This is an audio transcript of The Economics Show podcast episode: ‘What future for aid and development? With Minouche Shafik’
Alan Beattie
Hello. Alan Beattie here. I just want to let you know that the episode you’re about to listen to was recorded a few short hours before the UK government announced plans to cut its aid budget from 0.5 per cent of GDP to 0.3 per cent. Sometimes interviews get overtaken by events, but as you’ll hear in her very first answer, my guest today proved quite prescient about what was about to happen.
One of the very first things that Donald Trump did upon taking office was to suspend all US foreign aid, threatening the programme, which has put 20 million people with HIV in developing countries on antiretroviral drugs. The following weekend, Elon Musk, as part of his rampage through the federal government, single-handedly put “through the woodchipper”, in his own words, the US Agency for International Development. That’s the USAID body which was set up by President Kennedy in 1961 and last year disbursed more than $40bn a year in around 130 countries.
After several years in which budgetary constraints in rich countries had already led to aid being cut back, this was a serious blow to low-income countries dependent on assistance. At the same time, financial flows from rising powers like China, India, Saudi Arabia and Russia have been increasing. What will the new world of aid and development look like and how, with a, let’s say, turbulent outlook for geopolitics and trade mean for low- and middle-income countries?
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I’m Alan Beattie, the FT’s senior trade writer, and this is The Economics Show from the Financial Times. I’m joined here in London by Minouche Shafik.
Minouche is almost embarrassingly well-qualified to talk about this subject. Former vice-president at the World Bank, a deputy managing director of the IMF, a permanent secretary, the most senior civil servant at the UK Department for International Development when it was regarded as the cutting edge of aid. I could honestly go on for about an hour just reading out your CV, I think, but let me just finish it. Deputy governor of the Bank of England, director of the London School of Economics, and after a stint in the US as president of Columbia University, she’s back in the UK, a member of the House of Lords and undertaking a review of development policy for Keir Starmer’s government. Minouche, welcome.
Minouche Shafik
Thank you so much, Alan, for that very generous introduction.
Alan Beattie
So we always start the economic show with a simple question, which we ask you to answer on a scale of one to 10. So maybe 10, 15 years ago, certainly 20 years ago, the aid and development business really looked like it was on the up. Aid budgets were rising. The US had launched some big programmes. Best practices were being worked out. What’s the likelihood one to 10 in the foreseeable future, we get back to a situation like that?
Minouche Shafik
One.
Alan Beattie
Wow. Really? That’s actually the most pessimistic I’ve ever heard anyone answer one of those questions.
Minouche Shafik
I think the world is very, very different today. I’m not saying that we won’t have a world in which international development matters, but I think the way it works will change fundamentally.
Alan Beattie
OK, so let’s unpack that. You’ve come back to the UK after a while abroad and as I was saying, UK used to be one of the great leaders on aid. DfID, the Department of International Development was widely regarded as best practice if it no longer exists, it’s been folded into the Foreign Office. So what do you think the future for UK aid is, and what do you think it should be?
Minouche Shafik
Well, you know that moment that you referred to Ireland in the 2000s of June after the millennium, a time of great optimism and international solidarity and a real positive-sum view of the world. And there was this moment when we had a coalition of leading politicians, Tony Blair, Gordon Brown and others around the world, plus NGOs plus celebrities, plus very widespread public support. And that was true in the UK, but it was also true in many European countries and in parts of the US. Today, we see in the polling that public perceptions have changed. There is cynicism about aid. People are concerned about domestic issues. They worry about waste and corruption, and the view of the US administration of international relations is essentially zero-sum. You know that you win, I lose. And so seeing a much more kind of instrumental, self-interested view of the world, and I think we have to think about the future of international development in that very, very different context.
Alan Beattie
So just to stay with the UK for a moment, as I say this to Parliament, if it was widely admired, folded in the Foreign Office, do you think there’s a likelihood that it will be pulled out, set up as a standalone agency, you know, given more independence?
Minouche Shafik
So the UK made that decision under Boris Johnson’s government in 2019. And I think in retrospect that was a very poor decision. The UK lost a huge amount of capacity and respect internationally as a result of that. Now, I should say the UK wasn’t the only country that did that. The Canadians did it, the Australians did it. And I think that given where we are and given the changes in the world, the likelihood of going back to the old structure is very low. You know, you would lose a huge amount of time of untangling that merger. And the question is, what do we do now? What can we do differently now that would respond to the moment that we’re in?
Alan Beattie
So you mentioned this was not just a UK phenomenon. There was a treat from aid worldwide. And I know to even the EU which prides itself on this, you know, internationalist outlook has been cutting aid from sub-Saharan Africa, redirecting it to Ukraine. Given this was such a widespread phenomenon and it’s been going on for some time. What’s the one particular thing? Was it the global financial crisis? Was it Donald Trump himself? Was it something that sparked everyone, as it were, in the world, in the rich world, anyway, to act in the same way?
Minouche Shafik
I think there were two things. One is the backlash against globalisation after the international financial crisis and the concerns about unequal benefits and how that crisis was handled, and the winners and losers of globalisation. And the second thing was fiscal pressures. You see it across a number of countries now where there are serious fiscal pressures around public services, and today an increased pressure to spend more on the military. And those combined forces have meant that more and more traditional aid donors have been cutting their budgets. You see it across Europe, in the UK and now the US. But it’s important to note that total aid spending in the world actually continues to go up. The total number at the moment is about $225bn a year. But the composition of that is changing. European donors are becoming less important. Countries like China, the Gulf, Turkey, South Korea are becoming more important.
Alan Beattie
So we’ll definitely get on to that later. Another question about aid was I used to have this particular bee in my bonnet that everyone always used to measure the volume of aid. We need to get up to 0.72 per cent of GDP. You know, I still remember all the badges where everyone had 0.7. All the big donor conferences, 2005 Gleneagles conference. They were all about volume. At the same time, I never thought there was enough focus on quality. And what you’ve seen now is not just people cutting aid budgets, but also people counting basically military spending as aid, counting spending on refugees in the donor’s own country as aid. I mean, do you agree? Do you think that we were always focused on the width and not enough on the quality?
Minouche Shafik
I do agree that quality matters more than quantity, and what has happened in terms of broadening the definition has become very extreme. And I think it’s better to be honest about what you’re actually doing and calling development assistance, development assistance and calling refugee costs, refugee costs. It’s mad that often the biggest recipient of the country’s aid budget is itself because it’s spending most of it at home. The US is a good example of that. USAID is earmarked and has to be spent on American contractors and consultants and shipping and supplies. And so the biggest recipient is the United States. And we know that higher quality aid means spending more of it locally and using local institutions and local capacity, and building that so that countries can stand up on their own feet.
Alan Beattie
So moving to the US, apart from thinking that closing down USAID is a bad idea, which you’ve written about recently in the FT. What do you make of the Trump development and policy so far? Is it actually animated by anything apart from prejudice?
Minouche Shafik
I mean, I don’t think there is a development policy at the moment. There’s only a policy to destroy USAID. And of course, every development organisations in the world can improve and there are always inefficiencies that can be addressed. But there is also a huge amount of evidence that many things have been very, very effective. And so a real policy would try and look at those issues squarely. I think the other thing that’s quite clear is that merging development agencies into the diplomatic service, into the State Department, as has been done with USAID, inevitably results in a huge diminishment of capacity. I often say these days the world is becoming more political, but it’s also becoming more technical. And the capacity you need to solve things like climate change or trade issues or pandemics. Those issues require deep technical expertise, and when you eliminate your aid agency, you lose that expertise.
Alan Beattie
I mean, there’s always been a big political dimension to foreign policy, right. As I say at Kennedy, that sets up USAID. It wasn’t entirely selfless, and it’s been one way of selling it to American people that this is a sort of arm of foreign policy going right back to the Marshall Plan. We’re now seeing deals like the minerals deal, which President Trump is offering, that’s the word. Ukraine, whereby they give control over the minerals or revenues from the minerals to the US. Is this just an extension of what we’ve seen before is something really different?
Minouche Shafik
I mean, you’re right, USAID was born out of the cold war, and John F Kennedy created it in the ‘60s as a tool of foreign policy. I think what we’re seeing now is a shift in the motivation for aid. You know, you can give aid to a country for three reasons: in your own interests, in their interests, or for mutual benefit. And arguably in the heyday of the Millennium Development Goals in the aid business after the millennium, there was a very strong focus on giving aid for the countries benefit, for the recipients benefit and for their wellbeing. I think the pendulum is shifting now to self-interest, to doing it purely for the donor’s interest. I would like to think that actually, the most sustainable place to be is to find a space for mutual benefit. You know, if you think about an issue like climate change, it’s quite obvious that you can’t solve that without partnerships and looking at the mutual interests of countries involved. Similarly, with migration or pandemics or even economic growth, these are things where you can identify clear areas where the interests of rich countries and poor countries are quite aligned. And where there’s quite a lot that can be done.
Alan Beattie
So if this is the way that Trump development policies gains, and it emerges from the chaos at the moment, that it’s going to be more hard-nosed, it’s going to be American interests. Does that mean geographically in certain parts of the world or to certain parts of countries, it needs to be receiving more than they have in the past?
Minouche Shafik
No, there will definitely be a geographical shift. One is already seeing a change in the way the aid money is being spent. For a very long time, there was a very strong focus on reducing poverty in developing countries, getting kids into school, delivering basic healthcare like vaccinations and so on. That money is being squeezed at the moment, and where you’re seeing the money going now is increasingly on humanitarian spend because there are so many conflicts in the world at the moment and so many chronic humanitarian crises. And second, on climate change, which rich countries see as in their interest to have climate change addressed. And an area I think of growing focus going forward is going to be migration. As more and more countries are concerned about immigration issues and the consequences for their domestic politics.
Alan Beattie
Before we leave the US, you know, I was in Washington 20 years ago, a bit more when the Bush administration actually set up this program to combat HIV/Aids in developing countries, particularly in sub-Saharan Africa. And it came as a big surprise to lots of us. I think that, you know, really quite a conservative administration like Bush’s would vote for it. And in my view, was always actually, this wasn’t very cynical and it wasn’t soft power. It just managed to tap into a particular Republican strain of thinking, quite religious strain of thinking about wanting to help people. Does that strain still exist? I mean, does it exist in the administration? Does it exist still in Congress?
Minouche Shafik
Interestingly, what the polling shows is that when you ask people, why should you give aid? The main argument people give is to do good. The self-interested kind of soft power arguments are not on the top of the list. And so people believe in that motive, but they want to know that the money is being spent well.
Alan Beattie
One thing that a lot of campaigners focused on, whether it’s accurate or not, is their perceptions of increasing inequality. Now, you know, at a global level, for a long time that wasn’t necessarily true, but people believed it was true. Within countries, often there was an increase in inequality. What do you think that plays in overall outcomes?
Minouche Shafik
So the perception is often very different than the reality. But the perception matters. You know, I saw a very interesting piece of research which looked at people’s attitudes if they grew up in a period of low growth and social mobility. You tend to have a zero-sum view of the world, and you tend to be less trusting and less willing to see the world in a win-win sort of way. And there is a significant part of the US population which has experienced low growth and low social mobility, because the globalisation that we’ve had in recent decades has given very high rewards to people who are educated, and very low rewards to people who didn’t have a university level education. And so you can see why there is a backlash, and it reflects a failure of the educational system and the economy to share those opportunities more widely.
Alan Beattie
OK. So let’s talk about what the end point of this is all supposed to be, which is actual development outcomes. People living longer, lower infant mortality, lower maternal mortality, and so forth. Now, despite everything, despite Covid, which is obviously a big setback, overall welfare as measured by human development indicators, it’s on an upward trend that seems to be recovering. Is everything OK despite everything? Can we continue to reduce poverty even without aid?
Minouche Shafik
I think it’s really important to hammer home this point that the so-called development era, which is kind of the world since, let’s say, 1950. The progress that we have made in the world in that period in terms of incomes, poverty reduction, better health, education, nutrition, every single measure of human progress has been more than what was achieved throughout all of human history. It’s just worth dwelling for a moment. You know, we’ve had 10 times more progress than in all of human history. People in 1950 used to die in their 40s. Now average life expectancy is 71 globally. We’ve got almost every kid in the world into primary school. We’ve achieved gender equality so that every girl, just like every boy, gets access to education. You know, in 1950, half the world’s population was poor. Today it’s less than 10 per cent. So it has been a phenomenal success. Now the question is, was that because of aid? And the problem as always in economics, you don’t know what the counterfactual is. You can’t rerun the world for the last 75 years and say what would have happened without aid. But what we do know in thousands and thousands of studies that have been done, whether it’s randomised controlled trials or econometric studies or case studies, is that when aid was well-designed, the outcomes were incredibly positive.
Alan Beattie
And how much of this was just technological improvements, particularly in health? You know, one thing I still struggle to get my head around is that my grandmother, who was from a, you know, reasonably well-off background in England, had polio. She was paralysed for two months during the second world war of polio. And then she recovered and then she was fine and so forth. And it’s quite dramatic looking back, even in advanced countries, how measles for children and tuberculosis even for a long time, persisted. Now those were technological gains, vaccines and so on, which were largely developed in advanced economies. But how much of it was that? How much of it was just 1) it was technological improvements and 2) it was actually rich countries producing stuff that was mainly focused on themselves? You know, one of the first uses of penicillin was for soldiers in the second world war, right?
Minouche Shafik
So definitely technological progress and vaccines played an incredibly important role in reducing infant mortality. Clean water, hugely transformative in terms of increasing life expectancy around the world. And then I think the other thing I’d say is education and getting most kids, at least through primary school, that had huge knock-on benefits in terms of life expectancy, higher incomes, better nutrition and so on. And so those basic things have had huge consequences, I would say.
Alan Beattie
OK, so let’s throw to a break. But when we’re back, I’m going to ask what about developing countries themselves in all of these? What are they thinking? Do they have a collective voice? And above all, what’s the role of China?
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And we’re back. So there’s this term global south, which aims to take in all low- and middle-income countries. I’m personally not a fan. I’ve made quite a few enemies by not being a fan. And one reason I don’t really like it is there’s this huge amount of differentiation within those countries, and yet there are often some governments, like China and India, which claim to speak on behalf of the global south. You know, India convenes a meeting called the voices of the global south. Is there such a thing as a single developing country, a single emerging market interest?
Minouche Shafik
So I confess, I don’t really like the term myself, and I avoid using it because . . .
Alan Beattie
An ally. I finally have found an ally and it’s OK.
Minouche Shafik
Because I need to help and countries are very different than each other. They have different interests. And countries like China, India, South Africa, Brazil, these are middle-income countries with significant and growing power with a significant voice on the global stage. There are members of the G20. They have large economic interests and they have some power. And the second group are kind of small- and medium-size, low- and middle-income countries who, you know, are making development progress but don’t have significant power on the global stage. And then you have these fragile and conflict-affected countries where most of the poverty is where the humanitarian crises are and where their governments are very, very weak. The one issue that I think they do have in common is they would all agree that the current international system, as constructed after World War II, doesn’t give them enough voice. And that is the one issue that I think ties them together. What they would do with that voice is probably very different because they have different interests and different agendas.
Alan Beattie
So you mentioned the G20. You know, there was an institution that was elevated the heads of government level during the global financial crisis, and that was supposed to be the great institution which was going to bring people in. The US, I think, has now said it’s not going to even attend this particular meeting. I think maybe China has not attended some meetings in the past. Has the G20 failed?
Minouche Shafik
So I often describe the G20 like a tea bag. It only works when it’s in hot water. And so it’s been very useful at moments of international crisis. But for routine business it tends to trundle along, not having a lot of impact.
Alan Beattie
And why is that?
Minouche Shafik
Because people in a moment of crisis are forced to co-operate. Whether it was the 2008 financial crisis or even during major conflicts, they have to make compromises to co-operate.
Alan Beattie
OK, so you’re talking about low- and middle-income countries feeling themselves excluded from structures of governance. Traditionally, of course, that’s absolutely true. You know, it used to be a small gang of countries that stitched up deals in the WTO. Europe in particular, still heavily over-represented on the governing boards of both the World Bank and the IMF. I used to work. Now, this is another subject where I make myself some enemies, which is to point out every time the leadership role from these institutions comes up, the emerging market world completely fails to unite behind sometimes extremely impressive candidates. Why is that?
Minouche Shafik
Yes, I think it often is because the powers that be are very good at divide and rule. And so they manage to create divisions among the developing countries to be able to advance their own agendas. I think that’s the crux of it. Governance reform of these institutions has been on the agenda for decades, and we have made so little progress. It is extremely frustrating. And you know it is true that the biggest problem is mainly Europe who is over-represented. The US is actually not over-represented very much in the boards of these institutions. It’s the Europeans. And unless they find a way to accommodate more developing countries and give them a seat at the table equivalent to their economic importance, the relevance of these institutions will diminish.
Alan Beattie
I mean, there’s a lot of rivalry between the emerging markets. I think someone ran the numbers and said, if you just updated the voting power on the IMF Executive Board to reflect what’s changed in the global economy, China’s representation would shoot up to something like 17, 18 per cent. India’s would still be three or something per cent. And what someone else has said to me is you won’t have a Chinese president of the World Bank or managing director of International Monetary Fund because India would rather have an American or a European in that role. Similarly, you won’t have an Indian because the Chinese prefer an American over an Indian. So this seems to be this outward solidarity. But in practice, India and China have been to war with each other three times. These countries are rivals and they’re not as much as friends.
Minouche Shafik
Yes, that is true. That is true. And I think the important question, though, is are these institutions truly representative? The issues around who the head is, those kind of things, those are symbolically very important. But in the end, unless you’ve got a shareholding where people feel it reflects the real world, not the world as it was in the middle of the 20th century, they will have less stake in these institutions. And if you lose a large part of the world around that table because they don’t feel that they are being heard. That’s a big loss.
Alan Beattie
In the absence of this, what China in particular has done is set up its own institutions, like the Asian Infrastructure Investment Bank, for example, which some see as a sort of parallel to the World Bank. It’s not just because China wants to control institutions. Was it inevitable from that point of view? Or was it genuinely because they felt themselves squeezed out of the World Bank and the IMF?
Minouche Shafik
So I think China’s been riding two horses for a while, participating and arguing for more voice in the existing international system, while at the same time creating a parallel system as a kind of plan B. These days, it feels like because they’re frustrated with progress and because the geopolitical rivalry with the US has grown even more intense, plan B has become plan A, and those parallel institutions have growing memberships and growing resources. They’re still very nascent, and if there was a breakthrough in the existing international system, I think it can be salvaged. But on the current trajectory, we are moving toward parallel systems.
Alan Beattie
Now, we’re also moving towards a situation where some of the big emerging markets, better-off emerging markets, are donors rather than aid recipients — India, China, Russia, Saudi and so forth. How is that working? How is the way that they disburse aid and they use aid different from the way that traditional aid donors have done so?
Minouche Shafik
Their aid tends to be linked to commercial interests and is often focused on infrastructure rather than, say, human development, health, education and so on.
Alan Beattie
And as such, it’s better or worse, do you think, than traditional aid?
Minouche Shafik
It’s a debate about that. (Alan laughs) It’s very interesting. You know, if you talk to, say, policymakers in Africa, they will sometimes say, well, look, at least it’s tangible. I got a railroad or a football stadium or a highway as a result of that. And the conditionality tends to be more around commercial interests rather than whether your country’s democratic and what your human rights situation is.
So some people think that is better. Others would say it is very, very commercially minded. And so they are getting mining rights or rights to run infrastructure facilities like ports for very, very long-term contracts.
Alan Beattie
So from that point of view, what the US is doing in Ukraine is actually sort of coming into line with what China has done for a long time.
Minouche Shafik
You could say that. (Laughter)
Alan Beattie
I mean, the Chinese programme, in particular the Belt and Road Initiative, and it was huge at one point, around all over southern Africa, and that seems to have pulled back a bit. There seems to be some feeling that even in an autocracy like China, money had been wasted, projects hadn’t worked and it wasn’t wise for them to continue to put their money at risk in that way.
Minouche Shafik
Well, I do think that some aspects of Belt and Road are being reassessed, in particular the fact that many countries accumulated very large debts as a result of the Belt and Road Initiative, and it put China in the awkward position of being the major creditor to many countries in Africa. And working through the consequences of that has been very difficult.
You know, a country like Zambia has spent the last three years trying to restructure its debt, most of which is to China. And that has been a very difficult process for many African countries and I think also for the Chinese. Having said that, the Chinese have just committed an additional $50bn to Africa over the next few years, so they continue to be very major players.
Alan Beattie
China as a creditor is very interesting because one thing they have done is say we are not a traditional creditor, we’re not going to join traditional creditor organisations like the Paris Club of rich countries. We are a developing country ourselves and therefore we can’t be expected to be treated like other creditors. What do you think of that? Do you think that’s something that they’ll have to shift?
Minouche Shafik
I do think that we need a much better approach for dealing with these huge debt overhangs that are really affecting many countries in Africa. Many, many countries are now spending much more on servicing their debts than they are on health and education domestically, and many of their debts are unsustainable.
China also says these are not official debts. These are commercial debts by our commercial banks to their commercial entities and so there isn’t a real role for the state. But of course, China’s banks ultimately are state-owned, and so the line between what is official and what is private is more complicated.
Alan Beattie
And here’s the problem with the global south. I mean, another thing that people say about the global south is, oh, it’s not just about income being developing. It’s about their historic experience, their postcolonial experience.
Now, yes, China did obviously have a time of being occupied and controlled by western powers. At the same time, if you ask most Chinese people and if you look at Chinese history, I think they would regard themselves as having been an imperial power rather than a colony. So in a sense, the continuation of ideas like the global south or developing country interest is not very helpful here.
Minouche Shafik
Yeah. I mean, I think like on many, many international issues, you get coalitions of interest around particular issues at a particular moment in time. And at the moment, there is a very large coalition of developing countries who are highly indebted and whose debt burdens are unsustainable, and they have an interest in getting their debt restructured. And given what’s happening to aid budgets, that will put even more pressure on budgets in poor countries, and they will have to start finding resources to pay for the HIV drugs and the vaccinations and the schoolteachers that were being supported by aid before.
And so this will only make this debt issue more acute and more important for both Western, you know, European and Americans, but also the Chinese to solve. It will become the biggest development issue over the next few years.
Alan Beattie
OK. So finally, final question: if we could make you supreme dictator of the world . . . (Laughter) If you could wave a wand, and in fact just one, but just one big policy change on behalf of all governments in the world, what would it be?
Minouche Shafik
OK. I’m going to give you one answer, but then I wanna have a thing I could wish for, but I don’t know the answer for. So the one answer, I guess, is that we are entering a very different period demographically and we’ve got ageing populations almost everywhere except Africa, and we need young people of the next generation to be incredibly productive to be able to support these ageing populations.
And so I would want massive investment in early years and the first thousand days of life in health and nutrition, because we know, from very good development experience, that investing in that period massively increases educational attainment and employment opportunities and productivity later in life.
And if we did that across the board and gave every child in the world that really good start, I think that would transform both what’s happening in developing countries — it would help with ageing societies, which is a big problem in the advanced economies — and it would do a huge amount for reducing inequality. That’s the one where I know there’s an answer.
Alan Beattie
If the kids are all right, then everyone will be all right.
Minouche Shafik
Yeah, I think that’s true. The other thing that I lament in the policymaking world globally is the myopia of our politics. You know, if you look across so many domains, you know, that classic Benjamin Franklin quote about an ounce of prevention is worth a pound of cure, it applies in pandemic preparedness, it applies to climate change, it applies to humanitarian crises, it applies to healthcare.
And yet our political systems are unable to make the wise decisions around prevention and investing in prevention because of our political cycles, because of the way we count things fiscally so that the benefits don’t show up, if they don’t show up in a long time, nobody cares at the present. And so if there was a way that we could count things and change the accountability of politicians to get better decision making for the long term, we would be a lot better off. But I don’t have an answer to do that.
Alan Beattie
Minouche, thank you for coming in. Thanks very much for your time.
Minouche Shafik
Pleasure. Thank you, Alan.
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Alan Beattie
That’s all for this week. You’ve been listening to The Economics Show from the FT. This episode was produced by Laurence Knight with original music from Breen Turner. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Alan Beattie. Thanks for listening.
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