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Footing The Development Bill

The proportion of gross national product that wealthy industrial nations spend on development has fallen over the past decades. But there are other options to finance such assistance.

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Helping people help themselves is a major topic at the Earth Summit in Johannesburg

Official Development Aid - or ODA - cannot be the only possibility for helping developing nations. While various schools of thought agree on this point, opinions are divided on which other means of financial assistance have the most potential for success.

"One group says, we have to trust the powers of private industry," says Professor Gerd Braun, chief economist at the German Investment and Development Company DEG. "We have to mobilize resources in these countries and create conditions that move our resources there, and we have to open the markets."

Opponents of this theory, however, stand up for the classic version of development aid, he says. Industrial nations should finally fulfil their goal of spending 0.7 percent of gross national product on development aid. At the same time, this camp demands that developing countries' debts be waived. They should also be given more rights to a say in international institutions - such as the World Bank, the IMF and the WTO - which are still dominated by a few, large industrial nations.

DEG's Braun is convinced that it is only a combination of both that can have a lasting effect on developing nations' problems. He also believes direct investment by foreign companies is a good means to economic development. In addition to funds, technology and knowledge are brought into a country.

Dead capital

In many countries, administrative and banking systems need to be improved, he says. This could be financed through ODA. Subsequently, the available resources in these countries could be better used. For example, many people own a small piece of land with a small house, which they live in. But this land is mostly used only for agriculture.

A further development doesn't take place, says Braun. In an industrialized society, the owner could go to the bank and take out a loan, using the property as collateral. This would enable him to buy a small truck, operate a transport company or build a kiosk. "That means, this asset isn't activated. It is agriculturally, but not economically," he says.

Economist and Nobel Prize nominee Hernando de Soto calls this "dead capital", which is capital outside the law. This is related to the levels of trust people have in their countries. The basis of this trust are the standard forms and legal documents which provided opportunities to uniformly identify people, wealth, and ownership, he says.

For example, there are buildings in both Mexico and the U.S. where people work and live. But de Soto says there are 100 more things that the U.S. buildings do that the Mexico buildings don't. They are being mortgaged, act as collateral, are places where things are delivered, and so on. These sorts of uses are often not available to people in the developing world.

De Soto estimates that 90 percent of Egyptian businesses and people operate and live outside the legal system. He acknowledges that their activities represent enterprise, but not a real market economy operating within the rule of law. Egypt's poor own $245 billion in dead capital, which is 55 times of all Foreign Direct Investment in Egypt since Napoleon's time, he says.

So, according to de Soto, the wealth, in fact, lies with the poor. ''They are not the problem, they are the solution," he writes in his book The Mystery of Capital. "In the midst of their own poorest neighborhoods and shantytowns, there are - if not acres of diamonds - trillions of dollars, all ready to be put to use if only we can unravel the mystery of how assets are transformed into live capital.''

Ecological sustainability and equity

One basic problem of financing developing aid remains, however. Many people believe that pure economic growth is the best measure to battle poverty. But growth without consideration for limited natural resources is a flash in the pan, say the authors of the so-called "Jo'burg-Memo. Fairness in a Fragile World".

The document published by the Heinrich-Böll Foundation says this will only lead to a repetition of all the ecological mistakes that industrial nations have already made. Its recommendations are grounded in the principles of ecological sustainability and equity.

In spite of different views on the ongoing process of globalization, the authors agree about the urgent need to re-integrate markets in a framework of social and environmental regulations and limitations on a local, regional, national and global level. Its key demand is a redistribution of rights and resources.

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