What are the pros and cons of aid and other forms of external flows such as trade and investment? A strict policy of self-reliance would mean shunning them all. North Korea is currently the most adept practitioner of such isolationism. It is also among the poorest countries globally. Hermitism constitutes a splendid individual strategy for gaining nirvana but represents poor national policy. The proponents of self-reliance may protest that they object only to aid. However, foreign aid is not all bad nor are other types of external flows without problems.
While living in splendid isolation clearly ensures national ruin, the one-size-fits-all and the one-step-open-all form of economic openness preached by the IMF is also inappropriate for developing countries. Rather than the development ladder that their proponents present them as, such policies constitute a ladder and snakes game where spectacular, sudden and spurious short-term growth is often followed by steep climbdowns, as financial bubbles burst. The recent economic openness and consequent development of China and India is presented as the perfect validation of neoliberal prescriptions. While both countries have certainly opened up, they do not subscribe to neoliberal policies and are still classified as ‘mostly unfree’ by the US-based Heritage Foundation’s Index of Economic Freedom. Thus, national success lies neither in isolation nor unfettered openness but in smart, selective external engagement.
Foreign aid often suffers from high overheads, corruption and politicisation. However, well-disbursed aid clearly benefits developing countries, especially in the social sectors since the fruits of trade and investment often do not flow to the poorest. Ironically, the Pakistani firebrand critics of US aid are not entirely wrong. The US is the most miserly donor, with the lowest aid-to-national income ratio among rich countries. It does not even rank among the top 10 on the US-based Centre for Global Development’s Commitment to Development Index, which measures the quality of bilateral aid. Its aid is linked very closely with its foreign policies. Thus, the three biggest recipients of US aid are not the three poorest countries globally, but strategic middle and high-income countries —Israel, Egypt and Pakistan.
Despite its low aid ratio, the huge economy of the US makes it the largest single donor globally and its aid did benefit strategic allies like Taiwan and South Korea during the Cold War. Much depends on how you negotiate with Uncle Sam and fit in with its security interests. The aid of other rich countries and UN agencies usually tends to be beneficial and there is little justification in being wary of it. The important thing is to see aid as a complement and not a substitute for national resource mobilisation.
Much the same is true for trade and investment. While often portrayed as a panacea for developing countries, the global trade and investment regimes crafted by the World Trade Organization and rich countries often disregard the interests of developing countries. The US again leads the way in entangling developing countries into one-sided bilateral trade and investment agreements. As such, developing countries must exercise caution in negotiating bilateral and multilateral trade and investment treaties.
Thus, sensible policy lies in selective, carefully analysed engagement with foreign aid, trade and investment, as done by China and India. Unfortunately, such nuanced prescriptions do not translate into catchy political slogans. Consequently, politicians will continue to breathe fire and fury against foreign aid. However, hopefully others will recognise the benefits of a nuanced approach.
Published in The Express Tribune, July 13th, 2011.
COMMENTS (2)
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For shunning foreign aid, there is a pre-requisite. An inherent strength and ability to organize one's affairs, which leads to a sustainable system. Democracy or otherwise doesn't matter.
Pakistan can't sustain a system that spends far too much money on its roguish, unaccountable army. So it is pushed in to begging for money to sustain that army.
Why does it need the army? So it can fight India. Why does it have to fight India? Because, that's the answer the army has derived to the question - 'Pakistan ka Matlab kya'!!
If sane civilians can break that and define a different 'Pakistan ka matlab' - as one of welfare, growth, peace with all neighbors - then need for foreign aid will go away.
Smart engagement sounds great. But we like labels and extremes.
However, I have reservations on two of your hypothesis.
First, aid is always and everywhere strongly correlated NEGATIVELY with domestic savings. That should be intuitively obvious since aid saps the willingness of countries to raise their own domestic resources. Pakistan is a case in point. Aid presents huge 'moral hazard' issues for Pakistan.
Second, the POSITIVE correlation between economic growth and exports is very strong and very well established and explains the exceptional performance of Asian countries, including, most obviously, China.
Pakistan's problem has been that it has never articulated an export-led growth strategy or put in place the policies necessary to support it which, inter alia, include a competitive exchange rate. If anything the exchange tends towards APPRECIATION because of capital inflows (exports, remittances and other public and private inflows). The familiar "Dutch-Disease".
I don't have the latest calculations but I am sure the present trade and tax regime still discriminates against our exports. In other words, there is still an "anti-export bias" in the policy regime. That will get you nowhere in the highly competitive global economy and it shows in Pakistan's constant and slightly falling export-to-GDP ratio over the past 62 years.