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Misconceptions about aid

Foreign aid evokes much scepticism in Pakistan. Many argue that it creates dependence, undermines sovereignty, increases debt, encourages corruption and discourages local initiative. They find Pakistan`s use of foreign aid shameful, arguing that a country its size should rely on local resources.

Pakistan`s tax-to-GDP ratio (nine per cent) is admittedly low even regionally and must be increased by at least five per cent. However, this will not immediately eliminate the need for foreign aid. Pakistan`s budget deficit runs around seven to eight per cent of GDP annually.

If it increases its tax-to-GDP ratio and eliminates governmental losses and corruption, Pakistan could break even fiscally. However, Pakistan`s current expenditures on critical sectors like health, infrastructure and disaster management are abysmally low.

So, Pakistan spends around two per cent of GDP on education annually while Malaysia spends six per centplus. Financing these sectors sufficiently would cost at least five per cent of GDP, producing a budget deficit again.

Thus, foreign aid will remain important for Pakistan at this stage of development even if it miraculously attains exemplary fiscal management. Nor is that something shameful, for World Bank information shows that even countries more economically advanced and sensitive about sovereignty, e.g. India, China and Israel, still accept aid. However, they utilise it smartly. Instead of rejecting aid completely, Pakistan should also do the same, based on a dispassionate analysis of different forms of aid.

Foreign aid includes all non-market inflows from for-eign sources based on diplomatic or humanitarian considerations, e.g. grants or soft loans for budgetary support or project implementation, easy transfer of technology and preferential market access.

Pakistan presently receives several different categories of aid, including soft IMF loans for balance of payment problems; loans and grants by multilateral and bilateral donors for government projects; and grants given by such donors and private sources to NGOs.

Of these, Pakistan should certainly aim to eliminate IMF loans by building large foreign exchange reserves, not only because of IMF`s controversial conditions but also because, unlike other forms of aid, IMF aid use reflects serious financial crises.

The other aid categories are not problematic fundamentally but only in the way they are utilised. So, with project loans to the government, the main problem is not generating sufficient returns for repayment in foreign currency. With such loans and even grants implemented through the government, there is the additional risk of poor implementation due to the highly bureaucratic nature of both those donors and the Pakistani government.

However, there is nothing in the DNA of such aid which makes it inherently non-beneficial. Whatever problems exist with them can be eliminated through better management.

Some bilateral aid also comes with controversial political conditions. However, among Western donors, this issue is largely confined to American aid, which also includes higher overheads and self-serving procurement rules.

Unsurprisingly, even the Centre for Global Development, a US-based NGO with close links to the USAID, ranks America 19th out of 27 major donors in aid quality on its 2012 `commitment to devel-opment`index.

However, accompanying American aid`s low quality is its huge quantity since the US is the largest bilateral donor in absolute terms, though its generosity (foreign-aid/GDP) ratio is lower than that of other Western donors.

Moreover, America tends to be flexible faced with hardnosed negotiations. Thus, the answer is not refusing American aid but negotiating tenaciously. In being rightly wary of American aid conditions, Pakistan must also remember that Chinese and Saudi aid may also have implicit harmful conditions.

Finally, there is the aid of `pesky` NGOs, whose loud, critical advocacy work annoys governments. People accuse international NGOs of spreading Western values and harbouring Western spies, e.g. as with Save the Children in Pakistan recently.Because of these suspicions and stinging NGO advocacy work, governments clamp down on NGOs, ostensibly to make NGO aid more effective. However, hardly any Third World government has sufficient capacity to help enhance NGO programme quality and their monitoring efforts actually reduce NGO effectiveness.

Given the thousands of NGOs around globally, sweeping statements in favour of all NGOs are unwise. Reputable international NGOs all sign up to credible international codes and coordination/accreditation structures, which have principles prohibiting NGOs from undertaking political and religious activities.

NGOs signing up to such mechanisms are extremely unlikely to engage in nefarious activities. Certainly Save the Children is among the most reputable and principled NGOs around and I cannot believe the charges against it unless I see strong evidence personally.

Rather than engaging in counterproductive, heavy monitoring during NGO oper-ations, governments would do better to check while admitting NGOs initially into the country whether they are signatory to credible international NGO mechanisms.

Even the best of NGOs are generally poorly managed entities, due to their insecure funding base, shortage of skilled staff, high turnover and difficult, isolated working areas.

Despite these problems, they provide better service to highly marginalised communities than governments and markets, daring to go into isolated, war-affected areas. In the more than 100 villages that I have recently visited from Fata to Thatta, people generally feel that NGO work is much more extensive, participatory and transparent than that of other actors.

One must be realistic about what aid can do for Pakistan. While no country has ever developed due to foreign aid alone unless its own governance standards were good, American aid has been a critical secondary contributory factor in South Korea, Taiwan and Israel`s rapid development.

However, it was not budgetary or project support which was most helpful but the preferential transfer of technology and market access that America gave them to help establish high-tech industries.

This type of aid is not on offer to Pakistan. Thus, foreign aid cannot help it achieve Koreanstyle spectacular economic growth even if Pakistan spectacularly improves governance.

Aid, though, can play a less visible, yet important role in helping maintain infrastructure and improve abysmal social indicators. For Pakistan`s marginalised millions otherwise deprived of help, even this aid is better than nothing.• The writer is a political economist at the University of California, Berkeley.


Niaz Murtaza, "Misconceptions about aid," Dawn. 2013-01-08.