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Macro economics

Three short articles from George Clark of the
Caledonia Centre for Social Development

bulletPoverty Reduction by better Budgeting
bulletConditionality and Tied Aid.
bulletMacroeconomics a short guide to the options

Poverty Reduction by better Budgeting

Budgeting is about making choices. Poverty exists because of budgetary choices made in the past. Poverty will be eliminated by the choices we make in the future.

bulletWhen you work out what you want to buy and how much money you have you will not have enough money to buy everything. You have to choose to do one thing rather than another.
eg Will I buy a school uniform OR textbooks OR beer?
bulletPeople make these decisions as individuals, as members of families and as part of a community. There is never enough money to do everything so people have to make hard decisions about what to do and what not to do.
eg Will we repair the bridge OR dig a well OR build an irrigation system?
bulletAnd the problem does not end in the village. People have to decide what to do and what not to do at the regional government level.
eg Should we spend the available money on schools OR hospitals OR roads?
bulletAt the National Level the Parliament has to decide what to do about taxation and Government spending and how to deal with international trade, foreign aid, and multinational businesses.
eg Should we increase the level of income tax and take more from everybody based on how much they earn OR should we increase sales tax where the amount that people pay depends on how much they spend?

When you decide what to do with money you are making a budget. This is never easy because it involves putting a price on things which are very different eg education OR health, roads OR water etc.

When many people are involved it is more difficult to reach agreement because there are many strong feelings about how the money should be raised, what it should be spent on and where it should be spent. Most individuals want their own ideas to be at the top of the list!

Experts cannot really help because, in the end, the high level decisions are about feelings rather than facts. The job is to make value judgements and this is an act of politics.

Tanzania’s Poverty Reduction Strategy accepts that the process is as much political as it is scientific. The Government is therefore asking everybody to get involved not only in deciding what needs to be done but also in taking part in the process and watching that it is not straying from its target.

Jesus Christ said that ‘the poor will be with us always’ but he was referring to the ‘poor in spirit’. There is no excuse for material poverty in the modern world. All that is required is that we use the world’s wealth better and more fairly. The problem of poverty is enormous but if we all work together at local, regional, national and international levels we can eliminate it.

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Conditionality and Tied Aid.

Foreign aid comes as grants (which do not have to be paid back) and loans (which do have to be paid back). Most of the aid comes from individual governments or through the United Nation Agencies but some comes through private, commercial or charitable organisations. In most cases the donor will not give money unless the receiving country or organisation agrees to spend it in particular ways.

In the past when a particular foreign government provided money it would insist that the receiving government spend most of it to buy machines and experts from the donor country. For example if money came from a particular country that produced vehicles then the government had to buy them from that country. This type of tied aid is now much less common. These days Governments are expected to shop around to get best value for their money.

In the past money was given only to support activities that were fashionable with the donors and governments. During the last 50 years there have been many different theories and this has resulted in foreign money usually being given only on condition that it is spent according to the fashionable theory of the time. This has not really changed but donors now try harder to convince the receiving governments that the latest theory is in fact the best one for them.

Most money in the past was given in support of particular ‘projects’. These were easy to fund because they began and ended at particular times and the donors could stick labels on them to publicise themselves. The bosses of bigger projects were usually foreign experts working from special project buildings that had their own budgets and vehicles, etc. These days it is more common to run projects through existing government or non-government offices and there are even examples of donors giving money directly to government departments to help them do what they themselves have decided to do.

Support to macroeconomic policies are always ‘political’. In the days of the cold war you would not expect the communists to give money to a capitalist government - or the other way round. Nowadays the donors are nearly all capitalists but there are many different theories on how to make capitalism work. The two biggest lenders are the World Bank and the International Monetary Fund (IMF). Both of these organisations believe in free market policies and will lend only to governments that are willing to make economic reforms that they call ‘structural adjustments’. In the past these policies had unfortunate effects (e.g. the poor are now poorer and Third World Debt is now bigger) and the latest set of structural adjustments are designed to be ‘pro-poor and pro-growth’.

There is an old saying that captures the flavour of most Foreign Aid –

He who pays the Piper calls the tune

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