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Foreign AidEnablers and Disablers

Rethinking the Millennium Development Goals

for Africa

Professor Stephen PetersonHarvard University

Resident Finance Advisor: 1986-1994 Government of Kenya “ 1996-2008 Government of Ethiopia

What a Good Budget Does

“My role is to make everyone equally unhappy”

Allan Morris, Chairman

Commonwealth Grants Commission, Australia

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Preliminaries…………

BUDGET: 2 sides of the COIN Expenditure (what is the slice going to children) Revenue (what is the cake)

APPROPRIATION (budget) -- ‘to take’(the legal authority to spend)

COMPLIANCE : Paying the legal tax obligation

IMBALANCES: 2 Global Diseases (debt, unemployment)

SUSTAINABILITY: Expenditure with stable Revenue NOT Debt

The Right to Sustainable Development

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Country FY StructuralDeficit %

Capital/RecurrentRatio

PercentFA dependent

Tanzania actual

05-06

(50%) 32.6% 47.8%

projected

08 (24.4%) 45.6% 43%

Mozambique actual

08 1.6% 73.7% 46%

Rule of Thumb

0% 30% ??

The 2 High performers in budgeting for children

(Chart 8, page 15, ACPF Report)

Budgeting 101

Type of Expenditure Prudent sources of funding

Recurrent Wage Stable domestic revenue

Recurrent Operating and Maintenance Stable domestic revenue (possible external grants for lumpy/non-perishable items-- textbooks)

Recurrent statutory (interest, pensions) Stable domestic revenue

Capital Domestic: revenue/loanExternal : grant/loan

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The Financial Achilles Heel of MDGs/Social Sector Expenditures: >long-term liabilities (e.g. teacher salaries) should not be funded by short term volatile sources of funds (foreign aid)

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South Korea 1953 1958 1965 1971 1974 1975

General services 14.8% 17.4% 20.0% 14.1% 11.3% 13.5%

Defense 68.4 34.9 27.3 17.5 18.0 17.1

Social services 6.2 18.7 28.3 31.3 26.2 24.4

Economic services 10.1 26.3 23.3 35.0 38.9 43.8

Other 0.6 2.6 1.2 2.1 5.7 1.2

Ghana 1972 1980 1987

Defense 7.9% 3.7% 6.5%

Social services 30.5 35.8 39.0

Economic services 15.1 20.7 15.7

Other 46.6 39.8 38.3

Stagnant present…..or…..better future?

Africa’s investment priorities

1970-2003

Positive Growth: ServicesNegative Growth: Agriculture, Mining,

Manufacturing

[C. Rada, L.Taylor, ‘Developing and Transition Economies in the Late Twentieth Century: Diverging Growth Rates, Economic

Structures and Sources of Demand,’ DESA Working Paper 34,

UNDP, Sept 2006]

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MDGs as ‘Palliative NOT Development Economics

MDG Development Strategy: SLD (Service Led Development)

[I] shall argue that this palliative economics [the MDGs] has, to a considerable extent, taken the place of development economics. Indeed, the balance between development economics (i.e. radically changing the productive structures of poor countries) and palliative economics (i.e. easing the pains of economic misery) is key to avoiding long-term negative effects.

The MDG’s are Welfare Colonialism[Erik S. Reinert, How Rich Countries Got Rich…and Why Poor Countries Stay

Poor (New York: Carroll and Graf, 2007), p. 240].

My view: MDGs are a subsidy to non-taxpayers in developing countries

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The Global Crisis (box 2, pg 3)

• 1% (the decline in global GDP in 2008—first decline since the depression)

• 9% (the decline in global trade in 2008—the largest in 15 years)•  $10.5 trillion to $1.9 trillion(82% decline in capital flows from

2007 to 2008)•  $30 billion to $13 billion (net capital flows to low income

countries from 07-09)•  $11.6 billion (funding gap or social services for the poorest

countries)•  40% (decline in exports from Africa in 2008)•  7.9% (decline in remittances to Africa)• 6.5% to 1% (decline in Africa’s economic growth rate)•  $59 billion (external financing needs of low-income countries)•  89 million (more people living in extreme poverty by end of 2010)•  350 million (out of 650 million, the number of African’s living

below $1.25 per day)•  1 billion plus (number of people who go to bed hungry)•  $21.8 billion (projected 2009 bonus pool at Goldman Sachs)

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The Global LIE (box 3, page 5) Leverage Private sector

$600 trillion in derivative contracts in 2008 up from 100 trillion in 2000 25% of all mortgages in the US exceed asset value

Public sector $12 trillion in bonds which OECD countries must issue in 2008, $9 trillion in 2000 13% of GDP, Russia’s loan guarantees to state companies 10% of GDP, Turkey’s loan guarantees to state companies 53% of GDP, UAE’s loan guarantees to state companies

✓ Threat of Sovereign Default (Greece, Dubai), downgrade (US Treasury AAA bonds)

Institutions Financial, accounting and audit firms

Central banks / Credit agencies Regulatory agencies Bretton Woods agencies Accounting and Audit standards agencies The Academy

 Experts Accountants and Auditors Academicians in public and private financial management, economists    

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More Pressing Millennium Goals (box 7, pg. 36)

MDGs contribution goals ($140+ billion) will not be met MEG’s: Millennium Entitlement Goals

US: 10% of GDP 2008; 18% in 2050 MTG’s: Millennium Terrorist Goals

US Cost of Afghanistan--$209 billion (since 2001 to 2008) US, UK (Germany?; France?!?) troop buildup (Dec 1—09 Iraq ($3 trillion?)

MCG’s: Millennium Climate Goals European Commission Proposal Copenhagen ($80 billion per

annum) MUGs: Millennium Unwinding Goals

Private Sector ($600 trillion derivative contracts; $100 in 2000)

Public Sector ($12 trillion OECD bonds up $3 trillion in 2 yrs) Sovereign debt (default?) Dubai $60 billion, US (AAA) Govt guarantees of company loans (Russ—13% of GDP, Tur 10%,

Emirates 53%

The Crisis is NOT over

• G-20 debt has reached 118% of GDP• Will take a decade of spending cuts and tax

increases of 8% of GDP to bring debt down to 60%

• Conclusion– Low growth– Fiscal austerity– Sovereign default?[Source: Financial Times, November 4, 2009]

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Who do you call to fix the global problem?

‘A Lost Profession’

‘Today, not only is our economy in a shambles, but so to is the economic paradigm that predominated in the years before the crisis—or at least it should be.’

Joseph Stiglitz

On the occasion of the founding of: Institute for New Economic Thinking (INET)

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What to Do?

DIGs Decade Infrastructure Goals

DTGs Decade Tax Goals ‘Taxes are the price of living in a civilized society—on that has social services’

Domestic revenue >driver of social services >driver of absorption of foreign aid

DRGs Decade Road Goals Rural roads: win-win (human welfare & growth)

DAGs Decade Agriculture Goals1 billion people go hungry(Estimated: by 2050 the world will not be able to feed itself)

Livelihood of 75% of the poor Investment in Agriculture: 2005: 5% of revenue 1980-2006 FA decline 75%Yields : 1960’s 3-6%; now 0%

DPGs Decade Power Goals(Lots of power, not electricity) 15

No Magic Bullets ………but

A Proven Golden Bullet• Fact: 7-9 to 1 return on investment in tax auditing• Return to your countries and advocate an increase

of 25% in next years budget for tax audit• Take the nominal amount of that 25% increase to

the audit budget, multiply by a factor of 7 to 9• Ring fence that revenue increase to social services• Advocate for continuous 25% per annum increases

in tax audit budgets• Monitor tax compliance

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Parting Points

DIGS not MDGs—Best Bet for Africa

The Millennium Development Goals (MDGs) are not the best bet for the bottom billion: they have never been adequately funded, are unlikely to be adequately funded, are fiscally unsustainable, and not the best investment for poor countries in terms of level and certainty of return. The global economic crisis requires a rethink of development, a return to fundamentals, a return to growth and a return to fiscal probity.

Thank you for listening17