The “Dutch Disease” Effects of Aid in Uganda

1 December, 2008 by

In my recent post on Sorious Samura’s programme for Panorama on BBC One – an expose of aid to Africa, in particular to Sierra Leone and Uganda – I said we would come back on whether Uganda is experiencing a negative impact from the aid flows.

Remember the issue is whether foreign aid to Uganda is deterring export production via a “Dutch Disease” effect. If so, then aid is having perverse effects, hindering rather than helping economic growth.

How does this work?

Short explanation: A capital inflow like foreign aid raises domestic demand. This pushes up domestic prices and, if the exchange rate is not fixed by the government, the currency tends to appreciate as well (a shilling buys more dollars). Hence: exporting is less profitable and imports are cheaper (putting pressure on domestic producers of import-substitutes – for example domestic food crops suffer competition from cheaper food imports). Result: economic growth falls.

(Long explanation: The money is spent on two types of goods and services. First, non-tradables, that is items whose prices are mainly determined by domestic supply and demand. The price of a haircut in Kampala for example. Haircuts aren’t internationally traded. Second, tradables. These are goods and services whose prices are driven by international markets. The price of Uganda’s coffee, for example (Uganda is a ‘price-taker’ in commodity markets: some countries are big enough exporters to affect world prices – Saudi Arabia and oil, for example). A demand expansion caused by a capital inflow tends to push up the prices of non-tradables more than tradables, because the former are less-responsive (more inelastic, as economists say) in supply. The ratio of non-tradable prices relative to tradables prices rises, making it more profitable to produce the former. If the exchange rate is flexible – i.e. the central bank doesn’t fix it as a matter of policy – then it tends to appreciate as well. This adds to the appreciation of the real exchange rate that is caused by the rise in domestic prices as non-tradables prices outpace tradables prices. Result: people give up producing tradables such as coffee and move into the non-tradables sector, and growth falls).

Aid is not the only capital inflow that might cause this. The term Dutch Disease was first coined (and is most often used) to describe the impact of a natural resource windfall (natural gas in the case of 1970s Netherlands). Nigeria and other oil exporters suffered catastrophically from Dutch Disease in the 1970s when oil prices boomed (resulting in a severe contraction in Nigeria’s agriculture, a highly tradable sector).

However, much depends on what aid (or oil revenue) is used for. If it finances infrastructure construction, and if this is the right kind of infrastructure, then aid will have a supply-expanding effect. This could be of sufficient scale to offset any Dutch Disease effect (or the latter might be evident for a while until the infrastructure is built and then productivity effect kicks in: see Chris Adam and David Bevan).

So much for the theory. What about Uganda? The country has certainly had a large injection of aid, which has a big budgetary impact (see Martin Brownbridge and Emmanuel Tumusiime-Mutebile). An IMF study, by Mwanza Nkusu argues that Dutch Disease does not necessarily occur – especially when the economy has unused capacity (which is typical of countries like Uganda recovering from civil war). So the academic jury is still out.

What does recent data tell us? Economic growth was just under 10 per cent over 2007-08 according to a recent IMF staff mission to Uganda. Exports grew by 50 per cent over the same period. The Fund expects both to fall – the result of the global financial crisis that is weakening commodity prices (go here). Uganda is dealing with high inflation (core inflation is 14.5 per cent) – but this is more the result of the run-up (until recently) in global energy and food prices. The shilling has depreciated, not appreciated, recently. So, no indication of aid having Dutch Disease effects: the shilling is down, not up, and exports are up, not down.

But certainly the economy faces a tricky adjustment as it responds to the global economic shock of the last 6 months (true of all low-income, primary-commodity dependent, economies).

Whatever the other effects of aid on Uganda (whether it is being well spent, whether it targets the poor effectively etc.) there does not seem to be a Dutch Disease effect – at least recently. Perhaps more worrying is the potential Dutch Disease effect of the oil revenues that come on stream next year. If Uganda can manage oil well then it will be the first country in Africa to do so. Now that would be an achievement.

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008 by

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936”.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

“A fool at 40 is a fool forever”

24 November, 2008 by

Internationally acclaimed film maker Sorious Samura has a critical article on aid on the BBC News web site in advance of his Panorama programme on aid to Sierra Leone and Uganda – which is broadcast tonight (see our post a few days ago). He writes:

“Where I come from in West Africa, we have a saying: “A fool at 40 is a fool forever”, and most African countries have now been independent for over 40 years. Most are blessed with all the elements to help compete on a global stage….. And yet today, my continent, which is home to 10% of the world’s population, represents just 1% of global trade. I have no doubt we have to take responsibility for our failures. We can’t afford to keep playing the blame game. But when 50 years of foreign aid has failed to lift Africa out of poverty, could corruption be the reason?”

Much of what he says hits the nail on the head. Corruption has been pervasive, and the Rich World must take its share of the blame – for everyone taking a bribe, there is someone giving. And ‘grand corruption’ has been spectacularly rampant in Africa’s oil sector (see EITI here). My IDPM Colleague, Sarah Bracking, has a new book out on corruption and development and what is being done to reduce it (go here).

One point that I do take issue with in Sorious Samura’s article is his view that Uganda is being crippled by what economists term ‘Dutch Disease’, resulting from large aid inflows:

“Large inflows of foreign currency push up the value of the Ugandan shilling making its agricultural and manufactured goods less price competitive. This results in fewer exports and less home-grown, sustainable earnings for the country. Local entrepreneurs such as coffee growers and flower exporters should be cashing in on rising food and commodity prices across the globe at the moment, but they are finding themselves crowded out of their own economy by foreign aid dollars”.

Maybe, but I would like to see hard evidence of this in Uganda’s case. Aid also funds infrastructure investment which, when well-designed, reduces the costs of production, marketing and transport. This raises the profitability of businesses that use the infrastructure. This can more than offset the disincentive to export production resulting from the currency appreciation that Samura worries about, making exporting more profitable, not less, after aid.

As I said it has to be well-designed aid. Aid that simply goes to raising consumption won’t do the trick (although if it is consumption of the poor – including humanitarian aid – then I worry less). And nobody doubts that Africa needs a lot more infrastructure – partly to change the pattern of infrastructure that was created to serve the colonial economy. That pattern still dominates much of Africa 40 years on. Disadvantaged regions, in which chronic poverty is high, especially need better transport infrastructure. Tim Harford, the Undercover Economist, quotes a study that road transport in Francophone Africa is six times more expensive than in Pakistan.

So, I look forward to tonight’s Panorama programme. Sorious Samura will be rightly hard-hitting. We can’t tolerate corruption. And we need well-designed and well-implemented aid. In the meantime, I shall be reading up about Uganda’s aid programme, and whether “Dutch Disease” has been a problem. If you have some suggestions, do please send them along.

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Keynes is Back. But What to Do, Darling?

24 November, 2008 by

Britain’s Chancellor of the Exchequer, Alistair Darling is praising Keynes – along with just about everyone else. He’s boosted public spending (go here). The present focus on fiscal policy reflects the fear of a ‘liquidity trap’ – which Keynes first identified in the 1930s. The Bank of England is set to cut interest rates further, but this might not encourage banks to lend. So monetary policy alone can’t do the trick (it is said). Hence public spending. And now tax cuts.

Today we hear the Chancellor’s plans (at 3.30 pm: go here). The government’s spin machine was busy over the weekend so a VAT reduction will hardly come as a surprise. The FT reckons it will be a £12.5 bn package:

“At the heart of the stimulus package is an expected “temporary” cut in the VAT rate from 17.5 to 15 per cent, the lowest standard rate allowed in the EU. Food, children’s clothing and some other items have always been zero-rated in Britain”.

Will a VAT cut work? Canada cut its sales tax at the beginning of 2008, but this had modest effects on total spending, according to the ‘Undercover Economist’, Tim Harford interviewed on the BBC Today programme this morning. For a critique of the Canadian tax cuts from a poverty perspective see GrowingGap. Canadian readers: send us your views.

To cut taxes now, taxes have to rise later. Economists describe this as borrowing from ourselves. Spending won’t rise if we fully anticipate the future tax increase. Or at least that’s what some macro-economists say (see Robert Barro). It’s called Ricardian Equivalence (drop that into your next pub conversation on the economic crisis: sure to impress). Economist readers: please up-date us on whether Barro is right.

Will businesses cut prices following a VAT reduction? They are slashing prices in any case, in advance of Xmas – a last ditch hope that the sales can carry them through the new year. Buyers stormed Marks & Spencers last week, following a 20% price cut. So we might all now afford fresh underwear. But will stores cut prices further, or take some of the VAT cut to rebuild their margins?

Ann Pettifor of the New Economics Foundation interviewed on the BBC yesterday was skeptical about tax cuts (Ann was one of the first people to predict this crisis). She believes that people will instead save the VAT cut (i.e. you will still buy the same basket of goods, but now the basket will be cheaper and you won’t add any more items. Your money is then deposited in one of Britain’s hopeless banks or under your mattress). Ann points out that if the money is spent then a lot will go on foreign imports (true, but I don’t think this is necessarily as bad as is often believed. The Americans need help too. I’ll do my bit by buying a new Apple Mac).

Other ideas I have come across: delay VAT payments by small businesses for six months. Many small businesses are penalized by the larger firms not paying their suppliers on time (a zero-cost way for the latter to fund themselves). Peter Mandelson promised a crack down, but doesn’t seem to have achieved much yet. In the recession of the early 1990s, small business failures were running at a 1,000 a week. So maybe government could help with a delay in VAT payments. Housebuilders want a continuation of the present holiday on stamp duty to get the housing market re-started. Readers might like to comment on the merits of each.

But there are two ideas from the Get Fair campaign that I really like.

First, immediately invest £4bn in measures to halve child poverty by 2010. Child poverty costs at least £25 billion each year in losses to the Exchequer and in reduced GDP, according to research from the Joseph Rowntree foundation. So spending tax revenue on eliminating child poverty now would actually save public money in the future. Surely a good idea.

Second, Get Fair says improve the take-up of existing benefits: they estimate that this would help 500,000 pensioners out of poverty. Here in the UK we have just had Remembrance Sunday, a day on which we remember those who gave their lives to defend Britain – especially in the Two World Wars. A 20-year old in 1940, is now 88. Helping our pensioners now, especially those in poverty (2.5 million of them) will be one of our last chances to thank their generation.

So, over to you Darling.

Addicted to Aid?

19 November, 2008 by

Next week’s Panorama on BBC One is running a programme on aid to two countries for which Britain is one of the biggest donors. To judge from the blurb, it’s going to be very critical:

“Reporter Sorious Samura visits Uganda and his home country of Sierra Leone to reveal how aid money is lost, stolen and frittered away. He stops at a showpiece hospital, run by a well-funded health department, that looks like a warzone – yet its carpark is home to dozens of new 4x4s for ministry staff. He questions a former minister accused of stealing funds and offers his vision of how Africans can take control of their own destiny”.

Sorious Samuara has done some brilliant films exposing Africa’s “big men” and their corrupt ways, the other side of the coin to the region’s hunger and poverty (go here). But I do hope that he offers more than the usual critique of aid in the Panorama programme.

Yes, corruption is rife in Sierra Leone (it was a big issue in the last elections, with a clean-up promised: see this BBC report). And on a recent visit to Uganda I saw that the local media is full of stories of corruption (the benefits of a free press in Africa! See The New Vision). DFID is presently “ghost-busting” in Uganda (go here).

But I very much doubt that either Sierra Leone, Uganda (or Mozambique – another post-conflict country) would be where they are today without the aid they received to help reconstruction.

This is not in any way to argue that graft or misuse of aid money should be tolerated. But I get tired of the one-sided criticisms of aid that are trotted out repeatedly. For some background reading before the programme check out: the Chronic Poverty Report for Uganda, Joe Hanlon on corruption in Sierra Leone, a special issue of the Swedish Economic Policy Review on aid, and Roger Riddell Does Foreign Aid Really Work? – the best account by far of what aid can, and cannot, do.

So we shall see what Panorama concludes – especially, as Sorious Samura asks: how can Africans take control of their own destiny and graduate the continent away from aid dependence? Let us know what you think of the programme – and the big issues that it tackles.

The New Realities of Philanthrocapitalism

18 November, 2008 by

BWPI’s Mike Edwards’ book on business-led philanthropy, “Just Another Emperor?” is attracting a lot of attention – especially in the current financial climate. You can follow the debate on OpenDemocracy. More later.

A Fun Way to Harness the Energy of Children to Deliver Clean Water

12 November, 2008 by

In the discussion of my recent post about bottled water I mentioned that sales of bottled water at Manchester University support water pumps in Africa. Specifically, Playpump, a wonderful invention from South Africa.

As children spin on a roundabout, clean water is pumped from underground into storage tanks. The pumps cost about US$9,500 to install. They are much faster and pump at a more reliable rate than hand-driven pumps, and can supply up to 1,400 litres of water an hour.

Better water infrastructure in Africa not only reduces the incidence of the main water-borne illnesses, but also reduces the amount of time that communities spend collecting water from (often dirty) ponds and rivers. Since water collection is often an activity for girls, requiring them to walk many hours when water is inaccessible, it provides more time for them – including more time in school. More information on Playpump can be found here.

Leading the Global Debate from the South

12 November, 2008 by

The debate on global policy, including such critical issues as climate change and globalization, is still dominated by the North. Northern universities and media are well resourced. But the majority of humanity lives in the South. Recent years have seen some exciting ideas emerging from southern scholars, research institutes, and think tanks. The media in the South is exceptionally vigorous – I was impressed by the quality of debate in Uganda’s newspapers during a visit to Kampala last month.

The South Centre has played a major role in expanding the debate – especially South-to-South – and has now initiated INSouth (the Intellectual Network for the South) was launched by Benjamin Mkapa, President of Tanzania (1995-2005) recently. Tanzania under the late Julius Nyerere was a hotbed of ideas about development. Walter Rodney wrote his influential How Europe Underdeveloped Africa in Dar. Not all of the ideas worked out – for Tanzania was a young country and it was very much learning by doing – but there was a time in the 1970s when Dar es Salaam was the place to be.

We are now at a defining moment in the global economy. Many of the seemingly well-established principles of how to run the global economy lie in tatters. The international financial crisis is a shock that emanates from the North with a profound impact on the South – the collapse back in global commodity prices from their highs earlier in the year is leading many governments to revisit their assumptions about economic growth for 2008-2009. The IMF is warning of a synchronised global slowdown, with potentially deep recession in the economies most severely hit by the financial meltdown. Iceland not to mention Eastern Europe look badly exposed. China has initiated an expansionary programme to offset the impact of its rapidly slowing export growth.

Appropriately INSouth has initiated a debate on revamping the global financial architecture. Will we see a new system for regulating global capital markets to ensure that future blowups don’t hit world economic prosperity? Or will it just be another patch-up that ignores the interests of the poorer and weaker economies?

So How Grim is it Up North?

11 November, 2008 by

In yesterday’s post on ‘Parks for the Poor’ we cited the impact of proximity to greenery – parks, woodland – on life expectancy in the UK. Seems that you are less likely to suffer stress-related illness, irrespective of your income class if you can chill in some nice green space.

Now comes the news that Manchester is near the bottom of the league in environmental sustainability in the index constructed by Forum for the Future – and green space is part of the index. Manchester is down there at No.15 out of 20 – top place goes to Bristol and bottom goes to unloved Hull.

(Here is the list in descending order: Bristol; Brighton and Hove; Plymouth; Newcastle; Cardiff; Edinburgh; Sheffield; Leicester; Nottingham; London; Bradford; Coventry; Sunderland; Leeds; Manchester; Wolverhampton; Glasgow; Birmingham; Liverpool; Hull).

So while Manchester is aiming to achieve low-carbon city status by 2020, according to Forum for the Future,  it seems to have a long way to go. Ditto Liverpool, which starts from behind Manchester. Yesterday’s Daily Telegraph announced that “it’s still really grim up north”, with a north-south divide in the index. Yet that isn’t so evident: Newcastle and Sheffield are ahead of London (although the bottom of the index is decidedly northern). Daily Telegraph journalists might have difficulty finding Newcastle on a map.

However, Britain is far, far behind Europe – as a travel any Scandinavian city will demonstrate. Bristol is Britain’s lone entrant (in a field of 35) for the EU’s latest initiative – an annual European Green Capital. The green money is on Stockholm, Oslo, Copenhagen, Amsterdam, Hamburg, Freiburg and Münster.

So a suggestion to the leaders of Manchester, Liverpool (and Hull): set a target to become European Green Capital in the next decade. Now that the British government is intent on reflating the economy by expanding infrastructure investment, put together an ambitious plan to redevelop your cities with – sustainability at the core.

Check out the research of Simon Guy and others in the School of Environment and Development at Manchester, in particular the Building Sustainable Cities Initiative. Greening cities is the BIG urban agenda. And it’s a poverty issue too – for greenery improves life expectancy, regenerates blighted urban areas, and encourages inward investment (and hence jobs). Win-Win.

And to cheer yourself up go to KLF (Jams) ‘its grim up north’ on YouTube – for some northern merriment in the ceaseless rain.

Parks for the Poor

11 November, 2008 by

Yes, having some greenery around you can improve your chances in life. A new study in the Lancet finds that living near parks or woodland improves life expectancy and health, regardless of income class. People living in poorer areas are more likely to die earlier and to suffer more ill-health than the UK average. This income-related inequality in health is less pronounced in populations with greater exposure to green space, according to the study by Richard Mitchell and Frank Popham from the universities of Glasgow and St Andrews (see this BBC report).

Victorian Britain saw great efforts to bring green space to the poor. The first children’s playground was created in a Manchester park in 1859. Many of Britain’s inner city parks went into decline from the mid-twentieth century, and their regeneration began in earnest in the late 1980s. Manchester’s St Michael’s Flags and Angel Meadow Park is an example. The area became notorious in the 19th century for the mass burial of the poor whose families could not afford a proper funeral.

The charity GreenSpace is now working to improve parks and green access in the UK. We also need more efforts in the mega cities of the developing world. On a recent trip to Dhaka I was struck by the lack of accessible greenery. Much appears to have been illegally built over – including one green space now occupied by a truly hideous ‘pleasure park’ which charges for admission.

Green space is also exceptionally important to managing the impact of climate change on urban areas, a theme in Manchester University’s research on sustainable cities (check out John Handley in the School of Environment and Development). So get planting.