Britain might soon need Malaysian aid

THE MOST encouraging thing about the Pergau dam affair is that it should, in future, lead to much greater honesty by both the 'donors' and the recipients of what we call 'aid'.

The inverted commas are needed because much of what is popularly known as aid - and classified as such in the international statistics - has not been aid at all in the commonly accepted sense of the word. One country was not in some altruistic way helping another. Aid was a cross-border transaction that was deemed to be of either political or economic benefit to both sides.

To say that is not to attack the whole idea - as did, most famously, Teresa Hayter in her book Aid as Imperialism. It is to make the point that, as a general rule, both sides sought to benefit from the process. This applies to both multilateral and bilateral aid. The first, aid channelled through an international organisation such as the World Bank, did not involve any specific 'deal' between two countries. But if the aid took the form of a World Bank loan it was at a market rate of interest; and concessionary loans through the World Bank affiliate, the International Development Association (IDA), had to be repaid.

In return for this aid, the recipient countries bought goods and technical services from the countries supplying the funds. There was - genuinely - no linkage, but the fact remained that the developed world did benefit.

In the case of bilateral aid, there might be no requirement for the country receiving the loan to spend it on products or services from the country giving it. But frequently there was: the loan would be (and sometimes still is) in effect a trade credit, rather as a garage will arrange a loan for someone to buy a car. There is nothing wrong with that - except that it is a bit ridiculous to call it aid. Zero per cent car loans carry the cost of the interest in the price of the car.

But until, perhaps, the mid- Eighties, the fiction continued: we, the rich countries, extended aid to the poor ones, with the decisions as to what form such aid should take being made either by politicians at home or by officials in agencies such as the World Bank. The Pergau dam was such a deal, albeit one where the linkage was a little more explicit than usual.

Since the mid-Eighties, however, three things have happened that are together demolishing this rather cosy arrangement: the end of the Cold War; the growth of private sector investment flows, and the explosive growth of some developing countries, particularly in East Asia.

The effect of the end of the Cold War was twofold. Most obviously it ended competition between the West and the Communist world for influence among developing countries. Until then, if one side would not fund, and help build, the dam or the railway, the other side would. Since then, developing countries have had no choice. Aside from the multilateral agencies, the only secure source of funds was the West.

Less obvious was the psychological impact on developing countries of the collapse of Soviet Communism and the adoption of the market economy in much of China. Suddenly it became clear that one system really was better than the other. The abandonment of the centrally planned economy led to the second great change of the Eighties, the explosive growth of private sector financial flows. One measure of the scale on which countries have embraced the market system has been privatisation. Between 1988 and 1992 the governments of developing countries raised more than dollars 60bn ( pounds 40.5bn) from the sale of state-owned assets, of which dollars 18.5bn ( pounds 12.5bn), or 30 per cent of the total, came from abroad.

Naturally, the total flow of foreign funds into the developing countries was much larger. Take foreign direct investment, that is, investment by companies in plant and equipment. In 1992 net foreign direct investment reached nearly dollars 40bn ( pounds 27bn), far outstripping the dollars 22bn ( pounds 14.8bn) provided by the World Bank and the IDA that year. Beyond this are the flows of portfolio investment, as fund managers spot each new 'emerging market' and seek to invest in it. Emerging market funds were among the most profitable investments last year.

In other words, the developing countries are now receiving much more money and, in the case of direct investment, perhaps more technical help than they get from public sector bodies such as the World Bank. Aid has been privatised - except that it is no longer called aid.

Finally, the growth of East Asia has undermined much of the rationale (or rather what has been politically correct to pretend is the rationale) for giving aid: assisting economic growth. Some countries that have achieved economic take- off have benefited from foreign capital, but China, the country which achieved the fastest growth in the Eighties, received very little in the early stages of its growth. In contrast, many of the countries in sub-Saharan Africa that have received most aid on a per capita basis have shown the worst economic performance.

While it is very encouraging that countries such as Singapore, Hong Kong and South Korea have multiplied their real GNP per head 10 or 20-fold in one generation, it is profoundly disturbing to note that GDP per head in much of sub-Saharan Africa is lower now than it was in the Sixties.

Aid may sometimes assist growth, but anyone with any humanity must be disturbed by the fact that in much of Africa it seems, in this purpose, to have failed.

These three changes will transform the whole concept of aid as we now think of it. Much of what passes for aid - public sector finance from the West for projects in developing countries - will no longer exist, for the simple reason that in another generation many of the present developing countries will have achieved developed status. China will be transformed. It has already gone from the catastrophe of Mao's Great Leap Forward, which led to the deaths from starvation of more than 30 million people, to becoming the world's fastest-growing economy in one generation.

It will not just be China. Malaysia will, if it follows the experience of Singapore, have as high a GNP per head as Britain in about 20 years' time. Maybe we will be asking them for aid to finance our infrastructural projects - not such a silly idea, given the very high savings rations of East Asia. These countries will no longer need aid: it will long have been replaced by private capital flows, in all probability in both directions, between different grown-up economies. Money will follow investment opportunities, just as it did in the last century when cross- border capital flows were much greater in relation to GNP than they are today. Aid will have been replaced by a much more honest and open financial relationship.

Where aid, real aid, will still exist will be in the humanitarian field. There will undoubtedly be some countries that will need sustained humanitarian help, and this will have to be offered out of genuine altruism, for there will be little economic reward. When the governments of the developed world focus on that, and leave the financing of dams to the private sector, the whole aid industry will have become both more effective and more honest.