Today’s global finance is like water flowing uphill

Development Policy08 Sep 2011David Sogge

It is about time to start paying systematic attention to the resource transfers that are flowing from the world’s poor to the world’s rich, says David Sogge.  

We live in a world where resource transfers—especially foreign aid—are expected to make a positive difference by improving the living standards of the world’s poor. Nonetheless, aiding poor countries is mired in controversy as pressures to track the impact of those transfers are intensifying. As a result, thousands of evaluations of aid projects and policies are carried out each year to account for the effects monies spent. In the 2005 Paris Declaration on Aid Effectiveness, donors committed themselves to pursuing a “spirit of mutual accountability” and to tackling large transparency deficits that “erode public support, impede effective resource mobilisation and allocation and divert resources away from activities that are vital for poverty reduction and sustainable economic development”. But something is wrong with this picture. Today, that diversion of resources is colossal. It is time to start paying systematic attention to it.

Foreign aid from rich to poor is claiming public attention. Yet, as is demonstrated by important yet infrequently cited studies (such as those published in a formidable United Nations overview, the World Economic Situation and Prospects), resource transfers from poor countries to rich jurisdictions surpass many times the combined total of aid money allocated by the world’s rich to the world’s poor. Acknowledging that we have very little information about the scale of illicit, unrecorded resource transfers, the true amount is likely ten or more times that of foreign aid. In terms of conventional economic theory, as economist Dean Baker points out, such transfers are equivalent to water flowing uphill.

What actually happens as a result of this mammoth transfer of wealth is not systematically known. Indeed almost everyone, in poor and rich countries, is kept in the dark. Genuine accountability for those poor-to-rich transfers appears impossible. As long as it is denied, inclusive development and collective wellbeing will remain elusive.

Hence, this modest proposal: Let there be set in motion a broad initiative to evaluate this financial “aid” from poor to rich. Let its chief purpose be to render a public account to all, especially to citizens of countries in which these monies originate. Assessments should focus on the consequences of these transfers for equitable, inclusive development and broad human wellbeing, in both low and high income places. The evaluative logic need not be radically different from that of conventional evaluations of aid from rich to poor.

Obviously such an initiative would face major political headwinds and legal obstacles, e.g. laws promoting banking secrecy. However, it could build on already available information and analyses, for example with regard to the ways in which the global elite manages economic rents. It could further take advantage of new transparency norms and rules, and of future country-by-country reporting obligations of corporations. The process could grow through further probing by policy activists and journalists relying on ‘defectors’ or ‘deep throats’. Resulting information and data collections could trigger breakthroughs, capture the attention of parliamentarians and add to political momentum for change.