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Arvind
Panagariya Recent
calls for the expansion of the Official Development Assistance from 0.22
per cent of the donor countries’ GNP to 0.7 per cent deserve a closer
scrutiny. This is doubly essential because those making the calls most
forcefully, notably the World Bank President James Wolfensohn, are
themselves engaged in the distribution of aid and, hence, face a potential
conflict of interest. At
high profile conferences held at equally high frequency, you can hear
continuous and repetitious affirmation of the Millennium Development
Goals, followed by admonition to the donor countries for their
less-than-generous contributions. Missing from the exhortations, however,
is a clear roadmap of precisely how the extra funds are to be spent. The
Pearson Commission had first recommended the 0.7 per cent target in its
carefully crafted 1969 report Partners in Development. With more than 30
years elapsed since then, the donor countries are much richer today than
in 1969 and 0.7 per cent of their GNP a much larger sum. In
parallel, poverty has declined significantly, with many countries in East
Asia completely eliminating it. Nevertheless, many in the aid community
have chosen to coast along with the 0.7 per cent target without
re-examining its relevance under the changed circumstances. A
refreshing exception, however, is a recent paper by distinguished
economists Peter Heller and Sanjeev Gupta of the International Monetary
Fund. In the paper “Challenges in Expanding Development Assistance,”
the authors offer calculations that decisively lay to rest ANY claims that
the large increase in aid is required to outlaw poverty in the 49 Least
Developed Countries on which Wolfensohn and others focus tirelessly as
reasons for aid expansion. They conclude that if such a large increase in
aid is to be absorbed effectively, two thirds of it will have go to two
countries outside the LDC group, India and China. Not only do these
countries house half the world’s poor, they also have the necessary
absorption capacity. I
will argue shortly that even this solution to the aid-absorption problem
is unrealistic. But consider first the obvious problem in justifying the
0.7 per cent target as a means of alleviating poverty in the least
developed countries that have per-capita incomes of $500 or less. Meeting
the 0.7 per cent target would yield a whopping $175 billion in aid.
According to Heller and Gupta, spreading this amount evenly on a
per-capita basis across LDCs would result in aid flows ranging from 84 per
cent of GDP for Sudan to 302 per cent for Ethiopia. In every country, aid
would be several times its total government expenditure. The addition of “other low-income countries,” which have per-capita incomes between $500 and $800 and include such large countries as India, Indonesia, Nigeria and Pakistan, lowers per-country aid flows to LDCs but still leaves them well beyond their respective absorption capacities. Replacing the allocation criterion by the number of poor rather than total population does not materially alter the picture. Heller and Gupta conclude that the
only realistic poverty-based allocation consistent with the countries’
absorption capacity is the one that gives the lion’s share of ODA to
India and China. They calculate that if the allocation is based purely on
the number of poor, India would receive $73 billion and China $39 billion
and if policy effectiveness is given appropriate weight, India would
receive $40 billion and China $76 billion. Can
India and China absorb such large allocations? Contrary to Heller and
Gupta, even these large countries cannot absorb the proposed inflows.
Thus, consider just India. To maintain export competitiveness, the Reserve
Bank of India has had to purchase more than $10 billion worth of foreign
exchange within last one year, bringing the total foreign exchange
reserves to $57 billion. Even replacing all of the present capital inflows
other than foreign investment by aid, $40 billion in aid would result in
new inflows of $35 billion annually. Such inflows would lead to a huge
appreciation of the rupee and a collapse of India’s exports. The only
realistic option would be to retire the existing debt of $100 billion but
that too would be accomplished in less than three years. This
is only a part of the story. The advocates of aid tirelessly emphasise the
importance of good governance for aid effectiveness. Yet, they overlook
the adverse effects such mega sums of aid themselves would have on
governance. Unlike foreign investment flows, government disbursements of
aid inflows are not subject to the continuous market discipline. The
politics of aid makes it even less likely that countries such as India and
China would accept the proposed inflows. Donors can and do use bilateral
aid to promote their favourite domestic agendas and interests, sometimes
in ways that encroach upon the sovereignty of the recipient countries.
Likewise, multilateral aid is not costless and often comes with
conditionality. Even the World Bank’s IDA allocations are loans at
concessionary rates rather than pure grants and, thus, add to the
recipient country’s external debt. And not too long ago, the World Bank
and IMF temporarily blocked debt relief to Uganda under the Heavily
Indebted Poor Countries initiative because its President wanted to buy a
jet. Setting
the aid target without a broad roadmap of how such aid is to be spent puts
the cart before the horse. What the advocates of increased aid need to do
is to ground the aid target in a credible spending plan. In this respect,
Professor Jeffrey Sachs is to be admired for having linked his calls for
increased aid to an explicit plan to fight the health crisis in the Third
World. Unsurprisingly, his calls for additional aid are limited to the
modest sum of 0.01 per cent of developed countries’ GDP. The
idea that nations can be lifted out of poverty just by throwing enough
money at them belies the aid experience of the past fifty years. Countries
that adopted sound policies, irrespective of their aid status, have done
much better at poverty alleviation. Economic Times, July 31, 2002 |
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