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Foreign Aid Enablers and Disablers

Foreign Aid Enablers and Disablers. Rethinking the Millennium Development Goals for Africa Professor Stephen Peterson Harvard University Resident Finance Advisor: 1986-1994 Government of Kenya “ 1996-2008 Government of Ethiopia. What a Good Budget Does.

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Foreign Aid Enablers and Disablers

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  1. Foreign AidEnablers and Disablers Rethinking the Millennium Development Goals for Africa Professor Stephen Peterson Harvard University Resident Finance Advisor: 1986-1994 Government of Kenya “ 1996-2008 Government of Ethiopia

  2. What a Good Budget Does “My role is to make everyone equally unhappy” Allan Morris, Chairman Commonwealth Grants Commission, Australia

  3. 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

  4. The Right to Sustainable Development The 2 High performers in budgeting for children (Chart 8, page 15, ACPF Report)

  5. Budgeting 101 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)

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

  7. Africa’s investment priorities 1970-2003 • Positive Growth: Services • Negative 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]

  8. 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

  9. 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)

  10. 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

  11. 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; $100in 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%

  12. 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]

  13. 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)

  14. What to Do?

  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

  16. 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 listening

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