Does aid work?

At the end of World War II, with a great part of the world in ruins, a number of international agencies were established to deliver emergency aid. These included the United Nations Relief and Rehabilitation Administration (UNRRA) and the Commission for the Reconstruction of Devastated Areas in both Europe and Asia - which evolved into the United Nations commissions for Europe (ECE) and for Asia and the Far East (ECAFE).

The World Bank and the International Monetary Fund (IMF), also formed post-war by eminent economists of the day, were very different than they are now. Both were expected to help the major countries - the G7 of the post-war period - to avoid the miseries of the Great Depression of the 1930s, and to achieve full employment and economic stability. The World Bank provided funds for relatively rich countries, such as Britain or Australia, to embark on major infrastructure projects - and so enhance their fixed-capital investment, productivity and production. The IMF enabled the same countries, and others, to maintain stable exchange rates, and free convertibility and non-discrimination in financial transactions.

UNRRA largely succeeded in its work of relief and rehabilitation. The chaos and suffering of the post-war period was cleared away more quickly through the food, clothing, shelter and medical supplies. UNRRA was able to supply to the needy in Europe, Asia and the Pacific.

The World Bank and the IMF were also successful in their original roles. The Bank disbursed loans for developmental projects in ways that were, by and large, financially and economically sound, and which contributed to high and stable rates of economic growth in the post-war period. Between 1945 and 1971 the IMF maintained relatively stable exchange rates, increasingly free convertibility and non-discrimination.

Some major problems did, however, persist after the war for some countries, and especially for the British pound - the world's major reserve currency before World War II. Other currencies in Europe and elsewhere also had difficulties. But, with the strong US dollar as the linchpin of the system, currency disciplines were broadly maintained, exchange rates were adjusted in a relatively orderly manner, and convertibility and non-discrimination enlarged up to the late 1960s.

The success of the World Bank and the IMF was founded on stable economic growth and relatively full employment achieved through implementation of fundamentally Keynesian policies in the developed economies. American policies were founded on President Roosevelt’s New Deal policies, launched in the 1930s.

In Australia, they derived largely from the deliberations of the Royal Commission on Money and Banking of 1936, and from the contribution of such people as Joseph Benedict Chifley to those deliberations. When Chifley became Treasurer and then Prime Minister, Australian post-war stability and growth were founded on the Banking Act of 1944 and the White Paper on Full Employment in Australia of 1945.

National policies were reflected in specialised international agencies, such as the Food and Agriculture Organisation, the International Labour Office, the World Health Organisation and the General Agreement on Tariffs and Trade, which operated alongside and in co-operation with the Bank and IMF. They all came under the umbrella of the United Nations, and centred especially on the Economic and Social Council (ECOSOC) and the Second (Economic and Financial) Committee of the United Nations General Assembly, whose members included eminent economists and policy-makers determined to avoid a repeat of the economic turmoil of the 1930s. Under their guidance, national and the international arrangements were successful, up to the late 1960s. Compared with the pre-war period, the years from 1945 to 1969 were a golden age for the more highly developed economies.

What was the position of the developing countries and how did aid to them evolve?

After UNRRA, came a brief period during which the cleft between East and West was more sharply defined. With the descent of the Iron Curtain and the deepening Cold War, the West directed aid ideologically - to either win friends or discourage their departure to the other side.

During this period, the number of aid programs and the scope of aid expanded enormously. International institutions such as the Bank and IMF tended to focus on developing countries and new programs. Under President Truman, the Point Four and Economic and Technical Assistance to Developing Countries programs were created. In 1950, the (British) Commonwealth launched the Colombo Plan for aid to developing countries of the Commonwealth.

In 1963, when I was Australian Representative on the Second Committee of the UN General Assembly, the UN passed a resolution establishing the United Nations Conference on Trade and Development (UNCTAD). Its purpose was to assist comprehensive development within the developing world, using devices such as trade preferences and measurable goals for development aid. In some ways, that was a high point in both the giving of aid and in the dedication of the developed countries to it. The Second UNCTAD, in 1968, was a disappointment, and signalled the beginning of a long downward trend in aid efficacy.

From July 1969, when the Nixon Administration embarked on policies which introduced the world to stagflation, and especially after 1971, when the US went off gold standard and the IMF ceased to exist in its intended form, both delivery of aid and dedication to it went sharply into reverse. That did not, however, mean that billions of dollars ceased to be spent on aid. In money terms, aid continued to increase, but inflation ate away much of its value. The American addiction to development programs tended to retreat into cynicism about the way in which their earlier efforts had been received. Their passion for giving aid died long before the Cold War did. Despite periodic promises and protestations, it has not recovered since.

Nevertheless, billions of dollars worth of aid have been disbursed since the 1960s. How much good has it done? The short answer must be that it has done very little good, or that any benefits it brought have been overwhelmed by other negative factors.

I was High Commissioner in West Africa in the middle to late 1960s. At that time Australian aid was mainly technical assistance and equipment aid in education and agriculture. However useful, the two coups of 1966 and the Biafran Civil War overwhelmed any gains achieved through bilateral or multilateral aid. Political instability also frustrated aid and development in the Congo and other West African countries. When I was in Sierra Leone, the political situation was stable. The economy was advancing on the back of diamonds and other natural resources, and the future seemed promising. Australian aid seemed to be well chosen and effective. However, that stability and promise were later devastated. This was partly due to forces within the country, and the ruthless exploitation of the country's natural riches by foreign interests. The likeable people of Sierra Leone suffered terribly as a result.

Aid efficacy varies between recipient countries, and is dependent on many country-specific factors. However, the global environment for aid has been hugely complicated by the failure of economic stability after July 1969. The failure of interest-rate hikes to control inflation for the subsequent 30 years has, however, not deterred policy-makers. On the contrary, it stimulated even more intense use of an instrument of policy that has manifestly failed to deliver the intended effects.

From 1971 forward, stability in world currencies has increasingly diminished and free-floating currencies have become increasingly common. Currency speculation emerged as one of the main characteristics of the world economy. Many more billions can be made by guessing whether a currency will go up or down than can be made by traditional industry or trade. The continuing use of interest-rate changes to "control" inflation causes extreme volatility in asset prices, especially stocks, bonds and real estate, and further stimulates speculation on a grand and ever-increasing scale.

At the same time, increasing freedom of capital flows - widely regarded as a blessing - helps monetary forces already in operation to shift inflation from domestic consumer price increases to deficits in the balance of trade and payments. These deficits, especially of the US - but also those of some countries such as Australia which follow similar monetary policies - have become chronic. They move up and down in response to particular stimuli, but the trend remains upwards. The US external trade deficit is now running at a rate of more than $US700 billion a year and the prospect is that it will go higher. The Australian external trade deficit has steadily increased since the 1970s and is now running at more than $2 billion a month. It might be modified by the current upward movement in commodity prices but the trend will remain upward unless fundamental monetary policies are altered.

What effect have these economic and financial developments had on aid to developing countries?

In one respect, they have performed a miracle. Those countries which have been able to respond to the inflationary consumer demands in the US and countries pursuing similar policies have developed with unprecedented speed and intensity.

Over the last three decades, and especially since the early 1980s, East, South-East and South Asia, (including economic giants China and India), have received "aid" on a scale of which they could never have dreamed. It has not been aid as envisaged under UNRRA, or Point Four, or the Colombo Plan, or UNCTAD. Indeed, "recipients" have not been "aided" in this sense at all. They have simply taken proper and active advantage of a world economic opportunity offered to them. In turn, the "donors" have been mostly unaware they have been giving any "aid" to these rapidly developing countries. If they had, they would have quickly modified or reversed their economic and financial policies - policies that have been self-destructive not only in economic terms, but in social, political and strategic terms as well.

Not all developing countries have been able to take advantage of the shift in inflationary pressures from the domestic to the international marketplace, particularly in Africa. Those economies have not only not benefited from the economic and financial trends of the last three decades, they have also suffered from chronic declines in investment, productivity and production, or in rates of real economic growth and living standards.

Within the developed world, the “rich” countries have all experienced a decline in their motivation to extend traditional forms of aid. This even applies to those countries with less afflicted external trade deficits than in the US. Virtually all these countries follow the same monetary and interest-rate policies as the US, and all tend to suffer from slower growth, high and chronic unemployment and emigration of industry. Therefore, there is little prospect that any more effective aid will go to neglected developing countries until the fundamental errors in the monetary policies of donor countries are corrected.

In recent years (and even in recent months), several of the major donor countries have made extravagant promises of aid. But these promises are unlikely to be kept. If so, then only in the traditional ways - making loans and grants, often on a tied basis, or forgiving debts. These approaches are no more likely to succeed in the future than they have in the past.

The most rewarding approach is to tie-in monetary policy reforms within the donor countries with an acknowledgement that aid in the form of fixed-capital investment to the developing countries could and should be linked with policies of renewal of fixed-capital investment at home. This will bring new promise to the world economy and new hope to developing countries - especially in Africa, where poverty, disease and human deprivation still flourish.

What this seems to indicate is that we must try to set out on new paths. A first step is to look at the way national economies and the world economy, together with the UN and the specialised agencies, have developed over the last 60 years. We need to analyse more carefully and perceptively the impact of economic and monetary policies, especially since 1969, and conduct research on which approaches have been successful in the development of the world's component economies, and which have failed. From this, it should be possible to determine how we should proceed.

The problem is not insoluble. The solution is there, awaiting our grasp. Furthermore, it is as simple as the solution which we applied, post-war, to correct the economic and other miseries that had plagued us during the Great Depression of the 1930s.