19 Nov 2015

Development Aid: A puppeteering game?

Alicia writes*

For centuries, less-developed countries have bowed at the feet of their more economically developed counterparts and begged for aid, but this often comes with strings attached. When the recipient country solely relies on the donor country for goods and services related to aid-financed projects, and when grants are given only after the recipient country meets the conditions set by the donor, this is referred to as tied aid. The most archaic form of this transaction is known as, performance-based aid. This term is straight forward, whereby the recipient of this aid is based on the extent to which they are capable of meeting the conditions. This type of aid is an incentive for the host country to make political and economic reforms that not only benefit their country but the donor country as well.

The main problem with performance-based aid is that it ignores the sovereignty of the decision making processes within the host countries. By agreeing to this type of aid the recipient country may be ‘selling its soul’ without even knowing it. The conditions set by donor countries have the ability to expand over the hosts’ investment policies, trade regulations and government structure- core elements which define a nation. Additionally, tied aid can sink the recipient country further into debt and/or force them to adapt inappropriate technologies and infrastructure that may not be conducive to their environmental, social or economic needs. Although less economically developed countries may be trying their best to advance by relying on tied aid, it is perhaps impossible to grow and develop sustainably with another country pulling the strings.

Bottom Line: The desperation of blindly accepted aid can undermine the self-determination of developing countries and instead has the potential to turn them into puppets of their donor countries.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.


Olivia K said...

Hey Alicia,

Even though I agree that the tied aid programs you describe can undermine a country's sovereignty, I am wondering what alternative you suggest? I don't think that traditional forms of (monetary) aid without any requirements attached to it can be a viable alternative, so which form of aid do you think is would be preferable?

Dennis M. said...

Hey Alicia, Hey Olivia,

You point at a very interesting and relevant problem. What I believe to be important, and I am sure you would agree, is to reduce the differences in the negotiation positions. I admit that this is easier said than done, but usually donor countries do not help developing states simply out of generosity. As you point out, they often expect something in return. Therefore, strengthening the (political) institutions of these developing states could be one way to give these nations greater power in negotiations in the long run, so that they will no longer see themselves in a position where they have to accept the harsh conditions of some donor states. Resultantly, one might be able to say that the stronger these nations’ institutions become, the more they are able to gain (back) parts of their sovereignty.

Yeming said...

Hey Dennis, I do not really understand what you are suggesting. The position on the negotiation table of the recipient countries in relation to the donor countries is indeed inferior, decreasing this seems beneficial, however I do not get how this would change the problem of 'tied aid'. This is because aid will always happen when one country is inferior compared to the other, such that aid-receiving countries will never really have much bargaining power, besides accepting or rejecting aid.

Moreover, you propose strengthening the institutions in the recipient countries, such that they 'are able to gain back parts of their sovereignty'. However, is this also not what tied aid often imposes as a condition? If countries are able to build better institutions by themselves, then why would there be a need for aid? Seems like self-induced development is better than aid-dependent development. Also, if a country is able to reform its political system from, say, an extractive system to a more inclusive system, then I would doubt that aid wouldn't be tied to something else. I think that donor countries who engage in tied aid will always impose conditions on their aid, because many developing countries have a long way to go before they are on a level playing field with donor countries and as such donor countries keep being able to exercise their foreign policy through aid.

Yeming said...

Hi Alicia,
On your blogpost in general, I think the topic is very interesting and I am wondering what you think is a viable alternative to this solution. First of all I think that recipient countries should better evaluate the conditions that are tied to the aid. As such, they should improve their predictions of the possible effects of accepting tied aid. Secondly, I'd like to describe how Chinese aid works, which as Deborah Brautigam argues, the West can still learn a lot from. First, their aid is much less conditional than Western aid. Secondly, Chinese aid is more focused on infrastructure projects and setting up (private, manufacturing) industries. Thirdly, because of a mutual benefit principle, the Chinese often encourage Chinese business to move offshore (through subsidies or overseas economic zones) and undertake development projects that are initiated through development aid. As such the Chinese economy also benefits from providing aid to developing countries. Fourthly, the Chinese avoid local embezzlement and corruption by rarely transferring aid to African governments and instead disburse aid directly to Chinese companies who do the projects.

This way of untying aid while still benefiting from it through fostering investment of Chinese companies in Africa is beneficial to both sides and is similar to what Japan did in at the end of the 20th century in Southeast Asia. Southeast Asia’s “miracle” was underwritten not only by good policies, but by Japanese investment, and Japanese aid was a partner in this. These investments boosted manufacturing prowess, attracting Japanese firms to go offshore.

Maybe it is interesting for your paper to compare Western and International Financial Institutions (IFIs) aid to the Chinese model of aid, with special regard to constitutionality.

Dilara said...

Hi Alicia,
The topic that you are touching upon is very interesting and relates to one of the overarching discussions we had in class in regards to increasing preference of economic growth by donor countries which may have impeding effects on microeconomic development. Adjustment loans for instance, created more difficulties for some developing countries that adopted a socialist economy after their independence. With the adoption of the market economy, the requests by donor states were satisfied in exchange to aid. while we have seen some examples of growth in GDP over the years for countries like Tanznania and Brazil (from Monica´s case study on Bolsa Familia), quality of social sector (education, healthcare) did not show much improvement.

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