The Roles of Aid in Politics Putting China in Perspective

This paper has considered the economic literature on population and middle-income biases in overseas aid allocations, and has tested these hypotheses for the Australian bilateral aid program for the six years from 1986-87 to 1991-92. It is argued here that some of the previous empirical studies on the twin biases issue are subject to criticism on the grounds that the models employed are too simple and/or ad hoc. An appropriate way to proceed is to apply the general models of the aid allocation process that are to be found in the aid motivation literature. This approach is applied to data on Australia's bilateral aid program. More specifically, a RN [Recipient Need] model and a comprehensive model (incorporating both RN and DI [Donor Interest] variables) on bilateral aid are estimated in a quadratic and linear form. It is also important to estimate the equations in various years to determine if the relationships have shifted over time.

The empirical results reported in this paper are for the equations estimated which have the dependent variable specified as both per capita aid and absolute bilateral aid. The results for the per capita aid equations provide no evidence of a middle-income bias in the allocation of Australia's bilateral aid to recipient countries. In fact, the econometric results indicate that per capita aid decreases as recipient countries' incomes increase, ceteris paribus. However, the relationship is linear, not quadratic. With respect to the population bias, or the small country effect, the empirical results of the per capita aid equations provide some support for the view that Australian bilateral aid discriminates against more populous countries.

The conclusion obtained on the absolute aid equations for the middle-income bias are similar to that of per capita aid equations. There is no evidence of Australia's aid being allocated to middle-income countries. On the issue of the other aid bias, i.e. the population bias, the results indicate a reversal of the conclusion reached from the per capita aid equations. The absolute aid equations show an aid bias in terms of a “large country” effect.

Overseas aid to many developing countries has become an important source of external financing that contributes to a substantial part of their GDP. Despite the fact that sustained economic growth in Indonesia has benefited many, some 27 million people still remain in poverty. Australia's aid program has been directed to poverty alleviation, education, health, rural development, environmental management, and public infrastructure development. Even though Indonesia's sustained growth has promoted higher levels of development, the World Bank estimates that the need for substantial development assistance still remains.

The earlier cross-section studies of aid motivation by McKinlay and Little, and Maizels and Nissanke for Germany, France, Japan, the United Kingdom, and the United States, found that the RN model fails and the DI model explains the aid allocation of these five major donors. These results are different from those of Gounder for Australia's aid, where both these models are accepted, thus necessitating the application of nonnested tests. It has been argued here that time-series analysis is more important in answering the question of aid motivation to individual countries than the cross-sectional evaluation used in previous studies. The use of cross-sectional data conceals the question of aid motivation by aggregating the specific country characteristics and averaging the impact of aid allocation to all recipient countries.

The general conclusion of this study for these two separate models for Australia's aid to Indonesia is that both models fit the data. This necessitates the application of nonnested tests. The nonnested results reported here produced strong or decisive results in support of the RN model. Thus, there is unambiguous support for one motivation: all the nonnested tests reported in the study indicate acceptance of the RN model and rejection of the DI model. What do these results mean? The “conventional” results show that Australia’s aid program to Indonesia can be said to exhibit both RN and DI concerns. On the issue of which motive dominates the other, the nonnested tests produce a definite result in terms of accepting the RN model and rejecting the DI model. Thus Australia’s aid to Indonesia explains the recipient need concerns.

The foreign-aid regime that emerged after World War II was in many ways an integral part of Cold War international relations. By the time the Cold War ended, foreign aid was a widely accepted way for countries to cooperate with one another so as to further economic development and human welfare. In addition, foreign aid was an established and important instrument for promoting the foreign-policy interests of donor countries. This foreign-policy instrument was susceptible to change, however, after the Cold War came to an end.

This study has described the ways in which the U.S. and Japan, the world’s largest donors of foreign aid, have altered their policies toward the countries in the Asia-Pacific region following the Cold War. The analysis has concentrated on changes both in discourse and in rhetoric (as evident in policy documents and statements) and in actual aid disbursements in the Asia-Pacific region.

The rhetoric of Japanese aid started to change in the late 1980s. In response to critics at home and abroad who insisted that Tokyo assume a level of international political responsibility commensurate with its economic role in the world, the Japanese developed for the first time a declaratory policy on foreign aid. In earlier years, Japan’s foreign-assistance programs were fueled mainly by economic and commercial motivations. The Japanese made relatively little effort to clarify their motives to the public or to couch their foreign-assistance programs in statements of goals and purposes. By the early 1990s, however, the Japanese discourse intensified. An increasing number of policy statements emphasized the importance of a growing foreign-aid budget in order to serve broad principles of international cooperation and development (including environmental programs and projects for women) and to reaffirm these principles through criteria that make aid contingent upon the political behavior of recipients. Japan’s aid policies have indeed moved beyond geo-economics; Japan’s warning to China that further nuclear tests might hinder future aid allocations is a case in point.

The discourse of American foreign aid underwent important changes as well. The tone of its declaratory policies shifted from Cold War notions of development in order to secure freedom and democracy toward notions of “sustainable development” and facilitation of democratic transitions in former communist states. “The opportunity to put into practice what the Cold War often precluded is now upon us. We have entered an era . . . of cooperation and collaboration” (Wharton Report 1993:63). The Clinton administration’s discourse was at least in part characterized by an optimistic ideological commitment to reshaping a global order of cooperation, peace, and development. What was lacking in the new discourse was a reoriented foreign-aid policy that took advantage of the ending of the Cold War by shifting the emphasis of foreign-assistance programs in ways that were commercially beneficial to the U.S.

In terms of actual aid disbursements to the Asia-Pacific region, the U.S. and Japan have responded in opposite ways to the ending of the Cold War. The U.S., despite efforts to come up with new rationales for aid, has found it difficult to replace Cold War motivations. The only exception to this is American aid to the former communist states. Consequently, countries once prized for geopolitical interests have witnessed large-scale cutbacks in American aid after 1989; nor were these reductions of security aid compensated by other kinds of aid. Thus while a number of Asia-Pacific countries (NICs) offer wide opportunities for commercially motivated aid, Washington has not seized these opportunities. Across the region, U.S. aid has fallen to its lowest levels in forty years.

Tokyo’s response was precisely the opposite. If, for the U.S., the ending of the Cold War created an identity crisis and a frantic search for a new geopolitical code, for Japan it opened the door to a great power role in the world and especially in the Asia-Pacific. More than that, the ending of the Cold War actually forced Japan into a role that it had been reluctant to adopt—the assumption of political leadership. In contrast to the U.S., Japan has had the funds that are commensurate with that role. Since 1989, Japanese aid to the Asia-Pacific region has increased rapidly; by 1993 it was nine times the level of American aid. The Japanese increased aid to the NICs, to countries like India and Nepal, and to new recipients such as Vietnam. Also during this period, China became Japan’s largest aid recipient in the world. As to the future, there is no evidence that the so-called bursting of Japan’s “bubble economy” will have any effect on Japanese aid volumes. According to official statements, MOFA over the next five years expects to increase aid allocations that contribute to peace, stability, and prosperity in the world (Yanagitsubo 1998).

Foreign-aid policies are a reflection of the foreign policies of the donors. After the Cold War, American foreign policy stumbled into a rationality crisis that preempted a solid replacement for its foreign-aid policy. Lacking a convincing purpose for foreign aid, criticism of foreign-assistance programs has intensified and may result in dramatic budget cuts in the coming years. From the perspective of great power politics, this retreat from aid giving amounts to curtailment of an important foreign policy instrument and surrender of influence around the world. This is especially significant since the Japanese increasingly value foreign aid as a way of obtaining influence and leverage in international affairs. To be sure, it is not self-evident that the U.S. should shape its policies according to Japan’s. But either Japan is wasting its money or the U.S. is wasting its influence in one of the world’s most dynamic regions.

The pattern of development is complex and the effect upon it of foreign assistance is still undetermined, but it is clear that the relationship usually assumed to exist between aid and growth is too simple. In general, foreign assistance has neither accelerated growth nor helped to foster democratic political regimes. If anything, aid may have retarded development by leading to lower domestic savings, by distorting the composition of investment and thereby raising the capital-output ratio, by frustrating the emergence of an indigenous entrepreneurial class, and by inhibiting institutional reforms. Precisely how widespread and strong are these negative influences still remains to be determined, but the limited evidence available suggests that aid programs, as currently administered, and insofar as they are concerned with economic development, frequently are counterproductive.

Many commentators, while ignoring the points we have raised above, have emphasized the growing debt burden of the poor countries, their consequent acute balance-of-payments problems, and the severe constraint this imposes on growth.³⁴ Evidently, this is a major problem of contemporary aid programs which stems directly from the concentration on loans rather than grants. The long-run importance of this problem should not be exaggerated, however, as it is rather unlikely that the loans will ever be repaid. Loans were made in the past, but repayments occupy the future. What happened in the past is history, and what happens in the future is politics – and there is a great difference between politics and history. Had the loans been productive, they would have generated the funds for repayment,³⁵ but since they generally have not been, there is little reason to imagine that there will be a connection between the two. Since there was no growth generated, the debtors may feel no obligation was created.

The prospect of default can be seen in the statistics on loans and repayments from and to the powerful countries: according to UNCTAD data, between 1961 and 1965 the flow from the strong to the weak rose from $5.8 to $6.6 thousand million, while repayments rose from $0.7 to $1.2 thousand million. The net flow has leveled off, and was stationary in the last years (at $5.3 thousand million). In other words, repayments from the weak to the strong are becoming so large that they offset the annual increases in assistance from the strong to the weak.

As the repayments grow, they become more of a burden to the in-debted countries. In Latin America, for example, the servicing of foreign debts absorbed 6 percent of total export earnings in 1955; in 1964 this had risen to 15 percent. This is an average, and individual countries vary considerably. One country, Chile, found a few years ago that it was in the position of having to allocate half of its foreign exchange to debt repayments. In this case, as in several others – for example, Turkey, Brazil, Ghana, where the debts have increased beyond the ability of the country to liquidate them – it led to the first move of what will probably be many in the game of default, namely, “rephasing.” The second step will be from postponement to avoidance. There are any number of reasons or justifications that can be given for such action; a new regime can disown the debts of its predecessor; a vacillating regime can shift its allegiance from one to the other of the great powers, shifting or dropping the burdens of the past at the same time. When faced with a poor and disloyal debtor, unable to repay and unwilling to repent, there will be little the creditor can do. (Ejecting his government usually costs the creditors more, not less.) Lest one think that we delight in the prospect of default, we shall end on a solemn note. Just as assistance has not created obligations, so default will not promote concord. “When ingratitude barbs the dart of injury, the wound has double danger in it.” The breaking of agreements between the lenders and borrowers, no matter which one instigates the act, will deepen yet further the chasm between the rich and the poor, the strong and the weak. That the weak countries should avoid the breach goes against economics; that the strong should absolve them of their burdens goes against politics. Thus aid, ostensibly given in friendship, seems inevitably to lead to enmity.

Griffin, Keith (1991), “Foreign Aid After the Cold War,” in Development and Change, Vol. 22, No. 4, pp. 645–85.

This paper argues that foreign aid programmes originated as part of the ideological confrontation known as the Cold War and that the motives behind aid were always more political than economic. It is further argued that the economic justifications for foreign aid — filling ‘gaps’ in capital, technology and skills—are suspect and that the economic benefits in terms of long-term development are at best negligible. Turning to the future, foreign aid programmes are bound to change to reflect the new realities of global international relations. Nine specific predictions are made about the future size and composition of aid programmes. The outlook for those who favour aid is not bright, but recent changes in thinking about development suggest that more sell-reliant strategies could well be more beneficial to the poor than conventional aid-supported strategies. […]

The Marshall Plan was followed by President Truman’s Point Four programme – named after the fourth point in his inaugural address – which was a technical and economic assistance programme for Greece and Turkey, two poor countries bordering on the communist world and thought to be in danger. The third phase was a response to the disintegration of the old European empires and the proliferation of newly independent countries, first in Asia and later in Africa. Freedom from colonial rule led to a contest for the ‘hearts and minds’ of the people throughout what came to be called the Third World. Foreign aid was one weapon in this contest, not the only weapon and seldom the most powerful one, but none the less significant a tool of Western diplomacy.¹

Particularly difficult problems were posed by the collapse of the Japanese Empire, for it was in the territories occupied by Japan prior to and during the Second World War that the confrontation between the First World and the Second became most heated. After the liberation of China by the communists in 1949, the anti-communist nationalistic opposition retreated to Taiwan and mounted a political and economic challenge to the mainland. The challenge was supported by large amounts of foreign aid. Korea was divided into two countries, a communist North and a capitalist South, and in the early 1950s the Korean War was fought over the issue of reunification. South Korea won the war, thanks to massive military support from the West, and then after the war received large amounts of foreign aid. Similarly in Vietnam, the country was divided into a communist North and a capitalist South, and again a war was fought over the issue of reunification, with North Vietnam ultimately winning in 1975. Throughout the war, however, South Vietnam received huge amounts of military and economic assistance. Indeed, the political purposes of foreign aid were perhaps most clearly revealed in Taiwan, South Korea and South Vietnam.

The early foreign aid programmes, however, were not confided to the fringes of the communist world. The Cuban Revolution of the late 1950s extended the Cold War to the Western Hemisphere and posed a challenge to the long-standing hegemony of the US in that region. The response was multifaceted and included the diplomatic isolation of Cuba, sponsorship of a military invasion and an economic embargo. Also included in the package was a foreign aid programme for the rest of Latin America – Kennedy’s Alliance for Progress – which attempted to use the promise of financial assistance as an incentive to governments of recipient countries to introduce policy reforms.

Later foreign aid programmes were not always wholly dominated by US-Soviet rivalry but instead reflected narrower regional concerns, as in French aid to Francophone Africa, British aid to Commonwealth countries and Dutch aid to Indonesia. Moreover, although foreign aid was born out of political and ideological rivalry, it has always had an economic dimension, namely, an attempt to create a strong, expanding, global capitalist economy. These qualifications are important, but they must not be allowed to obscure the primacy of politics.

The origins and objectives of foreign aid cannot be understood outside the global political context. Foreign aid is a product of the Cold War, of the division of the globe into First, Second and Third Worlds and of the hostility of the two superpowers. Were it not for the Cold War there would have been no foreign aid programmes worthy of the name, for without the Cold War it would have been impossible to generate the domestic political support in donor countries necessary to sustain foreign assistance for more than four decades. Other motives apart from ideological confrontation also played a role, not so much in initiating aid programmes as in sustaining them once the general principle had been accepted. Diplomatic considerations clearly were important, e.g. in mobilizing support in the General Assembly of the United Nations and, in the case of France and Britain, in retaining influence in colonial territories after they became independent. Commercial advantage soon became a prominent motive: securing markets, promoting exports, creating a favorable climate for private foreign investment. And of course there were genuine humanitarian motives, e.g. in Scandinavia and one or two other small donor countries. But the conflict between the two superpowers was the sine qua non.²

Despite the stimulus of the Cold War, foreign aid may already have been running out of steam before the remarkable political developments of 1989. This is particularly true when seen from the perspective of the recipient countries, as is apparent in Table 1. Measured in real terms, i.e. the nominal value deflated by a world export unit value index, the average annual amount of official aid from the OECD countries doubled between 1950-5 and 1956-60. In 1980 prices, the yearly flow of aid rose from US$8.2 billion in the first half of the 1950s to US$16.6 billion in the second half. It increased by another 50 per cent in the next half decade (1961-5) and then remained more or less constant until the 1980s, when falling export prices pushed up the real value of aid. The flow of aid reached a peak in 1972, the year before the first oil crisis, and this peak was not regained until 1983.

Even these figures, unexciting as they are, may overstate changes in the real value of aid. A more appropriate deflator might be a unit value series of manufactured export goods, since the content of aid flows consists largely of manufactures; and the technical assistance component of aid would surely be subject to a higher deflation factor, reflecting an increase in the salary and other costs of Western advisors, teachers and technical experts. In addition, account should be taken of servicing and debt repayment of loans from multilateral aid agencies. Many borrowers of World Bank non-IDA funds, for instance, are now receiving very little in net terms. Thus, when viewed properly, real flows of foreign aid to developing countries have not increased all that much since the 1960s. The Cold War may have provided the fuel for foreign aid programmes, but the fuel was not very powerful.

Now that the Cold War is over, two questions are raised. First, as the ideological divisions begin to blur, as globalization proceeds and the three worlds blend into one, what is the outlook for foreign aid to developing countries? Second, if the end of the Cold War is to be accompanied by a significant reduction in foreign aid to poor countries, will this necessarily damage their development prospects? We shall begin by examining the second question, for if foreign aid does not in fact promote development, our joy over the end of the Cold War need not be tempered by sadness over the possible demise of foreign aid.