The incentives in the US financi al system that spawned this crisis bear a close resemblance to those that drove profligate lending to developing countries in the 1970s and 1980s. For subprime mortgage lenders in the USA, the overriding aim again was to move the money. ‘They didn’t care about the quality of the mortgage,’ explains Professor Nouriel Roubini of New York University. ‘They were caring about maximizing their volume, and getting a fee out of it.’ 48 Once again, the intoxicating appeal of upfront fees pushed any concerns about loan repayment difficulties out of sight and out of mind. ‘As long as the music is playing, you’ve got to get up and dance,’ the chief executive officer of Citigroup merrily explained to the Financial Times in 2007. ‘We’re still dancing.’ 49 Once again, short-run greed trumped long-run prudence. ‘The pro fits from reckless activities were simply too tantalizing and titanic to pass up for many of the executives running these insti- tutions,’ explains Gretchen Morgenson, financi al correspondent T 28 of the New York Times. ‘The take-the-money-and-run mentality ran amok.’ 50 Per verse incentives are not con fined to the lender side of international credit markets, as we have seen. On the borrower side, too, foreign loans were subject to what economists call a ‘principal-agent’ problem: an agent who is supposed to act on behalf of others (the principals) instead may put his own self- interest first . In loans to Africa and other developing nations, the people were the principals and top government officials were the agents. Officials borrowed in the name of the government, lined their own pockets and those of their cronies, and left the people with the debts. Diverse methods were used to channel funds from foreign loans to African governments into private pockets. We have already seen several examples: kickbacks and padded procurement contracts in Nigeria, oil-backed loans in the Republic of Congo, direct transfers from public accounts in Gabon. Another popular technique was public expenditure for ‘ghosts’ – fictitious roads, schools, soldiers, and so on. In Uganda, for example, officials reported in 2010 that medical supplies were being ostensibly delivered to some hundred non-existent facilities, including seven ‘ghost hospitals’ in the capital, Kampala. 51 Having diverted borrowed funds into their own pockets by such ruses, well-connected Africans could readily find foreign bankers who were willing and able to assist in moving the loot into hidden accounts abroad. In doing so, they took advantage of bank secrecy jurisdictions, also known as ‘tax havens’ – the same network of financi al institutions that is used not only by narcotics traffickers and other criminals seeking to hide their pro fits but also by large corporations seeking to evade taxation. The players in the international tax haven network include major banks. Citigroup, for example, has 427 subsidiaries in ‘tax havens or financial privacy jurisdictions’ around the world, according to a 2008 report by the US Government Accountability Office, including ninety in the Cayman Islands alone. 52 The term ‘capital flight’ focuses attention on the exodus of One 4 Citibank chairman Walter Wriston offered the assurance that ‘sovereign nations don’t go bankrupt’ (Tufts University, Digital Collections and Archives) 30 funds from African countries, but as financi al journalist Nicholas Shaxson remarks in his book Treasure Islands, ‘each flight of capital out of Africa must have a corresponding inflow somewhere else’. 53 The bankers who provide safe havens for flight capital again reap lucrative spreads and fees for their ser vices. At a conference on capital flight and Third World debt held in Washington, DC, in 1986, Austrian banker Erhard Fürst obser ved that foreign de- positors in Swiss banks often received negative interest returns, ‘implying that they were willing to pay a substantial premium for security’. 54 In these respects, too, the pathologies of international finance hav e not been con fined to Africa and other low-income nations. ‘The lines between thiever y and patriotism, between private advan – tage and the national interest, became impossibly blurred,’ wrote Fintan O’Toole in his 2010 book Ship of Fools. 55 O’Toole was writing not about Nigeria, or Congo, or Gabon, but about the debt crisis engul fing his own countr y, Ireland. Africa’s debt trap The 1998 World Bank study’s conclusion that much aid to developing countries went into poorly managed economies ‘with little result’ is only half true. Multimillion-dollar loans always have results, even if not the ones that were ostensibly intended. One notable result of the lax lending by official and private creditors to Africa has been the phenomenon of debt-fuelled capital flight. Some of this flight capital wound up in private accounts at the same banks that arranged the loans. ‘The bor- rowers stole the money and the lenders helped them steal it,’ in the blunt words of Brookings Institution scholar Raymond Baker. ‘In my judgment this is the ugliest chapter in international commerce since slaver y.’ 56 This dual bank–client relationship is illustrated in the case of Gabon by President Omar Bongo’s personal accounts at BNP, Crédit Lyonnais and Citibank. All three banks played important roles in syndicated loans to the government (see the ‘tombstones’ reproduced in Figure 1.1). In the next two chapters we document One 1.1 Examples of tombstones announcing syndicated loans to Gabon. Source : Euromoney, October 1975, p. 34; July 1974, p. 86. 32 the magnitude of African capital flight and its relationship to foreign loans. A second, and more evident, result of subprime lending to Africa was the accumulation of large foreign debts. This has resulted in the ongoing drain of the continent’s scarce resources into external debt ser vice payments. The total foreign debt of the thirty-three sub-Saharan African countries analysed in this book – those for which adequate data are available – is shown in Figure 1.2. Here and throughout the book we use 2008 dollars so as to depict real trends without the distorting effects of inflation. From less than $50 billion (in 2008 dollars) in 1970, the debt rose sharply through the late 1980s, and then more gradually until it peaked at over $250 billion in 1995. Since then the debt stock has declined to about $180 billion, owing to debt repayments and write-offs coupled with relatively modest new lending. The composition of sub-Saharan Africa’s external debt by type is shown in Figure 1.3. In 2008, roughly half the total was long- term debt to official creditors: 22 per cent was held by bilateral 1.2 T otal debt stock, thirty-three sub-Saharan African countries ($ billion, in constant 2008 dollars) Source : World Bank, World Development Indicators and Global Development Finance database. Converted to 2008 dollars using the GDP deflator as reported in the World Bank’s World Development Indicators. 1970 1975 1980 1985 1990 1995 2000 20050 50 100 150 200 250 300 Billion 2008$ One 33 creditors; 15 per cent by the World Bank; 1 per cent by the IMF; and 9 per cent by other official multilateral creditors. Another 27 per cent was held by private creditors as long-term debt; and an additional 26 per cent was short-term debt, most of it also owed to private creditors. 57 The composition of Africa’s debt has varied over time. The share of private creditors peaked on the eve of the debt crisis that struck developing countries in 1983, which led to a sharp contrac- tion of new lending by commercial banks. Private long-term debt shrank from 36 per cent of the total in 1982 to only 18 per cent in 2004, after which its share rose, mainly by virtue of write-offs of bilateral debts by official creditors. Since 1983, new loans have come mostly from the official creditors, allowing African countries to ser vice their debts to private creditors, paying them off or at least slowing the rate at which they fell into arrears. In effect, public money from the governments of industrialized countries thus helped to bail out the private creditors – again presaging a pattern that would recur in the wake of the subprime crisis in the United States. 58 Meanwhile capital flight from Africa continued, as we document in the next chapter. ‘It is the Western taxpayers 1.3 De bt by creditor in sub-Saharan Africa, 2008 Source : World Bank, World Development Indicators and Global Development Finance database Short-term Debt (26%) Bilateral Creditors (22%) Private Creditors (27%) World Bank (15%) IMF (1%) Other Multilateral Creditors (9%) Tales from the shadows 34 who are paying it out over the table,’ Raymond Baker explained to a New York Times reporter in 1999, ‘and the private banks who take it back under the table.’ 59 The ten sub-Saharan African countries with the largest external debts in 2008 are listed in Table 1.2. South Africa tops the list with an external debt of almost $42 billion, followed by Sudan, Angola, Côte d’Ivoire, the Democratic Republic of Congo and Nigeria, all of which owed more than $10 billion. Debts for each of the thirty-three countries covered in this book are reported in Appendix Table A.1, together with the ratio of external debts to gross domestic pro – duct (GDP). In several countries debt exceeds GDP, with Zimbabwe havi ng the dubious distinction of the highest ratio at 186 per cent. table 1.2 External debt: the top ten (sub-Saharan African countries, 2008) Countr y US$ billion South Africa 41.9 Sud an 19.6 Angol a 15.1 Côte d’Ivoire 12.6 Congo, Dem. Rep. 12.2 Nigeri a 11.2 Kenya 7.4 Tanzania 5.9 Congo, Rep. 5.5 Zimbabwe 5.2 Source : World Bank, World Development Indicators and Global Development Finance database As Africa’s external debt grew, so did its outflow of debt ser vice: interest payments and principal repayment. Figure 1.4 shows the trend in debt ser vice payments since the early 1970s, again in constant 2008 dollars. From less than $1 billion per year in the early 1970s, debt ser vice payments from the thirty-three sub- Saharan African countries have risen to more than $10 billion per year since 1994, with a peak outflow of $20 billion in 2006. One 35 Figure 1.5 shows the trend in net transfers for all thirty-three countries in the same period. The net transfer is the difference between inflows from new borrowing and outflows from debt ser vice payments on past loans. Positive net transfers to Africa – 1.4 External debt ser vice payments ($ billion, in constant 2008 dollars; three-year moving average) Source : World Bank, World Development Indicators and Global Development Finance database 1970 1975 1980 1985 1990 1995 2000 20050 5 10 15 20 25 Billion 2008$ 1.5 N et transfer ($ billion, in constant 2008 dollars; three-year moving average) Source : World Bank, World Development Indicators and Global Development Finance database 1970 1975 1980 1985 1990 1995 2000 2005-10 -5 0 5 10 15 20 25 Billion 2008$ Tales from the shadows 36 when new money exceeds debt ser vice payments – peaked in the late 1970s. For the past quarter-centur y, however, the average value of the net transfer to sub-Saharan Africa has been approximately zero. In other words, the inflows from new international lending have roughly offset the outflows to ser vice debts incurred in earlier years. When a countr y experiences a negative net transfer – as has happened to many African nations since the mid-1990s – it actually pays more in debt ser vice than it receives in new money. In such periods, foreign loans are a net drain on the economy, siphoning resources away from investment and consumption. For example, in the period 2000–08, the Democratic Republic of Congo (former Zaire) experienced a negative net transfer of $1.4 billion. Over this same period, the negative net transfer from the Republic of Congo amounted to $1.2 billion; from Gabon it was $4.2 billion. Nigeria saw a negative net transfer of more than $20 billion from 2000 until its 2006 Paris Club debt deal, on top of a $16 billion negative net transfer in the previous decade. 60 The negative net transfer is not merely a possibility: it is a mathematical certainty, in the absence of debt write-offs. Loans must be repaid with interest. For a time, a rising tide of new lending can enable borrowers to meet their debt ser vice obliga- tions with money to spare, resulting in a positive net transfer. But African countries, like individuals, cannot borrow ever-larger sums for ever. When the new money fails to cover debt ser vice payments on old money, the era of negative net transfers begins. If foreign loans were invested productively, yielding a rate of return sufficient to repay them with interest, a countr y’s economy would still be better off during the era of negative net transfers than if it had never borrowed. But if, instead, the loans were squandered on ill-conceived projects or diverted into capital flight, the countr y is worse off once the net transfer turns negative than if it had never borrowed in the first place. In Africa, the latter has not been the exception but the rule. For some African countries, the burden of negative net trans- fers has been eased if not eliminated by ‘debt relief ’ offered by One 37 creditors. For example, French president François Mitterrand an- nounced in 1989 that France would write off $2.6 billion in bilateral debts owed by low-income African countries. 61 Some countries, such as Nigeria, have negotiated debt write-downs from the Paris Club of official creditors as a whole. Such concessions contributed to the modest decline in sub-Saharan Africa’s total debt since the mid-1990s, shown in Figure 1.2, although the conditions attached by creditors to debt relief have often been controversial. 62 More importantly, for the purposes of the present book, debt write- offs do not address the fundamental weaknesses in international finance that generated repay ment problems in the first pl ace. Debt relief can treat the symptoms, but not the disease. T 60 3 | The revolving door At first blush it may seem paradoxical that foreign lenders sent billions of dollars to African governments at the same time as private Africans were sending billions out as capital flight. In a simple textbook world, both would respond similarly to local economic conditions. If the investment climate is favourable, foreign dollars flow in and local dollars stay at home. If it is not, foreign lending dries up and local capital departs in search of higher returns. Once we move beyond textbook economics to real-world econo – mies, the paradox begins to lift. In the real world, not all capital is acquired by honest means – some is accumulated through fraud, kickbacks, padded contracts, briber y and outright theft. And in the real world, not all movements of capital across international borders are declared to monetar y authorities – some moves via trade misinvoicing, clandestine wire transfers and suitcases of smuggled cash. This is why the balance-of-payments accounts typically do not, in fact, balance, as discussed in Chapter 2, and it is what enables us to calculate capital flight as the missing- money residual. These two phenomena – the illicit acquisition of capital and the illicit movement of capital – are interconnected. Individuals who obtain wealth by questionable means are not inclined to leave their money in plain sight where it may attract inconvenient scrutiny. They are unlikely to be scrupulous about paying taxes on this wealth and any earnings it generates. And they generally find it prudent to ship a substantial fraction of the loot out of the countr y to ‘safe havens’ that are insulated from unwelcome changes in the political climate at home. Foreign loans can be an important source of illicit wealth, and hence of capital flight, for reasons explored in Chapter 1. 61 On both sides of international lending agreements there are per- verse incentives: borrowers who contract liabilities in the name of the public with the aim of siphoning funds into private assets, and creditors driven by the imperative to ‘move the money’ and comforted by the prospect of bailouts when their loans go sour. The result can be a revolving door, in which money flows in from foreign lenders and flows back out as capital flight. How widespread is this phenomenon? In this chapter we inves- tigate the extent to which capital flight from sub-Saharan Africa has been fuelled by foreign borrowing. We do this by examining the statistical relationship between the two. Debt-fuelled capital flight Capital flight can be linked to foreign borrowing in four ways. These are depicted in Table 3.1. The tightest linkages occur when one directly fuels the other: that is, when the same money flows in and out through the revolving door. In the case of debt-fuelled capital flight, our primar y concern in this book, loans from foreign creditors to African governments finance the accumulation of private wealth via the illicit mechanisms described in Chapter 1: the diversion of funds from public accounts into private account s, kickbacks (or more politely, commissions) on government con- tracts, inflated procurement costs, ghost projects, and so on. The bene ficiaries of these loan-siphoning arrangements then park part or all of the proceeds in safe havens abroad. table 3.1 Linkages between foreign borrowing and capital flight De bt → Capital flight Capital flight → Debt Motive and means De bt-fuelled capital flight Flight-fue lled foreign borro wing Motive only De bt-driven capital flight Flight- driven foreign borro wing In the case of flight-fuelled foreign borrowing, a similar direct link operates in the reverse direction: private wealth holders T 62 first move funds into an offshore bank account, and then they ‘borrow’ back the money from the same bank, a phenomenon known as ‘round-tripping’ or a ‘back-to-back loan’. This technique was pioneered by the American organized crime financier Meyer Lansky in the 1930s as a way to launder money in Switzerland, the aim being to conceal the origins of the funds in question from suspicious government authorities. Lansky’s clients reaped a fringe bene fit, too: interest payments on these pseudo-loans were tax-deductible. 1 In developing countries today, where foreign loans to private borrowers generally come with an explicit or implicit guarantee that the government will assume the liability should the borrower default, a further attraction to the round-tripper is the prospect of shifting the resulting debt on to the government. In most of sub-Saharan Africa, foreign loans to private borrowers (even with public guarantees) have been relatively rare, so this phenomenon is likely to have been less widespread than in many Asian and Latin American countries. In addition to these direct linkages, there are more indirect ones, again running in both directions. In the case of debt-driven capital flight, foreign borrowing provides a motive for capital flight but not the actual money. The motive comes from the actual and anticipated economic impacts of the debt. In the short run, the influx of borrowed money pushes up the value of the domestic currency. But over the long run, as the stock of debt grows, so does the prospect that the net transfer will turn negative, leading to eventual depreciation of the domestic currency. By moving capital into hard currency accounts offshore while the value of the local currency is arti ficially inflated, the flight capitalist not only insures against this exchange-rate risk but also stands to reap a pro fit in the event of devaluation. Similarly, a large and growing debt overhang may raise fears among the wealthy that increased taxes or other regulations will reduce the value of asset s held domestically, motivating them to send money abroad. Finally, in the case of flight-driven foreign borrowing, capital flight generates demand for replacement funds that are borrowed from foreign lenders. On the borrower side, as the tax base is T 63 sapped by capital flight, African governments may seek foreign loans to finance expenditures. On the creditor side, the short-run incentives for loan-pushing, described in Chapter 1, coupled with the long-run expectation of bailouts, explain why lenders are willing to lend money even as private Africans move money in the opposite direction. Insofar as these linkages are in operation, we expect to find a positive correlation between capital flight and foreign debt – the precise opposite of what we might expect in the simpli fied world of textbook economics, where all capital movements are legitimate and all economic actors, whether official creditors, commercial banks or high net worth Africans, respond to similar incentives in deciding where to put their money. Figure 3.1 shows the correlation across African countries be- tween the cumulative stock of 1970–2008 capital flight and the stock of external debt in 2008, with both expressed as percentages of GDP to control for differences in the size of the different countries’ economies. This picture is consistent with the proposi- tion that capital flight and external debt are indeed intertwined. 2 3.1 Cumu lative capital flight and external debt, 1970–2008 Sources : Capital flight stock (with imputed interest earnings) from Table A.2; external debt and GDP (2008) from World Bank, Global Development Finance database. B B B B B B B B B BB B B B B B B B B B B B B B B B BB B B B B B 0 200 400 600 800 1,000 1,200 0 25 50 75 100 125 150 175 200 Capital flight stock (% of GDP) Debt stock (% of GDP) The revolving door 64 How much money spins through the revolving door? A key differ- ence between the direct and indirect effects of foreign borrowing on capital flight lies in the timing of these effects. In the case of debt-fuelled capital flight (and its cousin, flight-fuelled foreign borrowing), the revolving door spins quickly, and we can expect to find a strong year-to-year correlation between inflows of foreign borrowing and outflows of capital flight. In the case of debt-driven capital flight (and its cousin, flight-driven foreign borrowing), by contrast, the relationship is cumulative: it is the total stocks of external debt and capital flight which drive each other, so there is no compelling reason to expect tight year-to-year correlations between annual flows in both directions. Assume, for example, that an African countr y adds to its debt stock in a given year, but that it borrows less than it did in the previous year. We expect debt-fuelled capital flight to decrease, too, as there is less money coming through the revolving door. But we expect debt-driven capital flight to increase, as the debt overhang grows. This difference makes it possible to use statistical tools to distinguish between direct and indirect linkages and to estimate their respective magnitudes. In econometric studies published in the professional journals World Development and the International Review of Applied Economics, we have estimated the magnitude and statistical signi ficance of both sorts of effects in sub-Saharan Africa. 3 First, we investigated the effects of current borrowing – that is, annual inflows that add to the countr y’s total stock of external debt – on year-to-year variations in capital flight. Secondly, we investigated the effects of the total debt stock on capital flight. The results suggest that foreign loans have indeed fuelled capital flight in the short run, and that the accumulated stock of debt drives additional capital flight in the long run. We find that for ever y dollar of foreign loans to sub-Saharan Africa, roughly 60 cents flow back out as capital flight in the same year. In other words, we find statistical evidence of debt-fuelled capital flight on a large scale. We also find that ever y one-dollar increase in the stock of external debt is associated with 2–4 cents of additional capital flight annually in subsequent years. In other words, we find T 65 statistical evidence that debt-driven capital flight is a signi ficant drain on African economies as well. As a further statistical test of these relationships between capi- tal flight and external borrowing, we carried out the same exercise using a different proxy measure of private wealth held abroad by Africans: the deposits held by African individuals and firms in Western banks (formally, these are called ‘external positions of reporting banks vis-à-vis the non-bank sector’). 4 These officially recorded holdings in Western banks represent only a fraction of African capital flight. They omit non-bank financi al assets such as stocks and bonds, real estate and other non- financi al property, holdings in non-Western banks, and Western bank accounts in which the African identity of the depositor is concealed, as well as capital flight that was used to finance overseas consumption rather than being saved. For all these reasons, the proxy measure is much smaller than our measure of total capital flight. For the thirty-three African countries in our study, recorded bank deposits in 2008 amounted to $42.1 billion, or 5.7 per cent of cumulative real capital flight in the 1970–2008 period (reported in Table A.2). 5 Using this proxy measure, we again found that both annual inflows of foreign loans and the total stock of external debt have positive and statistically signi ficant effects on capital flight. As expected, the estimated magnitude of the effects is smaller: one dollar of new borrowing is associated with between 2 and 17 cents of deposits by Africans in foreign banks in the same year, and with about one extra cent of additional deposits annually in subsequent years. The positive relationship between capital flight and external borrowing is thus evident even when we use this quite restrictive proxy measure for capital flight. Capital flight as portfolio choice? Not all capital that flees Africa was illicitly acquired. Some capital flight involves outflows of honestly acquired assets. In textbook economics, such capital movements are attributed to portfolio choices by investors seek- ing to maximize risk-adjusted returns to capital. 6 The rates of return are expected to equalize across countries and markets, T 66 assuming that economic agents have access to complete informa- tion and that transactions costs are negligible. In such a world, systematic capital outflows from Africa would imply that returns to capital are systematically higher abroad. To assess the extent to which Africans hold funds abroad as a result of relative rate-of-return considerations, we examined the statistical relationship between capital flight and the difference in interest rates, adjusted for inflation, between African countries and the rest of the world. Using the short-term US Treasur y bill rate as a proxy for the world interest rate, we found no statisti- cally signi ficant effect of the interest rate differential on capital flight. 7 We conclude, therefore, that African capital flight cannot be explained adequately by conventional portfolio choice theor y. Moreover, if the rate of return to capital is lower in African countries than in the industrialized countries – or if investment is riskier in Africa, so that risk-adjusted returns are lower – this should discourage foreign lenders as well as domestic investors. As economist Manuel Pastor puts it, ‘If the investment climate in a countr y is negative enough to push out local capital, why would sav v y international bankers extend their own capital in the form of loans?’ 8 This paradox points to the existence of what economists call ‘asymmetric risk’. 9 Domestic capital may face a greater risk of seizure, particularly if it has been obtained by questionable means and if political circumstances change so as to reduce the owner’s degree of protection. Meanwhile, foreign capital may be guar- anteed against this risk by the government or by international institutions. 10 Under these circumstances, private Africans may find it in their interest to invest abroad, even as foreign creditors find it pro fitable to issue loans to African governments. When the mean- ing of ‘portfolio choice’ is expanded to encompass these ver y dif- ferent motives for borrowing and investing, we can reconcile the phenomena of simultaneous foreign borrowing and capital flight. Foreign aid: less likely to fuel capital flight? In addition to loans, African countries also receive external funding in the T 67 form of grant s from aid donors. In fact, for low-income African countries, grants and official loans with a high ‘grant element’ (by virtue of below-market interest rates) make up the bulk of their external financi ng. African countries have experienced capital flight even as they received substantial amounts of foreign aid. 11 It is therefore natural to ask whether the two are related. In a multi-countr y study of the effects of official development aid on capital flight, economists Paul Collier, Anke Hoeffler and Catherine Pattillo found that at low levels, aid tends to deter cap – ital flight, but that at high levels, aid tends to induce greater capital flight. 12 They calculate that the turning point at which the inducement effect starts to dominate the deterrent effect is beyond the obser ved aid levels for most of the African countries in their sample, implying that aid to Africa is not associated with more capital flight. Yet aid is a lootable resource, much like other forms of public external borrowing. Donors cannot fully monitor its use, either because it is practically difficult or because they do not wish to put pressure on a particular government for political reasons. As a result, corrupt government officials and their cronies can and sometimes do embezzle aid and channel the funds abroad. Zaire under Mobutu is a case in point. 13 Given the substantial share of official loans in the debts of African countries, our results do not support the view that aid has been immune from the operation of the revolving door. We also find that capital flight tends to be like bad grass in the field: once it has become rooted, it is hard to get rid of it. Our statistical studies show that countries that have experienced high levels of capital flight in the past tend to experience higher capital flight in subsequent years. This suggests that capital flight may be habit-forming, making it unlikely that any improvements in the investment climate will lead to its rapid disappearance. The greasy spigot: oil and capital flight Revenues from the extraction of natural resources can also ser ve as fuel for capital flight. These revenues come in three T 68 main forms: first , as ‘signature bonuses’, one-time payments by multinational enterprises in return for development rights; secondly, as royalties or taxes on oil and mineral exports; and thirdly, as resource-backed loans, such as the oil-backed loans described in Chapter 1. The Angolan government, for example, is reported to have received $879 million in signature bonuses from oil companies in the year 1999 alone; about $3 billion per year in oil taxes in 2000 and 2001; and about $3.5 billion in oil-backed loans over the same two years. 14 The oil-backed loans from private creditors allowed the government to circumvent the efforts of the World Bank and the IMF to make further lending conditional on greater accountability and transparency in revenue management. 15 To this end, the state oil company Sonangol set up offshore accounts into which income from Angolan oil exports was deposited; the oil-backed loans were repaid directly from these accounts, entirely bypassing the countr y’s domestic financi al system. 16 ‘Because of high interest rates, typically 2 percentage points above Libor [the London inter-bank offer rate], and safe repayment structures,’ the Financial Times reported, ‘the banks’ appetites for these oil-backed loans are voracious.’ 17 Oil revenues allowed senior Angolan leaders to amass vast per- sonal assets overseas. A 2002 IMF report, leaked to the press after its publication was blocked by the Angolan government, found that more than $900 million in oil revenues had gone missing from state coffers in 2001 – roughly three times the total value of humanitarian aid to Angola – and that $4 billion had disappeared in the previous five years. 18 In the same year, the non-governmental organization Global Witness traced $1.1 billion from Angolan oil revenues to a single bank account in the British Virgin Islands. 19 To investigate the role of oil’s greasy spigot in African capital flight, we compiled countr y-speci fic data on annual oil exports and added this to our statistical analysis of the determinants of the magnitude of capital flight. The relationship is positive and statistically signi ficant: for each extra dollar in oil exports, we estimate that an additional 11 to 26 cents leave the countr y as T 69 capital flight. 20 This comes on top of the capital flight fuelled by foreign borrowing, including oil-backed loans. We also examined the impact of non-oil mineral exports. In this case, we do not find a statistically signi ficant relationship. Why the difference? The countries in our sample that are rich in mineral resources, but not oil, are a diverse group that includes Botswana, South Africa, Mozambique, Zambia, Ghana and Guinea. Several of these countries have relatively strong records in terms of both economic growth and revenue mobilization, compared to oil-rich countries like Nigeria, Angola and the Republic of Congo. 21 We suspect that the difference can be traced more to the institutional characteristics of these countries than to intrinsic characteristics of the resources themselves. In other words, there may be no inherent reason to expect that oil revenues are neces- sarily more prone to capital flight than other mineral revenues. In theor y, and sometimes perhaps in practice, resource-backed loans can be an effective vehicle to finance bona fide develop- ment rather than capital flight. China, which recently overtook Japan as the world’s second-largest economy, bene fited from this type of finance from the same economic superpower it has now surpassed: three decades ago the Chinese government obtained more than $10 billion in Japanese loans to fund construction of railways, ports and electrical power infrastructure, agreeing to repay the loans with shipments of oil, coal and minerals. 22 Today China is entering into similar arrangements with a number of African countries. As of 2004, China became Africa’s second-leading trade partner after the European Union. 23 Since then, China has provided about $14 billion in resource-backed infrastructure loans to African countries, including an oil-backed loan to the Republic of Congo, a loan to the Democratic Republic of Congo (DRC) to be repaid with exports of copper and cobalt, and a loan to Ghana to be repaid in shipments of cocoa beans. 24 An attractive feature of these loans is that the infrastructure investments, built by a combination of Chinese and African labour, provide a tangible counterpart to the resources being extracted from Africa. In exchange for the copper and cobalt, for example, T 70 the DRC gets railways, roads and other public goods. For ordinar y Congolese people, the near-barter-trade arrangement means that they can see, feel and touch the proceeds of the transaction. They may regard this as a better deal than what they had under colonial rule, when Belgium got the Congo’s resources and all the countr y had to show for the digging of its precious metals was mounds of dirt. It also looks good compared to oil-backed loans from Western bankers to African governments, the counterparts of which are cash in secret offshore accounts or guns to suppress the regime’s opponents. Another attraction of the resource-backed loans is that they allow African countries to access finance that other wise would not be available. For African countries classi fied as low-income countries (LICs), market loans are typically out of reach, and their ability to access concessional loans from official creditors is con- strained by quotas and by conditionalities that penalize countries with poor ‘institutional performance’. 25 These LICs can become trapped in a vicious circle of low institutional capacity, finan – cing constraints and low capacity to improve their institutions. Resource-backed loans may offer one way out of this impasse. These loans are not immune to pathologies that have plagued other foreign loans to African governments, however. A National Assembly inquir y in the DRC reported in 2010 that more than $23 million in signature bonuses on the copper-backed loan had been stolen. 26 And there is concern, particularly among Western govern- ments, that the Chinese loans will support corrupt and authoritar- ian regimes. But as Deborah Brautigam, author of The Dragon’s Gift, a study of Chinese investment in Africa, points out, ‘the West also supports such regimes when it advances its interests’. 27 Other creditors are getting into the business of resource-backed lending to Africa, too. For example, shortly after China’s Export- Import Bank extended $2 billion in credit to Angola in 2004, Stan – dard Chartered Bank followed with another $2.25 billion oil-backed loan, drawing criticisms from civil society groups for the lack of transparency surrounding the deal. 28 In addition to China, other ‘emerging partners’ are lining up to enter this sector. Thus India T 71 and Brazil have signed or announced oil-for-infrastructure loans in several African countries. 29 From the perspective of economic development, this growing trend raises the question of whether African countries are ready to engage in a way that maximizes their share of the income from natural resource endowments and puts this income to productive use. The partners certainly have a strateg y of engagement with Africa. The question is: does Africa have one, too? 30 Foreign loans: the good, the bad and the capital-star ved Before concluding this chapter, we want to make it clear what our analysis is and is not saying about foreign loans. The evi- dence presented in this chapter has demonstrated that there is a strong link between external financi ng and capital flight via the phenomenon of debt-fuelled capital flight. The evidence indicates that a substantial fraction of the funds that African governments have secured from lending institutions and development partners either never made it to Africa or were diverted into the private pockets of politically influential individuals and their associates. For this reason, a substantial fraction of Africa’s debt can be considered ‘odious’, in that the people of Africa have no moral or legal obligation to repay loans that did not ser ve bona fide purposes. We return to this issue in the final chapter of the book. Our analysis does not suggest, however, that all loans go into capital flight or that all debt is odious. Africa’s landscape is cer- tainly replete with examples of inefficient use of foreign loans; African fields count plenty of (dead) ‘white elephants’, and as we have seen, much of the borrowed money came to rest outside of Africa. At the same time, many good things have happened on the continent thanks to aid and external borrowing. Roads have been built, linking markets and reducing the cost of doing business. Children have been educated, clinics have been constructed in rural areas, and mosquito nets have been distributed in malaria- infested areas, all with external support. Ample testimonies as to the bene fits of aid, including official lending, can be found in various areas, especially in health and T 72 education. For children born in low-income households in Africa, aid allows them to attend school, and allows some of them to move up the social ladder to become national leaders and even to reach the global stage. An example can be found right here in this book – one of the authors, Léonce Ndikumana, is a product of donor-funded public education from high school all the way to graduate school. The stor y began in 1972, as Burundi was ex- periencing a wave of bloody ethnic violence that took the life of his father. Having just completed elementar y school in Martyazo in southern Burundi, Léonce was one of seven students from his school who were selected to attend the Ecole Normale de Rutovu, a high school sponsored by Canadian Catholic brothers. The op – portunity to attend high school in Rutovu marked the beginning of a successful educational experience that would eventually lead Léonce to the University of Burundi and then to Washington Uni- versity in St Louis in the United States. The economics department at the University of Burundi at that time, along with the science departments and the medical school, was well equipped thanks to grants from bilateral aid donors. Léonce’s graduate school was also funded by a grant from the US Agency for International Develop – ment. Similar stories can be told of the majority of Burundian intellectuals, most of whom come from modest upbringings and would not have been able to afford higher education. It is also the stor y of many Africans in other countries whose upward social mobility was made possible by aid to education. Foreign loans and aid are valuable to the extent that they are put to good use. In principle, and at times in practice, foreign loans and grants can help African countries implement national development plans by filling the gap between domestic revenue and the costs of development projects. For example, in 2009, when Botswana faced a financi ng shortfall due to declining export revenues in the wake of the global economic crisis, the government approached the African Development Bank for the first time to request a $1.5 billion budget-support loan. This loan allowed the government to meet its recurrent expenses and to finance planned infrastructure projects that other wise would have had to be postponed. T 73 Yet without the right incentives and good management, loans can and often do yield bad results, as we have seen, funding wasteful expenditures and financi ng private wealth accumulation. For this reason, some analysts and donors have taken the view that development assistance should be universally preconditioned on ‘good governance’. This solution poses a quandar y in countries with weak governance institutions, including countries coming out of civil wars or at risk of violent conflict. In these settings, inadequate aid can exacerbate hardship and societal tensions, but misguided or misused aid can exacerbate these, too. Aid can yield positive results if it helps to build effective and sustainable institutions. 31 In the majority of African countries, aid currently is not enough to meet the massive investment needs. It is difficult to achieve meaningful development results if aid only trickles in small and unpredictable amounts. Low-income African countries, in par- ticular, find themselves in a problematic situation: they receive inadequate aid and at the same time conditionalities imposed by the international financi al institutions impede their access to private capital markets to raise additional funds. Yet some of these countries are now demonstrating the capacity to raise substan- tial amounts of financi ng from domestic and international bond markets. Ghana recently raised $750 million through Eurobond issues to finance infrastructure. Similarly, the Kenyan government’s domestic-currency infrastructure bond issue was oversubscribed by a large margin. There are clear needs for development financi ng across Africa today. The choices are not (or need not be) simply between bad loans or no loans. Good loans are possible, too. But making this possibility a reality will require systemic reforms in lending practices by financi al institutions, and in the management and use of external resources by African governments. The solution is not to ‘pull the plug’ on African countries, but to plug the leaks and fix the per verse incentives that have sapped the effectiveness of loans and aid in the past. T 74 4 | The human costs Capital flight drains resources from Africa. So does debt ser vice on loans that financed capital flight. The human costs of this drain can be glimpsed at the Centre Hospitalier Universitaire de Brazzaville, the main hospital in the Republic of Congo, where patients are carried up and down the stair wells on people’s backs because broken lifts have not been repaired. A French researcher grimly obser ves, ‘Only the morgue operates at full tilt.’ 1 In 2005 Congo’s government spent $101 million on external debt ser vice – more than it spent on public health. The Republic of Congo is one of five African countries where child mortality increased between 1990 and 2008. 2 Only 6 per cent of children sleep under mosquito nets that protect against malaria, the disease that accounts for one in five of all childhood deaths in Africa. 3 Congo is not alone. Across sub-Saharan Africa, many govern- ments today spend more on debt ser vice than on health for their people. Africa’s quiet violence In the decades since independence, violent conflicts have taken the lives of many Africans. Between 1960 and 2005, Africa experienced about 1.6 million battle deaths. 4 The toll is multi- plied by deaths due to war-related disease and star vation and the breakdown of healthcare systems. For example, including deaths from these causes, the war in the Democratic Republic of Congo claimed an estimated 5.4 million lives from 1998 to 2008, making it the world’s deadliest conflict since the Second World War. 5 In recent years, the number of violent conflicts in Africa and the associated death toll have subsided. We can hope that this trend will continue in the future, and that war will recede as a cause of human suffering and death. 5 ‘ The main teaching hospital here is in such disrepair that many patients have to pay freelance porters for pigg yback rides up and down the stairs to get X-rays. It costs $2 a flight, each way,’ the New York Times reported from Brazzaville in December 2007 (New York Times) 76 But the continent continues to wage an equally devastating battle against the quiet violence of needless disease and hunger. The majority of deaths in Africa are caused by diseases that are preventable and curable with existing medicines and technolog y. Each year, for example, nearly one million children under the age of five die from malaria worldwide. About 75 per cent of them are Africans. 6 Diarrhoea and pneumonia, both curable diseases, together account for 35 per cent of Africa’s child deaths. Apart from the human cost, the economic impacts of these diseases are also large. It has been estimated, for example, that Africa loses more than $12 billion of GDP ever y year owing to malaria. 7 Why? Malaria has been virtually eradicated in many places in the world. Premature death rates from other diseases have been greatly reduced elsewhere. But in Africa programmes for preven- tion and cure either do not exist or are inadequately funded. It may be true, as economist Jeffrey Sachs has remarked, that Africa is ‘really unlucky when it comes to malaria: high tem- peratures, plenty of breeding sites, and mosquitoes that prefer humans to cattle’. 8 But the real cause of the failure to conquer malaria in Africa is not bad luck; it is insufficient funding for prevention and treatment. Fewer than one in five African children sleep under mosquito-proofed nets. Until recently, as Sachs notes, malaria rarely figured on the agenda of Africa’s international aid partners: ‘Malaria was not on the policy radar screen. The IMF and World Bank were apparently too busy arguing for budget cuts and privatization of sugar mills to have much left to deal with malaria.’ 9 In addition to inadequate international funding, national re- sources are poorly managed. The problem is particularly striking in the case of resource-rich countries. In Equatorial Guinea, for example, the low coverage of anti-malaria programmes contrib- utes to high mortality rates, especially among children. Malaria mortality in Equatorial Guinea is more than twice the African average. 10 While the people battle disease, the countr y’s elite squanders the nation’s oil wealth on personal luxuries. Teodorin F 77 Obiang, the president’s son, is reported to have a $35 million mansion in Malibu, California, as well as multiple foreign bank accounts. 11 In 2011 Global Witness reported that he had commis- sioned plans for a 118-metre ‘super yacht’ complete with its own cinema, restaurant, bar and swimming pool. The yacht’s price tag would be $380 million, three times Equatorial Guinea’s annual budget for health and education combined. 12 In a similar vein, Global Witness reports that one month of private spending by Denis Christel Sassou Nguesso, the son of the Republic of Congo’s president, could have paid for vaccinations against measles for more than 80,000 Congolese babies. 13 Measles is a leading cause of child deaths in his countr y. Water-borne diseases are a major cause of ill health and deaths in Africa, especially among children. This is a result of lack of access to clean drinking water and sanitation facilities. In Nigeria, for example, only 58 per cent of the population has access to clean drinking water sources, despite the countr y’s oil wealth. 14 Only 34 per cent of Africa’s population had access to sanitation facilities in 2008, only a slight improvement on 30 per cent in 1990. In Latin America, by contrast, the corresponding figure is 87 per cent. As a result of inadequate funding from both national and international sources, Africa has too few health facilities, and those that exist do not have adequate equipment or personnel. Africa on average has only eleven nurses and midwives per 10,000 inhabitants, less than half the world average of twenty-eight. 15 Access to the ser vices and facilities that do exist is grossly unequal. Rural households often live far from health facilities, and the poor in general are at a disadvantage since they cannot afford to pay for private healthcare. In Côte d’Ivoire, for example, among the richest fifth of families, 95 per cent of childbirths are attended by skilled health staff; among the poorest fift h the figure is less than 30 per cent. In Nigeria, the corresponding ratios are 86 per cent for the top fifth of households, and only 8 per cent for the poorest fifth. 16 Ever y year millions of children worldwide die before reac hing T 78 their fifth birthday. UNICEF reports that ‘malnutrition is a con- tributing factor in more than half these young deaths’, and that more than half die at home owing to lack of access to health facilities. 17 Thanks to medical progress, child mortality worldwide has declined by more than a half in the past five decades, from 20 million deaths in 1960 to 8.8 million in 2008. But progress has been ver y slow in sub-Saharan Africa, which has the highest child death rates. 18 In 2008, the continent lost 86 babies for ever y 1,000 births (see Table 4.1). table 4.1 Infant mortality (deaths per 1,000 live births) Region 1980 2008 % change 1980–2008 Sub-Saharan Africa 115 86 –25.2 South Asia 114 58 –49.1 Middle East & North Africa 94 29 –69.2 East Asia & Paci fic 54 23 –57.4 Latin America & Caribbean 63 20 –69.2 Eastern Europe & Central Asia 53 19 –64.1 High-i ncome (OECD) 12 5 –58.3 Source : World Bank, World Development Indicators database The 2010 Millennium Development Goals (MDG) Global Moni- toring Report obser ves, ‘Sub-Saharan Africa has 20 percent of the world’s children under age five, but 50 percent of all child deaths.’ 19 Only Seychelles and Cape Verde have reached the MDG target of 45 deaths per 1,000 children, and only a handful of African countries are expected to reduce child mortality to this level by 2015. Historical evidence demonstrates that while growth in income helps to improve health outcomes, income alone is not enough. 20 Major public initiatives, such as water puri fication and supply, installation of sanitation systems, the draining of swamps, and mass vaccination campaigns, historically have played a key role in progress in health. For example, it is estimated that as much F 79 as half of the reduction in mortality in the first third of the twentieth centur y in the United States was a result of water puri- fication alone. 21 This underscores the importance of public health expenditure in Africa. On average, sub-Saharan African governments are currently spending $25 per person annually on healthcare (Table 4.2). This is less than half the amount spent in the Middle East and North Africa, and less than 1 per cent of public healthcare expenditure per person in the OECD countries. In some African countries per capita public spending on health care is in the single digits: at the bottom are Guinea at $2/year, Sierra Leone at $4/year and Ethiopia at $5/year (see Appendix Table A3). table 4.2 Public health expenditure (annual average, 2005–07) Region Public health expenditure US$ per person Share of GDP (%) Sub-Saharan Africa 25.6 2.7 South Asia 8.5 1.1 East Asia & Paci fic 36.0 1.8 Middle East & North Africa 64.8 2.8 Latin America & Caribbean 186.9 3.3 Eastern Europe & Central Asia 207.6 3.6 High-i ncome (OECD) 2602.2 7.0 Source : World Bank, World Development Indicators database In 2008 the MDG Africa Steering Group estimated that the continent needed an additional $10 billion per year by 2010 to im- prove health systems and reach the MDG targets in child mortality and maternal health. Another $17 billion per year was needed to finance programmes in Africa for the control of the major killer diseases. 22 In 2007 total international aid to the health sector in Africa amounted to $3.4 billion. 23 In Figure 4.1 we show the relationship between public health expenditure and infant mortality for the thirty-three countries in our study in the period 2005–07. Statistical analysis indicates that T 80 one infant’s life is saved for ever y $40,000 in extra spending on public health. 24 One million dollars in additional public health expenditure in sub-Saharan Africa thus translates into twenty- five fewer infant deaths. When debt ser vice is bad for your health Many African countries devote a signi ficant share of their scarce public revenues to paying external debt ser vice. Much of the debt being ser viced was used to finance capital flight, as we saw in the last chapter. Debt ser vice payments represent the third and final act in the tragedy of debt-fuelled capital flight. In the first two acts – foreign borrowing in the name of the public, and diversion of part or all of the money into private assets abroad – there is no net loss of capital from Africa. What comes in simply goes back out again. It is when African countries start to repay these debts that the resource drain begins. Sub-Saharan African governments as a whole today are spend- ing roughly the same amount on debt ser vice as they spend on public health (see Table A3 in the appendix). In other words, if 4.1 Infant mortality and public health expenditure, 2005–07 Source : Authors’ calculations using data from the World Bank’s World Development Indicators database B B B B BB BB BBBBBB B BB B BBB B B B B B B B B BB B B 0 20 40 60 80 100 120 140 160 180 1 10 100 1,000 Infant mortality (per 1,000 live births) Public health expenditure per capita ($) – log scale Four 81 all the subcontinent’s external debts were cancelled, and all the saved money allocated to healthcare, this would double health spending. The result undoubtedly would be greatly improved health outcomes for the African population in general and for the poor in particular. In practice, of course, there is not a simple one-to-one relation- ship between debt ser vice and public health spending. Healthcare is only one among many possible alternative uses for the money currently spent to repay foreign debts. To gauge the extent to which debt ser vice payments actually are associated with less public health spending, we need to examine the behaviour of African governments, or what economists would call the ‘revealed preferences’ of fiscal policy-makers. Total debt ser vice payments from the thirty-three countries in our capital flight analysis averaged $19.2 billion in the years 2005–07. Figure 4.2 depicts the relationship between each coun- tr y’s debt ser vice and public health expenditures in these years. Examining the correlation between the two, we find that each additional dollar paid in debt ser vice is associated with 29 cents 4.2 Pu blic health expenditure and debt ser vice (percentages of GDP, 2005–07) Source : Authors’ calculations using data from the World Bank’s World Development Indicators database B B B B B B B BB B BBB B B B B B B B B B B BBB B B B B 0 1 2 3 4 5 6 0 2 4 6 8 10 Public health expenditure/GDP Debt service/GDP The human costs 82 less spent on public health. 25 We estimate therefore that public health expenditures in these countries as a whole would have been $5.6 billion higher in the absence of debt-ser vice payments. The high levels of deaths in Africa from preventable and cur- able diseases are largely a result of lack of resources. These are in short supply, much below the needs. Moreover, the limited resources that exist are poorly managed and unequally distributed, compounding the problem. But when resources for healthcare are scaled up and well managed, the gains can be impressive. Several African countries, including Ethiopia, Rwanda, Tanzania and Zambia, have reduced malaria by as much as 50 per cent, for example, simply by distributing mosquito nets. 26 Efforts to secure more funding for public health in Africa will require a multi-pronged approach. Internally, it will require mobilizing more domestic resources and increasing budgetar y allocations to health systems. Externally, it will require raising more aid explicitly targeted at projects and activities that improve healthcare. It also will require curbing capital flight, launching strategies to recover Africa’s stolen wealth, and staunching the ongoing drain of financi al resources through debt ser vice. The importance of the latter measures is clear when we make the con- nections between capital flight, debt ser vice and health outcomes. Connecting the dots As we have documented in this chapter, debt-ser vice payments force African governments to reduce public health expenditures. We estimate that one more dollar spent on debt ser vice means 29 fewer cents spent on health. Less public health expenditure means that fewer clinics are built, less medicine is available in hospitals and pharmacies, and fewer healthcare workers can be employed. To illustrate the human cost, we examined the correlation between public health expenditure and infant mortality. We found that each additional $40,000 of health spending is associated with one less infant death. Putting these results together, we can calculate the impact F 83 of debt ser vice on infant mortality. A million-dollar increase in debt ser vice reduces government health expenditures by about $290,000. This translates into seven more infant deaths. For ever y $140,000 that sub-Saharan Africa pays in external debt ser vice, another African baby dies. This is a conser vative estimate of the human costs of debt ser vice. It omits other impacts of lower public health expenditure: higher mortality among children aged one to five (infant mortality refers only to the first year of life), higher premature deaths of older children and adults, and effects of non-fatal illnesses. It also leaves out human costs associated with the other 71 cents that are lost with each dollar of debt ser vice (apart from the 29 cents in forgone public health expenditure) owing to reduced spending on education, infrastructure and other public goods. In Chapter 3 we showed that for ever y dollar of foreign bor- rowing by African governments in the 1970–2008 period, roughly 60 cents left the countr y in the same year as capital flight. This means that four of the seven infant deaths associated with each million dollars of debt ser vice can be attributed to loans that funded capital flight. Applying this ratio to the $19.2 billion annual debt ser vice paid in 2005–07, we conclude that debt-fuelled capital flight resulted in 77,000 excess infant deaths per year. These numbers give new meaning to the phrase ‘blood money’. They illuminate the enormous human costs that Africa is suffering as a result of its financi al haemorrhage, as public and private actors at home and abroad contrive to smuggle money overseas while mortgaging the continent’s resources. Asking African countries to mobilize more domestic resources and to use them better to improve the well-being of their people is only part of the development stor y. So is asking donors to provide more aid for investments in healthcare and other human needs in Africa. The other part of the stor y, equally if not more important, is the urgent need to find ways to keep Africa’s resources onshore and to use them to improve the lives of the African people. T
For sources, you may only use readings assigned in class.Follow instruction and Provide me with plagiarism report Question is attached below
Pergamon World Development, Vol. 22, No. 4, pp. 501-516, 1994 Elsevier Science Ltd Printed in Great Britain 0305-750x/94 $7.00 + 0.00 0305750X(93)EOO25-F Convergence and Divergence in the Informal Sector Debate: A Focus on Latin America, 1984-92 CATHY A. RAKOWSKI” Ohio State University, Columbus Summary. – Over the years, the “informal sector debate” has increased its complexity and expanded its ambit. For this reason, academics, policy makers, and practitioners frequently have difficulty under- standing a phenomenon referred to by a term used in different ways and supported by data produced through a variety of methods to fit competing agendas. The objective of the present paper is to explain the debate, particularly for 1984-92 as applied to the informal sector in Latin America. The paper identi- fies the approaches/perspectives and personalities involved in the debate, assesses points of agreement or divergence, and clarifies policy implications. 1. INTRODUCTION World Development has long served as a forum for the conceptual, methodological and policy debates surrounding the informal sector.’ In 1978 the journal published a special issue edited by Ray Bromley with articles by Caroline Moser and Victor Tokman on issues under debate for that period; Moser subse- quently updated her article for a 1984 issue of Regional Development Dialogue. Lisa Peattie’s polemic and much cited critique of the informal sector concept appeared in World Development as did Tokman’s policy proposition for a heterogeneous informal sector.3 This paper both updates the debate for 1984-92 – especially as it took place in Latin America – and attempts to make sense of apparently competing paradigms and policy recommendations. The paper begins with an overview of contemporary issues and approaches, followed by a comparison of each of four major approaches. The final section sug- gests where the debate is likely to go as the 20th cen- tury draws to its conclusion. Moser identified the critical issues of the 1970s and early 1980s as the relationship between concep- tual definitions, research methodologies, and policy proposals; the reasons for the persistence of the sector; and its capacity to generate growth and employment.4 For Moser, the importance of the informal sector con- cept was primarily “a consequence of the fact that – under the prevailing conditions of twentieth century capitalism – small-scale forms of production are not disappearing (a marked difference from the process of capitalist development which occurred in nineteenth century Europe).“5 The issues cited by Moser remain valid, but some dramatic changes have taken place since 1984. These include a new assessment of the nature of informal activities, their relation to the state, and their role in development. 2. THE CHANGING DEBATE Change is exemplified by the growing acceptance among academics and policy makers that under cer- tain conditions (e.g., structural adjustment, recession, excessive regulation) many informal activities are valuable economic endeavors (as opposed to their past classification as “marginal”). Change also is reflected in the notion that informal activities are, possibly, a necessary (integral) stage or long-term component of developing market economies – a new path to capi- talist development. The restructuring of production in the global economy, recession and debt crisis in Latin America, the resurgence of neoliberal economic and democratic political ideologies, and long-term and new guerrilla activity (especially in Central America and Peru) encouraged this revaluation of informal activities and shifted discussion to issues of equity, competition, and power; the importance of macroeco- nomic versus social welfare objectives and of macro versus micro-level policies; and the role of private versus public sector agents in promoting “genuine” development. New issues crop up periodically, such as-most recently-a consideration of (a) the role of *This paper is a modified version of Chapter 3 (The Informal Sector Debate, Part 2: 1984-1993) in Cathy A. Rakowski (Ed.), CONTRAPUNTO: The Informal Sector Debate in Latin America (Albany: State University of New York Press, forthcoming) and is published with their per- mission. Final revision accepted: November 12, 1993. 501 502 WORLD DEVELOPMENT right- and left-wing ideologies and democratization in conceptualization and policy formulation, 6 (b) how a growing informal sector can reshape work, social organization, and state-society relations, and (c) the impact of informal sector responses to macroeco- nomic policy and state authority. 7 Debaters have changed too. The informal sector debate described by Moser was almost exclusively the domain of development economists and academic social scientists. They were joined in the 1980s by private voluntary agencies and other nongovernmen- tal organizations, community organizers, business leaders, politicians and political parties, and social planners. Whereas the debate once took place primar- ily in consultant reports, UN documents, scholarly publications, and at universities, think tanks, profes- sional meetings or in government planning offices, the contemporary debate extends to a broader arena– the popular press, television, chambers of commerce and business organizations, labor unions, legislative bod- ies, the offices of international donor agencies, and a variety of public and private spaces. Content has changed. Definitional concepts and methodology are still debated, s but relative impor- tance has shifted. In the 1970s, much energy was expended arguing over terminology and whether the informal sector was half of a dichotomy (economic dualism) or an extreme on a continuum. In the 1980s, new terms emerged leading debaters to focus more on understanding the phenomenon regardless of the label used. 9 By 1992, terms such as informality (operating outside or on the margins of the regulatory context) were used interchangeably with in- formal activity, sector or economy; self employment or disguised wage work; subcontracting; microenter- prise; the underground or black market economy; and casual work. Terms such as economic dualism, con- tinuum, petty commodity production, marginality, and traditional sector had fallen from favor. Accordingly, the people who engage in informal activities are equally likely to be called “the poor,” “unprotected workers,” “informals,” “entrepreneurs,” and — occasionally — “petty producers” and “casual labor.”10 The popularity of the informal sector concept among policy advisors and governments arose from a convergence of interest in poverty issues, the need for a policy instrument, H the difficulty of translating the academic-intellectual debate into policy, the visibility of the activities labeled informal, and competing pres- sures (by informals, labor unions, shopkeepers, the middle class, etc.) on the state to take action (whether that be repression, promotion, or tolerance). Other factors reinforced this focus on the informal sector, including economic factors (growing size of the sec- tor, economic crisis and slow growth, expanding poverty, the need for efficient use of resources, scarcity of financial resources) and cultural, political, and ideological factors (imported concepts such as underground economy and black market, democrati- zation and the importance of informals as con- stituents, popularization of neoliberal ideology regarding deregulation and a conservative interna- tional policy environment, a reconceptualization of informality from one of marginalization to one of entrepreneurial and capitalist endeavors). ~2 Governments, international financial institutions, and private foundations found in the concept a common language to coordinate their activities and, in the case of governments, to improve their access to interna- tional welfare funds earmarked for income-generating activities. In part, the popularity of the informal sector concept comes from its ability to bridge diverse ana- lytical and policy approaches, while its drawback is the inability to integrate approaches or improve ana- lytical usefulness. 13 A sketch of the major approaches and perspectives which have dominated since 1984 illustrates. A logical starting point is the ILO (International Labor Organization) position — more commonly known in Latin America as the PREALC approach. 3. MAKING SENSE OF THE DOMINANT APPROACHES (a) The ILO-PREALC (structuralist) approach Bromley summarizes the direction in which the ILO-PREALC tradition has moved since 1983: The attitude taken by most advocates of the informal sec- tor concept who have followed the ILO line is that defin- itional questions are unimportant, and the existence of the sector is just as obvious as the existence of a Third World or a middle class… The ILO version of the con- cept has mainly served to promote a social democratic ideology and reformist agenda for the Third World. It has provided encouragement for appropriate technologies, indigenous enterprise, and local self-help, and it has advocated an increased government role in supporting and nurturing informal sector enterprises.~4 PREALC is a policy-oriented organization and think tank comprised primarily of economists. Its approach is presented in the joint-authored publica- tions of PREALC, and in the writings of Victor Tokman, Jaime Mezzera, Gustavo Mfirquez, and Vanessa Cartaya. ~5 Despite widespread criticism, pro- ponents of the ILO-PREALC approach continue to use a dualistic definitional concept 16 (modern/infor- mal) linked to size of business (small), type of employment or way of doing things and way of orga- nizing production (self employment, family firms, low levels of capital, unsophisticated technology), and outcomes (low productivity, low incomes, survival strategies). This approach has evolved over time, while conserving the essence of its argument. INFORMAL SECTOR DEBATE 503 Proponents still focus on labor markets and argue that the informal sector results from an excess supply of labor caused by the nature of industrialization (e.g., capital intensive), worker characteristics (low skill, poorly educated, age and sex), rural-urban migration, and rapid growth in the urban labor force. 17 Informality is still equated with poverty (since the proportion of nonpoor TM in the sector is relatively low). 19 There have been some important changes in the ILO-PREALC approach. First, labor market segmen- tation has become more important than human capital models as a tool for analyzing labor markets. 2° Second, case studies and analyses of productive units complement census and survey analyses. Third, costs of legalizing and content of laws and regulations are accepted as contextual variables which impact infor- mality and productivity without being a cause of informality: “operating outside the margin of the law is the result of a certain form of production within a structural context characterized by an excess labor supply and a low demand for well-paid jobs. ”21 Fourth, PREALC analysts seldom refer to informal activities as “traditional” although critics argue this is implicit in the modern-informal point of segmentation used in labor market analyses. 22 Finally, proponents emphasize the heterogeneous nature of the informal sector 23 which is caused by economic conditions (prosperity, recession) and policies (structural adjust- ment, welfare subsidies, etc.). Heterogeneity is evident across industry sectors and subsectors — e.g., differences between informal manufacturing, services and commerce; self employment, domestic servants (individuals) compared with microenter- prises (productive units); owners compared with workers of microenterprises; and income segmenta- tion. This approach identifies at least two types of infor- mal activities — the survival strategies of the perma- nent poor (people with deficient human capital or tracked into marginal jobs because of their character- istics) and the “conjunctural” unemployed (who have lost jobs or whose incomes have declined due to eco- nomic recession, crisis, and structural adjustment policies). 24 PREALC analyses point to a role in the 1980s for the informal sector as a social welfare and employment “safety net” in countries which have no welfare system. PREALC also recognizes a third, small group — entrepreneurs (owners of microenter- prises) with growth potential. The PREALC approach proposes that the primary path to development and to poverty alleviation is macroeconomic policy which emphasizes expanding modern sector employment and incomes. But propo- nents of this approach also advocate a complementary package of mutually reinforcing policies to address the myriad factors which impact job creation, produc- tivity, and income. 2s (b) The underground economy approach This second approach is also structuralist. It has been called alternately the black market approach, the underground approach, the word-systems approach, and even the “Portes” approach. 26 Since the term underground is used in several writings, this is the label used here. The underground approach evolved in the noneco- nomic social sciences and academia; it has roots in neo-Marxist and dependency traditions dissatisfied with the ILO’s economistic model. 27 Policy relevance has not been of primary concern; contributing to knowledge and theory development have been. The cultural anthropologists and sociologists who predominate, however, share a basic neo-Marxist ideology which focuses on exposing class conflict, exploitation of labor, and the spread of imperialism through worldwide economic restructuring. Their agenda includes revealing the different causes and forms of labor exploitation in diverse settings, includ- ing the more developed countries of Europe and North America. Underground proponents reject economic dualism and reveal the way in which forms of production, productive units, technologies, and workers are integrated into local, regional and international economies. Underground language includes terms such as industrial restructuring, the internationaliza- tion of capital, and flexible specialization; “informal economy” and “underground” are the terms preferred over informal sector. Research on the underground assesses relations of production (especially mecha- nisms for subordinating labor), circuits of accumula- tion (e.g., linkages between informal activities and large firms), class cleavages, and the (re)organization of production under changing economic, institutional, social and legal conditions. Research includes labor market analyses (using survey and census data) and case studies of specific industries and their workers. 2s Since “informal economic processes cut across the whole social structure,” research focuses on the “social dynamics underlying the production of such conditions. ”29 Despite a long-standing debate between Tokman and Portes, 3° there are many points of agreement between the underground approach and the PREALC approach. Both focus on forms of production, identify economic restructuring and/or crises as factors in the expansion of informality and its changing role in the 1980s, and accept the heterogeneity of the informal economy: the informal sector is structurally heterogeneous and comprises such activities as direct subsistence, small- scale production and trade, and subcontracting to semi- clandestine enterprises and homeworkers.., the infor- mal economy simultaneously encompasses flexibility and exploitation, productivity and abuse, aggressive 504 WORLD DEVELOPMENT entrepreneurs and defenseless workers, libertarianism and greediness. 3I Both see a link between informality and impover- ishment of workers (although they differ on important details): “most individuals engaged in informal eco- nomic activities are poor… [but] informal economic processes cut across the whole social structure.” The informal economy “is not a set of survival strategies performed by destitute people on the margins of soci- ety… It is a specific form of relationships of produc- tion, while poverty is an attribute linked to the process of distribution. ”32 Despite differences in terminology, essentially both conclude that informality is the “expression of the uneven nature of capitalist development” in peripheral societies. 33 Finally, both agree that infor- mal economies can be growth economies under cer- tain conditions: technological advancement, an export orientation, and relative autonomy (when not inte- grated into vertical hierarchies of subcontracting). 34 Although not policy oriented, underground propo- nents agree with the advisability of a heterogeneous policy package and the need for state intervention to reduce inequalities, limit exploitation, and support entrepreneurial endeavors. The underground approach also differs from the PREALC approach in important respects, including its attribution of motive for subcontracting, interpreta- tion of the consequence of linkages with the “formal” sector, and assessment of the nature of segmentation and the direction of future economic change. Proponents emphasize that informality is present in both peripheral and advanced economies and that peripheral economies are themselves “modem;” both informal and formal activities are “features of capital- ism which fufill necessary functions for the accumula- tion of capital. Above all, there is disenfranchisement of the institutionalized power conquered by labor… in a two-century old struggle. ”35 Thus, the under- ground approach rejects the subtle notions of social marginality and inefficiency which — for some work- ers and work — remain implicit to the PREALC approach. Firms “go underground” — large firms sub- contract to small firms, large firms engage in illegal hiring practices — to lower costs associated with pro- tective labor legislation. The informal economy is a “process of income generation characterized by one central feature: it is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated. ”36 “Informalization” is a mechanism to reverse the costly process of proletar- ianization, weaken the rights of workers and unions, and disenfranchise a large sector of the working class — with the acquiescence of the state in the interest of renewed economic growth. 37 Informalization is “an instrument wielded by different participants in the class struggle and the outcome is to alter class struc- ture” and privilege. 38 For this reason, workers in the informal sector tend to share characteristics subsumed under the heading of “downgraded labor” — they receive fewer benefits, receive lower wages, and have poorer working conditions, prerequisites for their entry into the labor market. State-supported informal- ization grants competitive advantage. Economic activities can be informalized passively when state regulation is extended selectively (e.g., to large firms, but not to small scale firms) or actively when some firms and private interests gain a market advantage by avoiding some state controls (e.g., selective applica- tion of regulations encourages the subcontracting of production to small firms or the hiring of a casual labor force not subject to stability and benefits)) 9 Because of their size, small firms are more flexible — they can avoid the costs of regulations applied to large firms and can respond more quickly to changes in the market. In what would appear to be merely an argument over semantics, proponents of the underground approach claim the informal sector represents not a segment of the labor market (as PREALC argues), but a segment of the economy. This means that “the fun- damental cause for the maintenance and growth of an informal sector.., is the juxtaposition of extensive labor legislation.., and an abundant labor supply. ”4° This is only a shade different from the PREALC posi- tion that “laws are not the cause of informality… operating outside the margin of the law is the result of a certain form of production within a structural con- text characterized by an excess labor supply and a low demand for well paid jobs. ”4a Despite significant overlap in their positions, underground proponents have been highly critical of the PREALC definition of the informal sector as small scale, easy entry, or a way of doing things. The under- ground approach proposes “informality” should he conceptualized alternately as a “status of labor” — undeclared and noncontractual, lacking benefits and paid less than minimum wage; “conditions of work” — hazardous, unprotected; “form of management of some firms” — fiscal fraud, unrecorded transactions, family firm; and as the “nature” of work– extralegal, unprotected. 42 The policy implications of informality and the consequences for the welfare of workers can be laid out clearly. 43 One of the most important policy contributions of this approach is case study evidence that informality is not limited to peripheral economies, but is also typical of advanced economies. It is a strategy used by firms — both large and small — to cut costs, improve competitiveness, and guarantee flexibility in firm management and employment. A critical shortcoming of the approach is the virtual impossibility of operationalizing the concept for aggregate data analyses — censuses and surveys include no variables with information on compliance with regulations and exclude many types of self- INFORMAL SECTOR DEBATE 505 employment which can be classified as informal, including home-based subcontracting of women as part-time workers. Therefore, case studies — expen- sive, time consuming, not easily generalized to other settings — must be carded out. 44 (c) The legalist or ILD-de Sort approach Issues of regulation and extralegality are at the heart of a “new star” in the debate — the Peruvian Hemando de Soto and the think tank of primarily economists and lawyers he founded, the ILD/Instituto Libertad y Democracia (Institute of Liberty and Democracy). This approach is neoliberal and does not rely on economic modeling or academic research; its ideological position is neoliberal. Terms such as “moral,” “efficient,” “rational,” and “democratic” season its publications. It purports to be based on the real world economics Peattie advocates — the study of entrepreneurs (through surveys, in-depth inter- views, and case studies of subsectors and organiza- tion) and of the institutional constraints (through legal analysis and interviews) which make informality a rational economic strategy. Its arguments “blend well with.., descriptions.., of the advantages of ‘flexible specialization’ as implemented by cooperatives of microenterprises in central Italy” and elsewhere. 45 Proponents differ with both the PREALC and underground assessments of the primary causes and outcomes of informality and on the role of the infor- mal sector in economic growth. While the structural- ists would focus on “cleavages in economic and social composition between formal and informal economies” and “infer that the proper role of the state is to help equalize differences,” the legalists would argue that “cleavages are not structural but legal, bureaucratic, of state making.” There are also impor- tant points of convergence — although each would use a somewhat different language, they would agree that linkages between the sectors disadvantage those in informal work and that the informal sector plays an important role in peripheral economies; but structural- ists want to improve the situation of workers, while legalists argue worker protection would lead to loss of jobs. 46 Ghersi, a legalist, critiques the structuralist (ILO- PREALC) focus on labor markets as confusing effect with cause by defining informality in terms of size or scale of operation. He accuses other structuralists (net-Marxist anthropologists mainly) as blaming the victim by identifying informality as a problem of mar- ginal cultures and values which cannot compete in an advanced economy. In his opinion, informality (with small size as a consequence) is the only rational choice for people in light of the high cost of legality. 47 The legalist approach has had a profound impact on revising the image of the informal sector (from vic- rims to survivors, from parasites to heroes) and on pol- icy. 48 Its ideas have been incorporated rapidly into the work of neoliberal economists, policy advisors, and nongovernmental organizations (NGOs). 49 The legalist concept of “informality,” “informal activities,” “informals” or “informal sector” shares with the PREALC approach notions of dualism and the marginalization of certain actors or activities — in this case referred to as “entrepreneurs.” In contrast with underground proponents who emphasize produc- tive strategies of large firms, de Soto and other legal- ists emphasize income-generating efforts and expen- diture-saving activities of small firms. They discard assumptions (d la ILO and some academics) that informality represents marginalization, that Peruvian (Latin American) culture is incompatible with the kind of entrepreneurship found in advanced countries, and that the problems of Latin American economies are the result of extemal factors (e.g., imperialism). Although legalists frequently refer to informals as “poor entrepreneurs” and romanticize them as strug- gling against great odds to provide needed goods and services, they see in them the hope for competitive capitalist development — if only the state will get out of the market and eliminate the bureaucratic maze and costs associated with legalizing business operations. While Portes recognizes “elements of truth” to the discussion of overregulation, bribes and costs, he is highly critical of the notion that an unregulated econ- omy offers a “magical solution” to Latin America’s problem of underdevelopment. 5° This romanticizes the self-employed and owners of microenterprises. It does not consider their structural subordination or the exploitation of microenterprise employees by entre- preneurs (since their main competitive advantages are keeping the cost of labor low and flexibility — includ- ing to hire and fire as needed). The legalists and PREALC agree on some points. These include the notion that informal activities serve as a “safety valve for societal tensions ”5~ and are “sur- vival strategies” undertaken by the poor — but with great ingenuity and entrepreneurial spirit. 52 But where a sense of choice is implicit in PREALC analyses, the legalists emphasize that the informals are forced into extralegality (and poverty). This is because of dis- criminatory state regulations and costs which advan- tage powerful economic interest groups, because they have no property rights and — hence — no access to credit, and because they suffer from unfair competi- tion. This is an alternative concept of segmentation — between privileged enterprises and nonprivileged. 53 If legality is a privilege of those with political and eco- nomic power, then the informal sector is the people’ s “spontaneous and creative response to the state’s incapacity to satisfy the basic needs of the impover- ished masses” and to the system which has “tradition- ally made them victims of a kind of legal and eco- nomic apartheid ”54 which they have fought and — 506 WORLD DEVELOPMENT with hard work and ingenuity — survived. This is in contrast to PREALC’ s gentler position that informal- ity stems in part from the redundancy of a large segment of the labor force and the “inability” of a capital-intensive industrialization process to absorb this labor. Legalists accuse underground and PREALC pro- ponents of seeing the poor as “passive objects in need of assistance programs. ”55 According to legalists, the poor are the backbone of a country’s economy, risking all their assets in daily transactions, provid[ing] vital services and enhancing a nation’s human resources through the development of craft and entrepreneurial skills and increased capacity to educate themselves and their children, help[ing] to reduce imports and indebtedness by providing goods and ser- vices, and constructing necessary infrastructure (hous- ing, markets, transportation systems): 6 In other words, they create wealth — albeit unrecognized offi- cially as such — which is why they represent a genuine path to development. If this entrepreneurial spirit were legalized and nurtured rather than fettered and suppressed.., a burst of compet- itive energy would be released, living standards would start rising, international trade would increase, [and] developing countries could service their huge and debili- tating external debts more easily: 7 There are important points of convergence. The underground and legalist approaches share a notion of selective informality — firms/informals break only specific (unfair, disadvantageous) laws and regula- tions. 58 Legalists agree with PREALC on the charac- teristics of informal activities — including scale of operation, rudimentary technology, organization of production and form of insertion into the market — but see these as a consequence of state regulations and their costs, not a result of the human capital character- istics of individuals or short-term conjunctural condi- tions: 9 Finally, legalists and underground proponents share the notion that dealing with growing and persis- tent informality/informalization has contributed to ambivalent or contradictory behavior on the part of the state. The underground approach calls this the “informalization of the state” through the selective application of rules and regulations, while legalists refer to it as the state’s conscious acts to defend the status quo, respond to privileged interest groups and adjust to the reality of an informal sector which won’t go away. Both approaches recognize citizens’ dependence on the informal sector to supply goods and services the state cannot or won’t. 6° Furthermore, the state both tolerates many small, extralegal firms (while others are harassed) and stimulates some informal activities as a way to resolve social unrest or promote political patronage. Where the underground argues that informalization is not a social process developing outside the purview of the state; it is instead the expression of a new form of control.., the loss of formal control over these activities is compensated by the short-term poten- tial for legitimation and renewed economic growth that they offer, underground proponents argue that the state selec- tively applies regulations and looks the other way when large firms unable to compete engage in illegal subcontracting and other practices. 6~ A fundamental and probably insurmountable dif- ference between the PREALC, underground and legalist positions is the role they propose for the state in development and democratization. While PREALC and underground proponents stress the need for state intervention; legalists and neoliberals in general argue against state intervention. 62 Legalists also see infor- mality as the key to democracy, as popular resistance to an unfair and overly intrusive state: if the main reason for the existence of legal institutions is to protect individual rights and property from third par- ties, permit orderly access to productive activity, and facilitate harmonious interaction.., it is understandable that, when people are discriminated against, many will rebel… Thus, informality is the road to reform and infor- mals are a political force which can generate both true democracy and a rational, competitive, market econ- omy. 63 The legalist approach has had a profound impact in numerous settings, and think tanks similar to ILD have been established in other Latin American coun- tries and in some African countries. 64 The themes of costs of regulation, democracy, politics, and power are woven through publications on economic develop- ment. Hopenhayn includes in his definition of the informal sector that it is an expression of crisis, a new way of coexisting, democracy, and rational choice. 65 He calls it the “solidarity economy” characterized by social conscience, organizational culture, capacity for action, popular creativity, mutual aid, dedication and innovation. “Popular solidarity” is seen by some as a means to moral, democratic development in civil soci- ety 66 and a strong entrepreneurial sector is seen as a means for stabilizing political systems. 67 There is growing consensus on the need to legitimate the space of the informal sector in civil society 68 and that extralegal status discourages beneficial government intervention. 69 This problem has led to the growing importance of nongovernment organizations (NGOs) in providing assistance to informal finns and the self- employed. Among the major criticisms to these arguments is that the legalist argument “hides” economic causes of informality such as limited demand for labor, lack of INFORMAL SECTOR DEBATE 507 access to capital and markets, exploitation of infor- mals by large firms, and the real role of the state. Informality may be a symptom of the breakdown of the state. For instance, Portes argues that small enter- prises have managed to survive by taking unfair advantage of state regulation of large firms. Thus, legality is a burden for large firms, not the privilege touted by the legalists. Additionally, removal of regu- lation and labor protection could “make large firms more agile and competitive and this could reduce the competitiveness of the informals. ”7° Many of the most profitable activities would cease being profitable were markets liberalized. Discriminatory divisions within the informal sector 7~ are not addressed by the legalist approach; but studies of labor market segmentation carried out by PREALC and independent researchers find that microenterprise workers are the most disad- vantaged and exploited segment of the labor force. This gives small firms their competitive advantage. Many analysts find morally questionable support for a form of production based on the exploitation of workers. 72 Final criticisms of the legalist approach focus on their research methods — including accusations of biased sampling procedures and sloppy interviewing, and use of inappropriate econometric models. 73 In light of methodological shortcomings, PREALC com- missioned studies of the costs of legality in various Latin American cities. Studies found that costs varied widely across settings as did the advantages and dis- advantages of size or legality; only certain costs were important obstacles to legality. TM Other studies find that even informal entrepreneurs question the promo- tion of legal status because they fear it is the first step to the introduction of new taxes and control, 75 and studies from Mexico have found that few microentre- preneurs mention lack of legal status or cost of regula- tion as an obstacle to business success. Credit and lack of access to raw materials are the main obstacles cited. 76 The importance of the work of de Soto and other legalists may be that it “illustrates crucial interlink- ages between ideas, local conditions, intellectual envi- ronment, and global support. ”77 They are responsible for drawing attention away from the characteristics of workers, activities, and exclusively economic factors in development and toward the role of institutions, power and politics in development: “A country’s entrepreneurial reserves do not automatically function properly, they do so only if prevailing institutions allow them to. ”78 Cartaya 79 sees a potential for the three preceding approaches to serve as complementary paradigms pointing to a set of processes of differing origin but a singular direction — the generalization of forms of work and contractual relations different from the model of salaried, stable, protected work touted as the model of growth in the 1970s. Each approach con- tributes empirical knowledge and points out critical issues. The ILO approach contributes information on the technical basis of production, self-employment, and responses to excess labor supply. Some net- Marxist structuralists contribute information on the way in which certain productive forms and producers are “marginalized” from benefits, disabled competi- tively, exploited, and subordinated by large firms in ways that contribute to capital accumulation (hence, development). The underground approach provides information on the economic and regulatory rationale behind flexibility in hiring and production as a result of changes in the world economy. 8° A group she calls the neoliberals (which includes the legalists and NGOs engaged in microenterprise promotion) con- tribute information on entrepreneurship and the impact of institutions and state intervention on infor- mal activities. This notion of complementarity is appealing and, in fact, reflects a precedent set by those involved in microenterprise development and entre- preneurship promotion. “Entrepreneurship,” “microenterprise develop- ment,” “poverty alleviation,” and “popular initiatives” are concepts associated with the growing visibility in the 1980s of nongovernmental organizations and private programs targeting the poor. They have been joined by offices at international donor agencies and private business groups which support small enter- prise development. 8~ These organizations have become important participants in the informal sector debate in the 1980s and their organizational model has been adopted by diverse groups throughout Latin America. Their approach borrows concepts and ideas they find useful from both the structuralists and the legalists. (d) The microenterprise development approach The proponents of this approach are action ori- ented, not interested in conceptual issues, and are only marginally concerned with theories of the origin of microenterprises (used synonymously with informal sector and poverty). Typically neoliberal in economic orientation but also social welfare oriented, they feel comfortable with legalist arguments which reinforce their own sense of faith and confidence in the ability of the poor to defend themselves and survive. Because they accept notions of stratification, exploitation, and privileged sectors of society, they seek to “level the playing field,” expand jobs, and improve productivity and income. Some also aim to “empower” either indi- vidual entrepreneurs or disenfranchised groups and communities through business assistance and devel- opment of organizational skills and capacity. Their focus is practical and they promote, fund, and carry out programs which address the needs of the poor. Many stress basing needs assessments, plans, and pro- 508 WORLD DEVELOPMENT grams on “participatory research” — knowledge acquired through interaction with informals — and on evaluations of the practical experience of programs promoting microenterprise development. While these organizations have no formal label, their umbrella organizations, pamphlets, evaluations, instructional manuals, and papers are most easily identified by the use of the terms “poverty alleviation” and “microenterprise ”s2 and by their focus on practical action for social and economic change. The term “microenterprise” is typically linked to credit, solidar- ity groups, and training in marketing and accounting. 83 NGOs engaged in microenterprise development rapidly embraced the types of micro-level interven- tions advocated by the legalist school (many of which also were supported by PREALC). Some observers say NGOs see de Soto as a “potential savior” and his informal sector as the “new economic hero” who can “provide a sounder basis for development than skepti- cal bureaucracies and traffickers in privileges,” and behind whose products and services lie “sophisticated calculations” and “risk-taking ability. ”s4 The practical nature of NGOs and their use of an integrated approach to poverty alleviation and microenterprise promotion are illustrated by a pam- phlet published by ACCION International (circa 1986) in which the following description combines de Soto’s arguments with elements of both the PREALC and underground approaches: The informal sector is the vast market economy that has developed in Third World cities without imported eco- nomic models, government subsidies, or foreign aid. Its tenacious growth, despite enormous obstacles, gives new meaning to the term “free enterprise” in Latin America •.. all micro-businesses are labor-intensive, small-scale and usually family owned and operated• Capital inputs are minimal, and the enterprises rely almost exclusively on indigenous resources and markets.., transactions take place outside economic mainstream; they are not taxed, licensed, safety-inspected nor are they registered in the national income accounts. Micro-businesses create jobs . . . increase national income.., provide vocational training.., supply needed goods and services.., promote a broad distribution of wealth (as a basis for economic democracy.., particu- larly for women and the unskilled…). Far from obstructing development, the informal sec- tor represents the single most generative source of new jobs and income for the majority of the population and promises to strengthen a broad-based private sector in Latin America. Although new to the informal sector debate, microenterprise promotion has evolved from poverty alleviation activities dating from the early 1960s. Some began as charitable and disaster relief organiza- tions operating in rural and urban areas, 85 while others were founded specifically to bring multinational cor- porate funds to the aid of the poor in Latin American cities where these corporations had business interests. Some started out as Christian youth movements and peace corps equivalents, movements with altruistic desires to contribute to the making of a better world. 86 International groups predominated in the 1960s, but by the late 1970s, they were almost equally likely to be international or local in origin. Local groups often had financial support from and strong ties to international groups, especially during the first five years of opera- tion. Charitable and welfare organizations started with short term goals, but their work turned out to be never- ending. As a result, many found their organizational structure “institutionalizing” and their staff “profes- sionalizing.” From direct assistance and welfare, they were transformed over time into organizations which focused on “helping the poor help themselves.” By the early 1970s, their work concentrated on working with neighborhood or village groups on self-help initiatives and grassroots economic projects. 87 For these NGOs, the shift from charitable work and services to income generating activities was a nat- ural outgrowth of their collective and cumulative experience in helping organize community groups. Additionally, the expansion of the informal sector, especially in the poor neighborhoods where NGO activities concentrated led to an awareness of this sec- tor of people in unregulated, unlicensed, low resource, “marginal” activities which were critical to the sur- vival of the poor, especially women (who predomi- nated as heads of poor households). 88 The 1970s marked the promotion of empowerment and social welfare through economic growth. NGOs found their clients excluded from formal credit sys- tems and disadvantaged by lack of access to training and productive inputs. The underlying ideology and practical experience of NGOs gradually shifted pro- grams in the direction of increasing access to resources. Initially, the political contexts in which NGOs operated and their negative experience with government-supported programs encouraged them to keep their distance from state agencies. NGOs focused on creating a niche where they did not com- pete with governments or multi or bilateral agencies. 89 The kinds of programs (e.g., credit) and service (training) offered by NGOs require different technical and financial skills than did community development programs. 9° NGOs established a pattern of dialogue and networking among themselves 91 (and gradually incorporated international donors), having found through experience that exchange of information is a critical resource to improve the impact of their work. They developed models for evaluating the effective- ness of programs, and networking helped overcome limited access to funding for research and program evaluation and for staff training. 92 The NGOs of the late 1980s and early 1990s have been expanding their role. Despite the time and resources which NGOs as a group have invested in the INFORMAL SECTOR DEBATE 509 poor, a tremendous amount of need remains unmet. NGOs have begun to assume a role of catalyst for micro and macro-level policies and they engage in dialogues with governments and the private sector. 93 In fact, the private sector– business leaders, founda- tions, corporations — has created new, local-level NGOs for promoting microenterprise development through “massification” — applying the NGO method and philosophy on a broader scale to help increasing numbers of entrepreneurs and poor families. 94 Massification and overcoming institutional obstacles demand government and private sector collaboration. In direct contradiction with the legalists, NGOs stress the most important role for governments is to provide the appropriate policy environment for microenter- prise development. 95 4. CONCLUSION The preceding discussion reveals several impor- tant trends: the language of the debate has become simpler, the conceptual framework and discussion of theory less macroeconomic and academic, and propo- nents of different approaches appear to speak to each other’s concerns and critiques. In part, this may be explained by the natural evolution of ideas and meth- ods over time, and by improved access to the growing body of literature. Certainly the importance of the informal sector as a policy phenomenon must have had an impact since it would have created a demand for analyses and policy recommendations framed in terms easily understood and applied by planners and policy makers and readily explainable to interest groups and the general public. Complicated theories — e.g., neo-Marxist — may have fallen from favor because of their low potential for contributing to eco- nomic policy and their assumed contradiction with neoliberal democratization processes. Other logical possibilities include the demand from politicians, social welfare advocates, NGO personnel, and infor- mals themselves for clarification of ideas and discus- sions. Proponents of different approaches may have addressed their own frustrations in communicating with each other. In doing so, proponents for each approach have been influenced by ideas from the approaches with which they debate. This results in a significant move toward an alternative approach which may be more flexible, comprehensive, and use- ful for analyzing complex socio-economic systems. Some differences, however, may be insurmount- able and some issues have not been adequately addressed. The political ideologies underpinning each approach are not compatible — e.g., state intervention is bad, state intervention is good, the nature of state intervention should change; protect modern industry, protect microentrepreneurs, protect exploited workers of both, empower the poor and powerless. Proponents of each argument probably will resist an eclectic or integrated approach through which a third party selects what he or she considers the most useful ideas from competing approaches. Still at issue is to what extent the state should be involved and in what way. For instance, should the state support small firms (through credit, technical assistance, and training) or large firms (through macroeconomic policies), or should it withdraw from intervening in the market (deregulation, debureaucratization and privatization). One neglected issue is how to achieve the appropriate and efficient institutional environment needed for democracy and a market economy. 96 Not resolved is whether or not (or how) the self- employed and small enterprises should be included in decision-making and policy formulation — ignoring them may produce considerable diseconomies, waste, inefficiency and hardship, and may produce no con- crete benefits to larger scale enterprises. 97 Are there necessary limits to microenterprise support? There is some evidence that microenterprise intervention can be “generally inefficient, highly discriminatory, sus- ceptible to paternalism, favoritism, corruption, and victimization.” Perhaps it is more important to “regu- late broader economic, social and physical environ- mental conditions which affect numbers, types, and sizes of small enterprises, than to support or constrain individual enterprises on a highly selective basis. ”98 What are the implications of promotion of the informal sector for changing the balance of power, for long-range planning, for implementation of programs and plans, for the legitimacy of the state? Bringing informals into the policy arena and supporting microenterprises may lead to empowerment and democratization, but will it lead to a more rational and competitive economy? Perhaps informals will become merely one more officially recognized inter- est group able to gain special privileges which disad- vantage other groups. The demands of the informal sector tend to be concrete and pragmatic and the infor- mals support those groups and institutions which pro- vide the goods and services they need to survive. 99 In addition, including informals in decision making may require advocacy programs and government efforts for building grassroots constituencies. It is unlikely that state officials will reduce their patronage potential or give up their authority and privileges.~°° Also at issue is the “menu” approach to policy and programs which characterizes many microenterprise advocates and even Tokman’s policies for a heteroge- neous sector: toss in and stir deregulation, tax reform, access to credit, technical assistance, economic effi- ciency, education and training, linkages between for- mal and informal sectors, macroeconomic policies to promote large firms, policies to “graduate” small firms to middle-size and formal status, improved pro- tection for subcontracted workers, etc. ~°l More study is needed on the interactions among these and on their 510 WORLD DEVELOPMENT differential impact/outcomes under diverse condi- tions. There is substantial agreement on the need for pol- icy changes to accelerate growth and improve the wel- fare of the poor, but there is disagreement on how to go about doing this and how to accomplish policies of great magnitude. Still debated is whether the infor- mals should or can be incorporated into formal sectors (e.g., legalized, taxed) or provided special privileges and subsidies even if it is unlikely they can graduate to formal status. 102 In a context of economic crisis and scarce resources, priorities need to be established. Who should establish them? Major differences of opinion on appropriate policies are even rampant among those who promote small enterprises and among interna- tional development agencies. 1°3 The debate has not evolved sufficiently to achieve consensus over a com- prehensive strategy for economic development and poverty alleviation. 104 Some ideological differences between approaches also may be insurmountable. Is the problem one of directing scarce resources at amelioration of poverty, low productivity requiring human capital and techni- cal change, worker exploitation by both small and large firms? Should the most dynamic firms be pro- moted, should the playing field be leveled, or should competition be allowed to weed out the most effi- cient? Would expansion of the formal sector or the informal sector be a better means of creating jobs and increasing production? Should policy focus on “mod- em” activities for export markets or on small enter- prises that cater to local markets? Some argue that informal work may be rational and efficient in the short run, but in the long run economic and social gains depend on the achievement of much higher pro- ductivity levels through the creation of more efficient units of production which can draw labor into more highly organized sectors where there is better protec- tion of property and contractual rights and higher wages and benefits. 105 Finally, can development occur through consensus and can consensus be achieved in socioeconomic sys- tems through a coalition of support encouraged by the active leadership of policy makers? Or will develop- ment and poverty alleviation depend on a centralized, technocratic, authoritarian regime which may have to use coercion to introduce significant policy changes? 1°6 These are issues which should be debated through the 1990s. NOTES 1. The term “informal sector” — first conceptualized by Hart (1971, 1973) and disseminated by the International Labour Office (1970, 1972) — most commonly is used to refer to size (scale of operations), level of technical sophisti- cation, productivity, and income levels. Small-scale activi- ties are associated with unsophisticated techniques, low lev- els of productivity, and incomes below those of “modern” jobs. Alternative definitions include informal activities as survival strategies, petty commodity production, and entre- preneurship. See Moser (1978), PREALC (1978), and de Soto (1984). 2. Peattie (1987). 3. Tokman (1989). 4. Moser (1984). 5. Moser(forthcoming). 6. Annis and Franks (1989); Cameron (1989). 7. Franks (forthcoming); Cameron (1989). 8. Roberts (1991); Portes and Sassen-Koob (1987); Biggs, Grindle, and Snodgrass (1988). 9. Peattie (1987). 10. The plethora of terms and diversity of meanings led Peattie to refer to “the conceptual swamp which.., engulfed so many” and Cartaya to refer to the “confused world of the informal sector.” See Peattie (1987), p. 851; Cartaya (1987, 1988). 11. Tokman (1987a); Tendler (1988); Peattie (1987). 12. Tokman (1987a, 1987b, 1989); Mezzera (1991); P&ez S~iinz (1991). 13. Peattie (1987), p. 851-857. In her much cited article, Peattie concludes that the concept should be relegated to “an item in the history and sociology of ideas” which contributed to the identification of problems in the functioning of a com- plex economy, gave standing to a variety of economic activi- ties which otherwise would probably have been ignored in pol- icy, and opened a space for considerations which might be called political or moral. She cautions that lumping diverse activities together and separating them conceptually from others to which they are linked will make it harder to carry out analyses and arrive at useful conclusions. But Peattie’s is nearly a lone voice; definitional issues simply are no longer considered critical and are treated as distractions to understanding informal activities and addressing the needs of the poor and of the economies in which they operate. Ironically, it is her comment on the concept as a “real phe- nomenon” in policy and planning which has attracted atten- tion, rather than her central argument that the term is not useful, is “fuzzy,” obscures analysis of central issues, and is counterproductive for research and policy formulation. In INFORMAL SECTOR DEBATE 511 fact, there is support for integrating diverse approaches into a multifaceted, comprehensive approach. See Bejar (1987) and Hopenhayn (1987). 14. Bromley (1990),p. 338. 15. PREALC (1987, 1990);Tokman (1987a, 1987b, 1989, 1990, 1991); Mezzera (1987, 1990, 1991); Gustavo M~quez (forthcoming); M~quez and Portela (1991); Cartaya (1990, forthcoming); Cartaya and Garcia (1988); Cartaya and M~quez (1990). 16. Mhrquez (forthcoming) and Cartaya (forthcoming) argue that their commitment to a dualistic terminology is explained in great part by the way in which the concept is operationalized. The form of operationalization is itself constrained by the assumptions underlying census and sur- vey instruments (e.g., a market economy) and the limited range of census and survey variables useful for measuring informality (e.g., number of workers, worker classification, etc.). 17. Because of the conviction that informality is an urban phenomenon, PREALC has focused its research on large urban areas — especially capital cities. Regrettably this pre- cludes an assessment of the relative importance of informal- ity in secondary cities, towns and rural areas. Moser (1984) and Long and Roberts (1978) find ample evidence of infor- mality in secondary cities and towns, and Liedholm and Mead (1987) argue that informality in Africa is more wide- spread in rural areas than in urban. 18. The disagreement over the links between poverty and informality are the proverbial half full-half empty cup argu- ment. PREALC’s position is that if figures show that 70% of those in the informal sector are poor and that 62% of the poor work there, this is evidence that informality and poverty are virtually synonymous. Portes and de Soto on the other hand (and Cartaya, forthcoming) argue that these same figures are evidence that poverty is almost as important a problem for formal/modern sector workers and/or that wage employment in “modern” activities is no guarantee of a move out of poverty. In fact, private formal sector employees in certain industry subsectors tend to have the lowest incomes in those sub-sectors (for instance, transportation). 19. Tokman (1987a, 1987b); Mezzera (1990, 1991); P&ez S~linz (1991). 20. Mezzera (1990); Mhrquez and Portela (1991). 21. Tokman (1990), p. 22. 22. Portes (1989). 23. Tokman (1989); Mhrquez (forthcoming); PREALC (1987, 1990); Mezzera (1991). 24. See Tokman (1987a, 1987b); Mezzera (1987, 1990, I991); Mhrquez and Portela (1991). Although most analysts agree that structural adjustment has contributed to the expan- sion of poverty (at least in the short run), some also see struc- tural adjustment policies as a long-run solution to poverty because they encourage economies to “become outward ori- ented and achieve rapid rates of economic growth.” See Biggs, Grindle and Snodgrass (1988), p. 159. 25. See Mhrquez (forthcoming); Mhrquez and Portela (1991); Tokman (1989, 1990); Mezzera (1987, 1990); Carbonetto (1984). 26. In the early 1980s, Manuel Castells, Alejandro Portes and a group of Latin American sociologists organized a work- ing group to study and discuss case studies of the informal sec- tor in different settings, primarily in Latin America. The group expanded gradually over time to include graduate students and European sociologists studying “black markets” and under- ground economies in Europe and the United States. Two con- ferences were organized by Portes and held at Harper’s Ferry. The second conference culminated in an edited volume: Portes, Castells, and Benton (1989). 27. See Bromley and Gerry (1979). 28. See Portes, Castells, and Benton (1989); Beneria and Roldiin (1987); Rold~m (1985); Fern,’indez-Kelly (1983); Armstrong and McGee (1985). 29. Castells and Portes (1989), p. 12. 30. Tokman (1987b); Portes (1989). 31. Pones and Sassen-Koob (1987), p. 31. 32. Castells and Portes (1989), p. 12. 33. Peattie (1990); Portes and Sassen-Koob (1987); Castells and Portes (1989); Portes, Castells and Benton (1989); Feldman ( 1991 ). 34. Pones, Castells and Benton (1989), pp. 302-303. 35. Castells and Portes (1989), p. 11. 36. Castells and Portes (1989), p. 12. 37. Roberts (1991); Pones, Castells and Benton (1989), p. 308; Castells and Portes (1989), pp. 26-27; Safa (1987); Portes (forthcoming). 38. Portes, Castells and Benton (1989), p. 398. 39. Portes, Castells and Benton (1989), p. 299; Castells and Portes (1989), pp. 26-27. 40. Portes and Sassen-Koob (1987), p. 38. 41. Tokman(1990),p. 22. 42. Portes and Sassen-Koob (1987); Castells and Pones (1989). 43. Portes (forthcoming). 44. This is why many underground analysts resort to some variation on the PREALC form of operationalization — e.g., 512 WORLD DEVELOPMENT self-employment, unpaid family workers, and size of enter- prise — to arrive at statistical estimates of the relative im-por- tance of informality (see Portes and Sassen-Koob, 1987). 45. Portes (forthcoming). 46. Annis and Franks (1989), pp. 10, 12-13. 47. Ghersi (1991). 48. See Bromley (1990, forthcoming). 49. See Biggs, Grindle and Snodgrass (1988); Jenkins (1988). 50. Portes (1991). 51. de Soto (1989), p. 243. 52. Bromley (1990), p. 328; Main (1989). 53. Mfirquez and Portela (1991), p. 8. 54. de Soto (1989),p. xiv-xv. 55. de Soto (1989),p. 242. 56. Bromley (1990, forthcoming); de Soto (1989). 57. Main (1989), p. 15. 58. de Soto (1989), p. 12; Portes (forthcoming). 59. Mftrquez and Portela (1991), p. 8; de Soto (1989), p. 185. 60. Interestingly, de Soto both argues that informality is widespread (responsible for 42.6% of all housing in Lima, 93% of the urban transport fleet, 83% of all public markets), and that it is “traditional” and “institutionalized.” He cites records from as early as 1920 referring to efforts to control land invasions and the state’s acceptance of invasions as an accepted means of acquiring property (de Soto, 1989, pp. 37-52). In fact, street trading was first addressed in law and policy in 1594 and numerous laws between 1915 and 1970s cite efforts to regulate vending (pp. 75-78). In 1965 the state legally recognized minibus operators, in 1971 informal transportation systems and organizations were incorporated into the design of transportation policy, and by the 1980s organizations of informals had their own political candidates (pp. 78-87, 110-117). 61. Castells and Portes (1989), pp. 26-27. Bromley (1985) addresses the issue of informalization when he discusses the “paradoxical relation between official repression and the evi- dent functionality of small enterprises.” He cites the follow- ing factors encouraging repression: (a) elites and govern- ments hold negative stereotypes of the poor, (b) unionized workers and political parties have been disinterested in the problems of petty entrepreneurs, (c) governments may use sporadic repression to impress elites while in fact doing noth- ing serious to eliminate informal enterprises, (d) persecution may concentrate on enterprises which are unacceptable or unimportant to the urban economy and on those targeted by pressure or interest groups, and (e) governments may not understand the importance of these activities or the linkages between microenterprises and large firms subcontracting to them (pp. 328-329). 62. Bromley (1990), p. 339; PREALC (1987, 1990); Portes (forthcoming); Bromley (forthcoming); Biggs, Grindle, and Snodgrass (1988). 63. de Soto (1988), pp. 29-31,234. 64. Jenkins (1988). 65. Hopenhayn (1987). 66. Razeto Migliaro (1986). 67. Kilby (1988). 68. Mftrquez and Portela (1991), p. 9. 69. Biggs, Gfindle and Snodgrass (1988). 70. Portes (1991). 71. Jenkins (1988), p. 227, 231. 72. Mfirquez (forthcoming); Cartaya (forthcoming); Portes (forthcoming). 73. Rossini and Thomas (1990); ILD (1990b). 74. Mesa-Lago (1990). 75. Bromley (1992). 76. de Oliveira and Roberts (forthcoming). 77. Bromley(1990),p. 342. 78. de Soto (1989), p. 244; (1988), p. 16. 79. Cartaya(1987),p. 76. 80. See Sanchis and Mifiana (1988); Mingione (1991). 81. Sullivan (1987); Levitsky (1988); Liedholm and Mead (1987); SEEP Network (1991); Kilby (1988); GEMINI (1990-); ACCION International and the Calmeadow Foundation (1988). 82. In fact, Priigl (1989) argues that “microentrepreneurs” are not a self-identifying class (as de Soto would have them), but a “construction of international development practition- ers; part of the vocabulary used in an ongoing discourse in development practice which is dominated by a liberal theol- ogy.” 83. This is the language of efficiency and of the individual pursuit of self-interest, more than a language of fights of the weak or justice (Priigl, 1989). 84. de Soto (1989), p. 243; Bromley (1990), p. 330; Mfirquez and Portela (1991), p. 2. INFORMAL SECTOR DEBATE 513 85. Korten (1987). 86. Korten (1987); GEMINI (1990-). Insight into microenterprise promotion also was provided by conversa- tions with William Burrus, Executive Director of ACCION International and staff members of CESAP-Centro de Servicio al Acci6n Popular in Venezuela. During long phone conversations, Marfa Otero provided valuable information on the history and evolution of NGOs and private voluntary organizations (PVOs). 87. Korten (1987); Maria Otero, personal communication. 88. Maria Otero, personal communication. 89. Maria Otero, personal communication. 90. Korten (1987); Klein, Keeley, and Carlisle (1991); Maria Otero, personal communication. 91. The two best known networks are SEEP (through PACT at the United Nations) and the Committee of Donor Agencies for Small Enterprise Development housed at the World Bank. 102. A study carded out by Hugo Pirela in 1982 for CORDIPLAN, the Venezuelan National Planning Agency, and research carried out by Liedholm and Mead (1987) in Africa both found that there appears to be a size ceiling on microenterprises growth, efficiency, and profitability, although this varies from place to place depending on the local regulatory context (may be 10, 15, or even 30 workers). Microenterprises must make the leap between that ceiling and significantly larger size in order to compensate for the “kicking” in of labor legislation, social security, registration costs, payment of taxes, etc. The costs of bridging that gap make it unlikely that microfh’ms will grow beyond the ceil- ing. Ray Bromley reports (personal communication) having seen a draft of a microenterprise stock-taking report prepared for USAID in 1989 in which appeared the comment that in a survey of about 100 microenterprises, not one had graduated to legal, small or medium-sized finn status. This comment did not, however, appear in the final published version of that report. Occasionally, comments on the “high mortality rates” of microenterprises are made in the Inter-American Foundation’s Grassroots Development and at meetings on microenterprise promotion. 103. Bromley (1990), p. 345. 92. See McKean (forthcoming); Drabek (1987); Bromley (1992). 93. Korten (1987); Paul (1988); Otero (1990, forthcom- ing). 94. Bejar(1987); Korten(1987). 95. Otero (1990, forthcoming); Padr6n, Castro, Neumann, and Rodriguez (1991). Private foundations also have entered the informal sector debate. Some, such as the Carvajal Foundation in Colombia and Mendoza Foundation in Venezuela provide training, credit, and technical assistance to microentrepreneurs. Others, such as the Friedrich Ebert Foundation’s research organization ILDIS (with offices in several countries) fund, carry out, and disseminate research findings through conferences and publications. 96. Bromley (forthcoming); Peattie (1987). For a discus- sion of the role of the state in providing the appropriate insti- tutional environment, see Otero (1990, forthcoming). 97. Bromley (1985),p. 330. 98. Bromley (1985), p. 333; Liedholm and Mead (1987). 99. Cameron (1989). 100. Sullivan (1987); Jenkins (1988), p. 224. 104. There is exciting empirical research underway which is shedding new light on informal activities in specific eco- nomic and political contexts. Conclusions were not available prior to publication of this paper, but personal communica- tions and several papers presented at the Latin American Studies Association meetings in Los Angeles (September 1992) provide clues to the type of research underway. For instance, several studies in Nicaragua and elsewhere con- sider the impact on informal activities of cutbacks in state supported microenterprise programs and in the declining capacity of the state to purchase goods and services as a client of informal enterprises. A study in Costa Rica consid- ers the impact on informal activities of the aging of the pop- ulation (as a result of increasing life expectancies) and the contraction of state employment. That is, as older workers are pushed out of public sector employment and as families require income to meet the health care needs of the elderly, informal activities expand. Studies in Tegucigalpa, Honduras, and elsewhere document the characteristics and work history of traders and street vendors to assess whether or not these fit the characteristics described by de Soto for Lima. Other research is planned to assess the impact of the North American Free Trade Agreement (NAFTA) on infor- mal activities. 105. Biggs, Grindle and Snodgrass (1988), pp. 141-142. 106. Biggs, Grindle and Snodgrass (1988), pp. 163-165. 101. Sullivan (1987); Levitsky (1988); Tokman (1989). REFERENCES ACCION International, “The informal economy in Latin America: Problem or opportunity?” Pamphlet (Cambridge: ACCION, c. 1986). ACCION International and the Calmeadow Foundation, An Operational Guide for Micro-Enterprise Projects (Toronto: Calmeadow Foundation, 1988). 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For sources, you may only use readings assigned in class.Follow instruction and Provide me with plagiarism report Question is attached below
Module 5 Write a 5-7 page paper (double spaced, 12 point font, standard margins) on the topic below. Your title page and bibliography (and any other pages that are not writing) do not count towards the page count. Please cite all your sources, with an accepted citational standard of your choice. For sources, you may only use readings assigned in class.  In our examination of Global Economies and State Policy, we have looked at many debates and questions, including: Should states be involved in shaping economic development, or should the free market (with minimal state involvement) guide development? If states are involved, how should they be involved? Is free trade between countries a beneficial arrangement for everyone? How does aid from rich countries to poor countries affect various parties? How do technology, agrarian relations, and land distribution affect the lives and livelihoods of rural people? Should the state ever get involved in attempting to control prices? What is the informal sector, and how can policy affect the lives and livelihoods of those involved in the informal sector? In many of these debates, claims of mainstream economics are challenged by heterodox approaches. Pick out 2-3 of these debates, articulate different theories pertinent to the debates, and then reflect on what available empirical evidence tells us about these debates.

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