1 The Politics of Foreign Aid ECONOMICS THOUGHTS & POLITICAL ECONOMY Muhammad Fahad Sirajuddin Syed Muhammad Ali What is Foreign Aid Types of Foreign Aid Motives of Foreign Aid Political Motives of Foreign Aid Why need of Political Foreign Aid Arise The History of Foreign Aid Channels of Foreign Aid (Bilateral versus Multilateral) Effects of Foreign Aid on Developing Countries now Developed Effects of Foreign Aid on Developing Countries Criticism on Effectiveness of Foreign Aid to the Developing Countries Five Countries That Provide The Largest Foreign Aid The United States is the World Biggest Aid Donor Sector Wise Aid Allocation in %age of Total Aid Through Official Development Assistance of OECD in 2014 2 What Is Foreign Aid? Definition from Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Foreign aid as resource flows provided by official agencies with the intent to promote economic development. The resources must be given on concessional terms with at least a 25% grant element (OECD, website) 3 Types of Foreign Aid: The resources can be economic in nature, such as financial contributions. Technical assistance and commodities (such as food aid or agricultural equipment). The costs of humanitarian aid within peacekeeping operations can also be considered foreign assistance. Note: OECD specifically states that official development assistance (ODA) should not include military aid or antiterrorism activities. 4 Motives of Foreign Aid Economic development Alleviate poverty Improve human welfare (human rights violations, disease, population growth) Environmental degradation Social instability & Civil unrest (which, in turn, can produce flows of refugees and acts of terrorism) 5 Political Motives of Foreign Aid Promote geostrategic interests Strengthen alliances, or to keep allied regimes in power Supporting a friendly foreign government, the donor state can prevent the recipient state from falling into the enemy’s camp To win the hearts and minds of a population Reduce the likelihood of terrorist attacks by averting the causes of terrorism To ensure that poor countries not fall prey to the ideological underpinnings of fundamentalists Controversial: (Bush 2002) “providing people with a positive future would lessen their desire to embrace a radical Islamic ideology”. 6 Why Need of Political Foreign Aid Arise? In the post-war (World War II) decades, the United States became the world’s biggest aid donor, starting with the Marshall Plan to help Europe rebuild. As the Cold War developed, the two super powers and their allies would use aid to encourage political allegiances. During the Cold War, foreign aid was a tool Western states used to contain the spread of communism and to keep the power of the Soviet Union in check. In the post-9/11 era, foreign assistance is viewed as an important instrument in preventing terrorist attacks. 7 Why Need of Political Foreign Aid Arise? But foreign aid can be successfully used to buy strategic concessions, such as the building of military bases or consolidating military alliances from the recipient government. Foreign aid can be a large component of foreign capital flows for many low-income countries, thus increasing their dependence on donor governments. Aid by donor country can help continue or regenerate donor spheres of influence and reinforce political alliances. 8 Why Need of Political Foreign Aid Arise? As Global powers emerge as donors, a third 'horizontal' structure is now being discussed, based on mutual self-interest. ‘Rising Powers’ (e.g. China) have a different approach to aid, which they describe as development cooperation on the basis of mutual self-interest 9 The History of Foreign Aid Foreign aid structures began with European colonialism in the 19th century, and by the 1920s and '30s countries like Germany, France and Britain were providing regular aid to their colonies in Africa, Latin America and Asia. Colonial powers used their money to build infrastructure In the post-war decades, the United States became the world’s biggest aid donor, starting with the Marshall Plan to help Europe rebuild. As the Cold War developed, the two super powers and their allies would use aid to encourage political allegiances. 10 The History of Foreign Aid At the end of the 1960s, World Bank promoted the idea of using donor-funded programs to meet people's basic needs in health, education, water and sanitation The collapse of the Soviet Union in 1991 and the end of the Cold War led to a return to democracy in many countries and the increasing participation in development projects by both nongovernment organisations and wealthy philanthropists like Bill Gates and George Soros during the 1990s China provides a lot of economic infrastructure and support for social development, and in return becomes the privileged buyer of African raw materials for China's growing economy, 11 The History of Foreign Aid Over the past decade, which is important here because it influences how people think about what they are doing, these new sovereign powers stress that the corporation is horizontal, that it's not the old vertical relationship that the former colonial powers have with their erstwhile colonies who are now aid recipients.’ 12 Channels of Foreign Aid 13 Bilateral versus Multilateral Bilateral Aid • Flow directly from one country to another • Delivered through the public sector, NGOs, or public-private partnerships • • Aid as a geopolitical foreign policy tool prefer bilateral foreign aid because of the strategic objectives to be gained Aid is overseen, and frequently managed, by the donor (Riddell, 2014) Multilateral • Aid channeled through intergovernmental organizations such as the World Bank or the IMF; UN agencies and the OECD • The donor state cannot assign or predetermine the aid’s use • Multilateral aid can only be delivered through the multilateral organization • Earmarking allows the donor and likeminded countries greater influence in the allocation of multilateral aid decisions by targeting priority issues or economically and politically important countries. Effects of Foreign Aid on Developing Countries now Developed The first and most successful contemporary foreign aid initiative was the European Recovery Program (ERP), popularly known as the Marshall Plan. In 1947, secretary of state George Marshall announced a United States proposal to rebuild Europe in the aftermath of World War II. The Marshall Plan was motivated by humanitarian concern for the suffering of the European population, the plan also satisfied the strategic self-interests of U.S. foreign policy. United States leadership feared that with the destruction of the European economy and the growing misery of the European people, communism would gain a stronghold. The Marshall Plan proved to be very good for America’s economy, benefiting business, manufacturing, and agricultural interests by increasing U.S. exports and providing jobs to U.S. workers 14 Effects of Foreign Aid on Developing Countries A one percent increase in the aid to gross net income (GNI) ratio increases annual real per capita GDP growth by 0.031 percentage points (Source: Galiani, Sebastian, Stephen Knack, Lixin Colin Xu, and Ben Zou. “The Effect of Aid on Growth: Evidence from a Quasi-Experiment.” National Bureau of Economic Research Working Paper 22164, 2016) Countries receiving more health aid witnessed a more rapid rise in life expectancy and saw measurably larger declines in mortality among children under the age of 5 than countries that received less health aid. (study by Stanford University School of Medicine researchers in 2014) 15 Effects of Foreign Aid on Developing Countries Globally, funding for malaria control and treatment programs soared from $0.3 billion in 2003 to $1.7 billion in 2009, with the U.S. responsible for the lion’s share of the effort. Worldwide, 1 million people died of malaria in 2000, while 860,000 died of the disease in 2008, according to the World Health Organization (WHO) The Bill and Melinda Gates Foundation, USAID, UNICEF, and the Global Alliance for Vaccines and Immunisation (GAVI) have pushed back mortality and sickness caused by diseases like polio, measles, diphtheria, rotaviruses, mumps, meningitis and the like. The WHO estimates that 4 million children were spared death from three diseases (Hepatitis B, Haemophilus influenzae type b and Pertussis) from 2001 to 2009, thanks to these vaccine efforts. 16 Criticism on Effectiveness of Foreign Aid to the Developing Countries This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths Jason Sorens| October 10, 2007 “Development and the Political Economy of Foreign Aid” 17 Criticism on Effectiveness of Foreign Aid to the Developing Countries Ms Rosalind Eyben (feminist social anthropologist with a career in international development policy and practice) says there began to be a feeling that the people had been forgotten about, that there was still massive poverty in aid recipient countries, and that the investment in economic infrastructure was not necessarily making any difference to the lives of the majority The evidence that foreign aid generally has not enhanced economic growth is well-known. In The Elusive Quest for Growth (book by World Bank development economist William Easterly) 18 Five Countries That Provide The Largest Foreign Aid 19 1. China: (between 2000 and 2014, China offered $350 billion-worth of aid to 140 countries and territories, sponsoring more than 4000 projects) [Non-DAC country] 2. United States: (From 2002, the United States Agency for International Development (USAID) has gradually boosted the total foreign aid budget to a steady amount that rests around $32 billion) 3. Germany: (With a volume of $24.67 billion in 2016, Germany’s foreign aid ranked the second largest in OECD’s report) 4. The United Kingdom: (In fiscal year 2016, the U.K. spent a total of $18.01 billion in development aid, thus becoming the third largest foreign aid donor among DAC countries) 5. As the third-largest economy in the world, Japan contributes the fourth-largest ODA among DAC countries. Though Japan ranked high on the list of total aid volume, its $10.37 billion aid in fiscal year 2016 The United States is the World Biggest Aid Donor Why America needs to lead in Aid Donation? General Jim Mattis who testified before the Senate Armed Services Committee in 2013: “If you don’t fund the State Department fully, then I need to buy more ammunition.” National security: “The military alone cannot keep us safe.” Jobs and the economy: “95 percent of consumers live outside the United States.” Moral leadership: “America is that shining city on the hill.” 20 21 22 23 Sector Wise Aid Allocation in %age of Total Aid Through Official Development Assistance of OECD in 2014 Data source: (https:// stats.oecd.org/Index.aspx?DataSetCode=CRS1 S.No Description Funding Areas Aid in 2014 %age 24 1 Social Infrastructure and Services Education, health, and the promotion of civil society 39.4 2 Economic Infrastructure Transportation, energy, communications, and banking and financial services development 23.4 3 Production Sectors Agriculture, forestry and fishing, industry, mining and construction 9.1 4 General Budget Support funds Government budgets and support for macroeconomic reforms 1.5 5 Humanitarian Assistance Emergency response, reconstruction and disaster prevention 10.8 6 Multisector Support funding Include the environment and biodiversity 10.2 7 Action Relating to Debt, debt swaps, debt forgiveness, and debt relief 0.43 The remainder 5.17 is unspecified aid.
