Equity should be our guiding principle when it comes to foreign aid.

Liberal Vision’s Timothy Cox has called for the “Liberal Democrats to stand up and be counted on foreign aid”. He calls for the Lib Dems to “distance themselves from the aid ring-fence”, arguing, with good reason, that “government-to government aid has done very little to promote development over the last half century” and can “perpetuate long-term cycles of poverty in the developing world”. But there is one part of the Department for International Development that is successfully promoting sustainable development in poor countries while actually making money: the Commonwealth Development Corporation. If the Government does intend to increase the aid budget by £2 billion a year, then handing it to the CDC to invest in developing countries would be the best use of that money.

The Commonwealth Development Corporation functions as an equity investor in the developing world, recognising in its charter that economic growth and the success of native businesses is absolutely central to reducing poverty. It is a self-financing corporation, which Labour’s development Minister wee Dougie Alexander described well as a “self-perpetuating engine of development.”

The CDC invested £359 million during 2009, providing invaluable capital to businesses in the developing world during a difficult economic period, when commercial capital investment was shrinking. And it generated £162m of cash from this portfolio for future re-investment in developing countries.

The third world is crying out for investment, and can produce good returns on a commercial basis if investors are willing to take risks. The CDC has, among many other things, developed capital markets in countries with undeveloped private equity and invested in African banks, improved the management of Kenyan Orchards, established gold mines in Tanzania, invested in Indian Pharmeceuticals, and brought electricity to poor districts through the Globeleq energy company.

Private equity is generally not willing or able to work on the same risk basis as development finance institutions or specialist investment corporations like the CDC. But through its success, the CDC has demonstrated to other investors that it is possible to invest successfully in parts of the world that currently face a shortage of capital: last year it mobilised £742 million from third parties.

The Government has committed no new money to CDC since the mid-1990s, and the only additional money that it has invested are the returns on its portfolio – more than a hundred million pounds extra each year.

If we are to commit more money to development, maybe it’s time to make the CDC an even bigger arm of our development strategy, and give it a new injection of cash. This might even allow CDC investment funds to work with more marginal businesses and accept a greater level of risk on returns within the same overall commercial basis.

For years, people have eyed the CDC as a profitable sale by the Government, with Lord Ashcroft asking on 26 July this year whether consideration has been given to selling the Commonwealth Development Corporation in order to reduce the deficit. I’m glad that Baroness Verma replied for the Government that they do not have any plans to sell the CDC, which remains “an important instrument in the UK’s strategy to eliminate poverty through private sector development and growth.”

There is, however, an odd clause in the Coalition agreement: “We will keep aid untied from commercial interests, and will maintain DfID as an independent department focused on poverty reduction.” The CDC has proved over its sixty years that supporting commercial interests does reduce poverty – indeed, that no country in the world has been able to reduce poverty without economic growth. We can get good returns on our investments, while offering poor countries the only sustainable route out of poverty.

Published in: on August 8, 2010 at 11:14 pm  Comments (1)  

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  1. […] want to work constructively with Europe and other markets to open them to British imports. Even international aid can be framed in this narrative: supporting investment abroad as something that’s good for […]

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