Monday 1 October 2012

How Unholy is Foreign Aid?

Tuesday, October 2, 2012

How unholy is foreign aid?

Critics of foreign aid (FA) often argue that it is primarily used by the rich nations as an influence peddling mechanism to augment the interests of the citizens and organisations of the donor countries at the expense of the recipient countries. The popularly alleged partners of this unholy FA alliance are the donor governments, institutions like the World Bank, IMF and the UN, international NGOs and large multinationals. Political parties in the recipient countries are often labeled as agents of the FA alliance by many of their citizens, intellectuals and media.

This commentary attempts to evaluate the merits of this perception of FA being unholy or immoral. The focus here is on whether FA is contrived as an unholy endeavour, not the extent to which FA has historically helped or harmed the recipient countries. There are several angles to look at this issue.

First, except in unusual circumstances such as Iraq and Afghanistan, FA is not forcibly parachuted into the recipient countries; by and large it is the recipient countries that seek out FA.

Second, critics may argue that the alliance manufactures a crisis environment or a pretext in general, that forces a recipient country to request and accept FA. This could indeed be the case for achieving geo-political objectives of mighty or aspiring donor countries. In such instances, FA can be termed unholy if the geo-political outcomes are detrimental for the recipient country. There is nothing unholy about the manufactured pretext if both the donor and the recipient ultimately benefit from the geo-political outcomes.

Third, it is important to keep in mind a framework of mutual benefits for the parties to an endeavour. One-directional flow of benefits is inherently unsustainable in the long term, especially when resources are scarce. As such, that the FA alliance may seek to harness benefit from FA for their stakeholders is rational, and should be expected instead of suspected or despised. After all, FA transfers to the recipient country imply foregone opportunities (such as curtailing budget deficit) in the donor country. What could be truly at stake is the sharing of the long-term benefits of FA between the recipient and the donor countries. As a matter of practice, the long-term benefits for the donor countries are rarely stated or even discussed in FA arrangements. This lack of full disclosure permits the critics and political opportunists to paint FA as unholy endeavours with hidden agenda. Importantly, however, that the agenda of long-term benefits for the donor country is not being delineated does not make the offering of FA unholy in any way.

Fourth, it is true that there can be collusion between the international agencies and the rich donor countries funding these agencies. But this is known, rational and expected. Doesn't it make sense that the donor countries have a major say about the FA operations of the agencies they fund? Thus, for example, suppose the major donors ask the WB to cancel a previously approved loan to Bangladesh because of corruption allegations. Is this immoral? Not really. Governance is a major concern everywhere and it can only be beneficial for the people of Bangladesh if the WB uses the FA window judiciously to help improve governance atmosphere in Bangladesh.

Fifth, multinationals do profit from FA through consulting, banking, construction, et cetera, in the process of implementing FA funded projects. In most cases, the multinationals obtain these businesses through competitive bidding process and quite often they seek the services of local lobbyists and partnership of local firms. As long as the multinationals carryout these activities in a legal manner and within the stipulated conditions of specific FA ventures, there is nothing unholy about it. In fact, there is a transfer of technology and know-how from the multinationals to the recipient country. It is true that in some cases, the donor countries may insist on the employment of specific firms for FA projects. But in those instances, it is generally because the technological information is very sensitive and/or its transfer or leakage may pose a security risk, as in the case of nuclear power plants.

Sixth, unlike the multinationals, the NGOs are non-profit organisations. As they carry on their development work in the recipient countries, their mandate may require them to promote specific types of economic or social practices and institutions. Critics argue that the preferences of the NGOs lead to transformation away from the traditions of the recipient country. Yes, they can and yes, they do. The important thing, however, is that none of this is done by compulsion, all NGO activities take place upon the approval of the government of the recipient country and within the laws of the land, NGOs are not making any money from such activities and there is no owner of NGOs. They raise a significant part of their FA funds from the well-meaning citizens across the world including those from their home base or donor country, and the operations of NGOs create local employment and transfer of technology and know how. So, what is unholy about the operations of the NGOs?

To conclude, there is not much that is unholy or immoral about FA. So long as the FA activities are mutually consented to, respect the laws of the land and the terms of the contracts, and are not designed to benefit the donor countries and institutions at the expense of the recipient country counterparts, the perceived unholy alliance is just that, imagined, not factual, and the allegations are likely spawned by political opportunism or an inherent philosophical intolerance for foreign practices and institutions.

The writer is a Professor of Practice in Finance at McGill University, Montreal, Canada. Email:

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