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close this bookHealth Economics for Developing Countries: A Survival Kit (London School of Hygiene and Tropical Medicine, 1998, 134 p.)
View the document(introduction...)
View the documentPublication Series - Health Policy Unit
View the documentAcknowledgements
View the documentPreface
View the documentChapter 1: Health Economics and its Contribution to Health Planning
View the documentChapter 2: Economic Development and Health
View the documentChapter 3: Financing Economic and Health Development
View the documentChapter 4: Health Care: the State versus the Market
View the documentChapter 5: Demand, Supply and the Price System
View the documentChapter 6: Concepts of Economic Efficiency
View the documentChapter 7: Inputs, Resources and Costs
View the documentChapter 8: Outputs, Health and Health Indicators
View the documentChapter 9: The Techniques of Economic Evaluation
View the documentChapter 10: National Accounts and the Health Sector
View the documentChapter 11: Health Sector Finance and Expenditure
View the documentChapter 12: Sources of Finance for the Health Sector
View the documentChapter 13: Budgetary Procedures: Budgetary Reform and Programme Budgeting
View the documentChapter 14: Approaches to Financial Planning: Resource Allocation Planning and the Financial Master Plan
View the documentSelected Bibliography
View the documentGlossary
View the documentBack Cover

Chapter 3: Financing Economic and Health Development

1. Trade and the Balance of Payments

At the end of the colonial period developing countries were mainly exporters of food and raw materials and importers of manufactured consumer and capital goods. Even after the postwar period of development (1945-75) this pattern still applies to many countries.


Figure

It has certain implications for economic growth in developing countries:

- if there is no structural change in their economies, output can grow only as fast as the demand from developed countries

but

- if there is structural change, the manufacturing function can be (partly) shifted from developed to developing countries (import substitution, light and then heavy manufacturing exports)

but

- this needs investment (factories, power, etc.) before manufacturing can grow - hence increased imports of capital goods, usually paid for by borrowing from developed countries.

The balance of payments of a developing country is typically made up as follows:

Receipts of foreign currency

Spending of foreign currency

Exports of primary products

Imports of:

consumer goods

Other exports (including tourism)


material & fuel



capital goods



New borrowing from abroad

Interest and repayment of previous borrowing.

Receipts must be balanced with spending. This imposes a limit on the rate of growth of developing countries: measures to promote growth tend, in the short run, to increase the excess of imports over exports, either through greater imports of consumer or capital goods, or the diversion of resources from export production to the domestic market. The aim of a developing country must be to achieve the maximum rate of growth consistent with long-run balance of payments equilibrium.

The problems of doing this have been complicated for developing countries in the postwar period in several ways:

- increased production of food and raw materials in the developed countries (e.g. European beet sugar competing with cane; synthetic fibres competing with cotton)

- fluctuating price and demand for primary products (an old problem)

- the oil price increases 1974 - 1981

- depressed demand in developed countries (especially since 1979)

- uncertainty about prices and exchange rates leading to high interest rates.

Even before the present depression, the importance of the world trade and monetary system as a constraint on development was a matter of international discussion. It was recognized that no one country alone could do much to improve the prospects for economic growth. There are many possible approaches to solving the basic problems:

- the 'imperial' solution: one developed country trades with a number of developing countries which it controls politically. This is clearly politically obsolete

- the 'free trade' solution: remove all restrictions on trade, currency movements and immigration, and let supply and demand operate. This has a long history and much theory behind it. But success would depend on all governments following the rules in spite of short run economic and political costs: this seems highly unlikely

- the 'multinational' solution: control of trade across national boundaries in one or a group of commodities by large businesses. This can produce stability of price and supply (e.g. the oil markets before 1973) but at the cost of exploitation and loss of sovereignty

- 'self-sufficiency': minimize foreign trade, build up the home economy from indigenous resources. The short-run costs are high and even in the long run only feasible for large developing countries (e.g. China, India - both apparently now retreating from this policy)

- 'common market' arrangements: countries of the same economic level trade together under agreed long-term conditions. This has worked best for developed countries (EEC, Comecon)

- a 'New International Economic Order': a combination of international agreements and the setting up of functional agencies under UN auspices to deal with specific problems. This solution was endorsed by the UN in the 1970s, although there has been little progress on it since the onset of the depression. Some agencies are already established: for the foreign exchange system (IMF), for investment capital (IBRD). Additional agencies would deal with stabilization of primary product markets, sharing of technology, etc. The problems include conflicts with national sovereignty, the weakness of the UN as an executive agency, and conflicts of interest between and within developed and developing countries.

Failing some international solution, the balance of payments deficit remains a key problem of economic growth for developing countries.

2. Financing the Balance of Payments Deficit

If a country's export earnings are not enough to cover the cost of its imports and other foreign currency commitments, the foreign exchange needed to fill the gap has to be provided in some form by foreigners. It matters a great deal who does this, for what purpose, and what price and other conditions they impose in return.

The greater part of the money borrowed abroad by developing countries is commercial - that is, it is lent by private individuals and institutions for profit. In many cases the borrower is also a private person or institution. The circumstances of private-to-private lending may vary greatly, from direct investment by foreigners in a local business under conditions where they share the risk of success or failure, to short-term loans to importers who must repay by a fixed date. Private-to-private lending can be justified provided the production it generates covers the foreign exchange commitment to interest and repayment, through higher exports or lower imports. But if this condition is not met it represents a possible burden on the foreign exchange resources of the borrowing country, for which the government is ultimately responsible. The shorter the term of the loan the more difficult it is for the government to deal with the consequences if anything goes wrong.

Private-to-private lending normally brings profit to both parties, although the interest rate required may be very high because of the strength of the lender's market position and the uncertainty attaching to investment in many developing countries. Private-to-government lending may also be justified if the borrowing can be applied to produce gains for the whole country - for example, infrastructure or social development. But in this case the borrowing government's responsibility for the foreign exchange consequences is much more direct.

Outside the field of commercial investment, the governments of developed countries (and more recently of the capital-surplus oil countries) may also contribute to the foreign exchange needs of developing counties. Here the motivation is nominally non-commercial, and loans are only one of the forms of official development assistance, which also includes grants and technical co-operation. Such assistance may be either multilateral or bilateral.

Multilateral assistance involves funds or technical advice provided by international agencies who are financed by national governments but operate nominally in independence from them. The most important source is the UN system, with agencies concerned with world economic organization (World Bank, IMF), the preparation of development projects (UNDP), and specialized fields of assistance (e.g. WHO). Other international groupings also provide multilateral assistance (Comecon, EEC, regional development banks).

Bilateral assistance is negotiated directly between a donor and a recipient government. Unlike multilateral assistance it may include provision for special terms of trade between the countries concerned, and in fact much of the development assistance of Eastern bloc countries is believed to take this form (e.g. Russian purchases of Cuban sugar).

Although the central purpose of foreign aid is to provide developing countries with foreign exchange, many of its problems spring from the way in which both donor and recipient governments use it for other purposes. The former use it to promote their cultural influence and prestige and the commercial advantage of their nationals (for example, through tied loans which must be spent on the products of the donor country). The latter also use it for political and prestige purposes, and to raise money for government use beyond the limits imposed by their taxation system.

Finally, aid can be obtained from non-governmental organizations (NGOs). This aid is non-commercial and nominally free of government control (although few NGOs would ignore the sensitivities of the governments concerned). NGOs have usually operated at the local project level rather than the level of programmes or policies but this situation may be changing. They have a good reputation for innovative and emergency work.

3. Foreign Aid in the Health Field

Although it is difficult to find consistent and recent data on foreign aid, some estimates may help to show its limited role in relation both to the general foreign exchange problem of developing countries and to health in particular. In 1977 the developing countries' annual foreign exchange requirement (excess of imports over exports) was about US $45 billions; development assistance amounted to about $16 billions, of which only $4 billions was multilateral. In the health field, a number of estimates in the late 1970s suggested that the additional annual expenditure needed in the developing countries to achieve 'Health for All' (modestly defined) was of the order of US $20 billions for health services, and a similar amount for other health-related services. The fraction of development assistance going for health is, however, quite small - perhaps 5% for health services and another 10% for other health-related activities. In absolute financial terms the contribution of foreign aid to health development is quite limited. It is therefore important to examine how it is distributed between purposes, types of expenditure and countries.

Even though the ultimate justification of foreign assistance lies largely in the recipient country's foreign exchange situation, its immediate justification may be in terms of specific inputs from overseas - not only imports, but also technical knowledge (in the form of 'experts', or of the training of nationals in the donor country or of appropriate forms of organization). In the health field the emphasis varies widely from one form of aid to another. In emergency food aid, for example, the commodity element is dominant. In other fields, such as malaria control or immunization campaigns, the organizational element may be the most important.

For various reasons, only a part of the nominal total of assistance funds becomes available for direct expenditure on health problems in developing countries. After deduction of the sometimes considerable administrative overheads, a substantial part of bilateral assistance funds remains with nationals of the donor country, as export guarantees, payment for technical services, etc. Multilateral agencies reserve considerable sums, often quite justifiably, for headquarters services of various kinds.

Bilateral assistance, in particular, tends to be biased toward capital projects, which in the health services field means the building and equipping of hospitals and health centres. From the point of view of the donor these are easier to administer, more conspicuous and more profitable in terms of exports, whereas from the receiver's point of view they involve less external control than a dependence on foreigners for current expenditure (only acceptable to quasi-colonial territories such as Puerto Rico and the French Antilles). For similar reasons water supply and education (school-building) are favoured among health-related activities. This capital bias is hard to reconcile with policies emphasizing Primary Health Care.

The distribution of health aid between regions and countries does not correspond to need. Bilateral aid is often frankly political. Multilateral aid has fewer political limitations but has no generally accepted rationale for the distribution of funds: WHO, for example, has experimented with distribution schemes based on health and income indicators, but applied to a base which is historically determined. WHO also accepts the general UN designation of certain countries as 'least developed' and needing special treatment, but has limited means to provide this treatment without harming the interests of existing aid recipients, particularly in a period of economic stringency. Further, there is a bilateral element even in the operation of WHO since the regions may administer regional funds outside the regular budget - for example, the considerable funds flowing from the United States to Latin America.

The external aid available for health is therefore both small in relation to need and subject to distributional biases that limit its efficiency. It is very important for a developing country contemplating the use of external assistance to consider carefully the issues involved in order to make the best use of the aid available.