Author : Vivan Sharan

Originally Published 2013-11-18 09:16:04 Published on Nov 18, 2013
By using the markets, developed countries still have a lot to offer the international community, particularly the developing world. However, this would involve a fundamental recast of traditional aid into a wider framework.
Traditional aid has no future
" The events of September 09, 2001 shook the world. They reaffirmed the fact that domestic security of nation states in the West is also a function of external stability in geographies near and far. While globalisation has created wealth, it has done so disproportionately. Hard data shows that the world is more unequal now than ever before. Aid has traditionally been projected as an instrument of support or relief for those left at the so called economic 'periphery' - and perhaps has even been deployed in the same spirit, to bridge the sharp cleavages created by the international system. Ravaged by poverty, hunger and disease, African countries have been the 'recipients' of around US$ 2 trillion of such aid since 1950.

In 2005, 15 countries of the European Union (EU) agreed to achieve a target amount of 'Official Development Assistance' (ODA) by 2017, a term which the Organisation of Economic Cooperation and Development (OECD) defines as the concessional part of the resource flows towards developing countries. An equivalent spending target of 0.7 per cent of Gross National Income (GNI) on ODA was first pledged in a UN General Assembly Resolution in 1970, by a group of 35 economically advanced countries, without specific timelines.

However, the Global Financial Crisis has left advanced economies with very little fiscal room to manoeuvre. National budgets have shrunk, and spending decisions are under scrutiny. The situation is particularly severe in the EU, which has seen bilateral aid budgets stagnate at 2012 levels. Accounting for inflation, this means there is now a year on year decline in spending on ODA and the chances of achieving the 2017 target are remote. As growth and job creation dwindle, the case for increased spending on external assistance is becoming increasingly politically difficult to navigate for EU leaders. What does this mean for the future of traditional aid?

Traditional aid defined as ODA has largely been the remit of OECD countries. At the same time, there is little doubt that the global economic centre of gravity now lies somewhere to the East of Europe. Concomitantly, the aid discourse emanating from the West is now underpinned by two narratives. The first is that 'emerging countries' must share commensurate aid 'burden' with OECD countries. And the second is that this burden sharing must take place within suitable frameworks of accountability and effectiveness which have been developed and refined by OECD countries. Viewed from India, this discourse is redundant.

India's history of external development assistance can be traced back to its independence from British rule in 1947. Its programmes were driven by a principle of solidarity with postcolonial states in Asia and Africa, and not a donor-recipient framework that is characterised by 'tied aid'. India's development assistance strategy was shaped by its political stance in global matters, such as 'Non Alignment' with geopolitical blocs. While normative principles were never enshrined as policy, India's aid was, and continues to be premised on mutual benefit rather than burden sharing. Similarly, 'South-South Cooperation' is a wide and symbiotic concept that circumscribes India's development cooperation, and encompasses trade and investment flows.

Over the past decade or so, rapid economic growth has made India a prominent stakeholder in global political and economic governance system. A self aware India, no longer accepts tied aid, and is deploying upwards of US$ 1 billion annually through its development cooperation programmes. In 2012, to maintain strategic consonance with its foreign policy objectives, the Indian Ministry of External Affairs created the Development Partnership Administration (DPA) to manage development assistance programmes. The DPA has centralised within its fold, various functions that were previously disaggregated under multiple institutions and departments.

One of the main instruments of India's development cooperation, which is coordinated through the DPA, is the Lines of Credit (LoC) scheme. Under this scheme, a concessional rate of interest is extended to overseas borrowers for importing goods from India, by the Indian EXIM bank. The difference between the market rate of interest extended to borrowers and the concessional rate - is provided through the government's budgetary resources. However, unlike other forms of development assistance, LoCs are relatively unconstrained by the national budget, since the EXIM bank raises funds for them from international debt markets.

In 2012, the total amount of open LoCs was already over US$10 billion. While LoCs are a key instrument for development cooperation, they are fundamentally market based and demand driven. These elements make it the perfect tool for leveraging relatively modest sums of money through the markets, and for benefiting both countries involved. They are simultaneously a form of export promotion for domestic industry, and concessional lending which can fuel consumption and growth in countries that choose to borrow. The Indian experience shows that while LoCs may not check all the boxes of aid effectiveness since all their real impacts are not directly measurable, they cannot be discounted as credible and sustainable instruments of foreign aid.

Markets tend to get a lot of bad press during financial crises. Yet only markets offer solutions for economic rebalancing at the sheer scale and urgent pace at which it is required. Crisis or not, developed countries cannot wish away their historical responsibility and should not obfuscate the aid discourse by alluding to the incumbent responsibility of 'emerging' countries. The new stakeholders in the international system, including India, are not easily compelled by the rather misplaced set of assumptions that underpin this discourse. And indeed the accompanying dissonance between responsibility sharing and burden sharing is not easily resolved unless a truly inclusive, innovative and flexible global partnership can be instituted.

By using the markets, whether for programmes on trade similar to the LoC scheme, poverty alleviation through impact investments or even climate change mitigation through pooled funds that can be leveraged through market instruments; developed countries still have a lot to offer the international community - particularly the developing world. However, this would involve a fundamental recast of traditional aid into a wider framework, wherein there would be opportunities to learn and work with the global South.

(Vivan Sharan is an Associate Fellow at Observer Research Foundation)

Courtesy : The Global Policy, November 18, 2013

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Vivan Sharan

Vivan Sharan

Vivan was a visiting fellow at ORF, where he supports programmes on the ‘new economy’. Previously, as the CEO of ORF’s Global Governance Initiative, he ...

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