The Roles of Aid in Politics Putting China in Perspective

Lancaster, Carol (2008a), George Bush’s Foreign Aid: Transformation or Chaos?, Baltimore: Brookings Institution Press

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Lancaster, Carol (2008a), George Bush’s Foreign Aid: Transformation or Chaos?, Baltimore: Brookings Institution Press.

Introduction (pp. 1-9)

Over the past seven years, the Bush administration has launched a transformation of U.S. foreign aid. No time since the administration of President John F. Kenney has seen more changes in the volume of aid, in aid’s purposes and policies, in its organization, and in its overall status in U.S. foreign policy. If “transformation” in politics is taken to mean fundamentally changing existing systems, President Bush has initiated one.

But the notion of “transformation” also implies radical change in pursuit of a broad new vision. Such a vision has been absent from the numerous changes in aid implemented by the Bush administration, leaving an aid system – already in considerable disarray – in chaos. However, the policy and organizational chaos characterizing U.S. aid offers the next administration an important and compelling opportunity to reshape U.S. economic assistance while engaging the emerging world of the twenty-first century.1

The view that U.S. aid in 2008 is badly in need of policy and organizational reform is reflected in the veritable blizzard of books, study commission statements, and congressional reports on aid published in recent years, especially in 2007 (see box 1-1). These efforts share a number of common concerns though the specifics of their policy recommendations are quite different.

These reports and studies reflect the extraordinary interest combined with considerable disquiet about foreign aid in the foreign policy and development communities. They mostly examine foreign aid from a particular policy perspective – for example, its relation to security or broader foreign policy issues or fragile states. This study adds to the aid discussion by examining U.S. economic assistance as a whole, analyzing in detail the array of recent reforms and the difficult issues they raise, and placing these changes and the manner of their implementation in a historical and political context. It agrees with many of the reports and commission that a major reform in U.S. foreign aid is urgently required, including elevating “development” in U.S. foreign policy in reality as well as in rhetoric. It considers the creation of a Department for Development has much to recommend it. But is also recognizes that a Department for Development is controversial, especially in the foreign policy community, and could be politically costly and time consuming to plan and implement for a new administration. It thus offers a “Plan B” that would improve the existing system but imply fewer political costs for a new administration, which will inherit a large number of urgent and difficult problems, domestic and foreign, that it will have to confront once in office.

Elements of a Transformation: Changes in U.S. Foreign Aid

Foreign aid is an instrument of U.S. foreign policy and sometimes of U.S. domestic policy. It is used to pursue a variety of national purposes, including providing humanitarian relief, furthering diplomatic goals, promoting development and democracy abroad, addressing global issues, supporting economic and political transitions, expanding export markets, preventing and mitigating conflict, and strengthening the weak states. Of all of these, promoting diplomacy and development have long been the most prominent purposes of U.S. aid, reflecting U.S. interests and values abroad and sustaining an often uneasy coalition of domestic support for aid-giving from the political right and left within the United States.

It is worth considering what I mean here by “diplomacy” and “development” as purposes of U.S. economic assistance. Strictly speaking, diplomacy includes the tools and tactics used to shape relations between countries. In this study, I shall take the liberty of using the term somewhat differently – to refer to the issues in U.S. relations with other countries that relate to U.S. national interests (primarily security and political interests) and U.S. leadership abroad. The specific diplomatic goals for which U.S. economic assistance has been used include containing the spread of communism, promoting peace (for example, in the Middle East and the Balkans) and fighting the global war on terror. In addressing these issues, U.S. aid has been used to strengthen friendly governments and their economies, to reward desirable behavior (for example, the provision of base rights, vote in the United Nations, support of U.S. policies generally) and to secure the U.S. presence, access, and influence worldwide. I shall use development to refer to rising levels of per capita income and reductions in poverty with all the complex changes, including improved health and education, robust political institutions, high levels of savings, investment and trade, and other social, political, and economic changes that are both causes and consequences of development.2

Aid for development has been used to expand the capacity of developing country governments to manage their economies (for example, through technical assistance and training), to increase assets supportive of development (for example, through funding increased infrastructure, health, education, credit, agricultural support), and to act as an incentive for governments to adopt economic and political reforms regarded as essential to foster investment, growth, and poverty reduction.

In the 1990s, with the end of the cold war, the value of aid as an instrument of diplomacy diminished, and with growing doubts about its effectiveness in furthering development (especially in Africa), the importance of aid and of promoting development abroad declined, along with the volume of that aid.

President Bush dramatically reversed both of these trends. In his two major statements on the national security strategy of the United States, he dedicated one or more sections to development, signally that it is in the first tier of U.S. foreign policy priorities, along with defense and diplomacy.3 This is the first time for many decades that a U.S. president has declared that promoting development abroad is a key priority in U.S. foreign policy. And the major instrument of that policy was inevitably foreign aid.4

Following these statements, the volume of U.S. aid has grown dramatically during the Bush administration – faster than at any time since the Marshall Plan. In current dollars, U.S. aid was higher in 2005 (and slightly down in 2006, the last year for which data are available, see figures 1-1, 1-2) than at any time in U.S. history, even deducting the monies for reconstruction in Iraq and Afghanistan and aid to Pakistan (figure 1-3).5 (The light bars – series 2 in figure 1-3 – represent aid to Pakistan, Iraq and Afghanistan.)

The increase has lifted the United States out of the bottom place on the list of governments providing aid as a percentage of Gross National Income (GNI) – a position it occupied for many years. (However, it is still only one rung from the bottom.)6

The purposes governing U.S. aid also changed during the Bush administration. Aid for diplomatic purposes now includes fighting the global war on terror.7 And there has been a dramatic increase in aid for global health, especially fighting HIV/AIDS – a use of aid that is aimed at addressing a global issue but has great relevance for development in poor countries as well.

Changes in aid in the Bush administration have involved the way the U.S. government organizes itself to manage its aid. An entirely new aid agency has been established – the Millennium Challenge Corporation (MCC). There has been an integration of planning and budgeting by the U.S. Agency for International Development (USAID) and the Department of State. The President’s Emergency Program for AIDS Relief (PEPFAR) – a new aid program to fight HIV/AIDS – is up and running. And the Department of Defense (DoD) has become increasingly prominent in providing economic assistance, with every sign that that prominences will continue to grow.

Two new approaches to delivering aid have been implemented. One, led by the MCC, involves performance-based aid – providing relatively large amounts of aid to countries that are deemed “good performers” to spur their economic growth. And to ensure ownership of aid-funded activities, the recipients must take an active role in deciding how the aid is to be spent. A second approach, led by PEPFAR, involves applying very large amounts of aid ($30 billion for the coming five years) to tackle a single major problem: the scourge of HIV/AIDS. Aid monies have been used to address a variety of functional or global problems in the past, but never has the amount of aid allocated to PEPFAR been used against a single world problem in the space of a relatively short period of time.

Each of these changes in U.S. aid giving has much to recommend it. Elevating the promotion of development abroad is a priority in U.S. foreign policy reflects the realities of the twenty-first century in which massive disparities in wealth and opportunity in a rapidly integrating world can generate serious threats to U.S. interests abroad and the well-being of Americans at home. Addressing the problems of poverty abroad as a priority of U.S. foreign policy also reflects the values and views of many Americans that they, being among the most blessed and wealthy of peoples in human history, should act to help bring those blessings to the 2 billion of the world’s population living in severe deprivation. Further, giving development a central place in foreign policy strengthens U.S. leadership in the world combining “soft power” – the ability to attract and persuade others to do what you want (often through demonstrating that you have their interests at heart as well as yours) – with “hard power” – threats, sometimes involving the use of force, to compel compliance from others. And expanding the volume of U.S. aid dramatically brings it to a level more consistent with international needs, with the U.S. role as the world’s sole superpower, and with the ability of the United States to provide international economic assistance.

With regard to the aid policy and programmatic initiatives of the Bush administration, the approach of the MCC to aid giving – preferring those countries whose governments performed well in promoting democracy and development – has been welcomed with its promise of more effective aid in support of more rapid development. The large increase in U.S. aid to fight HIV/AIDS – one of the worst plagues to afflict humanity for many centuries – has been very well received by groups and individuals from all points on the political spectrum. The State Department-USAID integration of aid budget and policy planning was seen by many as a useful reform that would enhance the coherence of U.S. aid giving and align it more closely with U.S. foreign policy. The rise of DoD as an aid-giving agency and, in particular, the creation of AFRICOM (a new military command for Africa) have been regarded as innovations justified by the problems of fighting terrorism generally as well as the difficulties of managing community relations during U.S. military occupations.

At the same time, a number of these changes have raised serious concerns. The MCC has been extraordinarily slow in disbursing the sizeable amount of funding appropriated to it, raising questions about the efficacy of this new model of performance and ownership-based aid giving. There is some evidence that large amounts of funding for HIV/AIDS have begun to have negative effects of other efforts to address health conditions abroad and may simply be too large for recipients to absorb quickly and effectively. More basically, the massive increase in aid for HIV/AIDS skews overall U.S. bilateral aid away from development, which requires addressing many obstacles impeding economic progress in poor countries, including limited health care. The integration of USAID and Department of State planning and budgeting has sowed confusion and discontent in both agencies and raises fear in the development community that aid programs will eventually focus more on short-term diplomatic goals, and not the longer-term development mission of USAID. The increasing engagement of the DoD in aid giving adds yet another big player to a cluttered landscape aid organizations in the U.S. government, a player with, as yet, no professional capacity to manage aid for stabilization and development and that can give the impression of a militarization of U.S. foreign aid.

Finally, in addition to the substance of the changes, there has been considerable controversy about the ideas behind some of them (such as the “failing states” paradigm), their organizational implications, and the manner in which some of them have been implemented.

This book offers a stocktaking and analysis of U.S. foreign aid as it has changed since 2000 and offers recommendations for its future. It examines the principal changes in four chapters: first, it describes the individual changes themselves, including their origins, their promise, and their potential problems; second, it analyzes several major policy issues raised by the changes; third, it examines the organizational issues raised by the reforms and the problems in the implementation, including changes management in the public sector; fourth, the book concludes with a look at the evolving context of aid giving in the twenty-first century and recommends a set of changes in U.S. aid to meet the opportunities and challenges of the new world of aid giving.

The message of this study is simple: first, foreign aid is an essential instrument of U.S. foreign policy, broadly defined, and will remain so for the foreseeable future; second, initiatives over the past seven years have produced both a transformation and chaos in an aid system that was already in disarray and ripe for change. The next administration must address the challenge and opportunity of keeping what is valuable in these changes, discarding what is not working, and melding these initiatives into a coherent vision of the role of foreign aid and U.S. foreign policy. In short, it has the chance to complete a transformation of U.S. aid.

Lancaster, Carol (2008b), “Foreign Aid in the Twenty-First Century: What Purposes?”, in Picard, Louis A., Groelsema, Robert and Buss, Terry F. (eds.), Foreign Aid and Foreign Policy: Lessons for the Next Half Century, pp. 39-50, New York: M. E. Sharpe, Inc.

Development aid is alive and well and resurgent. Development appears set to be the major purpose of aid in the future. But not all the signs point in the same direction, suggesting that major domestic economic problems, international crises involving terrorism or political conflicts among states, major global issues like the spread of infectious disease (e.g., avian flu), or other incidents and trends can draw off aid to address these purposes.

The international norm that rich countries should help poor countries to emerge from poverty appears well established and influential in supporting development aid. But other needs can and will influence aid’s purposes in the future. And should the current increases in aid for development fail to make a visible impact on growth and poverty in poor countries, especially in Africa, in coming years, aid for development could again be challenged in the future.

Lavergne, Réal P. (1989), “Determinants of Canadian Aid Policy,” in Stokke, Olav (ed.), Western Middle Powers and Global Poverty: The Determinants of the Aid Policies of Canada, Denmark, the Netherlands, Norway and Sweden, pp. 33-90, Uppsala, Sweden: The Scandinavian Institute of African Studies.

What, then, of the ‘determinants’ of Canadian aid policy? What can we say, in particular, about the true objectives of the aid program as described above? Consider first the commercial dimension.

One may ask what the aid program would resemble if it were, as some have suggested, designed primarily to satisfy commercial objectives. This is not a difficult question to answer since a Canadian program of that sort does in fact exist in the guise of the Export Development Corporation (EDC). An aid program which was primarily commercial in focus would behave essentially like the EDC, except that it would concentrate its attention on Third World countries. It would provide mostly loans; and any grants or soft loans which were provided would be ‘mixed’ with loans at commercial rates in order to maximize the sales impact of the aid. That aid would be directed exclusively through commercially-oriented channels and it would probably be directed mainly to the dynamic markets of higher-income and higher-growth LDCs. The Agency would maintain close links with the export community, and it would be responsive mainly to initiatives identified by that community, with special attention to possibilities for long-term market penetration.

It should be more than obvious from the previous section that the Canadian aid program is nothing of the sort. Canadian aid is provided on the softest terms, and mixed credits account even in recent years for only 3 per cent of Canadian ODA. Less than half of Canadian aid is provided through channels capable of generating very much at all in the way of commercial benefits for Canada: 43.7 per cent through the government-to-government channel, 2.6 per cent through Petro-Canada International and 1.9 per cent through the Industrial Cooperation program in 1984. And it goes predominantly to the poorest and slowest-growing Third World countries. The Agency is as a rule responsive not to Canadian business initiatives but to requests received from recipient countries and it operates quite independently on a day-to-day basis from the Department of International Trade. It should be obvious that the primary motivation of Canadian aid policy is not a commercial one.

Commercial interests do intrude upon the aid program, however. The main instrument for this is aid tying, and over half of Canadian ODA remains tied even today. Support for Canadian commercial interests is also provided through the Industrial Cooperation, through the use of mixed credit arrangements and through occasional political intervention in support of favored projects or in contract allocations. CIDA documents make it clear that commercial considerations are a criterion in the choice of recipient countries, although that influence is not, as we have seen, statistically apparent. One can nonetheless identify several recipient countries whose choice has probably been influenced to some extent by commercial considerations. At the risk of error in the absence of detailed case studies, one could probably include here Algeria, Indonesia, Ivory Coast, Zaire, Cameroon and perhaps a number of others whose needs are for large infrastructure projects of interest to Canadian business.

Procurement tying is by far the principal instrument of export promotion associated with the aid program, and it is this policy above all which has influenced academic thinking about the nature of Canadian aid. As the North-South Institute points out,

Critic of aid programmes point to tying probably more than to any other factor as an example of the self-interestedness of ‘donors’, and for many it has become a cause of deep cynicism about aid in general (North-South Institute, 1977, p. 125).

Tying is indeed difficult to understand in rational terms. As many observers have pointed out, it provides little real benefit to the Canadian economy, while imposing substantial costs on the ability of Canadian aid to deliver cost-effective development assistance (Economic Council of Canada, 1978; Lavergne, forth.; North-South Institute, 1977, p. 126; Treasury Board, 1976; Triantis; and Wyse, p. 1-12). Unable to understand aid tying in terms of the stated objectives of the aid program, critics have thus tended to question the integrity of those objectives themselves.

But governments are not necessarily rational, and governments do not necessarily believe the critics on such matters as aid-tying. Canadian politicians are subjected to a barrage of conflicting and biased sources of information on such matters, and they are quite capable, like individuals, of believing what they want to believe. Canadian politicians are naturally predisposed to believe that more than one objective can be satisfied at once – hence the concept of ‘mutual’ benefits and never that of ‘conflicting’ benefits. Such an approach is also the easiest one to maintain politically, and there is substantial advantage in pretending that everyone’s objectives for the aid program can be satisfied simultaneously. One of the remarkable facts about tying in Canada is that very little effort has been made by the government to assess its costs. Those costs are conveniently ignored, and the issue is rarely addressed even in project documents within the Agency.

Tying can also be understood as the aid program’s sop to influential business interests and to others, in and out of the government, who would otherwise not support the aid program. The role of tying in this regard is to achieve a degree of consensus on the aid program as a whole. Other ways of achieving such consensus could no doubt be found, but they would require more leadership on the issue than the government has been willing to provide in recent years.

An important question is whether the Canadian aid program has in fact become more commercially oriented over time. There is evidence that it has, but any statement in this regard must be a qualified one. Policymakers have become more actively conscious of commercial objectives, and they have sought out new ways of effectively satisfying these objectives in recent years by the use of mixed credits and the Industrial Cooperation program; but the trends in other respects are more ambiguous. Aid to multilateral agencies has declined as a share of ODA relative to the peak which was reached in 1976, but it remains much higher than in the 1960s and early 1970s, and it would be higher yet if the IDA replenishment negotiations had been more successful. At the same time, increasing recourse has also been made to such development institutions as the NGOs and IDRC, and the share of ODA being allocated through more ‘commercial’ channels such as government-to-government aid, Petro-Canada International and Industrial Cooperation actually declined slightly from 55.8 per cent to 48.2 per cent between 1975 and 1984. Turning to the allocation of aid among countries, one does find that the share going to higher income LDCs has increased, but this is a long-term trend associated with the reduction of aid to India, and the trend does not seem to have accelerated in recent years. At the same time, the share of aid going to the poorest developing countries has also tended to increase, as has the share going to low growth countries other than India.

The suggestion that Canadian aid has become increasingly commercialized must be interpreted in relative terms. It is certainly more commercialized today than one would have believed after reading the 1975 Strategy which promised that government-to-government aid was to be partially untied and which paid almost no attention to Canadian commercial interests. One [sic] the other hand, commercial objectives do not appear to be all that much more ‘primary’ than before in the actual practice of Canadian aid policy. There appears to be a feeling that any new efforts in a commercial direction should not be achieved at the expense of what Canada is already doing in the way of development. The abandonment of the Trade and Development facility in response to cutbacks in the growth targets for aid was a clear manifestation of this policy approach.

The political dimension of Canadian aid is more difficult to assess than the commercial one. Canadian aid is without doubt an arm of Canadian foreign policy, and this is hardly surprising in view of the fact that for many recipient countries the aid link is by far the most important aspect of their relationship with Canada. But aid can be political without being self-interested, and even self-interest may be interpreted in terms of fostering ‘harmonious and fruitful relationships between nations’ (CIDA, Strategy, p. 17). In neither case need a political orientation be inconsistent with a generous and humanitarian aid policy.

Canadian political interests have of course influenced Canadian aid policy in some respects. They help to explain the neat division of aid between francophone and Anglophone Africa and the extraordinary dispersal of Canadian aid to 125 recipient countries between 1980 and 1984. They also help to explain the ‘responsive’ approach to project selection and design. And they help to explain the territorial conflicts between CIDA and External Affairs with regard to representation in the field. Yet Canada does not use its aid in a heavy-handed way as ‘leverage’ to obtain favors from recipient countries, and most observers suggest that there are few political gains to be gotten from foreign aid anyway, particularly for small donors (Bird, 1981; Lyon and Tareq, p. xxxix; Wyse, pp. 19-22). The limited importance of self-serving foreign policy objectives in Canadian aid is suggested also by the decreasing use which is being made of government-to-government aid as opposed to other channels and by the concentration of aid on low-income and low-growth recipients who are unlikely to have much to offer Canada in terms of any quid pro quo arrangements. Such countries may at best be able to offer their votes in the United Nations on issues which are of importance to Canada, but any donor trading for UN votes would do best to concentrate its aid among a large number of small countries. Statistical analyses have not been able to uncover any significant Canadian bias in favor of small countries.

These observations, combined with those made earlier about the limited commercial orientation of the aid program, suggest that Canadian aid objectives are, as the rhetoric suggests, primarily developmental and humanitarian in orientation.

The willingness of Canadians to contribute as a nation to the alleviation of world poverty is not so difficult to understand. In a world where the role of the state in redressing income inequalities has assumed axiomatic legitimacy – barely dented by Thatcherism and Reaganomics – it requires little imagination to extend the same concept beyond the borders of the nation-state. Willingness to do so is limited by two factors: the reduced sense of community which exists between people of distant places, and the weakness of institutional mechanisms for ensuring that all members of the world community share equally the burden of redistribution. With modern telecommunications and air transport continuing to make the world a smaller place, the sense of community which exists between Canadians and the poor of the Third World has no doubt increased in recent decades and can be expected to continue increasing in the future.

Too much can be made of the importance of Canadian humanitarian sentiment regarding the Third World. The amount contributed by Canadians to the Third World on a voluntary basis is niggling when computed on a per capita basis: USD 5.30 per Canadian in 1983!27 The amount redistributed through the government is more substantial, amounting to USD 57.41 per capita, but it is little by comparison to the amount redistributed internally to support the poor in Canada. The latter was in the order of USD 1,622 per capita in 1983.28 Such discrepancies can be explained in large part by the public good nature of income redistribution,29 and the availability or non-availability of appropriate institutions to supply such a good. Income redistribution at the national level is a national public good (to some extent even a municipal or provincial one30 for which collective action can be mobilized through existing government institutions. The benefits of foreign aid are mostly international in scope, however, and at this level there are no institutions comparable in power and authority to domestic governments.

The public good dimension of world poverty reduction explains why Canadian behavior in the aid field is not normally determined independently but rather through negotiation with other donor countries. Such negotiations and the resulting international agreements are, after all, the only available mechanism for securing international cooperation in such matter. As a middle power, Canada has a particular interest in seeking and supporting international solutions to world problems. It is too small to have much impact on such problems when acting alone, yet large enough to have an impact when speaking or acting in support of international measures.

Canada has in fact tended to take internationally-set targets seriously, though certainly not as seriously as many would like. Although paying lip service to UN targets as a long-run objective, the government did not establish a timetable for meeting the 0.7 per cent target until the early 1980s. Since then, the timetable has been repeatedly reneged upon, and the ODA/GNP ratio has not risen at anything like the promised rate. Some limited progress has been made in the direction of the UN target, however, and it can be argued that Canada’s ODA would have grown more slowly, if at all, as a function of GNP in the absence of this target. By committing itself to meeting the UN target, the Canadian government has been better placed to resist pressure to cut back on the growth of foreign aid in times of sluggish economic growth and acute budget deficits.

Canadian aid to multilateral agencies has also been influenced by commitments made in collaboration with other donors. The discussion of IDA-6 and IDA-7 in the third section of this chapter showed that Canada, along with other donor countries, has given substantial importance to traditional burden-sharing arrangements in the area of multilateral finance, to the point where this was allowed substantially to erode Canadian contributions to IDA in the 1980s.

A third area of international agreement which may be mentioned is that concerning aid to the least developed countries (LLDCs). This category was established by the United Nations in 1971 in a resolution asking that special measures be taken to assist these countries, and the matter was studied by the DAC in 1972. The increased attention thus being brought to LLDCs seems to have had a strong impact on Canadian aid to this group of countries, which shot up dramatically in 1971 and continued to increase through the 1970s. Over 39 per cent of Canada’s bilateral aid now goes to this group of countries (see Figure 11).

One dimension of international negotiations which appears not to have had much effect on Canadian practices relates to the tying of bilateral aid. The possibility of donors untying aid on a reciprocal multilateral basis was the subject of difficult negotiations in the DAC in the early and mid-1970s, but Canada was among the most hard-line of countries resisting untying agreements (North-South Institute, 1977, p. 126). Canada has not applied a 1974 Memorandum of Understanding by the Majority of DAC members to untie bilateral development loans in favor of procurement in developing countries. As noted above, only Austria performs worse than Canada on the percentage of its aid which remains tied. The reasons behind Canada’s tying policy have already been discussed. That Canada should be more reluctant to untie than other donors is possibly explained by the particular weakness of Canadian manufacturing in Third World markets. Canadian officials are particularly touchy on the subject of aid tying. The feeling seems to be that Canada is justified to use aid as a form of subsidy for infant manufactured-export industries, and that Canada cannot, as an underdog, afford to let aid contracts fall to its competitors.

Overall, however, the concept of foreign aid as an international public good seems to have substantial explanatory power, both for understanding the limited nature of Canada’s contribution to reducing world poverty, and for appreciating the importance of international efforts to coordinate donor country policies. It is evident that Canadian aid policy has in fact been influenced by these efforts.

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