FOREIGN AID BLESSING OR CURSE?

K P CHANDRASHEKHAR
TERI
January 9, 2008 Bangalore International Centre

SOME STARTLING FACTS!!!

Foreign Aid or Development Assistance? Japans progress can be attributed to massive foreign assistance. Washington Post 40% -75% of the budgetary resources in many developing countries, notably East African countries, come in the form of foreign aid. Economist Aid curse represents the correlation between richness of natural resources and the general weakening of public institutions and democracy in the target country. Altruism continues to mix abundantly with both bad and good intentions that pave the way to hell. IMFs Finance & Development

SOME STARTLING FACTS!!!

Spend FOR Africa, but NOT IN? Chinas interest in Africa? Foreign aid is driven by many motivations moral obligation, altruism, foreign policy, economic policy, etc. Foreign aid has nothing to do with the successes of China and India and did not prevent the African tragedy. The dumping of food-surplus aid has damaged local agriculture. Rats have consumed more than half of the food at the docks and storages.

SOME STARTLING FACTS!!!

Abuse of foreign aid corruption, mismanagement, exchange for weapons. Ethiopia, Mozambique, Albania, Romania, Congo, Sudan. A tool to acquire natural resources. Foreign aid to India declining and 90% of it is in the form of loans. It is about $ 3 billion. India is emerging as a Donor now.

MULTIPLE PURPOSES/INTERESTS
Typical purposes:
Diplomatic Commercial Developmental Humanitarian Promoting democracy/human rights Addressing global problems Strengthen fragile states

Interests often difficult to disentangle

WHO PROVIDES & WHY?

Public Sources: ODA

Multilateral Donors
UN Agencies FAO, UNDP, WFP, IFAD, WHO, UNICEF Non-UN Agencies WB, IMF Why? To promote development & economic reforms

Bilateral Donors
DCs OPEC Countries Japan Why? To promote security, economic/political reforms etc

WHO PROVIDES & WHY?

Private Sources
Foundations: Rockefeller, Ford, Gates Churches NGOs: Oxfam, CARE, CRS, World Vision Private Philanthropy: Gates, Clinton, Buffett, Turner, Soros Why? Promote humanitarian concerns, development

WHICH GOVERNMENTS PURSUE WHICH INTERESTS/PURPOSES?

Denmark: developmental/commercial France: diplomatic/development/commercial Japan: diplomatic/development/commercial US: diplomatic/development/commercial/other EU diplomatic/development/commercial/other

WHY THESE INTERESTS?

History e.g., colonial ties; affinity groups Geo-strategic position National economic imperatives Development domestic constituencies Diplomatic Commercial Developmental Humanitarian Promoting democracy/human rights Addressing global problems Strengthen fragile states

Interests often difficult to disentangle

WHAT IS FOREIGN AID?

What are the major types of foreign development assistance?
Financial aid Technical assistance Food aid

Development Aid, Humanitarian Aid and Military Aid Food Aid, Commodity Aid and Projects Aid Bilateral (USAID), Multilateral (World Bank) and Non-Governmental (CARE) Includes grants and loans with at least a 25% grant element are defined as Official Development Assistance

WHAT ACTUALLY HAPPENS?

A substantial part of foreign aid finds its way back to the lenders in form of consultant fees and cost of equipment. Government officials, politicians and the influential persons involved in the process, get their due share Only a scanty sum reaches the poor through some services or benefits Economists claim that only 25 percent of aid goes to the target groups while 75 percent is siphoned off

SOME GLARING FEATURES OF FOREIGN AID

The record of success of foreign aid in poverty alleviation is more frustrating than what one usually thinks about it Foreign aid has facilitated the expansion of the capitalist market economy and the culture of consumerism The glaring phenomenon of "aid-dependent consumerism" has serious implication for the economy, especially for savings and investment. An unfortunate plight with foreign aid is that loan components have surged significantly over the last decade.

RATIONALE FOR FOREIGN AID

1.
a. b. c.

Humanitarian (moral or ethical)

Compensation for past injustices Uneven distribution of global natural resources Moral obligation to help the poor improve their nutritional status and standard of living

2.

Political (strategic self interest) (buy friends) (security assistance) Economic self-interest
a. b.

3.

Develop markets for developed countrys goods Dispose of surpluses

FOREIGN AID & INDIA

Most of it is official development assistance. Received the most World Bank aid. Mostly used to finance public sector and its imports. Aid discouraged local production. Aid fuelled inflation. Foreign aid effects in agricultural sector are ambiguous at best. Drowning in Aid India embarked on phasing out foreign aid.

CONDITIONALITY
Tied with unreasonable conditions, which infringe on the sovereignty. Chinas massive investment in Africa is tied to commercial interest in natural resources.

GEO-POLITICAL INTERESTS
Transfer of money performs the function of a price paid for political services rendered. (Morgenthau, 1962) Bilateral donors largely pursued their own political interests when allocating aid. (McGillivray, 2003) US has typically considered financial aid as being important means to achieve their foreign policy objectives. Zimmermann, 1993) The main purpose of American aid is not to help other nations but to help ourselves. (Richard Nixon) Aid does buy votes in UN General Assembly.

A CASE FOR FOREIGN AID

Countries like China, India and Chile are in a slipstream of rapid economic growth. Their economic transformations show that basket cases can become emerging markets. Has boosted food production and reduced famines. Has improved health conditions Has ended economic isolation. Targeted, specific, measurable, accountable and scalable aid will produce good results.

FREEDOM FROM FOREIGN CONTROL

Growth under colonialism was poor, growth has been much higher since independence in most countries Growth under foreign aid/structural adjustment is poor Most successful examples of growth are homegrown : China, India, Vietnam, Turkey, Chile, Singapore, Taiwan, South Korea, Mauritius. Each society figured out its own unique path to accommodate dynamic individuals. Not told what to do by international organizations or invading armies.

DEVELOPMENT OR DESTRUCTION? INTERNATIONAL FINANCIAL INSTITUTIONS (IFIs)

The common agendas of IFIs
Dismantling public institutions and public enterprises that deprives people but give immense authority to big business Removing all supports and protection for local industries and agriculture by liberalizing imports Supporting export oriented activities to meet the needs of western market by supplying cheap product at the expense of economy and environment Withdrawing state's responsibility of providing basic services such as health care and education for the people Raising prices of fuel, gas, electricity, raising fees of education and healthcare to create good business opportunities of the global companies

WHAT IFIs GET IN RETURN, IF POLICES/AGENDA ARE IMPLEMENTED? A huge marker for the global capital Favourable conditions to have extraordinary return on investment An open space for global big businesses to do whatever they like to do Foreign Aid & Poverty.ppt

WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENT1

The lack of progress in Third World countries reflects factors that cannot be overcome by aid. Capital can be secured without Aid. Governments who are capable of using capital productively can always attract investment or borrow money from abroad. Aid does not descend indiscriminately on the population who may need it most but goes directly to the government. Aid can therefore increases the patronage and power of an unpopular government.

WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENT2 Foreign aids enable governments to pursue policies that retard growth and exacerbates poverty Foreign aid makes it easier for governments to restrict internal private investment so to serve their political interests. Aid has often been applied to dictate unpopular and unsuitable external development models.

WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENT3 Aid breeds dependency and promotes the belief that economic improvement depends on circumstances and influences outside ones control The influx of money from aid drives up the exchange rate and adversely affects inflation at home and foreign trade competitiveness

REASONS FOR INEFFECTIVENESS OF AID

Aid creates the wrong incentives Aid frequently given for political reasons No adequate targeting of aid No capacity to deal with huge aid inflows Lack of responsibility Aid reduces competitiveness Conditionality, strings

NOW.
DECIDE

WHETHER FOREIGN AID A BLESSING OR A CURSE THANK YOU