The European Report on Development 2015 was crucial in guiding Europe’s position on the post-2015 agenda. The Report, produced by a partnership of European think tanks, including the German Development Institute (GDI), United Kingdom’s Overseas Development Institute (ODI) and the European Centre for Development Policy Management (ECDPM), has thoroughly analysed the linkage between financing and policymaking. James Mackie (PhD), a senior advisor at the ECDPM, was one of the authors of the Report. A specialist on European Union’s development policy, Mackie has rich research and policy advisory experience. In this exclusive interview with GETACHEW T. ALEMU, FORTUNE’S OP-ED EDITOR, Mackie has discussed Europe’s internal crisis and its impact on global development. Excerpts:
Fortune: There has been much talk about going beyond aid, but past experience has shown, with aid for trade for example, that the results have been mixed. Do you think that a functional framework is going to come out of this conference in terms of financing aspects beyond aid?
James Mackie: I think the phrase beyond aid is understood in different ways. For me, the first thing is, if you look at it from a purely financial point of view, you just discuss money and you look at what finances development, aid is a tiny proportion. The big thing – and particularly if we go back to 2000, the period since the MDGs started – is the rise in domestic tax revenue in developing countries. So it has gone up hugely and we showed this in the European Report on Development that I was one of the core team members for – it was published two months ago.
So you have to recognise that the real effort in terms of funding development is actually government’s own tax revenue. And then, the next big category is domestic private capital. Then only do you get international private capital, which is foreign direct investment (FDI) and remittances, and finally, if you take the fourth category which is public international, that is official development assistance (ODA) and that is really quite a small portion. Hence, going beyond aid can mean you must look at not just aid, but everything that finances development – domestic, international, private, public and public-private.
Q: Do you see that there is actually a consensual understanding about what this concept means and consensus towards developing a functional framework to embrace and leverage all those resources beyond ODA?
Yes, I think so. If you look at the Addis Abeba Action Agenda that is coming out of this conference, you will find that the first big substantive chapter, after the Introduction, is Domestic Tax Revenue. So already, right at the start, they are not featuring ODA, they are featuring domestic revenue. So that I think is recognised quite widely – the little analysis I was giving you there – that is quite widely recognised.
Q: In terms of leveraging resources beyond ODA, or support coming from outside, what could Africa actually learn from Europe?
The big experience that Europe had with external aid was the Marshall Plan, after the war that ravaged European economies, and the recognition by the Americans that if they wanted somebody to trade with, and their biggest market was Europe, the European economy had to build up again. So that, was the experience – something like 150 billion dollars were channelled through the Marshall Plan – a lot of that went to Germany because Germany was one of the most affected countries but also, Britain, also France and that money was partly aid in social things, but a lot of it was about infrastructure, getting industry back working, getting roads and things so that the economy could move. And so that, to me, is quite a strong lesson.
But the other thing that I think you can learn, if you look particularly at poverty, and you look at European social protection, I mean nowadays I think the consensus is if you want to tackle poverty, you need a trio of policies – social protection, universal health care, and education (primary, secondary, also universal). So those three are seen as key, there is a lot of consensus around that.
And how did European countries pay for that?
In our experience, if you go back a hundred and fifty years, when we started setting up social protection, basically that was paid from domestic tax resources – our own tax money – and if you want that scale of money, you can go across the world, and you look at economies everywhere, the economies that have social protection systems which are sustainable in the long term, are paid out of tax resources. That is a lesson you can get from Europe but you can also get it from developing countries – other developing countries which are setting up social protection systems and universal health care.
Q: As you have alluded in your report, it is one thing to talk about financing, but it is another thing to actually get policy right, and make it ready to absorb and effectively utilise finance. How do you evaluate the performance of Africa over the past 15 years of the MDGs in terms of creating this synergy between finance and policy?
I think if you look at the countries that have done best, they have put quite a bit of effort into institutional development. They have developed their systems for managing finance, both public and private finance. They have developed tax revenues collection, looked at policies for spending money and set up a framework for the private sector to operate in.
If you look here in Ethiopia, a lot of that sort of thing happened. Countries like Ghana have really put an effort into institutional development and choosing good policies. And that applies to spending their own resources, but also to spending resources from outside.
If we accept that ODA is such a small proportion of financing, essentially, that means it is a precious commodity. You can use ODA quite flexibly, that is one of its big advantages. One of the disadvantages is that it is not always very long-term because governments and policies change. You have to have the right policies about using aid.
Q: If there is one dividing line that has emerged in this meeting, it is country ownership. On the one hand, there are these developed countries saying country ownership should be at the centre of the whole thing. But on the other hand there are sceptics that are saying a significant amount of accountability structure has to also be infused into the system. What is your view?
I do not think that is contradictory. I mean ownership also needs accountability. If you are, for instance, putting efforts into raising your tax revenue, populations are generally reticent to hand over money to government, if they are not confident about the way the government spends that money. On the other hand, if they can see the government is spending it well, if they can see that the government reports on the way the money is spent and they can see there is no corruption, that accountability actually encourages your tax system because the population are willing to put more money into it. And they also feel ownership.
Q: In light of African countries, where democratic deficit is often a norm, how do you see the role of politics in this?
I think you will find that the politics are very much part of it. Development is about change, and that becomes political. You are not going to avoid it. It is always going to be political.
Somebody will benefit. Other people will benefit more or less. We will always have a political element. I do not think it is realistic to pretend it is otherwise. Then, of course, you need to have a political system which allows discussion and debates, and which allows the population to feel that they have a sense of ownership as well and it is not just the elite that has the ownership.
If you are going to develop your tax system, you have to enter into some sort of social compact, between the government and the population. We ask you to pay but in return we are going to provide you with more infrastructure, more facilities, better education and better health. That is a political agreement and you cannot expect the population to support it, unless they can see the benefits. So, it is a deal, if you like, a big, high level deal.
But as we see in Europe as well, if you just look at the austerity programmes in Greece, for instance. What you are seeing is that the European level elite are saying, well you have overspent, you have got no money left but the population in Greece are saying they are not supporting it. So you get a clash there. And somehow, that political discussion has to happen.
Q: Europe is facing its own crisis as can be learned from what is happening in Greece. How do you see the influence of this internal crisis in Europe, in view of Europe’s role in taking part in the design and in setting the agenda for global development in the next 15 years?
It is very important that Europe contains the crisis, because if it does not contain the crisis, the impact it can have is huge, because the Euro is such a big currency. The crisis can have worldwide impact. There are other European countries who feel it. The Americans will feel it. It is not surprising that President Barack Obama rings up the European leaders and says, “Solve this. We have had enough of this.” Because they know, they can see the dangers.
It probably has some sort of impact in China, where the stock markets have been fluctuating. So, that is the first thing. We know it is something that we do not just owe to ourselves to sort out. We owe it to the world. We have to sort this out.
Q: How does that transpire in the bigger picture of global development?
In the global development, we went from an era when the dollar dominated everything and in many ways that was not beneficial for everybody else, apart from the Americans. Basically, they dictated the dollar policy and then we all had to live with it. Now you are getting a situation where there are a number of big currencies. There is the dollar (still), there is the Chinese renminbi and there is the euro – those three are probably the biggest. And in many ways, that helps everybody because it means you have a multi-polar global economy.
If one currency is not doing too well, the others can perhaps stabilise things. And we are not all subject to just the decisions of one government on their macroeconomic policy. We are affected by multiples and that is probably a bit safer than having all your eggs in one basket.
Q: If you were to sit at an advisory table with the European leaders, what would be the main message that you want them to take from you so that they could put Europe in its right place in the global economy?
Stability is very important for governments around the world. Stability of markets is very important for private capital. If they have fluctuating financial markets, they see bigger risks, they are less likely to invest, and that also does not help development.
Q: If there is any new trend that has emerged in this financing for development conference, it is the introduction of new multi-stakeholder partnerships. Can we say that this is the new model that is going to play an important role in financing the Sustainable Development Goals (SDGs)?
Absolutely! It has to be. Just the fact that you are recognising that ODA is not the only source of finance, that actually it is only a small proportion of finance, that other types of finance are more important, implies immediately that you have to have partnerships. Governments have tax resources, you have migrants who are bringing remittances, you have investors, both domestic and international, and each of those types of finance can do certain things. I mean it has got characteristics, some of which are very positive, some of them may impose limitations. So what you really need to do is combine the different sources of finance, so that you build on the positives of each one, to overcome the disadvantages of the others.
Q: In terms of both financing and policy, where do you think will be the major challenges for least developed countries in the next 15 years?
In financing terms, their major challenge is to gradually diversify their sources of funding. They are where they are at the moment, ODA is very important, for them, maybe 40pc of their national budget, but they must not plan on the basis of that being the continuing pattern. They need to look ahead a bit widely. They ought to learn from countries that have got a bit of a higher income than them. They have to look at the sort of pattern of financing they have and learn from it. There is a lot of work to be done, but there are countries that have done it and taking lessons will be important.
Q: Where do you see the role of the private sector in all of this?
The private sector is very important. People always think that when you say the private sector, you mean, manufacturing or factories or trading, but think agriculture. Agriculture’s small farmers are private sector. They are individual entrepreneurs. And a huge proportion of Africa’s population is still farmers. And by and large, 90pc of it is done by the private sector, so you are not going to get development without them. As much as you want them to produce more to feed the population, they should also be entitled to the health services, to the education services and so on. So somehow you have to make rural areas a better place to live, and encourage people to stay in rural areas and invest in agriculture and improve agriculture, improve the productivity – and that is all the private sector. Virtually, entirely – private sector is vital.