FOREIGN AID FOREIGN AID ––BLESSING OR CURSE?BLESSING OR CURSE?
K P CHANDRASHEKHARK P CHANDRASHEKHAR
TERITERIJanuary 9, 2008January 9, 2008
Bangalore International CentreBangalore International Centre
SOME STARTLING FACTS!!!SOME STARTLING FACTS!!!
�� Foreign Aid or Development Assistance?Foreign Aid or Development Assistance?�� JapanJapan’’s progress can be attributed to massive s progress can be attributed to massive
foreign assistance. foreign assistance. –– Washington PostWashington Post�� 40% 40% --75% of the budgetary resources in many 75% of the budgetary resources in many
developing countries, notably East African developing countries, notably East African countries, come in the form of foreign aid. countries, come in the form of foreign aid. ––EconomistEconomist
�� Aid curse Aid curse –– represents the correlation between represents the correlation between richness of natural resources and the general richness of natural resources and the general weakening of public institutions and democracy in weakening of public institutions and democracy in the target country.the target country.
�� Altruism continues to mix abundantly with both Altruism 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. –– IMFIMF’’ss Finance & DevelopmentFinance & Development
SOME STARTLING FACTS!!!SOME STARTLING FACTS!!!�� Spend FOR Africa, but NOT IN?Spend FOR Africa, but NOT IN?
�� ChinaChina’’s interest in Africa?s interest in Africa?
�� Foreign aid is driven by many motivations Foreign aid is driven by many motivations –– moral moral obligation, altruism, foreign policy, economic obligation, altruism, foreign policy, economic policy, etc.policy, etc.
�� Foreign aid has nothing to do with the successes of Foreign aid has nothing to do with the successes of China and India and did not prevent the African China and India and did not prevent the African tragedy.tragedy.
�� The dumping of foodThe dumping of food--surplus aid has damaged local surplus aid has damaged local agriculture.agriculture.
�� Rats have consumed more than half of the food at Rats have consumed more than half of the food at the docks and storages.the docks and storages.
SOME STARTLING FACTS!!!SOME STARTLING FACTS!!!
�� Abuse of foreign aid Abuse 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 it Foreign 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.
MULTIPLE PURPOSES/INTERESTSMULTIPLE PURPOSES/INTERESTS
Typical purposes:Typical purposes:
�� DiplomaticDiplomatic�� CommercialCommercial�� DevelopmentalDevelopmental�� HumanitarianHumanitarian�� Promoting democracy/human rightsPromoting democracy/human rights�� Addressing global problemsAddressing global problems�� Strengthen Strengthen ‘‘fragile statesfragile states’’
Interests often difficult to disentangleInterests often difficult to disentangle
WHO PROVIDES & WHY?WHO PROVIDES & WHY?
�� Public Sources: ODAPublic Sources: ODA
•• Multilateral DonorsMultilateral Donors
�� UN Agencies UN Agencies –– FAO, UNDP, WFP, IFAD, WHO, UNICEFFAO, UNDP, WFP, IFAD, WHO, UNICEF
�� NonNon--UN Agencies UN 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 reforms To promote security, economic/political reforms etcetc
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
WHICH GOVERNMENTS PURSUE WHICH 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
WHY THESE INTERESTS?WHY THESE INTERESTS?
�� History History –– e.g., colonial ties; affinity groupse.g., colonial ties; affinity groups�� GeoGeo--strategic positionstrategic position�� National economic imperativesNational economic imperatives�� Development Development –– domestic constituenciesdomestic constituencies
�� DiplomaticDiplomatic�� CommercialCommercial�� DevelopmentalDevelopmental�� HumanitarianHumanitarian�� Promoting democracy/human rightsPromoting democracy/human rights�� Addressing global problemsAddressing global problems�� Strengthen Strengthen ‘‘fragile statesfragile states’’
Interests often difficult to disentangleInterests often difficult to disentangle
WHAT IS FOREIGN AID?WHAT IS FOREIGN AID?
�� What are the major types of foreign What are the major types of foreign development assistance?development assistance?�� Financial aidFinancial aid�� Technical assistanceTechnical assistance�� Food aidFood aid
�� Development Aid, Humanitarian Aid and Military Development Aid, Humanitarian Aid and Military AidAid
�� Food Aid, Commodity Aid and Projects AidFood Aid, Commodity Aid and Projects Aid�� Bilateral (USAID), Multilateral (World Bank) and Bilateral (USAID), Multilateral (World Bank) and
NonNon--Governmental (CARE)Governmental (CARE)�� Includes grants and loans with at least a 25% grant Includes grants and loans with at least a 25% grant
element are defined as element are defined as Official Development Official Development AssistanceAssistance
WHAT ACTUALLY HAPPENS?WHAT ACTUALLY HAPPENS?
�� A substantial part of foreign aid finds its way A substantial part of foreign aid finds its way back to the lenders in form of consultant fees back to the lenders in form of consultant fees and cost of equipment.and cost of equipment.
�� Government officials, politicians and the Government officials, politicians and the influential persons involved in the process, get influential persons involved in the process, get their due sharetheir due share
�� Only a scanty sum reaches the poor through Only a scanty sum reaches the poor through some services or benefitssome services or benefits
�� Economists claim that only 25 percent of aid Economists claim that only 25 percent of aid goes to the target groups while 75 percent is goes to the target groups while 75 percent is siphoned offsiphoned off
SOME GLARING FEATURES OF SOME GLARING FEATURES OF FOREIGN AIDFOREIGN AID
�� The record of success of foreign aid in poverty The record of success of foreign aid in poverty alleviation is more frustrating than what one alleviation is more frustrating than what one usually thinks about itusually thinks about it
�� Foreign aid has facilitated the expansion of the Foreign aid has facilitated the expansion of the capitalist market economy and the culture of capitalist market economy and the culture of consumerismconsumerism
�� The glaring phenomenon of "aidThe glaring phenomenon of "aid--dependent dependent consumerism" has serious implication for the consumerism" has serious implication for the economy, especially for savings and investment.economy, especially for savings and investment.
�� An unfortunate plight with foreign aid is that An unfortunate plight with foreign aid is that loan components have surged significantly over loan components have surged significantly over the last decade. the last decade.
RATIONALE FOR FOREIGN AIDRATIONALE FOR FOREIGN AID
1.1. Humanitarian (moral or ethical)Humanitarian (moral or ethical)a.a. Compensation for past injusticesCompensation for past injusticesb.b. Uneven distribution of global natural resourcesUneven distribution of global natural resourcesc.c. Moral obligation to help the poor improve their Moral obligation to help the poor improve their
nutritional 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 country’’s goodss goodsb.b. Dispose of surplusesDispose of surpluses
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 its Mostly 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 are Foreign aid effects in agricultural sector are
ambiguous at best.ambiguous at best.�� Drowning in AidDrowning in Aid�� India embarked on phasing out foreign aid.India embarked on phasing out foreign aid.
CONDITIONALITYCONDITIONALITY
�� ‘‘TiedTied’’ with unreasonable conditions, which with unreasonable conditions, which infringe on the sovereignty.infringe on the sovereignty.
�� ChinaChina’’s massive investment in Africa is tied s massive investment in Africa is tied to commercial interest in natural resources.to commercial interest in natural resources.
GEOGEO--POLITICAL INTERESTSPOLITICAL INTERESTS
�� Transfer of money performs the function of a price Transfer of money performs the function of a price paid for political services rendered. (paid for political services rendered. (MorgenthauMorgenthau, , 1962)1962)
�� Bilateral donors largely pursued their own political Bilateral donors largely pursued their own political interests when allocating aid. (interests when allocating aid. (McGillivrayMcGillivray, 2003), 2003)
�� US has typically considered financial aid as being US has typically considered financial aid as being important means to achieve their foreign policy important means to achieve their foreign policy objectives. Zimmermann, 1993)objectives. Zimmermann, 1993)
�� The main purpose of American aid is not to help The main purpose of American aid is not to help other 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.
A CASE FOR FOREIGN AIDA CASE FOR FOREIGN AID
�� Countries like China, India and Chile are in a Countries like China, India and Chile are in a slipstream of rapid economic growth.slipstream of rapid economic growth.
�� Their economic transformations show that Their economic transformations show that ‘‘basket basket casescases’’ can become can 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 and Targeted, specific, measurable, accountable and scalable aid will produce good results.scalable aid will produce good results.
FREEDOM FROM FOREIGN FREEDOM FROM FOREIGN CONTROLCONTROL
�� Growth under colonialism was poor, growth has Growth under colonialism was poor, growth has been much higher since independence in most been much higher since independence in most countriescountries
�� Growth under foreign aid/structural adjustment is Growth under foreign aid/structural adjustment is poorpoor
�� Most successful examples of growth are Most successful examples of growth are homegrown : China, India, Vietnam, Turkey, Chile, homegrown : China, India, Vietnam, Turkey, Chile, Singapore, Taiwan, South Korea, Mauritius. Each Singapore, Taiwan, South Korea, Mauritius. Each society figured out its own unique path to society figured out its own unique path to accommodate dynamic individuals. Not told what accommodate dynamic individuals. Not told what to do by international organizations or invading to do by international organizations or invading armies.armies.
DEVELOPMENT OR DESTRUCTION?DEVELOPMENT OR DESTRUCTION?INTERNATIONAL FINANCIAL INSTITUTIONS INTERNATIONAL FINANCIAL INSTITUTIONS
((IFIsIFIs))The common agendas of The common agendas of IFIsIFIs�� Dismantling public institutions and public enterprises that Dismantling public institutions and public enterprises that
deprives people but give immense authority to big businessdeprives people but give immense authority to big business
�� Removing all supports and protection for local industries Removing all supports and protection for local industries and agriculture by liberalizing importsand agriculture by liberalizing imports
�� Supporting export oriented activities to meet the needs of Supporting export oriented activities to meet the needs of western market by supplying cheap product at the expense western market by supplying cheap product at the expense of economy and environmentof economy and environment
�� Withdrawing state's responsibility of providing basic services Withdrawing state's responsibility of providing basic services such as health care and education for the peoplesuch as health care and education for the people
�� Raising prices of fuel, gas, electricity, raising fees of Raising prices of fuel, gas, electricity, raising fees of education and healthcare to create good business education and healthcare to create good business opportunities of the global companiesopportunities of the global companies
WHAT WHAT IFIsIFIs GET IN RETURN, IF GET 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 have Favourable conditions to have extraordinary return on investment extraordinary return on investment
�� An open space for global big An open space for global big businesses to do whatever they like to businesses to do whatever they like to dodo
�� Foreign Aid & Foreign Aid & Poverty.pptPoverty.ppt
WHY AID MIGHT NOT BE A PANACEA TO WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT……11
�� The lack of progress in Third World countries The 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 capital Governments who are capable of using capital productively can always attract investment or productively can always attract investment or borrow money from abroad.borrow money from abroad.
�� Aid does not descend indiscriminately on the Aid does not descend indiscriminately on the population who may need it most but goes population who may need it most but goes directly to the government. directly to the government.
�� Aid can therefore increases the patronage and Aid can therefore increases the patronage and power of an unpopular government.power of an unpopular government.
WHY AID MIGHT NOT BE A PANACEA TO WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT……22
�� Foreign aids enable governments to pursue Foreign aids enable governments to pursue policies that retard growth and exacerbates policies that retard growth and exacerbates povertypoverty
�� Foreign aid makes it easier for governments Foreign aid makes it easier for governments to restrict internal private investment so to to restrict internal private investment so to serve their political interests. serve their political interests.
�� Aid has often been applied to dictate Aid has often been applied to dictate unpopular and unsuitable external unpopular and unsuitable external development models.development models.
WHY AID MIGHT NOT BE A PANACEA TO WHY AID MIGHT NOT BE A PANACEA TO THIRD WORLD DEVELOPMENTTHIRD WORLD DEVELOPMENT……33
�� Aid breeds dependency and promotes the Aid breeds dependency and promotes the belief that economic improvement depends belief that economic improvement depends on circumstances and influences outside on circumstances and influences outside oneone’’s controls control
�� The influx of money from aid drives up the The influx of money from aid drives up the exchange rate and adversely affects inflation exchange rate and adversely affects inflation at home and foreign trade competitivenessat home and foreign trade competitiveness
REASONS FOR INEFFECTIVENESS OF REASONS 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
NOWNOW……..
�� DECIDEDECIDE
��WHETHER FOREIGN AID A WHETHER FOREIGN AID A BLESSING OR A CURSEBLESSING OR A CURSE
THANK YOUTHANK YOU
