Aid in transition

Print edition : December 14, 2012

The essays in the book capture the changing complexion of foreign aid today.

SOME six decades ago, when development economics was emerging as a field of study, it was axiomatic that poor countries of the world, then designated as underdeveloped economies, were caught up in a low-level equilibrium trap of low incomes and low domestic savings and hence could not expect to move on to the growth path without aid from developed countries.

A distinguished authority on the subject, who later went on to win the Nobel Prize in Economics, stated that most underdeveloped countries were not saving more than 5 per cent of their gross domestic product (GDP) and they could claim to be able to sustain development only if domestic savings went up to 12 per cent. This was considered to be a difficult task.

The scene at the beginning of the 21st century is different. Many former underdeveloped economies have crossed the 12-per-cent savings barrier without much effortChina, India and other South Asian countries being among themand have emerged as the fastest-growing economies in the world. And yet, foreign aid continues to have a prominent role in the global agenda of development. This is, of course, partly because many countries of the world, especially those in Africa, still continue to be poor, retaining low income status. But there are other factors as well.

At the dawn of the new century, countries of the world, especially the advanced ones, made the commitmentthe Millennium Development Goalsto eliminate poverty by 2015 and pledged their support to make it possible. There were other global consultations and pronouncements, too. Among them was the Paris Declaration of 2005 on Aid Effectiveness, which focussed on the five principles of ownership, alignment, harmonisation, managing for results and mutual accountability. Reflecting the changing ethos, there has been a shift in emphasis from North-South dealings to South-South Co-operation. The global economic meltdown, too, has had a major impact on foreign aid.

Under these circumstances, the book under review on the emerging scenario of foreign aid in South AsiaIndia, Pakistan, Afghanistan, Sri Lanka, Nepal, Bangladesh, Bhutan and the Maldivesis a welcome addition to the literature.

The editor, who also provides a useful introduction, is the Executive Director of the Institute of Policy Studies of Sri Lanka. The country studies have been contributed by scholars who have specialised knowledge about the region. Over the years, there has been an attempt to project aid, which for long had been what it says, transfer of resources from a richer, stronger party to a poorer, weaker one, as a means of cooperation between two parties for the benefit of both; hence the emphasis on cooperation.

Increasingly, aid is also being seen as a way to ensure sustainable development, which an official international document defines as a development path along which the maximisation of human well-being for todays generations does not lead to declines in future well-being.

The emphasis on sustainability reflects the growing awareness of the urgent need for environmental protection which no country will be able to ensure by itself, thus reinforcing the need for cooperation. However, these noble sentiments yield to practical exigencies, as the county studies show.

Changing complexion

As far as South Asia is concerned, a major factor that has changed the complexion of aid is that there are now aid givers from the region itself, which during the past century were about the largest aid receivers. India is the best example. From being a developing economy, it is now an emerging economy in a position to provide aid to the developing countries of Africa. But since the elimination of poverty is the thrust of aid globally and India still remains the home of a large proportion of the poor of the world, it qualifies to be an aid receiver as well.

India also has to reckon with the fact that China, too, is a prominent donor of aid to African countries. Hence, political considerations of winning friends and influencing people inevitably enter into providing aid. This means, too, that while there is a great deal of emphasis on multilateralism in aid transactions globally, bilateralism still dominates on the ground. Indeed, the much-lauded South-South Cooperation is little more than bilateralism justified on the grounds that it provides greater scope for mutual accountability. And as for Trilateral Cooperationdonors from advanced and emerging economies working jointly on projects in developing countries not many instances have become a reality so far.

Non-economic factors

Non-economic factors dominate aid for other reasons as well. In the case of Pakistan, for instance, military considerations have played a major role as far as foreign aid is concerned. The authors of the chapter on Pakistan say:

Most recent aid flows for Pakistan are associated with the geopolitical and the law and order situations in the country and the neighbouring region with Afghanistan. The security concern of donors, however, has hampered future aid flows to Pakistan, particularly in long-term infrastructure projects. The volatility of assistance, in turn, results in delayed disbursements, project closures, shifting of aid portfolio from budgetary support to project aid.

The military dimension of foreign aid is most clearly seen in the case of Afghanistan. Not surprisingly, following the fall of the Taliban regime in 2001, foreign aid has played an increasingly prominent role in the expenditures of the government of Afghanistan. And since the United States is the main donor, although there are several other countries and international organisations among the aid givers, it is effectively a case of bilateral relationship. Aid is also largely channelled through the external budget, bypassing the governmental system, thereby reducing the states control over both resources and development activities.

In Sri Lanka, foreign aid has played an important part in terms of developmental activities, particularly in terms of financing large-scale infrastructural projects, social services and poverty-reduction programmes. Historically, close to 80 per cent of the aid came from Japan, the Asian Development Bank and the World Bank. The long-term loans had exceptionally favourable conditions, with one of them having a 30-year maturity and a 0.5 per cent interest rate. Aid began to taper off as the country came to be classified as a lower middle income country. But the countrys domestic conflict brought in many changes. Western aid became more and more conditional and by 2009, China, which had played only a minor role prior to 2007, became the highest lender. India also plays an important role now, increasingly financing development projects. However, with declining access to concessional borrowing and the withdrawal of certain donors owing to non-economic considerations, the country has been forced to go in for commercial borrowings.

The brief comments made above obviously do not do justice to the detailed analysis contained in the book about each of the countries studied. Each case study is rich in details, not only about the changing role of foreign aid in the country concerned, but also of its development experience in general. For those interested in these topics, the book is an excellent source material.

Commercial borrowing

A few more general observations contained in the book about the changing patterns of foreign aid are worth noting. Foreign aid in the initial stages consisted of government-to-government transactions and concessional loans provided by international agencies. But from the 1980s, commercial borrowings came to play a major and decisive role as far as many developing countries were concerned. Soon, many of them, which until then had very guarded attitudes towards allowing foreign private capital to come into their territories, opened up and, in no time, there was a large flow of private capital across most national boundaries. Fairly soon, particularly after the tsunami in the region in 2004, non-commercial and non-governmental agencies also entered the aid business. The scene today is one of an incessant flow of funds across national boundaries for a variety of reasons. By far the largest component of these flows is admittedly private and commercial; but they claim to have some characteristics of aid, such as transfer of technology, training of labour force, and so on. Insofar as they have the support of the governments of their countries, they can be said to have some public character as well.

Some of the non-governmental agencies which claim that they are guided solely by humanitarian considerations have their hidden political agendas. Some countries, India being one of the best examples, which officially state that they are crucially dependent on foreign capital for growth and development, provide aid to other countries and also encourage domestic capital to go out in search of higher profits.

A couple of the essays in the book make oblique references to one or two of these aspects, but the more difficult question of how to evaluate conventional foreign aid in the context of this flux has not been addressed at all.

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