IS FREE AID FREE? International Affairs Forum Vol 4, No 2, December 2013.

Synopsis  An important factor that needs to be taken into account in analyzing development aid effectiveness (distinguishing it from emergency or humanitarian aid) is its ongoing opportunity cost. This can seriously complicate the measurement of its impact. Opportunity cost for a donor is a small cut in its national income which could have been used for something else like improving schools or providing support to the poor at home. What about the opportunity costs to the recipient country? These costs include both the direct transaction costs to the country of absorbing aid such as the highly time-intensive negotiations and learning processes required to deal with donors and the extensive indirect/ “systemic” costs of aid in terms of societal, institutional, cultural and economic development (e.g. resource curse effects) that corrupt  capacity rather than building it. With these significant costs its impact can easily be negative, something which is not captured in individual project impact studies regardless of their level of sophistication.

Full article at: http://www.tandfonline.com/doi/full/10.1080/23258020.2013.876865#.U7FnMv0U-_I

BRICS AND DEVELOPMENT AID: COULD CHINESE AID BE ANY DIFFERENT?

International Affairs Forum July 2013

Of the BRICS nations none has affected development aid as critically as China. The Chinese aid programs have attracted critics who claim its goals focus on access to oil and other resources and defenders who point to its improved concept of aid and the impact of its concessional loans. In April 2011, the Government finally produced a policy paper on foreign aid that outlined its objectives, scope, and principles for assistance.  The question is – can China’s large donation stream really in the end help the internal development of recipient countries?

On 24 March 2013, new Chinese President Xi JinPing gave a speech in Dar Es Salaam, Tanzania, in which he tried to explain the rapidly increasing Chinese exports to Africa and Chinese imports of African raw materials which are blamed for wiping out African manufacturing and causing African economies to revert to a colonial structure. He also confirmed an earlier promise by President Hu Jintao of $20 billion in loans over three years plus extensive training assistance, the latest expansion of China’s aid program which has risen from a negligible amount in 2000 to over $20 billion a year worldwide in 2012 – 44% to Africa, 36% to Latin America, and 20% to South-east Asia. The total aid and investment flows to Sub-Saharan Africa are larger than US development assistance, while annual Chinese investment flows to Africa have been nearly as much as US direct investment.¹ 

China was formally recognized as a donor at a major Aid Conference in Busan, South Korea in December 2011. But it only reluctantly acceded to the OECD aid philosophy, agreeing to join a watered down Conference Declaration only after strenuous efforts (notably by Britain) to convince it to participate. China provided aid in the past to projects such as the construction of the Tanzania–Zambia railway in the 1970s, but its formal aid initiative dates from 1993 when it set up a foreign aid fund. In 1995, the Export–Import Bank of China began to provide low-interest loans to developing countries. In 2000, the Forum on China–Africa Cooperation was initiated; and in 2006, China announced its arrival in Africa by stating that it would commit US$20 billion over 3 years to support Chinese exports and business in Africa, a sum larger than that of any other donor to Africa, including the World Bank. In 2009, China further announced a plan to help Africa in climate change, clean energy, agriculture, health, and education and a further US$10 billion in concessional loans. It also to some extent came into line with the OECD by allowing zero-tariff treatment on 95% of exports from African countries with which it had diplomatic relations.

Chinese aid programs have attracted broad criticism (Tan-Mullins, Mohan, & Power, 2010). The main charges leveled have been: that its goal is primarily to gain access to oil and other natural resources; that its aid is often not truly aid but investment; that it makes corruption worse through lack of conditions and a willingness to deal with whoever holds power, undermining OECD Development Assistance Committee (DAC) donors’ efforts to promote good governance; that Chinese enterprises ignore environmental and social standards; that Chinese state enterprises investing in Africa use government subsidies that undercut African business; that its aid projects abroad rely on imported Chinese labor; and, that it is free-riding on debt relief provided by the OECD donors (Brautigam, 2010). The skeptical view was reflected in a study from New York University in 2008 (The Wagner School, 2008). It found that aid and investment were indeed primarily directed at raw materials and, secondly, at infrastructure. Oil comprises the large majority of Chinese imports from Africa and infrastructure financing is largely concentrated in Angola, Nigeria, Ethiopia, and Sudan, all of which have oilfields. Second, it charged that Chinese aid was motivated by political objectives such as the isolation of Taiwan. Third, Chinese aid and investment is used to open up foreign markets for Chinese goods and help Chinese companies invest in foreign markets.

A more favorable study (Lum, 2009) found that much of Chinese lending has been in the form of business transactions between African and Chinese enterprises or purchases of stocks or bonds in African companies. But China has been open about this (referring to it as concessional loans). Furthermore, while Chinese investment and aid has gone to mineral industries, it has also moved across sectors. China’s willingness to deal with corrupt leaders (e.g. Mugabe in Zimbabwe) is changing and it has also played constructive roles such as mediator in the Sudan. China’s own labor market is tightening and its pollution problems are worsening, so that its labor and environmental laws are being modernized. Finally, with regard to free-riding on OECD debt relief the majority of China’s projects are in resource-rich countries where debt relief has been insignificant, and China claims to have itself offered debt relief equal to about a sixth of the value of its concessional and interest-free loans.

Perhaps partly to counter the widespread speculation about its intentions the Chinese government finally produced in April 2011 a policy paper (“white paper”) on foreign aid (Information Office of the State Council, 2011). In this it reported that the majority of its “concessional loans” have gone toward infrastructure and only 9% for the development of energy and resources such as oil and minerals. In response to the criticisms concerning the use of Chinese labor, the report cited technical-training programs and the employment of local workers. In response to charges of lack of transparency it provided a list of previous aid policy statements made at major UN conferences. In August 2010, the government held a national conference on foreign aid to define aid strategy. As the white paper put it, China’s foreign aid thus entered a new stage. China’s resources, it said, are provided as grants, interest-free loans, and concessional loans. Each category has a degree of subsidy with concessional loans having the smallest subsidy (2–3%), equivalent to International Bank for Reconstruction and Development (IBRD) loans with long repayment and grace periods. The first two offerings come from China’s state finances, while concessional loans are provided by the Export–Import Bank are used mainly for infrastructure. By the end of 2009, according to the white paper, with total funding increasing by nearly 30% per annum, China had provided approximately US $32 billion in aid and investment to foreign countries.² The Official Development Assistance component (grants and interest-free loans) amounted to US$22.5 billion of which more than a half went to Africa.³

The white paper also sets out principles for China’s assistance. Its aims, says the paper, are to help countries build up their self-help capacity; to foster local personnel and technical forces; and to build infrastructure and domestic resources. It will impose no political conditions, and will respect recipient countries’ right to independently select their own path of development. It will never use foreign aid as a means to interfere in a countries’ internal affairs nor gain political advantage; it will adhere to equality, mutual benefit, and common development; it will foster mutual help between developing countries; it will keep pace with the times and pay attention to reform and innovation; it will be adaptive; and it will pay attention to lessons of experience. Additionally, China has announced flexibility on loan repayment; a promise to replace deficient materials; and, finally, Chinese experts will have the same standard of living as the experts of the recipient country.

The undertakings are, of course, no more than good intentions. It is unknown whether China is any better at living up to its principles than the OECD donors. Some of these principles, such as the intent to avoid making other countries dependent on China, are untenable since many African countries are increasingly dependent on China as their trade balances with China remain in deficit and their capacity to export manufactures is reduced. With regard to the Chinese undertaking to use and train local labor there is also ambiguity since the white paper itself states that over 2000 “complete projects” have been delivered in which the Chinese have been responsible for the process from study to completion, bringing in Chinese labor as well as all or part of the equipment and materials.⁴ It is, however, not clear what proportion of total assistance the “complete projects” comprise so it is difficult to gauge their importance. It is also difficult to gauge the amount of funding going to minerals and energy because the white paper reports fully only in the case of concessional loans, of which only a small proportion have gone to minerals. It may well be that a large proportion of the grants and interest-free loans went to energy and minerals.

The Chinese government’s own policy paper therefore leaves room for doubt about how it will live up to its declared principles. But leaving caveats aside, China’s aid policy has characteristics that mark it out. It is explicit on self-determination, lack of conditions, and respect for sovereignty, which is a more promising start than that which enshrined the earlier Western assistance programs. The promise that Chinese workers will live in the same conditions as local workers is an important gesture toward the gap between expatriate and local lifestyles that helps to fuel excessive consumption and corruption, although this has been offset by instances of miscommunication and distrust between Chinese and local workers. Finally, and most importantly, if lighter conditionality makes it easier to do business, albeit that it carries other risks, then Chinese assistance may significantly reduce the large transaction costs of OECD Aid.

The attitude of Africans to the Chinese presence is mixed, with generally favorable elite opinion but skeptical popular views which wait to see whether China lives up to its ideals after some initial missteps.⁵ The favorable opinions may reflect the fact that it is easier to understand simple business motives that may be superficially similar to those of nineteenth-century colonialism, but which have critical differences such as the lack of a colonial or military presence and a more level playing field for negotiation than existed when the markets were controlled by a few European multinational firms.⁶ If Chinese assistance has mineral or agricultural resource-extraction objectives, then commercial motives are possibly more transparent and understandable to the counterpart country. It is neither surprising nor problematic in principle that a rapidly industrializing economy with one-sixth of the world’s population needs to procure resources. Much more important are the terms of the procurement. The Chinese tend to come to do business armed with checkbooks and contracts (the “CC” approach) whereas the OECD donors look for participation, deliver papers, and set conditions (the “PPC” approach). The first looks more like an arms-length trade, while the second is more a complicated embrace with opaque transaction costs that negate the donors’ claims of transparency.

If “real” as opposed to “faux” transparency is an indicator of better aid, the Chinese may be making a good start. That, however, does not, of course, address the much more fundamental issue of whether foreigners, Chinese or Western, can create economic progress in other people’s countries by making donations, an issue that is the principal concern of my book. In China’s case the donations to poor economies also have to be seen against the enormous revenues (and profits) from sales by Chinese enterprises to poor economies, arguably boosted by an artificially low Yuan exchange rate over the past few years. If, in addition, even with a more equal relationship, foreign donations are an unsustainable approach to the social and economic development of an economy and society, then it does not necessarily matter whether they come from China or the US. In these circumstances, the aid which is provided by BRICS countries to poor countries in Africa will not make much difference to the prospects for development in Africa even if it is provided on better terms.

Notes

1. In comparison, US aid to Africa was US$4.7 billion in 2007 and US$5.2 billion in 2008. Similar amounts came from the UK and France.
2. In local currency terms this was 256 billion yuan, converted at 8 yuan to the US dollar. Total funding included US$13 billion in grants, US$9.5 billion in interest-free loans, and US$9 billion in concessional loans.
3. By the end of 2009, China’s aid and investment was distributed to Asia (32.8%), Africa (45%), and Latin America and the Caribbean (12.7%). The remainder went to Oceania and Eastern Europe.
4. These projects are broadly across-sector, especially in the category “public facilities” which consist of one-third of the total, and are well represented also in transport and light industry (25% of the total).
5. “Africa and China: Issues and Insights” conference, Georgetown University, November 7, 2008.
6. For example, Dambisa Moyo in Dead Aid writes, “China, on the other hand, sends cash to Africa and demands returns. With returns Africans get jobs, get roads, get food, making Africans better off. … The secret of China’s success is that its foray into Africa is all business” (Moyo, 2008).

References

Brautigam, D. (2010). The Dragon’s gift: The real story of China in Africa. Oxford: Oxford University Press.
Information Office of the State Council. (2011, April). China’s foreign aid. Beijing: Author. Lum, T. (2009, February).
China’s foreign aid strategies in Africa, Latin America and South East Asia. Congressional Research Service.
Moyo, D.  (2008). Dead aid. London: Allen Lane.
Tan-Mullins, M., Mohan, G., & Power, M. (2010, September). Redefining ‘aid’ in the China–Africa Context. Development and Change, 41(5), 857–881.
The Wagner School. (2008, April 25). Understanding Chinese foreign aid: A look at China’s development assistance to Africa, Southeast Asia, and Latin America. New York, NY: New York University, Wagner School.

IMPACT ASSESSMENT AND RCTs

Millions of research dollars are being spent on developing methodologies for evaluating project impact, largely because of the pressure from the “aid effectiveness” movement (eg the organization ‘3iE’). A capacity for evaluation  is being built into the design of many new donor aided projects, so much so that the ‘evaluation tail’ often wags the ‘project dog.’ Evaluation junkies often don’t realize that the modifications that they require in a project’s design in order to allow measurement of impact can feed into the ‘lack of local ownership’ issue which itself damages the success of many projects. (I am involved in one right now).  But quite apart from that, the thing is that impact evaluation is often inherently unable to determine why a donor-supported project fails or succeeds (even if, unusually, it is designed well, the econometrics are done right, the participants cooperate and enough there’s money to pay for it all). This is because it assumes that the reasons for success or failure are mainly project related and ‘technical’. But in many situations they are not! They relate to systemic issues of external assistance – the effects on economic structure, governance, accountability, capacity, incentives and behavior created by large amounts of external cash and resources being injected into a poor country often with diverse and often confused objectives. 

It might be better to largely close down the impact evaluation industry and focus attention on how to address the institutional and accountability factors that prevent new projects succeeding. Thus, instead of taking the institutional environment as a given (because as it were, ‘nothing can be done to improve institutions in the short term’) and trying to assess projects from the technical point of view, perhaps we should instead be taking the projects as a given (because as it were, ‘they may be bad or they may be good but nothing that current aid  practice can do will improve that’) and instead focus on how donor projects can promote institutions (which will probably require doing a lot less of them). The problem of development aid is not one of whether individual projects do well (some do, some don’t) – it is one of whether the whole project of external assistance, or charitable giving, is consistent with the systemic challenge of eradicating poverty.

FOREIGN AID AND THE DIASPORA

A main interest in this blog is about the World’s diasporas and how their capacity compares with development aid. My starting question is this: is it really credible that an alien, paternalistic, public  sector driven,  bureaucratic  process, fragmented into dozens or hundreds of projects in one country sponsored by large numbers of donors of different sizes and motives, opaque decision making, complex  procedures and varying degrees of knowledge (and ignorance) about what they  are doing, could significantly  accelerate economic growth in someone else’s country?  Commonsense would surely suggest that it cannot, and indeed there has been no research at all that suggests that an injection of aid resources is associated with a high rate of growth, and much that has claimed a weak, nonexistent or even negative impact. Outside the Government sector (the NGOs) there is also an increasing realization that all is not well as tens of thousands of small, often poorly directed, agencies compete for charitable funds to spend on the world’s poor, often with conflicting ideas and little knowledge. This whole apparatus is simply inconsistent with what is needed to eradicate poverty, accelerate growth or mobilize capacity anywhere.  The need of the citizens of the poorest countries to emerge from poverty are vastly more urgent than can be handled by such a cumbersome, time-wasting, dysfunctional process which often infringes on their sovereignty and responds more to political interests at home.

So – what about the role of the diaspora World’s diasporas ?  I am not proposing that these are the answer to economic development – but they are a better option than development aid in many important areas of small to medium scale investment –  in industry, services, finance, education and training, health and community services, urban development,  transport, water supply etc. The areas where aid is needed are for global problems such as economic crises and international financial stability, global health, nutrition and pest invasions, alleviating the effects of climate change, and major cross-border infrastructure. Given its rapid rate of growth and increasing dynamism (Somalia for example is a country where diasporans were flocking in well before the donors started) and its increasing direction towards investment accompanied by expertise, plus above all its low transaction costs, lack of politics, cultural affinity with its recipients, and clear objectives,  it responds to many of the issues that severely limit the effectiveness of aid. If development aid was reorganized, cut back and made relevant to country capacities it might be able to provide a complement to diaspora initiatives. But at the moment  there is little prospect, despite the many pompous declarations over many years from many international conferences on aid effectiveness, that it will or can reform itself in this direction.