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OPINION (Rule 147) for the Committee on Development and Cooperation on improving the effectiveness of Community aid (report by Mr Goerens) Committee on Research, Technological Development and Energy
Draftsman Elly Plooij- van Gorsel

27 May 1997

PROCEDURE

At its meeting of 19 July 1995 the Committee on Research, Technological Development and Energy appointed Mrs Plooij-van Gorsel draftsman.
It considered the draft opinion at its meeting of 26 May 1997.
At this meeting it adopted the following conclusions unanimously.
The following were present for the vote: Scapagnini, chairman; Adam, vice-chairman; Plooij-van Gorsel, draftsman; Desama, Estevan Bolea, Heinisch (for Chichester), Holm (for Bloch von Blottnitz), Linkohr, Marset Campos, McNally, Stockmann, Trakatellis (for Ferber) and W.G. van Velzen.

INTRODUCTION

This opinion, starting from an analysis of particulars, such as project aid, goes on to present some radical views about more general structural issues; views which are predicated on the assumption that effectiveness in aid requires sound understanding, based on reliable, good quality research into the issues addressed.[The draftsman acknowledges the valuable advice offered to her by inter alia, Kunibert Raffer of the University of Vienna, and Dr. Oliver Morrisey of the University of Nottingham.]

The effects of project aid, and the role of science and technology as enabling factors in development

Recipient countries are in need of good infrastructure, especially in transport, telecommunications, power and other utilities, but lack the domestic technological capacity to build everything themselves. Project aid is needed and has in general been beneficial, but its overall effectiveness, however, has been undermined in two ways. Firstly, the technology transferred has not always been the most appropriate. There is a labour-saving bias in European technology: consequently many aid projects are capital intensive relative to the recipient's labour abundance. Capital could be delivered with relatively labour-intensive techniques which are more appropriate to the resource endowments of most aid recipients. The tendency of the EU and its Member States to tie aid exacerbates the problem of inappropriate technology transfer and bias. Secondly, many projects are not sustained: donors finance the construction/ start-up but may not fund the recurrent operating costs; once donor support ceases, many projects collapse for lack of local financing.

Development aid through investment in the private sector, especially in small businesses

'In a situation where dictatorial systems face ever increasing pressure from the world moving towards greater democracy, the importance of the private sector, business community, entrepreneurial and private investment field - in a nutshell, FMO's territory and task - grows apace.' ['Money and much more: 25 years policy and practice of investing in development', edited by Ria Dalmeijer, Sdu Uitgeverij Koninginnegracht,'s-Gravenhage 1995]
The increasingly successful economies of S.E Asia have an unusually high ratio of private investment, mainly allocated via market mechanisms. Private sector investment, entrepreneurship and market mechanisms are powerful elements in the promotion of social and economic progress. In the energy sector, for example, it is interesting to note that one of Africa's rare money-making companies is The Electricity Supply Commission of Malawi (ESCOM), which, as a 'para-statal' company, gets no subsidies and is required to operate at a profit, exploiting the country's hydro-electric power potential.

The importance of knowledge and information for sustainable development

Technological knowledge and skills are increasingly embedded within private firms, involving the ability to organise the 'production and delivery' of goods and services. International firms have thus become repositories of know-how, going far beyond the sum of the individual knowledge of each employee. Transferring this type of technology raises a number of difficult but not insurmountable issues concerning the historical relationship between developing countries and multi-national corporations. The purpose is to generate virtuous circles in which the acquisition of ideas and skills leads to the acquisition of more ideas and skills. Ideas can be bought off-the-shelf, as with licences, but making them work is another matter. [For a stimulating discussion which broadens these themes in an African context, see Stephen McCarthy, 'Africa: the Challenge of Transformation', British Academic Press, 1994.] The involvement of people in learning to use and adapt technologies is crucially important: there is a tacit element in technical knowledge which is easily ignored, but without which things simply do not work. Experience gained by work in companies which harbour such knowledge can therefore be mutually beneficial.

Investing in the role of women in development

It has been pointed out by the OECD that the best aid to less developed countries is the education of women, not least because there appears to be an inverse correlation between the level of education of women, and the rate of childbirth. This will help to stop the explosive growth of the population, which is the main hindrance to sustainable development in these countries.
A number of recent initiatives have targeted women as potential entrepreneurs in developing economies. By providing access to credit, even at modest levels, to women who have traditionally had little or no access to the banking sector, they have been encouraged to develop small businesses in a variety of countries, and have at the same time increased their self-reliance and dignity. Moreover, sources of local private finance have often been used in this context, thus avoiding the donor-driven characteristics of much foreign aid. Such schemes typically start as trial and error pilot projects, which learn by experience, and which thereby increase the loan repayment rate.

The power of new learning methods and technologies

The spread of the Internet and global telecommunication technologies promises new modes of learning to be adapted to the needs of developing countries. Decentralised local production of modest amounts of electricity using maintenance free thin-film solar cells could be used to power or recharge PCs and /or mobile 'phones, thereby enabling Internet connections from remote locations possessing neither power-lines nor telephone lines. More simply, they could also be used to power local workshops.

Structural characteristics, and where we might go from here.

Analysts and policy-makers have learned much from almost 50 years experience with aid, and these lessons can permit enhanced effectiveness of aid in the future. What structural features might we consider?
With Lome I the EEC introduced a new and innovative form of North-South co-operation, characterised by a strong element of partnership. Unfortunately, this unique element has increasingly been pushed back by the subsequent treaties. Lome developed from contractuality to conditionality, or from a good attempt at partnership towards increased domination by donors. To revive the spirit of Lome I changes to the present system are urgently needed: a new Lome Treaty could serve to test new ideas. EU-ACP co-operation could play a very innovative role: rather than becoming a donor like any other, the EU could regain intellectual leadership in development co-operation. On this basis the following proposals are made:

1) Simplification of Procedures and Structures - Self-Monitoring by Recipients*:

Lome III established a cumbersome planning and execution system, demanded by the Europeans. Therefore a new Lome should copy a most successful innovation of the Marshall Plan: the self-monitoring by recipients. The US encouraged Europeans to monitor one another's performance. Each Western European government submitted a plan which was inspected, vetted and monitored by other European recipient governments in the OEEC. Control by peers is also a principle advocated in business management.
This successful process of self-monitoring and joint requests to the EU should and could be further enhanced by integrating NGOs into the process. Public discussions including affected people, open information policies and thus strong transparency should be encouraged. This model would meet demands for good governance, democracy and transparency, as presently voiced by donors. Country groups could be formed mostly according to geographical but, if this should be more advisable, also according to other, economic criteria.

2) Financial Accountability of Donors and International Financial Institutions (IFIs):*

It is present practice to let recipients pay for failures made by the staff of donors or IFIs, even in cases of gross negligence, whereas a firm in an OECD-country could successfully sue its consultant for damages. This exemption from economic and legal consequences leads to failed projects or programmes calling for new ones to repair damages, often financed by new loans from the same source. Particularly in the case of IFIs IFI-flops thus create IFI-jobs. This perverted incentive system creates systemic inefficiencies and failures.
Because of the predominance of grants in Lome this problem is less pronounced than in the case of multilateral development banks. Nevertheless the EU could play the role of the innovator, bringing simple but necessary market mechanisms to bear. As donors and particularly IFIs control the use of loans they should be liable for damage done by them in the same way as private consulting firms are liable to their clients. This market element would act as an incentive for donors and IFIs to perform better and protect the poor from damages done by ill-conceived projects. Victims of development projects must be enabled to receive damage compensation. While IFIs and donors keenly preach human rights or respect of private (especially foreigners') property they have nonetheless financed projects violating these values (e.g. by forced resettlements without proper compensation), particularly so when the victims were vulnerable groups or indigenous people. The EU could set a precedent here, which could not be ignored by others and would eventually strongly improve the quality of all aid.

3) 'Structural Adjustment'*

When Lome IV was signed a great deal of scepticism was expressed by European institutions with regard to 'Structural Adjustment' by the IMF and the IBRD. Unfortunately attempts by DG VIII to create and to implement an alternative adjustment model were discontinued and the EU supports this approach fully now, even though it has not achieved any lasting positive results so far. It should not be forgotten that the IMF has been implementing 'Structural Adjustment' in Africa for over 20 years without lasting success. Asking what might happen to a salesman with the same record - assuming that he could stay employed that long - may be a useful help in judging the economic justification of the IMF's performance. Applying the most basic principles of a market economy to the IFIs themselves would make a discontinuation of these policies mandatory, particularly so as even IFIs agree that they have created great hardship. De-linking Lome from the 'seal of approval' of the Bretton Woods Institutions would be a first and necessary step. Reviving the search for an alternative approach - possibly in a joint effort with Japan, a country that expressed strong criticism of present 'Structural Adjustment'- would be needed.

Conclusions

On balance, your draftsman believes that aid has had a beneficial impact. It has not always been effective, and has often had detrimental effects, but the failings are not criticisms of aid per se, but rather of the way it has been delivered and used. Accordingly, the Committee on Research, Technological Development and Energy asks the Committee on Development and Cooperation to include the following elements in its resolution:

1. Believes that technology transfer must be sensitive to recipient cultures, and to local economic and labour market conditions, taking into consideration local universities and national research centres.
2. Believes ethical investment in the private sector, entrepreneurship and the development of market mechanisms are essential to promote economic and social progress.
3. Believes that the know-how contained within international firms is a valuable resource which can be tapped via carefully handled encouragement of such firms to locate in developing countries.
4. Stresses the importance of investment in the role of women in the development process, including both the education and technical training of women, and the provision of credit for small businesses run by women.
5. Emphasises the potential of the Internet and global telecommunication technologies in the development of new modes of distance learning and new job opportunities.
6. Encourages the self-monitoring by peers, organised in 'country groups', of the effective utilisation of aid, in an open and transparent process involving public discussion by those affected and NGOs.
7. Calls for the establishment of legal and financial accountability of donors and international Financial Institutions for damage caused by ill-conveived projects.
8. Proposes a radical reappraisal fo the structural adjustment policies of the IMF and IBRD, and the development of an alternative approach.

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* These points are argued in greater detail in K. Raffer & H.W. Singer, The Foreign Aid Business, Economic Assistance and Development Co-operation, E.Elgar, Cheltenham 1996, Chapter 14.