Foreign Aid & Economic Transformation:
The Case of Sudan
“One should attach enough importance to giving aid and send more envoys ….” Sun Tzu (Chinese military strategist, 500 B.C.), on the need to control strategic regions, as interpreted by General Tao Hanzhang of the Chinese Peoples’ Liberation Army in his book, Sun Tzu’s Art of War, The Modern Chinese Interpretation, English edition published by Main Street, a division of Sterling Publishing Co., New York, p 86
Sudan, then and now
When I visited Sudan in 1996 it was a poor Third World country despite all the assistance provided by international agencies and Western aid programs. Khartoum was a dull city with dilapidated buildings from British colonial times. The twin city of Omdurman was a gigantic slum and had a vast dusty bazaar with camel and donkey carts. Outside the cities, drought had reduced harvests and high food prices had led to hunger and malnutrition. There were no signs of economic progress.
Up to 1999 Sudan depended on IMF/World Bank advice and foreign loans from Western countries and the IMF/World Bank duo. To obtain these funds it had to adhere to fixed guidelines and targets that characterised the Structural Adjustment Programmes of the Washington Consensus[1]: privatize public enterprises, remove subsidies[2] and liberalise imports, reduce corporate taxes, reduce import duties and liberalise imports, restrict bank credit, increase interest rates, reduce social programs and cut public expenditure. By 1990 the country had external debts of over $21 billion and was defaulting on payments and had little to show for the loans or Western inspired programs. This is an excerpt from my report of 1996[3].
“Sudan is among the least developed countries in the world with a GNP of US$10.1 billion (1990) and a per capita GNP of US$401 (1991). The economy is weighed down by an external debt of over US$20 billion requiring a debt service of US$21 million per annum with arrears of US$1.7 billion to the IMF alone. Government measures to liberalise the currency exchange rates to allow free-floating exchange rates and reduce government spending , coupled with increased food production in the last year, reduced inflation from highs of 100% per annum to a current rate of around 65-70%. The budget for 1995 also reduced corporate taxes, land purchase taxes and some import duties. However, Sudan’s inability to meet the IMF demands for loan payments led to a suspension of the Structural Adjustment Facility which the IMF has again refused to reinstate this year. The withdrawal of the IMF assistance also means that Sudan has lost the support of other bi-lateral aid donors that now follow the IMF lead.”
That was in 1996. When we arrived in 2007 the country was transformed. The GDP had increased almost five times in the ten years and stood at US$49.7 billion. There was a massive construction boom in Northern Sudan, despite the tribal wars in the Western Region and the uneasy peace in Southern Sudan where the principal rebel group had joined the government. In Khartoum and Omdurman there were modern 4-6 lane highways, over and under-passes on highways, several new bridges over the River Nile, modern buildings and supermarkets and many other constructions were coming up. The roads were filled with new cars and trucks, mostly from the local Hyundai car manufacturing plant and the Mitsubishi truck plant. Foreign investment was flowing in from the Middle East and Asia. Khartoum had the appearance of a boom town. This is an extract from the introduction to my report of 2007[4].
“The economy of Sudan has received a boost due to the peace treaty with the Sudan Peoples Liberation Movement (SPLM) and petroleum exports which, since 1999, has become the engine for economic growth. The oil industry has revived light industry and the export processing zones and helped stabilize the currency exchange rate. Sudan has been implementing IMF macro-economic reforms since 1997 and the economy is generally on a sound footing. Consequently, GDP growth is in the range of 9-12% annually and, despite some serious imbalances due to deficit budgeting and Balance of Payments problems, the future prospects are brighter. These economic imbalances could be eventually resolved with an increase in industrial production and exports. There are some other favourable signals. Direct Foreign Investment (FDI) in Sudan is increasing and the levels are high for a developing country in Africa. FDI in 2005 was US$2.305 billion and in 2006 was US$3.533 billion.”
Both projects we worked on in Sudan were of minor significance to Sudan but being UN consultants in the country gave us the opportunity to have personal meetings with policy makers at the highest levels: cabinet ministers, secretaries of ministries and heads of departments, chambers of commerce and top corporate executives.
Sudan’s economic transformation
What was the secret of the dramatic economic transformation? Without a doubt oil was the major catalyst for change. Oil extraction and exports commenced in 1999 and by 2007 Sudan was extracting close to 475,000 barrels a day. With the new concessions that were being given out in 2007, it is expected to reach one million barrels a day in the next decade, making Sudan a major player in the oil market which is seeing an endless escalation of market prices. But this happy situation did not take place till Western corporations and aid agencies abandoned Sudan (except for much publicised Western aid to refugees in South and Western Sudan), deeming it a pariah state that was grossly violating human rights, thus providing the opportunity for Asian and Middle Eastern states to participate in Sudan’s economic development.
The story of Sudan’s oil needs to be told as we had the opportunity to meet the four leading corporate players in the business to seek their views on vocational training needs: China National Petroleum Corporation (CNPC), PETRONAS of Malaysia, ONGC Videsh of India and the Sudanese corporation SUDAPET. All four corporations were working with the Sudanese Greater Nile Petroleum Corporation (GNPOC) which was given the operation of the pipelines and also recruited non-executive workers for the industry on behalf of the oil companies.
Oil exploration started with the US oil corporation, Chevron, in 1974. In 1984 an attack by the Southern rebels led to the death of four Chevron employees and relations with Sudan gradually soured. The Americans left and were replaced by the Canadian company, Talisman Energy. This company was sued a few years later by a US human rights organization for “supporting a country that violated human rights” and they left under US pressure, selling their shares eventually to ONGC Videsh Ltd. of India in 2001.
The departure of Western corporations, the US trade embargo and the constant demonization of Sudan by Western governments provided the opportunity for the Asians: the Chinese, the Malaysians and Indians. Their approach to business was markedly different from that of Westerners. Instead of being arrogant and dictatorial, the Asian companies worked in close collaboration with the government. Though the Asians brought in the investment and the expertise, financed the oil drilling and constructed the pipelines, they gave a Sudanese company to operate the pipelines and also recruit and supply the non-executive workers. The Asian companies have set up technical training schools to train prospective employees and send higher level staff to their own countries for further training. The Chinese funded, constructed and equipped what is the best and the largest vocational training school and gave it to the Khartoum State education department to manage.
Increased oil revenues and vastly improving infrastructure is making Sudan a prime destination for foreign investment in Africa. But Sudan has still a long way to go before it becomes a mature developed economy. The Sudanese economy, apart from the oil industry and foreign investment, is being driven by an active private sector. Governance and the public administration are still in a weak state. During our work in 2007, efforts to obtain basic data on economic performance were usually futile. During visits to government departments and ministries we would often find that most officers were absent from their desks and very little work was being done. Government offices were ill-kept and shabby and only the office of the cabinet minister was kept in proper order. Computerisation was minimal. Yet the available staff were always friendly and tried their best to be helpful.
The longer term prognosis for Sudan is good. With rising affluence and a greater demand for skilled workers, the present disparities will diminish. Affluence is bringing hope and a new sense of confidence and pride to both the government and the people. This change will be easier if the West is less critical of the Sudanese and takes a lesson from the Asians: that more can be achieved by friendly cooperation than by dictation and belligerence. Since Sudan’s vast oil resources are now operated by Asians, this amount of goodwill will not happen soon. It will also require a fundamental change in Western attitudes to developing countries which prefer tutelage to partnership.
Contrasting forms of aid
The Chinese, who had 70% of the oil facilities at the time of our visit, had earned the highest reputation among all foreigners. It was common to hear people say “China is our best friend”. Chinese goods flooded local markets but the Chinese kept a low profile and their presence was hardly visible to the public. China is increasing the capacity of the Khartoum oil refinery to handle one million barrels a day and built the oil pipelines from the South to the refinery and to the Red Sea port. But instead of controlling these pipelines, these were handed over to a Sudanese government corporation, the Greater Nile Petroleum Operating Co., for operations and the foreign oil companies pay this company for its services.
Contrast this with the situation in another country that I worked in as a resource person on a Commonwealth Secretariat training course on public enterprise management, Nigeria. Nigeria has the highest levels of oil production in Africa and Western oil companies that operate on the basis of a cosy relationship with corrupt local politicians are hated in the local areas where they have their facilities. The violence runs into regular attacks on oil company executives and facilities and armed retaliation by the government security agencies. Now the Chinese are making quiet inroads into this country with generous offers of grants, loans and investments[5], much to the chagrin of Western powers who demand that Chinese assistance to Africa should be conditional to human rights and improvements in governance. These moral conditions do not apply where Western interests are involved in the worst dictatorships in Africa, the Middle East and South America.
What was visible was a fundamental difference in the approach of the IMF and World Bank and the Western aid agencies to developing countries and the operations of Asian governments and corporations. The Bretton Woods Twins came with a list of pre-conceived conditions of their own which they customarily applied to all aid recipient countries, often making the recipient countries economically weaker and debt-ridden. The position of aid-giver to aid-recipient was a form of master-servant relationship, with the recipient having little say and being subject to punishment by having aid withheld for any failure to meet compliance or deadlines.
The anger of the Sudanese government against this kind of treatment was palpable during our visit in 1995/6. When we called on the Minister of Industry, Hon. Badr al-Din Suleiman, he burst into a tirade against aid agencies. When he paused for breath after about ten minutes, my colleague, Prof. Husnu Can Basar from Turkey, intervened and said that both us came from developing countries and that we understood and empathised with the country’s problems and were only there to help in our own small way. The minister was mollified and apologised for his seeming rudeness.
Some of the conditions imposed on Sudan were helpful initially. Sudan had very controlled pseudo-socialist economy of the type favoured by many developing countries in the post-World War 2 era. We noted in our study of the pharmaceutical industry that the liberalising of some imports and the freer availability of foreign exchange for industrialists and businesses helped industrial growth to some extent. But many other conditions provided the very basis for the failure of the development program. The restrictions on credit and high interest rates, though it reduced inflation, severely restricted industrial growth and local investment. But more importantly, the reduction of public expenditure and revenue (as a result of reduced taxes and import duties) undercut the very basis for development.
It is recognised today that investment cannot be lured by low taxes, duty free manufacturing zones or investor seminars in Europe (a favourite tool of the UN system and the World Bank to attract Western investment to the Third World). Investment generally seeks countries with good infrastructure, an educated workforce and reasonably good governance. All these require planning for the longer term and investments by developing country governments on improving infrastructure, education, health care and improved public services. The investments required are very high. Without adequate public revenue or external aid for these areas, these long gestation projects are not possible.
The result was that Sudan received stop gap assistance to survive but could not develop the capacity for sustainable growth as there was no investment or industrial expansion. It also became heavily indebted.
In the final analysis, it is not oil but the changes in the global economy that led to the transformation of Sudan and other developing countries. The economic change in Sudan is the best example of the changes in Africa resulting from the changing world economy. Up to close to the end of the 20th century, finance was the monopoly of the industrialised West and, with the control of the World Bank and the IMF largely in the hands of the US and EU administrations, they dictated foreign aid and development policies. But in the first decade of the 21st century, the sovereign funds of the BRIC (Brazil, Russia, India and China) countries has completely overshadowed the external resources of the World Bank/IMF and the West.
Chinese role in African development
The historically unprecedented economic growth of China has made it the main market for most of the world’s raw material exports. Africa, heavily dependent on commodity sales, saw commodity prices decline over four decades, leading to increased poverty, not development, despite all the aid given by the aid agencies. But China’s trade with Africa has reversed the situation and has been the catalyst for rising growth in Africa. According to the World Bank itself, global development is now more dependent on China than on the USA which is still the world’s largest economy. African economists, who have long pleaded that “Trade, not Aid” was what they needed for development, are now getting their wish.
But this is not the only change in the developing country scene. While the US, the World Bank, the IMF, and to a lesser extent the EU countries, tread heavily in developing countries of Asia, Africa and South America, China with its larger resources, walks lightly, seeking cooperation and friendship without conditions. Chinese trade is supplemented by substantial grants and the construction of essential infrastructure using Chinese expertise. In Sudan, apart from building the oil infrastructure, China was building the Merowe hydro-electric complex in 2007 at a cost of US$2.0 billion which would supply all of Sudan’s electricity needs by end-2008. When I arrived in Sudan on a project in 2009, the Merowe hydro-electric were already operating, providing electricity for most of the country.
The World Bank/IMF twins are being increasingly marginalised throughout the developing world while the angry chorus of criticism of China is ever rising in the West.
Good Public relations are high on the Chinese agenda. Unlike Western aid donors, they do not publicise their aid provisions. In fact, much of their aid budget is unreported though it is acknowledged that the volume of Chinese aid to developing countries exceeds that of the World Bank/IMF. Chinese working in foreign countries maintain a very low profile. When we visited the offices of the oil companies in Sudan, the CNPC was the one company where the front office was only manned by Sudanese nationals who talked to us and the Chinese were invisible. Though hundreds of thousands of Chinese work in developing countries, there presence is hardly noticeable as they keep to themselves.
Several examples illustrate the fundamental difference between Chinese aid and Western aid. Western aid is often given in measly sums, for limited purposes, after much negotiation and without much involvement by the local authorities in the final aid package. Furthermore, promises of aid given at highly publicized aid consortium conferences rarely materialise as promised, with only a small percentage of the promised aid being delivered. Aid to Haiti after the 2009 earthquake is the most recent and glaring example. Chinese aid is always generous, comes without strings and involves the local authorities who are given the lead role. China is also welcomed because it provides valuable assistance outside business and economic activity. Throughout Africa, China is gifting modern hospitals, cultural centres and public infrastructure and coming up with generous loans for infrastructure development. They come as friends, not stern teachers. They have also written off bad debts without the usual round of publicity that accompanies such events.
A common criticism in the West is that aid fails in Africa due to widespread corruption[6] and the incompetence of governments[7]. This is due to the structure of World Bank/IMF and other Western aid projects that allocate large sums to consulting services and contractors where local officials have the opportunity to interfere. Such problems do not occur with Chinese or Indian aid as these countries send their own corporations to take full responsibility for the project planning and implementation so that local interference is kept to a minimum. When the Chinese build an infrastructure project, they bring their own experts, equipment, materials and take full responsibility for project completion. Unlike Western project contractors, the Chinese never have cost over-runs and finish projects ahead of schedule. And the costs of Chinese or Indian construction may be at least about 50% less than that of Western companies.
The increasing prosperity of Africa and its rising GDP is due mainly to economic growth in China and, a lesser extent, India. African countries are mainly raw material producers and raw material prices steadily declined after the 1960s as Western buyers kept depressing prices. With the emergence of Asians as the major industrial producers with phenomenal growth rates, raw material demand and prices have escalated, helping many developing countries, and even developed countries like Australia. Even at this juncture, Greece is in discussion with China for Chinese aid and investment in a number of infrastructure projects. The aid flow from the East is expanding while West is trying to deal with their own economic problems created by its ideological commitment to unregulated markets and unbridled capitalism. Macro-economic theory will surely have to be re-written in the coming decade based on the current realities.
The IMF has now gone some way to refashion its image and moderate its conditions for assistance. It is hoped that the Western countries also can follow this trend to ensure their fuller participation in effective international development.
Kenneth Abeywickrama
01 March 2011.
Copyrights to article reserved. It may be reproduced with author’s permission.
[1] The Washington Consensus consists of the World Bank, the International Monetary Fund (IMF) and the United States Treasury, all headquartered in close proximity to each other in Washington, which worked together like a family with common interests and formulated development policies for developing countries.
[2] While World Bank/IMF demanded the removal of fertilizer subsidies, huge agricultural subsidies for EU and American farmers hurt Africa where small farms are the main livelihood.
[3] UNIDO Fact-Finding & Preparatory Assistance for the Industrial Utilization of Medicinal & Aromatic Plants in Sudan, report by K. Husnu Can Baser, Chemical Technologist, and Kenneth Abeywickrama, Economist/Marketing Consultant, January 2996.
[4] UNIDO report on Enhancing the Capacity of Khartoum State in the Delivery of Pro-Poor Vocational Training Services, August 2007.
[5] The Chinese government gave Nigeria a concessional loan of US$1.0 billion to modernise its railways in 2006. The World Bank’s offer of a US$9.0 million conditional loan to improve the railways was scuttled when the Chinese offer of aid arrived. Earlier, the Chinese oil company, CNOC, paid US$ 2.3 billion for a stake in a Nigerian oil and gas field.
[6] Many Western corporations, mainly in the oil and arms industries, have also bribed political leaders in Africa on a large scale.
[7] See article in Wall Street journal for an elaboration of this view at
http://online.wsj.com/article/SB123758895999200083.html