G&M Article: Harper shifts aid policy from grants to multilateral lenders

Campbell Clark

Harper shifts aid policy from grants to backing multilateral lenders

Thomas Mirow is a bespectacled and technocratic German politician-turned-banker, and he’s now playing a central role in Stephen Harper’s policy toward the Arab Spring.

Two weeks ago, when world leaders at the G8 looked for financial assistance to help Egypt and Tunisia move toward democracy, Mr. Harper didn’t offer Canadian aid. Instead, he pointed to Ottawa’s backing of multilateral banks such as the one Mr. Mirow heads, the European Bank for Reconstruction and Development.

This is a trend in the making. Mr. Harper may be skeptical of the popular uprisings sweeping the Arab world, but in a broader sense his government is gradually shifting Canadian international-development policy to less direct aid in grants, and more backing of multilateral development banks to issue loans.

Last year, Mr. Harper surprised many at the G8 summit in Muskoka by leading an initiative to combat deaths of mothers and children in poor countries, pledging $1.1-billion over five years. But it’s the last grand aid announcement he’s expected to make for years. There’s a four-year freeze on the foreign aid budget.

Using multilateral banks as a channel for development funding suits Mr. Harper not just financially, but philosophically; he’s questioned whether aid is always effective and stressed that loans place pressure on a country to make their own development sustainable.

At the height of the global financial crisis, Mr. Harper showed up at international summits with quick promises of billions of dollars in loan guarantees for regional development banks. It allowed them to issue more loans, but won’t cost Canada a penny unless they suffer massive losses.

Mr. Harper is a skeptic about whether the Arab Spring will lead to democracies, and often refers to the risks. He’s doesn’t see Egypt and Tunisia as a neighbourhood concern – such as Haiti – and believes that in general, better-off developing countries such as Egypt and Tunisia should turn to loans from development banks, rather than aid.

In North Africa, he’s looking to development banks such as Mr. Mirow’s outfit to step in. The EBRD was created in 1991 to finance small and medium-sized business in the former Eastern Bloc, and Canada plays a relatively large part as the eighth-largest of its 61 shareholders. Now it’s about to expand to North Africa, notably to Egypt, with Tunisia likely to follow, pumping about $3.5-billion a year into the region.

Both Egypt and Tunisia have suffered deep economic setbacks. Tourism and foreign investment have dried up. Frustrated youths who sparked many of the protests that ousted dictators remain jobless. The strapped state has played a big part in both economies.

A number of multilateral banks are providing direct loans to their governments. But the EBRD focuses on lending or investing in private-business projects – usually through loans to small and medium-sized companies, when commercial banks won’t. It tries to change the structure of heavily state-run economies to encourage more private entrepreneurship.

“The Arab countries, as the central and eastern Europe countries 20 years ago, suffer from a public-sector, public-run economy that is inefficient, that is too big, too large – and from insufficient room for private initiative, for entrepreneurship,” Mr. Mirow said in an interview as he attended this week’s international economics confab in Montreal.

Mr. Mirow notes the differences between post-Cold War Europe and the Arab world. “But there are similarities in fundamental terms. Young people want to have a decent life, and want to have freedom,” he said. “And also in structural terms: a very weak private financial sector, a very poor layer of small and medium-sized companies, bad services and utilities in many cities and towns.”

One focus for the EBRD is encouraging private-sector projects that invest in improving local infrastructure, a means of using private funds for a public good. And, Mr. Mirow notes that countries such as Canada put in €5-billion in 1991, which has grown to $13-billion in the bank’s coffers. Since then, shareholders have added guarantees to expand lending. “It’s an investment in a better global future,” he argued, “and it is at the same time a sound financial investment.”

Development banks aren’t a perfect tool for developing countries. Loans mean a debt burden that the poorest can’t meet. Canada missed an opportunity by not putting direct aid into Egypt and Tunisia, which have pockets of deep poverty, to help strengthen a transition to democracy, said Roy Culpeper, a research fellow with the North-South Institute who has long studied multilateral banks. But, he said, development banks can do a lot to assist better-off developing countries.

Canada has for decades been a big backer of multilateral development banks, and is one of a handful of countries with a director’s seat on a half-dozen of them. At a time when Ottawa’s international-development policies will be squeezed for new funds, they are going to make up a bigger share of Canada’s approach to the developing world.

Campbell Clark writes about foreign affairs from Ottawa