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How UK Foreign Aid Benefits the 1%

Research & Commentary
February 01, 2017

by Theo Morrissey

A British development agency has invested in luxury hotels and gated communities, while funneling profits into the pockets of top executives.

The UK government is moving to increase the share of how much of the public money spent on development goes to the private sector. Plans for an eight-fold increase in the funding cap for the government’s development finance institution are currently rushing through parliament. This may seem like quite a technical detail but, make no mistake, therein lies the devil.

Credit: Gavin Houtheusen/Department for International Development

Gavin Houtheusen/Department for International Development

The Commonwealth Development Corporation — or CDC, formerly the Colonial Development Corporation — aims to “support the building of businesses throughout Africa and South Asia, to create jobs and make a lasting difference to people’s lives in some of the world’s poorest places.”

The CDC, a public company 100 percent owned by the Department for International Development, is expected to make a profit. Between 2004 and 2007, the agency most certainly did, reaping annual returns on investment as high as 40 percent.

Some of these returns went to underwrite the astronomical salaries of the agency’s top executives, over £1 million in the case of one former chief exec.

And what sort of investments did the CDC make to forge “a lasting difference to people’s lives in some of the world’s poorest places”? The agency turned out to be funding luxury hotels, gated communities, shopping malls, schools with expensive fees, private hospitals, restaurant chains, and advertising companies.

If spending public money on luxury hotels to help the developing world’s poor strikes you as a suspect development strategy, congratulations. Your moral compass is working. But beyond simple morality, this approach makes no sense. We have next to no practical proof that investing in gated communities and private hospitals alleviates poverty in the world’s poorest countries.

Defenders of the CDC these days assure us that the agency has become a reformed beast no longer prone to these sorts of past excesses. Indeed, some reform did take place in 2010, after the CDC found itself caught in compromising positions a few too many times (some examples in this summary).[pullquote]We have next to no practical proof that investing in gated communities alleviates poverty.[/pullquote]

These reforms refocused investments on countries that have the most poverty, cut agency executive pay, and better prioritized job creation. But these reforms have not changed the Commonwealth Development Corporation’s general culture. Some 35 CDC employees, for instance, still take home more than the UK’s prime minister.

Make no mistake, though: These people rate among Britain’s best and brightest, fighting poverty in ways we can only attempt to understand . . . or so they would want us to believe.

CDC claims to benefit developing countries by creating jobs. The agency, the argument goes, has created over a million new jobs in the past year alone. An impressive figure. Also quite misleading, as a recent briefing by Global Justice Now highlights. Indirect jobs, calculated based on estimates of the possible impact of investments, account for 97 percent of the CDC million-jobs figure.

We need, warns a recent study by the Trade Union Development Cooperation Network, to beware the CDC’s over-reliance on self-reporting. The employment figures the agency cites come from the agency’s investment partners and have not been independently audited or even verified by the CDC itself.

So much for the quantity of jobs created. On the quality of jobs created, the CDC abandons even the manufacturing of homemade figures. The agency makes not a single provision for the monitoring of the quality of new jobs created.

To raise the profile of job quality and other employment issues, best practice should include having worker representatives on the board of directors of the CDC and other development finance institutions. Needless to say, CDC efforts fall well below best practice.

Neither in the host countries where the CDC operates nor in the UK itself do worker organizations get consulted at any point in the process. In fact, evidence suggests that the agency at times undermines the ability of workers to organize into unions, collectively bargain, or even raise complaints. This contempt for worker rights makes for a blatant contradiction. How can creating jobs “alleviate poverty” when workers can’t organize to fight poverty wages?

The Trade Union Development Cooperation Network 2016 study, The Development Effectiveness of Supporting the Private Sector with ODA Funds, highlights shortcomings of the CDC in other key areas. The agency keeps governments of developing countries out of the loop on decision making and legitimizes tax havens — a disaster for developing countries —  by channeling 75 per cent of its investments through notoriously secretive jurisdictions like the Cayman Islands and Guernsey.[pullquote]The blurring of lines between public and private interests will only worsen our problems.[/pullquote]

The CDC’s poor reporting standards, the 2016 study notes, adds to the transparency problems stakeholders in developing countries face. The CDC has also failed to set up independent complaint mechanisms for those the agency claims to be helping.

These shortcomings all help reveal a deeply flawed model of development aid, a model that avoids coming to grips with a basic reality: Profit-driven investors have little incentive to invest in contexts of crushing poverty, even when shored up by public money.

Developing countries, one recent report shows, remain net creditors to the developed world to this day. The UK has laudably declared that it will continue to dedicate 0.7 per cent of its GDP to development assistance, but this effort may become meaningless without a true commitment to an effective use of these funds.

We are seeing instead additional prominence being given to the role of the private sector in development internationally. The mantra of trade liberalization is encouraging countries to pick private sector champions and promote their interests at home and abroad. Stripped of the ability to build any such champions on internal markets, developing countries are destined to remain confined to the lower echelons of value chains.

Tax avoidance and austerity measures mean that cash-strapped governments are looking to the private sector to invest in the development effort. But the revenues of multinational enterprises dwarf the GDP of developing countries. This power imbalance bears witness to an instrumentalization of public policy making by private interests — the exact opposite of what should be happening.

Under these conditions, the blurring of lines between public and private interests will only worsen the social, economic, or environmental problems we face.

An earlier version of this article appeared in Equal Times.

Theo Morrissey works at the International Trade Union Confederation as the outreach communications officer of the Trade Union Development Cooperation Network. The ITUC represents 180 million workers in 162 countries.

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