International Aid

The Flow of Public Resources from Rich to Poor Countries

J. M. Clifford

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351511896
• Edition: 1
• Topic: Economía
• Subtopic: Economía del desarrollo

This is a comprehensive analysis of the economics of international aid that provides a systematic framework for understanding, planning, and executing aid programs. Though much has been written on different aspects of international aid, this book was the first to synthesize information on all facets of aid and to investigate the consequences, for both donor and recipient nations, of the transfer of public resources in aid programs. The authors first present the history of aid, discuss the principles that govern aid as practiced by the United States, the United Kingdom, Russia, China, the United Nations, and other donors, and then provide a broad theoretical structure in which to discuss particular questions taken up in subsequent chapters. The book systematically covers all aspects of the aid relationship, and in addition to broad coverage of aid programs, analyzes details of the aid relationship to discern the function of the different variables of aid. In one coherent volume, International Aid outlines sound theoretical bases for discussion of aid programs, provides valuable insights into contemporary practices, and offers far-reaching suggestions on the future of aid programs. On first publication in the mid-1960s, in the midst of the Cold War, this book had considerable influence and its interest outlasts its parochial times as one of the first to discuss the effects of aid on both donor and recipient countries.

PART ONE

World Aid and General Principles

CHAPTER I

The History of Aid

1 The Emergence of Aid as a World-Wide Phenomenon

Aid in the form of transactions between rich and poor, but independent, governments was very restricted in scopebefore 1960. France and Britain had been helping their colonies with development since the 1920s. The USA had run a number of programmes with increasing emphasis on development, but nevertheless concentrated heavily on military strategy and supporting friendly governments. The Soviet Union had begun to lend on a small scale to non-Communist developing countries, with avowedly political objectives. Other countries were just beginning to be involved in aid for development. Table 2 (p. 48) shows how little bilateral aid there was in 1957–9, from OECD members other than the USA and the colonial powers. The most important part of aid history is almost indistinguishable from an account of current aid programmes, since most important changes in aid policy since 1960 have not yet been completed. In preference to describing the emergence of aid chronologically, we shall first describe the big changes of 1959 and 1960, and then turn to the development of aid in the USA, USSR, Germany, and the main colonial countries, separately.

1959 and 1960 saw the admission to UN membership of a large number of former French, Belgian, British, and Italian colonies, most of them in Africa ; independence of a few other countries, again mostly in Africa, was scheduled to take place during the next few years. Even now, it is hard to realize what a difference this made to international politics, especially in the UN. Before 1959, colonies looked to the metropolitan countries for most of their financial needs. Other countries—in Latin America and Asia—tended to look to the USA for bilateral assistance; or occasionally, for very small amounts of help under Commonwealth schemes as in India, Pakistan, and Ceylon, to the United Kingdom and other Commonwealth countries. Pressure was exerted in the UN for more multilateral assistance—resulting, for instance, in the formation of the International Finance Corporation (IFC) in 1957 (but the volume of assistance from the USA was considerably greater than from all UN agencies combined). Change began with the Indian Second Five-Year Plan, and her urgent need for balance of payments support in 1958 which drew in us A and UK finance, and also funds from new sources like Germany and Japan, on an unprecedented scale. African independence, particularly of former British territories, later transformed the aid situation.

The main reason for change was the increase in both the need and demand for aid. Prices of most important commodities fell sharply from about 1952, and by 1958 poor countries’ external reserves (especially in the form of sterling balances) had nearly all been spent. Independence itself brought new expenditure on overseas representation, on new buildings for government and parliament, and on compensation for large numbers of expatriates—mostly British but a few French—who could not remain in their posts under the old terms. Replacing the expatriates, either with newly-trained local people, or with more expatriates on contract terms, was an added burden. The problem was made more acute by the ex-British colonies’ new financial relationships with Britain. Grant aid ceased at independence, with a few exceptions which, since about 1962, have almost become the rule. Loans from the British Government for independent countries are mostly tied to the purchase of British goods, although exceptions to this rule have also been on the increase. For all these reasons, developing countries taken together clearly needed new sources of aid.

Demands for aid outstripped even the increased need. The movement for independence had inevitably carried with it demands for a better material standard of living—one of the criticisms of colonialism was that it prevented economic progress—and virtually all of the new governments were pledged to grandiose plans for development. Demand increased most dramatically of all in India, because the cautious First Five-Year Plan of 1950 was followed by the large Second Five-Year Plan under which India’s reserves of foreign currency were virtually exhausted by 1958, and which effectively implied a large and increasing balance of payments deficit.

The new countries were not slow to take their demands to the UN, and to make it clear that aid from any source, including the Soviet bloc, would be welcome. Pressure through the UN, reinforced by fear lest the Russians gain influence too easily, helped to persuade the rich countries to become more generous.

In the UN, the addition of new voices to the clamour for a Special United Nations Fund for Economic Development (SUNFED), together with India’s deteriorating financial position and the financial weakness of the new countries, produced two useful new institutions : each was, in a sense, a partial substitute for the non-existent SUNFED, though the demand for a UN multilateral capital development fund has not even now been stifled. The first was the International Development Association (IDA) established in 1959, which makes low-interest, long-term loans for infrastructure projects of the kind acceptable to the International Bank for Reconstruction and Development (IBRD) in countries which are deemed to be too heavily in debt to receive more loans on IBRD terms. The IDA is affiliated to the IBRD, and administered in conjunction with it. It differs from the proposed SUNFED in size—currently, it cannot pledge more than about $300 million in any one year—and in the fact that the IBRD, and not the UN General Assembly (via the Economic and Social Council (ECOSOC)), is responsible for administering its funds. The second innovation was the United Nations Special Fund (UNSF), whose administration is responsible to the UN General Assembly, but this receives less than $100 million a year, and may spend money only on ‘pre-investment’ schemes—surveys, technical education, research, and the like. These have been the only concessions so far made, multilaterally, to demands for a world capital development fund.

Bilaterally, there has been a much greater response to demands for more development finance. Countries like Germany, Japan, and Italy, really only entered bilateral development financing in 1960—and of these only Germany is now a significant donor of aid proper. Countries with colonial histories like Britain, France, Belgium, and the Netherlands, far from reducing the volume of their aid when their colonies reached independence, have all increased it. The USA, having been in the aid business for nearly twenty years, was beginning to place more emphasis on development and self-help (the Cuban revolution gave more impetus to this policy change) and had for some time been widening the forms of her aid, as well as the political conformity required of recipients of aid.

The reasons for all these changes are a matter for speculation. Soviet activity clearly had a strong effect on USA policy ; in 1953 and again in 1956, Congress cut the Administration’s request for development assistance aid to India, on the grounds that Nehru was too pro-Communist; yet in 1957 aid to Indonesia was increased because of an Indonesian loan agreement with the USSR, signed in September 1956.¹ The USA document Policy Guidance for Foreign Assistance² states quite clearly that one object of USA aid is to prevent certain countries from becoming unduly dependent on Soviet aid. In general, Soviet aid has probably strengthened the USA Administration’s case in Congress for aiding neutral countries. Federal Germany has also been influenced by Soviet activity, since one of its foreign policy objectives is to gain sympathy among uncommitted countries for its position in Berlin, and to prevent such countries from recognizing the East German Government.

Commercial motives have been strong; Germany, Italy, and Japan, began in the 1950s to compete for new markets, and export credit (which is frequently confused with aid, and cannot always be distinguished from it) has been a major weapon. These countries had at this time only recently emerged from post-war reconstruction; Germany was by the late 1950s well able to take on overseas commitments, but Italy and Japan still had serious regional development problems of their own, and were less equipped to provide aid proper in addition to commercially motivated credit. Other forms of aid, particularly technical assistance of almost all kinds, are also believed to promote exports. Refinance credits, which in 1959 accounted for more than 10 per cent of total gross ‘aid’ from OECD members, are equally justifiable on commercial grounds, since an extension of credit is often the only way of making eventual repayment possible.

Whatever their reasons, rich countries have responded to some extent to the need for extra finance, and for technical advice and training, for developing countries. We shall explain later how, despite the slogans of the UN Development Decade, this response has been limited, and how the forms in which finance and aid are provided severely restrict their usefulness to recipients.

Once it became clear that bilateral development aid would be increased, and that a large number of countries would be establishing new bilateral programmes, consultation between donors became an obvious necessity. This has been approached from two directions. On the one hand, the IBRD (and later other bodies) has sponsored consortia of ‘donors’ to certain recipients of aid, the most important being India and Pakistan. On the other, the OECD sponsors work on development through the DAC. The DAC’S most important function so far has been the mutual examination, known as ‘confrontation’, of each member’s aid policies in its Annual Aid Review and, as a by-product of this, publication of the most comprehensive of available statistics of ‘aid’. The DAC Secretariat also carries out research on the effects of past aid policies, and on the possibilities of closer coordination in more limited fields, like technical assistance, tying, and the terms of aid. In the process of confrontation, data collection, and reporting on members’ policies, it is able to exert some pressure on members who fail to pull their weight, and has helped to bring about changes in policy by member governments; for instance, the reduction of German and British interest rates on some loans.

The events which led up to the changes of 1960 followed fairly independent courses in the various countries that provided aid before that date. Colonial powers were concerned only with their colonies, for which they had come to accept increasing responsibility as their concepts of the role of government changed. The USA became involved in aid to developing countries because of her world-wide political and economic strength and interests, and because the Cold War threatened those interests ; and the Soviet bloc’s aid seems to have been, initially, a counter-attack.

Other countries’ ‘aid’ before 1960, as set out in the statistics collected in 1960,¹ was more or less a statistical accident, except for the small amounts subscribed and contributed to UN agencies and programmes. Bilateral grants from Austria, Norway, Sweden, Denmark, Switzerland, and Germany, totalled only $24 million for the four years 1956-9. Japan provided a further $182 million, but $177 million of this was debt cancellation rather than new grants.² Canada’s grants totalled $164 million, but much of this was in the form of gifts of surplus commodities. Thus total bilateral grants, apart from surplus commodities, from these eight countries were of the order of only $60 million, over a four-year period. They also provided nearly $500 million in reparations, and $482 million in bilateral loans at unsubsidized rates of interest (mostly either as refinance credits or as loans tied to purchases from the lending country), but none of this is aid proper.

Although aid in the form of direct transfers of funds from one independent government to another with the intention of helping the people of a country is new, the use of finance in diplomacy has a long history, and some transactions that find their way into aid statistics today are little different from their earlier counterparts.

The first diplomats to offer (rather than exact) subsidies as a tool of foreign policy seem to have been the Renaissance princes of Italy. Subsidies were extensively used throughout the seventeenth and eighteenth centuries to manipulate the balance of power. Compared with modern aid, subsidies were a relatively simple weapon, used to hire troops, or in lieu of sending troops, or to buy support or neutrality. George Liska (our source of information on this period of history) has written that this kind of aid depends on the assumption that ‘there is a definable unit of fighting power or defence power that can be had cheaper outside a nation’s military establishment’.¹ This is as true of military and related ‘economic’ aid today as it was then. The essential difference between the subsidy system and the modern system of aid is that ‘the relation between the intention of the grant and the performance of the recipient has come to be less determinate’,² in terms of both political and military objectives. It was still possible under the subsidy system to claim repayment of an already disbursed subsidy, if the recipient failed to perform.³ It would be unthinkable to demand repayment of a modern grant to a developing country, however overtly political its purposes may have been, on the grounds that the recipient had failed to fulfil its side of the bargain.

In the nineteenth century, the use of direct government ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• INTRODUCTION TO THE ALDINETRANSACTION EDITION
• INTRODUCTION AND DEFINITIONS
• Part One World Aid and General Principles
• Part Two Aid and Development
• Part Three Donors’ Problems
• Part Four Conclusions
• GLOSSARY
• WORKS CITED
• INDEX