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Foreign aid effectiveness and Bangladesh

Foreign aid effectiveness and Bangladesh

Noted political philosopher Richard Miller once critiqued foreign aid as a 'tool' of the world's great powers, who are not driven by a desire to help the poorest, rather they are interested in "using aid to cajole, support and threaten [in a way] that guarantees volatility as challenges and opportunities change location over time". Such notions are deeply embedded in the aid effectiveness discourse.

The concept traditionally refers to the effectiveness of foreign assistance in economic development of a country. The conventional focus of foreign aid has been poverty reduction. However, in recent times, the focus has shifted to multidimensional issues of development, especially social and human development aspects. In gauging aid effectiveness, other than the 'motivation' [of donors] debate, there is another fundamental problem--'attribution'. It is ever more difficult to establish any causal connection between aid and development outcomes of recipient countries. Though donors in general use some criteria to review aid effectiveness, which include-- relevance of aid, efficiency and efficacy, measuring aid effectiveness has always been a bone of contention.

Bangladesh's emergence as an independent, sovereign state in 1971 came with great devastation and destruction resulting from nine months' bloody war of liberation. The country, therefore, had to significantly rely on foreign assistance since its early days. According to the Ministry of Finance (MoF), Government of Bangladesh, the country received about $69 billion in grant and loan during 1971-2016 against commitments of about $99 billion. Though the reliance on foreign aid has been drastically reduced over the years, a sizeable portion of the development budget of the country still comes from external assistance. For instance, in 2015-2016 fiscal year, about 34 per cent of Annul Development Programme (ADP) undertaken by the government has been financed from foreign aid. With fast economic growth, there is also a thrust for mobilising more development funding. From 2010-2016, approximately $32 Billion aid agreements (commitments) have been signed with various donors and development partners, while only $17 billion was disbursed. The contribution of foreign aid in development programmes illustrates the enormous significance foreign aid bears in Bangladesh's socio-economic development. There are, however, debates as to the effectiveness of aid, or how much of a country's progress or development successes can be attributed to foreign assistance. This is even pronounced especially when there are conflicting evidences in many countries that foreign aid did more harm than good. It is therefore imperative to look at many dimensions of aid effectiveness.

While donors are upbeat about the importance of foreign aid in the recipient countries, measuring the extent of aid's efficiency, efficacy and impact is a herculean task. Any social or economic development programme usually draws funding from multiple sources; hence, attributing success to one or the other is a difficult task. Besides, there are compelling arguments as to why aids can be rendered 'ineffective'. If aid is too small and erratic, it may not have any significant impact on the country's economy. On the contrary, if aid is too large, it can also lead to various other economic problems-- it can hit the country's absorptive-capacity constraint, leading to delays and inefficiencies in aid utilisation. A large inflow of foreign assistance may also lead to economic pathologies known as Dutch disease-- aid causing an appreciation of the real exchange rate thereby impeding the expansion of exports and growth of income. Conditionalities imposed by donors on national governments also impede the homegrown solutions thereby inviting unintended consequences.

Bangladesh traditionally attracted donor funding in human resource development, environmental management and gender equity, integrated rural advancement and private-sector growth, infrastructure, manufacturing and services. However, increasingly, in recent years donors shifted their gears towards more efficient institutions and governance aspects. While interventions in economic and social sector development tackles less-sensitive economic and social policies and may produce tangible outcome, the governance interventions are very complex, politically sensitive, and directly intervenes in the social contract between the citizens and the state.  Hence, the governance reforms are unbelievably slow and gradual and the impacts are not immediate or tangible. Besides, measuring institutional or governance performances is more challenging than measuring an infrastructure project.

In general, evidences suggest that Bangladesh has done reasonably well in macroeconomic management and coping with natural disasters. However, its performance has been remarkably weak in public finance management, tax collection, procurement and financial controls. There is a significant lacking in human resources development, and successes in education and health sectors service deliveries are questionable. The serious bottlenecks in physical infrastructure (i.e., electricity, power and transport) have undermined efforts in private sector development. The recent years have demonstrated big scams and corruption in financial institutions (public and private alike) that put the entire financial sector at risk. Therefore, it can be reasonably argued that the focus of aid on governance and institutions bore too little fruits -- in some cases the situation has rather aggravated.

There are competing hypotheses as to why some donor-funded projects 'failed' to have any significant impact, especially on governance and policy issues. One argument is that there is a lack of trust between the government and the donors leading to ineffective policy choices that the government often undertakes 'reluctantly'. As the government seeks project funding, it has to agree with the terms pushed by the donors, thus the donors often enjoy a disproportionate influence on policymakers. Nevertheless, since the government lacks 'ownership' of ideas forwarded or pushed by donors, the initiatives barely sustain in the long run. Such externally imposed conditionalities also constrict policy autonomy of the government.

Experts argue that the aid recipient countries also suffer from absorptive capacity constraints, meaning that there are limits to the amount of foreign assistance they can productively utilise. Whether through binding capacity constraints or diminishing competitiveness, the effectiveness of aid can considerably decline with its volume increasing. Another less-talked-about but a distinctive flaw in aid governance is the unintended harms caused by foreign assistances. Nobel Laureate Angus Deaton strongly critiques that foreign aid undermines the social contract that holds countries together by inserting donors into the relationship between states and citizens. In countries lacking strong impersonal institutions, such dynamics could further weaken them if the policies are not carefully chosen or if the policies do not reciprocates with what is required in a given socio-political reality.

It is possible to funnel funding in areas which is 'doable' and can bring immediate results, while there are many areas where producing a robust connection is a tough task. But aid can be effective under certain conditions. Recent empirical evidences from developing countries suggest that foreign assistance can work effectively if certain conditions are met. First, if such assistance can augment limited domestic savings. Second, if the aids are utilised to finance critical capital requirements and imports of raw materials. Third, if the aids facilitate the development of human capital and the promotion of domestic capacity. One should bear in mind that these are not a panacea or a magical formula. There are myriad exogenous factors that can still determine any outcome deriving from external assistances. However, adoption of these approaches can increase the likelihood of the effectiveness of foreign aid.

Dalia Rahman, Chairperson, AGROHO

Published:  December 04, 2017 18:21:14, The Financial Express