The aid question

There are challenges to the 0.7 per cent target, but the debate should be wider than a number.

The latest challenge to Britain's 0.7 per cent aid spending target offers little that is new. While the House of Lords Economic Affairs Committee Report marshals a fairly balanced argument against the imposition of arbitrary spending targets, what we see in the press is the by-now familiar "shoot from the hip" critique of the aid budget as bloated and ineffective. The result is an escalation of calls for an extension of the austerity agenda to the world's poor - no surprise there... On the other hand, the fact that a debate which directly affects hundreds of millions of lives is reduced to percentage points should be a cause for concern, no matter which side of the aisle you sit.

Support for the 0.7 per cent largely transcends all three major political parties in Westminster yet there are and always have been question-marks about the robustness of the target and whether unequivocal support for it is actually the best political strategy for those committed to sustaining the UK commitment to aid. It is, after all , a 40-year-old target, based on an idea of how much rich countries should cough up to meet the financing gap facing poor countries. It bears no relation to current needs (which are still significant and are changing) nor to rich countries' ability to pay (which is also significant). The target has all too often focused the attention of campaigning organisations on the quantity over the quality of development assistance and diverted much-needed political capital away from demonstrating the role that aid can play.

That said, the UK's international development budget affects more people than any other government budget. The idea we cannot afford it is nonsense and the UK aid pound works incredibly hard on behalf of the world's poor, often in very difficult circumstances. If we want to make a change in the world then the taxes we pay towards development are probably the surest way to do that. tThat shouldn't be underestimated for either its moral value or economic and diplomatic benefit. Plus it gives us a mechanism to hold other countries to account and ensure that the fight to end poverty is a global endeavour.

Solutions to global problems are far from simple. If money alone was the answer to global poverty then we'd be in a different place now. It takes more than just schools, vaccines and roads to deliver sustained progress. You also need more private investment, more effective teachers, more technology, innovation and better-quality leadership. Spending money on development without involving developing country governments and their citizens in decisions about how to spend it will only create unsustainable systems and unsustainable solutions.

Effectiveness and value for money are vital components of the aid conversation; it can never be a case of quantity over quality. The government's creation of an aid watchdog has started a process of cultural change and it has been met with a serious effort from NGOs to show results and value for money. Beyond the headlines the House of Lords committee's critique is reasoned but remains behind the curve of current action. Continuing critical thought about the future of Britain's aid relationships is essential, but political and media attention must find a way beyond the narrow prism of 0.7 per cent if the debate is to wake up to the challenges now framing global development.

Dr Alison Evans is the director of the Overseas Development Institute

Refugees in Ethiopia following severe drought in the Horn of Africa. Photo: Getty Images
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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation