The politics of aid

Published: May 29, 2011
The writer is former vice-president of the World Bank and former finance minister of Pakistan

The writer is former vice-president of the World Bank and former finance minister of Pakistan

In a speech given recently at the Woodrow Wilson Centre in Washington, I made two points about the flow of aid to Pakistan. I said that the American assistance to the country was overestimated since some of the numbers that were discussed in the press — in particular the American press — did not differentiate between commitments and disbursements. The programme envisaged under the Kerry-Lugar bill was moving very slowly. There were several other aspects of aid-counting that had to be factored in before aggregate numbers were used.

My second point was to suggest that China had become the largest provider of aid to Pakistan and would become even larger, once the various programmes and projects that were in the planning stage were implemented. The second point drew some attention from some people in the audience. In one email, I was told that the numbers available in various documents suggest that China was nowhere near the position I had assigned the country in my comments. This reaction reflected less than full understanding of what is really meant by ‘aid’. I think this subject is important enough to be given some careful thought, especially by those in Islamabad’s official establishment who have the data to estimate the amount of total aid the country receives from various bilateral and multilateral sources.

Aid is commonly associated with what is generally called budgetary and balance of payments support. This assistance may come with policy conditions. Once they are met, the provider of aid writes a cheque, the proceeds from which can be used in any way the recipient wishes. This is the way the International Monetary Fund (IMF) aids the countries in economic distress. In Pakistan’s long history with the Fund, the country has seldom succeeded in completing what the IMF calls the “programme”. This is likely to happen once again, as the Fund is not satisfied with Pakistan’s performance and has suspended disbursements from the $11 billion plus programme it signed with Islamabad in late 2008.

The World Bank began to provide non-project assistance in the early 1980s when its introduced ‘structural adjustment lending’. The idea was to provide free money to the recipients when the needed structural adjustments were promised. Mahbubul Haq and I — both of us then worked in the Bank’s policy department — opposed this move by suggesting that this kind of money would be wasted and also develop poor habits. I believe our assessment was right. Pakistan is a good example of a county where this has been the outcome.

Aid has always been difficult to define. Several decades ago, Mahbubul Haq had the Planning Commission carry out a study in which he drew a sharp distinction between gross and net flows of aid. In determining net flows, he factored out from the total the amount that went back to the donors in various forms. Often — at least at that time — aid came to be tied to the procurement of goods and commodities being financed. Their prices could be much higher than those in the international market place. Some of the project aid came with the condition that the consulting services being provided would come from the donor, even when those skills were available from within the country receiving aid.

Haq’s work in the Planning Commission had an important impact in the sense that the members of the OECD (Organisation for Economic Co-operation and Development), the organisation of rich countries, pledged that they would not tie their aid to procurement from the countries providing it. Development agencies such as the World Bank and the Asian Development Bank insisted on the provision that the procurement from their funds would be on the basis of international competitive bidding — contracts go to the cheapest bidder.

This last provision brings me to case of China’s assistance to Pakistan. There is an impression that the Chinese assistance is more talk than substance; that the country promises more than it gives. This feeling is based on a misunderstanding of what is really meant by assistance. The Chinese are interested in giving mostly project support. It was, after all, Mao Zedong who said that it is much better teaching the needy to fish, rather than giving them fish to eat. Beijing considers budgetary support equivalent to giving fish and project assistance teaching the recipient to fish. One of the few occasions the Chinese departed from this practice was when I went to Beijing to seek their support to help us service debt we had with such ‘preferred creditors’ as the IMF and the World Bank. This was in late 1996, when I had taken leave of absence from the World Bank to manage Pakistan’s finance and development. We were then very close to bankruptcy. Telling me that they would not let Pakistan default while I was in charge, they made a deposit of $500 million in our account with the Federal Reserve System in New York. That saved the situation for us.

Today, China is by far the largest provider of project assistance to Pakistan. The financing of these projects comes mostly from Chinese sources which combine loans at commercial rates with grants. This helps to lower the cost to Pakistan in terms of both the amount of interest paid on the loan, as well as the period over which it needs to be serviced. China, as is well known, has financed the construction of several high profile projects — roads, nuclear stations, dams and railway equipment. For proper aid accounting, the terms of financing for each of these projects will need to be compared with alternative sources of supply and the difference between the two would constitute the component of aid.

If this calculation is done, it will show that an impressive amount of assistance is coming to Pakistan from China. Having some firm estimates — something the economic affairs division should be able to do — will put in perspective the amount of help Pakistan is receiving from China compared to other donors. Since our foreign policy focuses on economic relations, such an estimate will put the sources and amounts of aid the country receives in the right context.

Published in The Express Tribune, May 30th, 2011.

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Reader Comments (11)

  • Rashid Awan
    May 29, 2011 - 10:35PM

    Good and thoughtful words by the man of wisdom. Pakistan should look Chinese and be vocal to tell the world as our True Friends. Pak China Friendship Zindabad.Recommend

  • May 29, 2011 - 10:53PM

    Mr Burki, I would be very interested in seeing if you have any estimates on the relative aid flows from China compared to those from the United States and/or Britain.Recommend

  • Faheem
    May 30, 2011 - 2:04AM

    Dr Burki missed two very important points here: one, though China has become the largest ‘bilateral donor’ to Pakistan in recent years but China-Aid has little control and influence on international development partners than US. We have experienced sharp decline in aid inflows whenever Pakistan faced economic sanctions from the US governments.

    And second, China has contributed only 11.5 percent of the total project aid (disbursements) during 2001-09 so it would be unwise to rush after China-Aid. Japan (followed by US and UK) is next in the row but has larger investments in our economy than China.

    I think rather estimating who gives more Aid to Pakistan it is more important for the decision makers to see who gives us more trade and investment opportunities.Recommend

  • Suresh
    May 30, 2011 - 9:58AM

    You are right. Trade and investment opportunity should be considered. Another important factor is which country provides large employment opportunity for the people in those respective country and help in earning hard currency. How US and China fare in this regard, how many Pakistanis are employed in China?? Further, whenever China takes up any overseas project, even against cash payment ( as in India) it insists upon using its own labor, at the expense of local employment. So, obviously its project assistance would certainly laced with this condition at the cost of Pakistani labour, which is not in case of US, except for top management job.Recommend

  • Hashmat Khan
    May 30, 2011 - 10:20AM

    Thank you ,sir for your wonderful article.Could you for my benefit,tell about the Chinese investments,monetary support to USA or Chinese money in total dollars in every shape that is supporting American economy.Thank you. ,Recommend

  • Singh
    May 30, 2011 - 11:06AM

    Kuddo to Writer.
    Aid mean Handout.Recommend

  • Mona Siddiqui
    May 30, 2011 - 4:00PM

    Foreign aid is anarcho-capitalism in disguise.Recommend

  • meekal ahmed
    May 30, 2011 - 5:29PM

    It would be interesting to know the terms of Chinese aid. It is said that Chinese investments in Africa, for example, are made with loans which “rival the World Bank” in terms of their concessionality.

    The Economic Affairs Division should compile, on a regular, on-going basis, information on commitments, disbursements, net flows and the “grant element” of aid received.

    It is not rocket science and needs only simple software.

    The author makes the important point that aid which goes for budgetary financing is prone to miss-use/waste. This is true unless it is tied to strong and verifiable conditionality. Recommend

  • Tahir
    May 30, 2011 - 8:09PM

    American aid is doing more harm then good. Unless we stop taking aid we will not be independent in our policies. Recommend

  • May 31, 2011 - 12:47AM

    There is a basic flaw in Pakistan’s foreign policy as from its creation, she has been a constant seeker of foreign aids despite focusing on orchestrating self-reliance. Policy makers in Pakistan are deliberately making Pakistan a colony of China by giving them not only geostrategic assets but also pumping Chinese’ huge chunk of money in the energy, infrastructure, agriculture and technology sectors. On the other hand, the alliance with America brought a bitter fruit to Pakistan in the form of US$80 billion during a so-called war on terrorism in Afghanistan and Pakistan since 2002. This is a big reward we as Pakistanis got from America and only God knows how many loses we would have to get in near future.
    Pakistan should foster self-reliance by utilizing its own resources saying good-bye to any foreign aid. Recommend

  • amoghavarsha.ii
    May 31, 2011 - 2:45PM

    “… procurement from their funds would be on the basis of international competitive bidding — contracts go to the cheapest bidder….”
    the last provision….

    well now you can know who benefits from Aid ( direct or indirect)

    CHINA ONLY..because of CHEAP PRICES????

    so what is your strategy for that, that is thinking of maximising for pakistan, that is if you want pakistan to win? that is if you love pakistan?Recommend

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