Southasian aid regimes
17 December 2013
It is too often forgotten that aid giving is a political project.
In 1961, US President J F Kennedy described foreign aid as “a method by which the United States maintains a position of influence and control around the world.” Equally candid, in 1968 President Richard Nixon advised fellow Americans to “remember that the main purpose of American aid is not to help other nations but to help ourselves.” Four decades later – call it amnesia or American exceptionalism – US Secretary of State Hillary Clinton, addressing poor countries at the 2011 Busan aid conference, urged them to “be wary of donors who are more interested in extracting your resources than in building your capacity.”
It is easy to overlook the fact that aid is above all a political project because of its associations with humanitarian assistance and development. As an adjunct of foreign policy, aid is used to secure the economic, political and military interests of donor countries. The maxim that there is no such thing as a free lunch is applicable to the context of foreign aid. Aid puts an iniquitous burden of debt on poor countries. Given the financial instability and volatility of currencies in today’s globalised world, poor countries find themselves spending more and more with every passing year on debt repayment. Patrick Bond, in his book Looting Africa, writes that the debt of developing countries rose from $580 billion in 1980, to $2.4 trillion in 2002 – much of it unrepayable. The volume of overseas development aid in this year was $37 billion, but there was a net outflow of $340 billion in servicing this debt. Indeed, as economist Joseph Stiglitz has observed, “What a peculiar world, in which the poor countries are in effect subsidizing the richest…”
The Paris Declaration principles
These mounting reverse outflows coincided with a period of significant reform in the international aid community, starting in the 1980s. Global consultations, initiated at the turn of the century in Monterrey, Mexico, in 2002, and followed by meetings in Rome in 2003, Paris in 2005, Accra in 2008, and Busan in 2011 led to consensus among donors on “far reaching and monitorable actions” to reform the ways aid was delivered and managed. Questions raised at these meetings were more to do with the effective and predicable delivery of aid than its necessity in the first place. The meeting in Paris was particularly important because it led to the drafting of a roadmap for aid effectiveness – now referred to as the Paris Declaration (PD) – organised around five principles: harmonisation, ownership, alignment, managing for results and mutual accountability.
These ongoing reforms in the international aid regime form the backdrop for the discussions in Saman Kelegama’s edited Foreign Aid in South Asia: The Emerging Scenario. This is an enquiry into the emerging scenario of foreign aid in contemporary Southasia. Kelegama is a Sri Lankan economist, and this book positions itself within the specific framework of the PD principles. The premise of aid effectiveness therefore underlies the majority of the book, from which emerges a country-by-country picture of Southasia’s engagement with foreign aid.
The structure of the book honours the uniqueness of Southasia as a composite region of developing and least developed countries (LDCs) with wide geo-political disparities, where, as Kelegama points out, “the role of foreign assistance in each economy stands on its own footing.” Thus, Sri Lanka and Nepal are countries emerging out of conflict; Pakistan and Afghanistan are countries still in conflict; Bangladesh, Bhutan and the Maldives are all LDCs but distinguished by further unique characteristics (Bhutan being landlocked and the Maldives a small island economy); and India is the region’s emerging economy, among today’s aid givers but still home to millions living in poverty.
The diversity of the developmental circumstances in the region, reflected so effectively in the book’s structure, is unfortunately levelled out by the standard application of the PD principles of aid effectiveness throughout the book. In practice this means that typically, a chapter begins with a historical overview of the country’s engagement with aid. This is followed by a discussion of the effects of aid on the domestic economy, a discussion that without exception yields a fraught and worrying macroeconomic picture. The chapter then introduces the metrics and principles of aid effectiveness developed by the donor community, which serves as the benchmark for the rest of the discussion. The final analysis therefore flows not from the ground-level facts in the chapter but from a need to tailor these to fit the PD framework. By privileging the PD framework as an analytic tool and a stock template for each chapter, the book follows precisely the same ‘one size fits all’ approach that, in the introduction, Kelegama cautions us against. The country-based discussions end up being bounded by terms set by the donor community, incorporating the basic assumptions of the official doctrines on aid.
Most Southasian countries today are locked into inexorable cycles of aid dependency and debt. This dependency, this need for aid, is usually aid’s sole defence. Donor motivation is left unexplored and, therefore, unchallenged. The present book follows much of the current literature on aid, with little mention of the motives for aid giving. The political economy of aid is flattened into merely the economy of aid. Therefore the larger imperialist interests to which aid is tied are never explicitly stated, leading to a vexing incongruence of problem and prescription. Throughout the book, in chapter after chapter, country after country, the effects of aid are listed and appear to be singularly and dismally similar. Everywhere, aid seems to be having a negative impact on economic growth. It runs counter to domestic resource mobilisation; it is impossible to retire, so future aid in the context of mounting debt is only for repatriation; and it triggers in many cases a skewing of exchange rates, making manufacturing uncompetitive in a globalised economy and thwarting ‘state-building’ activities – those that might allow the state, particularly in conflict situations, to reclaim legitimacy.
Significantly, nowhere in the book is a correlation established between aid and development. Developmental outcomes associated with aid are described as “mixed”; the “scourge of degrading and dehumanizing poverty…despite the increase in aid flows” is decried; countries are reportedly being unable to “optimize the gain from aid”, and no particular governance-related reforms seem to work. Yet, curiously, the prescription is for more aid, albeit with the riders of better governance and more South-South cooperation.
The reluctance to discuss and critique donor motivation imbues the discussion on South-South cooperation with a degree of implausibility. Observing that emerging donors are not “overtly” attempting to overturn or replace the well-established rules of multilateral development assistance, the authors of the chapter on South-South cooperation (economists Rajiv Kumar, Michael Dickerson and Surabhi Tandon) argue that a better understanding of ground realities on the part of emerging donors, and the transfer of their own recent development experience, will ensure that more sustainable development ensues from South-South cooperation. This optimism, however, overlooks the manner in which aid is being used by emerging donors to rapidly secure oil interests in Africa and Asia. It also overlooks the nature of the aid on offer – which is often tied to procurement and sourcing conditions – as is evident from the discussions in the book on Indian aid to Sri Lanka, Nepal and Afghanistan. Indeed, it is not at all clear from the discussion on South-South cooperation why China and India would not follow the tried-and-tested rules of the game and eschew an imperialist strategy vis a vis aid to open up new markets and resource bases.
(Post) conflict zones
The trouble with aid is powerfully highlighted by the chapters on two conflict-ridden Southasian countries, Pakistan and Afghanistan. Pakistan presents a fragile macroeconomic picture where aid – linked to geopolitical and security concerns in the region – is fragmented and volatile, increasingly loan- rather than grant-based. Aid here is associated with the increasing leakage of domestic inputs, rising unemployment and rural poverty, and the strengthening of military regimes. And so when the authors of this chapter, economists Vaqar Ahmed and Muhammad Wahab, write that “society has started to perceive aid as a compensation (and not assistance) for Pakistan’s involvement in wars led by developed nations”, the statement reflects the reality that aid to Pakistan is tied to the use of the country as a frontline base for military operations.
Another bleak macroeconomic picture appears in the case of Afghanistan which, since 2002, has received a third of its foreign aid from the US. According to Anneka De Silva, 36 percent of the country’s recurrent expenditure is financed by foreign aid while informal activities, including the opium trade, make up 80-90 percent of total economic activity. The state, perceived within as being run by the international community and foreign firms, enjoys little credibility. Prevailing aid practices have led to deep schisms among sub-national groupings. Since 2008 a development strategy emphasising private investment led donors to consider not just security but also some other areas of development.
Writing in Economic and Political Weekly on the role of foreign aid in Afghanistan’s reconstruction, Hikmatullah Fayez has pointed out that such “a donor-driven strategy of a free market economy…will intensify dependence on import and discourage domestic industrial investment.” From the discussion on foreign aid in Afghanistan it seems obvious that far from ushering in democracy or the sovereignty of the state, aid is running counter to economic development and self-reliant growth, and hence to employment generation or wealth creation for the people at large. The movement towards public-private partnerships simply makes more explicit the profiteering motive associated with aid. In the context of the dismal picture that emerges, aid effectiveness-driven metrics and recommendations make little sense. Clearly, poor governance is not the cause for aid failure in Afghanistan but the outcome of the underlying politics of aid itself.
For countries emerging out of conflict, aid’s deleterious effects become apparent from the discussions on Sri Lanka and Nepal. From the chapter on aid in Sri Lanka, authored by Deshal de Mel and Anneka De Silva, we learn that historically the country has relied on long-term, largely untied and multilateral, concessional aid associated with long repayment windows and low interest rates. Access to concessional aid, however, began to shrink when Sri Lanka was upped to Low- and/or Middle-Income Countries (LMIC) status. With the intensification of the conflict the country began to lean more and more heavily on emerging bilateral donors like China, who placed less emphasis on non-economic issues. In 2009 macroeconomic instability forced Sri Lanka to enter into a Standby Arrangement (SBA) with the International Monetary Fund whose terms “stipulated that the budget deficit for 2007 should be maintained at 7-7.5 per cent of the GDP.” Since the SBA curtails domestic borrowing, and since the global financial crisis makes commercial loans unaffordable, Sri Lanka today, the authors point out, has few options apart from concessionary borrowing – that is, more foreign aid. How this will play out for the country remains to be seen but two points of caution emerge: first, that in today’s situation of currency volatility, long term concessionary debt might work heavily against borrowers; and second, because the regime of fiscal discipline imposed by aid, as in the case of the SBA, is inevitably tied to spending cuts in social security, employment and income generation, the poorest must pay the price for the country’s growth.
When aid is viewed as necessary – or at most as a necessary evil – irrespective of the potential costs it entails, then irreconcilable inconsistencies begin to emerge. This becomes apparent in the discussion of foreign aid in Nepal, another Southasian country emerging from conflict. Nepal, once funded largely by bilateral aid from India and the US, receives more of its aid today from multilateral sources. Aid inflows have increased significantly following the 2006 peace accord. According to author Bishwambher Pyakuryal, aid for Nepal is unavoidable given the country’s high fiscal deficit, large savings-investment gap and low share of domestic borrowing. To the extent that this is so the country must look to emerging donors like China or Saudi Arabia.
In contrast to the societies in or emerging from conflict, Bangladesh, one of the three LDCs in the region identified in the book, appears to be moving from an aid- to a trade-dependent economy. Domestic savings are increasingly replacing aid and the mobilisation of national capital is replacing concessional borrowings from bilateral and multilateral sources. The export of readymade garments, and the export of manpower leading to remittances into the country are increasingly fuelling Bangladesh’s current economic growth. From the discussion in this book, however, it appears that the country will continue to rely on aid in the short- to medium-term. Bangladesh’s aid profile shows the proportion of loans compared to grant-in-aid has increased steadily, leading to a mounting debt. The country’s debt-to-GDP ratio rose from seven percent in the mid-1970s, to 27 percent in 2007-08. This, as economist and author of the chapter on Bangladesh, Selim Raihan, points out, means that debt repayment absorbs funds urgently needed to meet the needs of the country’s poor.
While the possibility of economic growth leading to an exit from aid dependency gives hope, the export-led paradigm of growth being pursued by the country is a cause for concern. This model, one that seeks to build global competitiveness solely on low wages, has the effect of depressing wage levels across the country, inhibiting domestic demand. The insecure nature of this business, with margins being pushed ever down, attracts investors looking for short-term profits who are unwilling to make investments in technology and infrastructure. This fact is cruelly borne out by the spate of fire accidents in garment factories in the recent past, claiming the lives of over a thousand workers.
What got you in here will not get you out of here: this adage of everyday life has been turned on its head by the logic of the international aid regime, according to which more aid is the solution for aid that is clearly not working. We only have to look to the debt crisis of the 1980s to remind ourselves that when the donor community talks of aid harmonisation, it usually has a cartel – its own – in mind. It’s also useful to remember that few countries have ever managed to extricate themselves from the aid trap except by taking a political position on aid, such as Argentina for example. Given aid’s fraught and dishonourable history, is there no other path for the countries of Southasia except the free market route driven by the international aid community? From the discussions in Foreign Aid in South Asia, one is likely to conclude that there isn’t. Yet within the civil societies of these very countries there is growing demand for debt cancellation, debt default and sovereign debt relief, for a model of economic development based not on sacrificing the lives of the poor and needy or the plunder of natural resources by the ruling elites, but on the principles of justice and equity for all. It is high time these voices were heard.
~Nilanjana Biswas is an independent researcher on development and gender-related issues based in Bangalore