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FOREIGN AID ADJUSTS TO NEW MARKET REALITIES

In keeping with current notions of 'effective aid', developed nation donors are increasingly directing aid to only a few 'reform-minded' Indian states, neglecting the poorest states with weak economic management. This virtually amounts to punishing the poor for the failures of their rulers.

By Binu S Thomas


August 1999

Bangalore: Like most other developing countries, India has, in recent years, witnessed a decline in official development assistance (ODA) from governments of developed nations.

Aid to India has been falling every year since 1994 when, according to OECD (the Organisation for Economic Cooperation and Development) data, it stood at $2.3 billion. In 1997, the figure dropped to $1.6 billion, which still made India the third largest recipient that year after China and Egypt. The decline in ODA is not in itself surprising, given that global aid volumes fell by more than $10 billion during this period.

In 1998, aid flows to India dipped even lower in the wake of the sanctions imposed by various donors following the nuclear tests in May. Japan, the largest bilateral donor with a contribution of $492 million in 1997, suspended new yen loans, grant aid and technical cooperation, keeping open only its tiny grant assistance facility to non-governmental organisations.

Sweden terminated its three-year (1997-99) cooperation agreement with India. Norway froze all aid except those directed towards poverty alleviation programmes. Denmark decided to reduce aid against the increase it had envisaged during aid talks held in January 1998. Germany, the second largest bilateral donor, cancelled 1998 aid negotiations. Among the bilateral aid programmes that remained virtually unaffected by the nuclear blasts were those of the UK, France, Italy and Belgium.

There are some early signs that many of the aid suspensions may be lifted. The distinct thaw in US-India relations following the Washington initiative to get Pakistan to pull back its infiltrators from the Indian side of the Line of Control in Kashmir and the better appreciation of India's security concerns that the Pakistani adventure contributed to is likely to help put the aid programme to India back on track in the near future.

Multilateral aid, particularly from members of the UN family, has also fallen sharply in recent years.

While some of the decline has to do with the commencement of new funding cycles, UN sources say that overall reductions to budgets being experienced by leading UN agencies worldwide are beginning to tell on their funding in India. The United Nations Development Programme (UNDP), for instance, has been affected by major cutbacks to its budget effected by Denmark and Germany although it hopes to receive higher contributions from Britain to its coffers this year.

The general decline in aid comes at a time when aid flows have been dwarfed by the huge increase in private capital flows. From a situation where the volume of aid was higher than private capital flows to developing nations in the late 1980s, things have changed dramatically to private capital outstripping aid more than threefold.

Most of the private flows, however, have gone to a handful of fast-developing countries, most notably China, and for the vast majority of very poor nations aid still constitutes their major source of development funds. In Mozambique, for instance, aid constitutes over 60% of gross national product, compared to 0.6% for India.

Much more significant than the decline in volume of aid is the change in the thinking of aid bureaucracies that the massive expansion of private capital has triggered. Aid administrators are under pressure like never before to show returns on investment almost along the lines of private capital.

The induction of people with World Bank and IMF backgrounds into key positions in development ministries and aid agencies (for example, the new Dutch Development Minister has a World Bank background, having been her country's executive director on the board, as does the new chief of the UNDP) has no doubt contributed to this. But there are larger strategic reasons as well. With the end of the Cold War, the need to prop up allies in developing countries with dollops of aid has disappeared.

The other important reason for aid getting a market orientation is private capital's becoming a contributor to official aid budgets, something that was previously the preserve of governments. The UNDP, for instance, announced earlier this year it was launching a Global Sustainable Development Facility with major transnational corporations contributing $50,000 each.

Largely in response to the new market pressures to become more efficient, the UN Secretary-General has launched an initiative to get the various UN agencies to work under a common United Nations Development Assistance Framework (UNDAF) in a country context with common objectives and time-frame. The UN operation in India is one of 18 countries' piloting UNDAF and the new framework is expected to be made public in New Delhi on 24 October - the last UN Day of this millennium.

But this is not proving easy work. There are fears within various agencies of UNDAF resulting in loss of identity of the individual agencies, likely cuts in budgets and staff lay-offs.

For its part, the Government of India is said to be concerned that a common development framework for UN agencies may lead to less money being made available for development activities while increasing the bargaining power of the UN system. In December 1998, India mooted a resolution in the General Assembly stressing the importance of the UN ensuring full government participation in UNDAF and its full ownership through the agreement of the recipient governments to the finalised framework. Following this, three advisers to the Planning Commission have become actively involved in the UNDAF preparation.

Among bilateral agencies, too, the new market orientation has led to a re-ordering of priorities. Many have begun focusing on the better-performing states with strong economic management.

The UN government's Department for International Development (DFID), which moved its South Asia Department to New Delhi lock, stock and barrel from London a few years ago, has identified Andhra Pradesh, Orissa, West Bengal and Madhya Pradesh as the states it wants to focus its aid programme on. For the Netherlands, which has sharply cut the number of countries it will focus its aid programme on from 80 to 19, the states in India it will direct its aid to are Andhra Pradesh, Gujarat and Kerala.

The Danish aid programme in India has been scaled back from four states to just two - Karnataka and Madhya Pradesh. The decision to drop Orissa, which has the largest percentage of poor people of any state in India, in favour of Karnataka was a surprising one but not without its own logic.

'It has probably been a good deal more important that Karnataka - and in particular the capital Bangalore, widely projected as a dynamic city, the new electronic software capital of India - is much more interesting than Orissa from the point of view of Danish business interests. A Danida private sector adviser has been stationed in Bangalore since 1993 and several Danish firms are either established or on their way,' notes a recent study on Danish aid to India ('Danish Development Cooperation in India - In a Poverty Reduction Perspective'. CDR Working Paper 98.2. February 1998).

The rush among official donors to focus on a few reform-oriented states rather than those with the largest concentration of poor signals a shift in directing aid from where it is most needed to where it is likely to be most effective and, indeed, profitable.

This shift is likely to open up considerable business opportunities for corporations from the donor countries, given that states like Andhra Pradesh, Karnataka, Orissa and Gujarat are in the forefront of market-led reforms. Both Andhra Pradesh and Orissa, in particular, have ambitious plans to privatise the power sector and DFID, for one, has already committed some 130 million to power sector reforms in both states.

Rapid privatisation of infrastructure can, however, turn into a 'horror story', as the head of the World Bank's Asia-Pacific region Jean-Michel Severino recently told the London Financial Times while describing the impact this strategy had in South-East Asia in the wake of the regional economic crisis.

The increasing tendency of official donors to pick on a few 'reform-minded' states to direct their aid to is in keeping with current notions of what constitutes effective aid. A recent World Bank paper, 'Assessing Aid: What Works, What Doesn't, And Why', argues that the first condition to ensure that aid is effective in tackling poverty is to target it at low-income countries with sound economic management.

The International Development Association (the World Bank's soft-lending affiliate), which is the single largest official aid-giver, has gone one step further. Among the recommendations for IDA-12 is that 'lending to countries with weak governance should be scaled back or stopped entirely if necessary'.

This virtually amounts to punishing the poor for the failures of their rulers. Some bilaterals in India seem to be acting on such advice and neglecting states like Uttar Pradesh and Bihar, which are the poorest in the country and have weak economic management, to focus on the star performers. The Netherlands, for instance, has just removed UP from its list of priority states after a recent aid review. Uttar Pradesh and Bihar together account for 49.7% of India's poor, by official estimates.

At a time of dwindling aid budgets, it perhaps makes good practical sense for aid bureaucracies to concentrate their limited resources on where results can be shown and quickly. This will help protect, if not expand, existing aid budgets.

Sadly, in the process, it appears that the aid effort which drew its moral sustenance from the felt need to address pressing humanitarian and social concerns in developing countries is increasingly coming to be characterised by the politics of the market.

The Government of India is reportedly worried by these trends but given the situation where the Indian economy is itself fast integrating into the transnational-driven and WTO-led global economy, it cannot protest too loudly.

If official donors operating in India are to stay true to their goal of poverty reduction, they need to redress the growing imbalance in favour of the so-called progressive states by directing a sizeable portion of their assistance to supporting institutional and policy reform in weaker Indian states, which are almost always the poorest as well.

But in doing so, they will have to focus on reform of institutions and policies that directly benefit the poor rather than those, like the power sector, which the market would dictate.

'Assessing Aid', after examining the cases of successes in difficult environments, recommends four things that donors ought to do. First, find a reform-minded champion from among heterogeneous communities and perhaps even from within government. Second, have a long-term (10 years) vision of systemic change. Third, support knowledge creation through innovation and evaluation; and finally, support civil society to either pressure the government to change or take service provision directly into its own hands.

ODA to India today stands at a crossroads. Donors could take the low road and blindly route their assistance to the few fast-reforming states, which may bring them good results in the short term.

Or they could take the high road of encouraging pro-poor aspects of reform in the fast-developing states while devoting an equal amount of resources to pushing pro-poor institutional and policy reform in the weaker states - no doubt a long, tedious enterprise and a less rewarding one in terms of quick results. But it is the latter that would ensure the continued legitimacy of their aid programmes into the new millennium. - Third World Network Features

About the writer: Binu Thomas is Coordinator, Policy and Advocacy unit, ActionAid India, and contributed this article to SUNS (South-North Development Monitor) in a personal capacity.

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