Foreign Aid Blessing or Curse

8/3/2019 Foreign Aid Blessing or Curse

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FOREIGN AIDFOREIGN AID BLESSING OR CURSE?BLESSING OR CURSE?

K P CHANDRASHEKHARK P CHANDRASHEKHAR

TERITERIJanuary 9, 2008January 9, 2008

Bangalore International CentreBangalore International Centre


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SOME STARTLING FACTS!!!SOME STARTLING FACTS!!!

Foreign Aid or Development Assistance?Foreign Aid or Development Assistance?

JapanJapans progress can be attributed to massives progress can be attributed to massive

foreign assistance.foreign assistance. Washington PostWashington Post 40%40% --75% of the budgetary resources in many75% of the budgetary resources in many

developing countries, notably East Africandeveloping countries, notably East African

countries, come in the form of foreign aid.countries, come in the form of foreign aid. EconomistEconomist

Aid curseAid curse represents the correlation betweenrepresents the correlation betweenrichness of natural resources and the generalrichness of natural resources and the general

weakening of public institutions and democracy inweakening of public institutions and democracy inthe target country.the target country.

Altruism continues to mix abundantly with bothAltruism continues to mix abundantly with both

bad and good intentions that pave the way to hell.bad and good intentions that pave the way to hell. IMFIMFss Finance & DevelopmentFinance & Development


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SOME STARTLING FACTS!!!SOME STARTLING FACTS!!!

Spend FOR Africa, but NOT IN?Spend FOR Africa, but NOT IN?

ChinaChinas interest in Africa?s interest in Africa?

Foreign aid is driven by many motivationsForeign aid is driven by many motivations moralmoralobligation, altruism, foreign policy, economicobligation, altruism, foreign policy, economicpolicy, etc.policy, etc.

Foreign aid has nothing to do with the successes ofForeign aid has nothing to do with the successes ofChina and India and did not prevent the AfricanChina and India and did not prevent the Africantragedy.tragedy.

The dumping of foodThe dumping of food--surplus aid has damaged localsurplus aid has damaged localagriculture.agriculture.

Rats have consumed more than half of the food atRats have consumed more than half of the food at

the docks and storages.the docks and storages.


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SOME STARTLING FACTS!!!SOME STARTLING FACTS!!! Abuse of foreign aidAbuse of foreign aid corruption,corruption,

mismanagement, exchange for weaponsmismanagement, exchange for weapons.. Ethiopia, Mozambique, Albania, Romania,Ethiopia, Mozambique, Albania, Romania,

Congo, SudanCongo, Sudan.. A tool to acquire natural resourcesA tool to acquire natural resources..

Foreign aid to India declining and 90% of itForeign aid to India declining and 90% of it

is in the form of loans. It is about $ 3 billion.is in the form of loans. It is about $ 3 billion.

India is emerging as a Donor now.India is emerging as a Donor now.


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MULTIPLE PURPOSES/INTERESTSMULTIPLE PURPOSES/INTERESTSTypical purposes:Typical purposes:

DiplomaticDiplomatic

CommercialCommercial

DevelopmentalDevelopmental

HumanitarianHumanitarian Promoting democracy/human rightsPromoting democracy/human rights

Addressing global problemsAddressing global problems

StrengthenStrengthen fragile statesfragile states

Interests often difficult to disentangleInterests often difficult to disentangle


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WHO PROVIDES & WHY?WHO PROVIDES & WHY?

Public Sources: ODAPublic Sources: ODA

Multilateral DonorsMultilateral Donors UN AgenciesUN Agencies FAO, UNDP, WFP, IFAD, WHO, UNICEFFAO, UNDP, WFP, IFAD, WHO, UNICEF

NonNon--UN AgenciesUN Agencies WB, IMFWB, IMF

Why?Why? To promote development & economic reformsTo promote development & economic reforms Bilateral DonorsBilateral Donors

DCsDCs

OPEC CountriesOPEC Countries

JapanJapan

Why?Why? To promote security, economic/political reformsTo promote security, economic/political reforms

etcetc


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WHO PROVIDES & WHY?WHO PROVIDES & WHY?

Private SourcesPrivate Sources

Foundations: Rockefeller, Ford, GatesFoundations: Rockefeller, Ford, Gates ChurchesChurches

NGOs: Oxfam, CARE, CRS, World VisionNGOs: Oxfam, CARE, CRS, World Vision

Private Philanthropy: Gates, Clinton,Private Philanthropy: Gates, Clinton, BuffettBuffett,,Turner,Turner, SorosSoros

Why?Why? Promote humanitarian concerns,Promote humanitarian concerns,

developmentdevelopment


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WHICH GOVERNMENTS PURSUEWHICH GOVERNMENTS PURSUE

WHICH INTERESTS/PURPOSES?WHICH INTERESTS/PURPOSES? Denmark:Denmark:

developmental/commercialdevelopmental/commercial France:France:

diplomatic/development/commercialdiplomatic/development/commercial

Japan:Japan:diplomatic/development/commercialdiplomatic/development/commercial

US:US:

diplomatic/development/commercial/otherdiplomatic/development/commercial/other EUEU

diplomatic/development/commercial/otherdiplomatic/development/commercial/other


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WHY THESE INTERESTS?WHY THESE INTERESTS? HistoryHistory e.g., colonial ties; affinity groupse.g., colonial ties; affinity groups

GeoGeo--strategic positionstrategic position

National economic imperativesNational economic imperatives

DevelopmentDevelopment domestic constituenciesdomestic constituencies

DiplomaticDiplomatic

CommercialCommercial DevelopmentalDevelopmental

HumanitarianHumanitarian

Promoting democracy/human rightsPromoting democracy/human rights

Addressing global problemsAddressing global problems

StrengthenStrengthen fragile statesfragile states

Interests often difficult to disentangleInterests often difficult to disentangle


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WHAT IS FOREIGN AID?WHAT IS FOREIGN AID?

What are the major types of foreignWhat are the major types of foreigndevelopment assistance?development assistance? Financial aidFinancial aid Technical assistanceTechnical assistance

Food aidFood aid

Development Aid, Humanitarian Aid and MilitaryDevelopment Aid, Humanitarian Aid and MilitaryAidAid

Food Aid, Commodity Aid and Projects AidFood Aid, Commodity Aid and Projects Aid

Bilateral (USAID), Multilateral (World Bank) andBilateral (USAID), Multilateral (World Bank) andNonNon--Governmental (CARE)Governmental (CARE)

Includes grants and loans with at least a 25% grantIncludes grants and loans with at least a 25% grantelement are defined aselement are defined as Official DevelopmentOfficial Development

AssistanceAssistance


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WHAT ACTUALLY HAPPENS?WHAT ACTUALLY HAPPENS?

A substantial part of foreign aid finds its wayA substantial part of foreign aid finds its way

back to the lenders in form of consultant feesback to the lenders in form of consultant fees

and cost of equipment.and cost of equipment.

Government officials, politicians and theGovernment officials, politicians and the

influential persons involved in the process, getinfluential persons involved in the process, gettheir due sharetheir due share

Only a scanty sum reaches the poor throughOnly a scanty sum reaches the poor through

some services or benefitssome services or benefits Economists claim that only 25 percent of aidEconomists claim that only 25 percent of aid

goes to the target groups while 75 percent isgoes to the target groups while 75 percent is

siphoned offsiphoned off


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SOME GLARING FEATURES OFSOME GLARING FEATURES OF

FOREIGN AIDFOREIGN AID The record of success of foreign aid in povertyThe record of success of foreign aid in poverty

alleviation is more frustrating than what onealleviation is more frustrating than what oneusually thinks about itusually thinks about it

Foreign aid has facilitated the expansion of theForeign aid has facilitated the expansion of thecapitalist market economy and the culture ofcapitalist market economy and the culture ofconsumerismconsumerism

The glaring phenomenon of "aidThe glaring phenomenon of "aid--dependentdependentconsumerism" has serious implication for theconsumerism" has serious implication for the

economy, especially for savings and investment.economy, especially for savings and investment. An unfortunate plight with foreign aid is thatAn unfortunate plight with foreign aid is that

loan components have surged significantly overloan components have surged significantly over

the last decade.the last decade.


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RATIONALE FOR FOREIGN AIDRATIONALE FOR FOREIGN AID1.1. Humanitarian (moral or ethical)Humanitarian (moral or ethical)

a.a. Compensation for past injusticesCompensation for past injustices

b.b. Uneven distribution of global natural resourcesUneven distribution of global natural resources

c.c. Moral obligation to help the poor improve theirMoral obligation to help the poor improve theirnutritional status and standard of livingnutritional status and standard of living

2.2. Political (strategic self interest) (buy friends)Political (strategic self interest) (buy friends)(security assistance)(security assistance)

3.3. Economic selfEconomic self--interestinteresta.a. Develop markets for developed countryDevelop markets for developed countrys goodss goods

b.b. Dispose of surplusesDispose of surpluses


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FOREIGN AID & INDIAFOREIGN AID & INDIA Most of it is official development assistance.Most of it is official development assistance.

Received the most World Bank aid.Received the most World Bank aid. Mostly used to finance public sector and itsMostly used to finance public sector and its

imports.imports.

Aid discouraged local production.Aid discouraged local production.

Aid fuelled inflation.Aid fuelled inflation.

Foreign aid effects in agricultural sector areForeign aid effects in agricultural sector areambiguous at best.ambiguous at best.

Drowning in AidDrowning in Aid India embarked on phasing out foreign aid.India embarked on phasing out foreign aid.


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CONDITIONALITYCONDITIONALITY TiedTied with unreasonable conditions, whichwith unreasonable conditions, which

infringe on the sovereignty.infringe on the sovereignty. ChinaChinas massive investment in Africa is tieds massive investment in Africa is tied

to commercial interest in natural resources.to commercial interest in natural resources.


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GEOGEO--POLITICAL INTERESTSPOLITICAL INTERESTS

Transfer of money performs the function of a priceTransfer of money performs the function of a pricepaid for political services rendered. (paid for political services rendered. (MorgenthauMorgenthau,,

1962)1962) Bilateral donors largely pursued their own politicalBilateral donors largely pursued their own political

interests when allocating aid. (interests when allocating aid. (McGillivrayMcGillivray, 2003), 2003)

US has typically considered financial aid as beingUS has typically considered financial aid as beingimportant means to achieve their foreign policyimportant means to achieve their foreign policyobjectives. Zimmermann, 1993)objectives. Zimmermann, 1993)

The main purpose of American aid is not to helpThe main purpose of American aid is not to helpother nations but to help ourselves. (Richard Nixon)other nations but to help ourselves. (Richard Nixon)

Aid does buy votes in UN General Assembly.Aid does buy votes in UN General Assembly.


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A CASE FOR FOREIGN AIDA CASE FOR FOREIGN AID

Countries like China, India and Chile are in aCountries like China, India and Chile are in a

slipstream of rapid economic growth.slipstream of rapid economic growth.

Their economic transformations show thatTheir economic transformations show that basketbasket

casescases can becomecan become emerging marketsemerging markets..

Has boosted food production and reduced famines.Has boosted food production and reduced famines. Has improved health conditionsHas improved health conditions

Has ended economic isolation.Has ended economic isolation.

Targeted, specific, measurable, accountable andTargeted, specific, measurable, accountable andscalable aid will produce good results.scalable aid will produce good results.


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FREEDOM FROM FOREIGNFREEDOM FROM FOREIGN

CONTROLCONTROL Growth under colonialism was poor, growth hasGrowth under colonialism was poor, growth has

been much higher since independence in mostbeen much higher since independence in mostcountriescountries

Growth under foreign aid/structural adjustment isGrowth under foreign aid/structural adjustment ispoorpoor

Most successful examples of growth areMost successful examples of growth arehomegrown : China, India, Vietnam, Turkey, Chile,homegrown : China, India, Vietnam, Turkey, Chile,Singapore, Taiwan, South Korea, Mauritius. EachSingapore, Taiwan, South Korea, Mauritius. Eachsociety figured out its own unique path tosociety figured out its own unique path toaccommodate dynamic individuals. Not told whataccommodate dynamic individuals. Not told whatto do by international organizations or invadingto do by international organizations or invadingarmies.armies.


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DEVELOPMENT OR DESTRUCTION?DEVELOPMENT OR DESTRUCTION?

INTERNATIONAL FINANCIAL INSTITUTIONSINTERNATIONAL FINANCIAL INSTITUTIONS

((IFIsIFIs))The common agendas ofThe common agendas of IFIsIFIs

Dismantling public institutions and public enterprises thatDismantling public institutions and public enterprises thatdeprives people but give immense authority to big businessdeprives people but give immense authority to big business

Removing all supports and protection for local industriesRemoving all supports and protection for local industriesand agriculture by liberalizing importsand agriculture by liberalizing imports

Supporting export oriented activities to meet the needs ofSupporting export oriented activities to meet the needs ofwestern market by supplying cheap product at the expensewestern market by supplying cheap product at the expenseof economy and environmentof economy and environment

Withdrawing state's responsibility of providing basic servicesWithdrawing state's responsibility of providing basic servicessuch as health care and education for the peoplesuch as health care and education for the people

Raising prices of fuel, gas, electricity, raising fees ofRaising prices of fuel, gas, electricity, raising fees ofeducation and healthcare to create good businesseducation and healthcare to create good business

opportunities of the global companiesopportunities of the global companies


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WHATWHAT IFIsIFIs GET IN RETURN, IFGET IN RETURN, IF

POLICES/AGENDA ARE IMPLEMENTED?POLICES/AGENDA ARE IMPLEMENTED?

A huge marker for the global capitalA huge marker for the global capital

Favourable conditions to haveFavourable conditions to have

extraordinary return on investmentextraordinary return on investment

An open space for global bigAn open space for global big

businesses to do whatever they like tobusinesses to do whatever they like tododo

Foreign Aid &Foreign Aid &

Poverty.pptPoverty.ppt


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WHY AID MIGHT NOT BE A PANACEA TOWHY AID MIGHT NOT BE A PANACEA TO

THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT11 The lack of progress in Third World countriesThe lack of progress in Third World countries

reflects factors that cannot be overcome by aid.reflects factors that cannot be overcome by aid.

Capital can be secured without Aid.Capital can be secured without Aid.Governments who are capable of using capitalGovernments who are capable of using capitalproductively can always attract investment orproductively can always attract investment or

borrow money from abroad.borrow money from abroad. Aid does not descend indiscriminately on theAid does not descend indiscriminately on the

population who may need it most but goespopulation who may need it most but goes

directly to the government.directly to the government. Aid can therefore increases the patronage andAid can therefore increases the patronage and

power of an unpopular government.power of an unpopular government.


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THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT22

Foreign aids enable governments to pursueForeign aids enable governments to pursue

policies that retard growth and exacerbatespolicies that retard growth and exacerbatespovertypoverty

Foreign aid makes it easier for governmentsForeign aid makes it easier for governments

to restrict internal private investment so toto restrict internal private investment so toserve their political interests.serve their political interests.

Aid has often been applied to dictateAid has often been applied to dictateunpopular and unsuitable externalunpopular and unsuitable externaldevelopment models.development models.


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THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT33

Aid breeds dependency and promotes theAid breeds dependency and promotes the

belief that economic improvement dependsbelief that economic improvement dependson circumstances and influences outsideon circumstances and influences outside

oneones controls control

The influx of money from aid drives up theThe influx of money from aid drives up the

exchange rate and adversely affects inflationexchange rate and adversely affects inflationat home and foreign trade competitivenessat home and foreign trade competitiveness


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REASONS FOR INEFFECTIVENESS OFREASONS FOR INEFFECTIVENESS OF

AIDAID Aid creates the wrong incentivesAid creates the wrong incentives

Aid frequently given for political reasonsAid frequently given for political reasons No adequate targeting of aidNo adequate targeting of aid

No capacity to deal with huge aid inflowsNo capacity to deal with huge aid inflows Lack of responsibilityLack of responsibility

Aid reduces competitivenessAid reduces competitiveness Conditionality, stringsConditionality, strings


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NOWNOW.. DECIDEDECIDE

WHETHER FOREIGN AID AWHETHER FOREIGN AID ABLESSING OR A CURSEBLESSING OR A CURSE

THANK YOUTHANK YOU

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Foreign Aid Blessing or Curse