Donor prudence

Fitch Ratings started it, lowering its 2009 economic growth forecast for the Philippines to just 0.5 percent from the original 2.5 in January, far below the optimistic 4.4 percent projected by the government.

Now the International Monetary Fund (IMF) has come up with a worse prediction, downscaling its initial growth forecast of 2.25 percent for the country to a big, fat zero.

So much for our immunity from the global financial meltdown. We have so far been immune to bird flu and, except for a handful of cases, we proved immune to SARS. But today’s economic virus is one we cannot avoid.

There’s another consequence of the financial crisis that we will be feeling: donor countries will want better utilization of their official development assistance (ODA).

The Europeans said as much during this week’s two-day conference of the Asia-Europe Meeting (ASEM) hosted by Manila. As Koos Richelle memorably put it, “Donorland is not Disneyland.”

Richelle is director general of the European Commission’s ODA arm, the EuropeAid Cooperation Office. EuropeAid handles 7 billion euros (over $9.1 billion) in aid every year, with its programs covering 160 countries and territories including the Philippines.

Richelle is Dutch, like the heads of both the IMF and the World Bank offices in the Philippines. Their other compatriot in Manila, Ambassador Robert Brinks, remembers in particular a story related by Richelle at the ASEM conference, about a bricklayer in their country having to give up 40 percent of his limited earnings to their government. Part of that revenue will go to Dutch and European foreign aid.

Western European countries have some of the steepest tax rates in the world. Even during boom times, European taxpayers demand from their governments the judicious use of public funds.

In this period of recession, that demand becomes greater. Accountability is sought even in the way ODA is doled out and utilized by the recipients.

And so the business of providing aid to needy countries must be results-oriented. The track record so far has been disappointing. As Richelle observed at the conference, no recipient of foreign aid in the past 50 years has significantly reduced poverty incidence. Aid, he said, is not enough; recipient states need quality leadership and governance. Ouch.

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Though he gave good sound bites and was widely quoted in newspapers as he warned that without results, European ODA would dry up, Richelle in fact was diplomatic in delivering his message.

Among the objectives of EuropeAid is the achievement of Millennium Development Goals. In giving out ODA, it also promotes democracy, transparency, good governance, human rights, and all those other values that underpin assistance from members of that elite donor club, the Organization for Economic Cooperation and Development (OECD).

In public, Richelle gave no direct critique of the performance of the Arroyo administration in terms of those values. EuropeAid, and most other donor states and institutions, generally prefer to engage governments, and to deal with problems such as corruption and human rights violations in general terms. In this regard, European Commission Ambassador Alistair MacDonald has been more vocal about what the Europeans think of the Philippine situation.

In private, Richelle told me Tuesday night that EuropeAid will be needing periodic updates from recipient governments on the status of ODA-funded projects and programs. If the projects are stalled or moving in the wrong direction, ODA could be suspended. One of the programs with EuropeAid funding in the Philippines involves the promotion of sound fiscal management, which includes ways of preventing corruption.

Richelle emphasized that corruption is found everywhere, even in rich donor countries. The difference lies in the way governments deal with the problem, how much is being done about it, and whether people get caught and punished for corruption.

EuropeAid has a proposal for curbing corruption, which Philippine government workers may not like. One of the factors behind widespread corruption is the poor pay of government workers, especially in developing countries where bureaucracies are typically bloated.

The solution? Cut the bureaucratic fat, starting at the top. Retain only the good performers and give them a substantial pay raise to encourage sustained good work. The salary scale will also attract better recruits.

In this country where appointment to public office is a component of patronage politics, we’re a long way from implementing this kind of solution to corruption.

The World Bank and Washington have also incorporated anti-corruption efforts in their foreign aid. Manila is still waiting for US approval for elevation to “compact” status to be eligible for greater aid from the Millennium Challenge Corp. The country’s track record in fighting corruption has held back the approval.

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When access to traditional sources of ODA gets tough, Pinoy toughies get going and turn to… China.

Beijing is becoming one of the largest sources of aid for developing countries. But its approach to aid is, in typical Chinese fashion, business-like, pragmatic, and meant to bring benefits to China.

While OECD members (China is unlikely to become one any time soon) tack on a lot of conditionalities such as transparency to their ODA, Chinese ODA has only one requirement: projects funded by their aid or soft loans should be undertaken by Chinese companies.

The only other thing expected of the loan recipient is, of course, repayment. The money being a loan, it is up to the recipient to decide how to use it or identify projects for funding.

Currently the Philippines is the biggest foreign recipient of Chinese concessional loans, with Beijing committing $1.5 billion. The scandal over the ZTE broadband deal has stalled Manila’s utilization of the loan facility, but the Chinese funding commitment stands.

With the economic downturn hitting China, which is expected to grow by only about 8 percent this year, even the Chinese will likely also want to see their loans and grants producing positive results.

A new order is developing in the international donor community. It’s not quite donor fatigue, but donor prudence.

As economies contract, taxpayers in donor countries are closely scrutinizing the way precious tax money is being spent by their government. In Donorland, it can no longer be business as usual.