The Roles of Aid in Politics Putting China in Perspective

The aim of this paper is to assess the inter-country allocation of foreign aid by selected donors to I8 recipients in Eastern and Southern Africa (ESA). The five country cases discussed in this paper, show that the aid environment has not been supportive of recipients reform efforts during the 1980s. A comparison is made between International Development Agency (IDA) allocation and other donors. Cross-section and time-series regressions demonstrate a variety of considerations influencing bilateral aid. Lastly, in discussing present aid policies and coordination efforts, three options arc analyzed with respect to future aid policies. It is suggested that new initiatives by IDA in its allocation criteria and aid coordination efforts can yield some progress.

As the cases of China and Yugoslavia clearly indicate, Stalin’s ideas exercised an independent power to influence the policy choices and institutions of other countries by offering persuasive answers to the most compelling questions they faced: What did socialism mean? How should a social economy be developed? How could the making and implementation of policy be coordinated? These questions could be answered in a variety of ways, but Stalinism represented a unique set of ideas that had already been formulated and moreover was associated with success. It is hardly surprising that neither Mao nor Tito seems to have contemplated any alternative notion of socialism, at least until Tito found himself forced to do so. The implication of these two cases is that because the other East European countries faced the same needs and pressures as China and Yugoslavia, they would have been likely to adopt Stalinist ideas even if Stalin had granted them a much greater degree of independence than he did.

The Chinese case suggests that ideas that are accepted as correct need not necessarily exert their influence immediately: they must first seem relevant to the situation in which one finds oneself. The Chinese initially did not believe that the conditions necessary for socialism existed in their country, so their attention first centered on creating those conditions. But because they had accepted a particular idea of socialism, pressures soon built to put it into practice. Primary among those pressures was the need for coordination: they needed an acceptable, agreed-upon guide to policy and its implementation. This need, as well as enhanced control over society and economy, produced a more rapid adoption of Stalinist political economy than China’s leader had anticipated. And once the Stalinist model was fully institutionalized within the body of the economics discipline and the political infrastructure, it proved remarkably resilient. It continues to shape Chinese policy to this day.

The Yugoslav case demonstrates that although ideas can sometimes be hooks, or justifications for policies adopted for reasons of interest, they can also be pursued even when they go against the national interest. Yugoslavia’s relations with the USSR would certainly have been smoother if Tito had been willing, like other Eastern European leaders, to tailor his policies to Stalin’s wishes instead of his theories. The idea of moving toward socialism and acceptance of Stalin’s definition of socialism motivated him far more than Stalin’s policy pronouncements. The Yugoslav case also demonstrates that ideas do not necessarily prevail against all counterincentives; faced with a fairly desperate situation, Yugoslavia eventually relaxed its hold on Stalinism. Facing the same needs for legitimation, information and coordination as the other socialist states, Yugoslavia was forced to embark upon the difficult and costly path of defining its own version of socialism.

The overall conclusion to be drawn from these cases is that, particularly after a revolution, countries seize on preexisting ideas to guide them through times of uncertainty and to allow them to legitimate and coordinate their actions. This solution can often produce a more slavish imitation of another country’s experience than might seem merited on ground of pure efficiency. And once the practices and doctrines taken from abroad have been institutionalized, they may have very long-lasting effects. Decades from now the countries of Eastern Europe may marvel at their willingness in this current period of revolution to adopt so wholeheartedly the ideas and institutions of Western capitalism. But at this time their need for ideas is no less urgent than it was after their socialist revolutions. And the ideas they adopt are likely to have equally long-lasting effects. One can only hope that fifty years from now their current choices will appear more fortunate than those they made nearly fifty years ago.

Hansen, Henrik and Tarp, Finn (2000), “Aid Effectiveness Disputed,” in Journal of International Development, Vol. 12, No. 3, pp. 375–398.

What can we conclude from this survey of cross-country literature on a long and contentious debate on the macroeconomic effectiveness of foreign aid? Other literature surveys hold, in the words of the Economist (26 June, 1999), that ‘countless studies have failed to find a link between aid and faster growth’. We have surveyed three generations of empirical work: early Harrod-Domar models, reduced form aid-growth models, and new-growth-theory reduced-form models. We find a consistent pattern of results. Aid increases aggregate savings; aid increases investment; and there is a positive relationship between aid and growth in reduced form models. The positive aid-growth link is a robust result from all three generations of work. As a corollary, using perceived ineffectiveness of aid as an argument against cross-country regressions at large is not substantiated. Important information is embedded in the similarities among countries, and cross-country work does provide clues to how aid interacts with savings, investment, and growth.

The obvious question is why do other surveys find that the aid-savings evidence is mixed and that the evidence in favour of a positive aid-growth link is weak – or non-existent? A few highly influential studies in each generation of work have argued the negative. There has been a tendency for negative studies to dominate the debate. Our survey covers 131 first- and second-generation regressions and compares them with third-generation work in a common analytical framework. We find that in each generation of studies those arguing the negative are clearly in the minority. When all the studies are considered as a group, the positive evidence is convincing. The micro- macro paradox is non-existent. Microeconomic studies indicating that aid is beneficial are consistent with the macroeconomic evidence.

Third-generation work goes beyond earlier empirical studies to address the necessary conditions for (increased) aid effectiveness. Burnside and Dollar (1997) offer a solution to what has so far appeared as a Gordian knot, i.e. the perceived ineffectiveness of aid at the macro level. They argue that aid is effective, but only in a good policy environment. This intriguing result – which is broadly in line with the ‘Washington consensus’ view of development – is appealing to many. It suggests how donors and aid recipients can learn from mistakes in the past and improve aid effectiveness in the future in a straightforward manner.

Nevertheless, the basic Burnside-Dollar result turns out to be sensitive to data and model specification. The significance of the crucial aid-policy interaction term depends on five observations (an extension of the sample by about 2 per cent). In addition, Burnside and Dollar depart from the other three third-generation studies in that they do not report any regressions with squared aid terms in their estimations. They only include the aid-policy interaction term to capture polynomial effects in the aid-growth relationship. This is in contrast with the by now common result in empirical growth modeling, where squared terms appear as the rule rather than the exception. This issue of specification is critical. The aid squared term is statistically significant and robust, while the same cannot be said about the aid-policy interactions term.

What general policy lessons can be drawn from this extensive literature. The Economist (1999) argues:

Rich countries should be much more ruthless about how they allocate their largesse, whether earmarked or not. Emergency relief is one thing. But mainstream aid should be directed only to countries with sound economic management (emphasis added).

While the extreme view that aid only works in an environment of sound policy appears wrong, there is evidence that economic policies have an impact on the marginal productivity of aid. Yet, the world is heterogenous and noisy, and it may well be that many of those countries where aid works the best are, at the same time, among those that need foreign aid the least. In contrast, countries that are less fortunate in having good policies in place, may need help badly to help bring them on track. They may need different forms of aid, but such real-world dilemmas remain unresolved. Single-cause explanations and mechanistic aid allocation rules are neither robust nor useful guides to policy makers.

The third-generation work recognizes that development is a complex process with interactions between economic and non-economic variables. The past decade has seen enormous changes in the world economic environment and the economic systems in place in many countries. Using past performance as an indicator of future performance is especially dubious in this environment, given the existing limited understanding of the interplay between aid, macroeconomic policy, and political economy variables. In sum, the unresolved issue in assessing aid effectiveness is not whether aid works, but how and whether we can make the different kinds of aid instruments at hand work better in varying country circumstances.

Hansen, Henrik and Finn, Tarp (2001), “Aid and Growth Regressions,” in Journal of Development Economics, Vol. 64, pp. 547–70.

Aid effectiveness is likely to remain a contentious area of debate. Substantial resources are involved, and the widespread perception that aid has been ineffective in fostering growth at the macro level has led to aid fatigue in many donor countries. In this paper, we have investigated what modern cross-country growth regressions can tell about the effect of aid on aggregate growth. We find that aid increases the growth rate, and this conclusion is not conditional on the policy index established by Burnside and Dollar (2000).

Using a fairly standard growth model capturing non-linear effects between aid and growth, the empirical specification, with most support by data, does not include an aid–policy interaction term. We therefore believe to have substantiated that it is premature to rely on policy indexes, such as the one proposed by Burnside–Dollar, in the allocation of aid.

We also note that empirical conclusions about aid effectiveness, based on cross-country growth regressions, depend on poorly understood non-linearities and critical methodological choices. As such, lack of robustness should not come as a surprise. On this background, it might be tempting to discard cross-country growth regressions altogether. Yet, some regularities do seem to exist across countries. The focus in this paper has been on whether there is regularity in the impact of aid across countries. This seems to be the case.

The diversity of developing countries in their natural endowments and cultural and socioeconomic characteristics is another recurrent theme in cross-country comparisons of aid effectiveness. In this paper, the effect hereof on the growth impact of aid is captured through the introduction of country specific effects in the regressions. Moreover, aid allocation issues are taken into account by inclusion of aid as an endogenous regressor. It emerges that these two factors have strong implications for the empirical results.

Finally, we reconfirm the empirical support for the hypothesis that aid impacts on growth via investment. This effect is shown to be potent, while an alleged negative effect on total factor productivity has only weak support in the data. The above observations underline that better theoretical explanations about the aid–investment–growth processes are required before we can derive satisfactory empirical specifications and formulate useful testable hypotheses.

Harris, Stuart (1982), “Australia’s Interests in Third World Development: The Perspective of A Resource Exporter,” in Cassen, Robert, Jolly, Richard, Sewell, John, and Wood, Robert (eds.) Rich Country Interests and Third World Development, pp. 156-181, London: Croom Helm.

Historically, Australia has seen itself threatened by developing countries and has sought the protection of developed countries. Its cultural links tie Australia to developed countries while its affluence, its advanced economic institutions and its technological base are developed country characteristics. Moreover, despite its similarity of interests with the Third World on some issues, on others, and as a rich nation, its interests often compete or conflict with those of developing countries. Australia tends to see itself as of the West, even if – no doubt like others – with a difference. Yet it has had increasingly to take Third World development more seriously.

Policy attitudes probably remain predominantly orthodox but, from recent public debate, increasingly enlightened. The Harries report, reinforced more strongly by the Senate report, argued that Australia should distinguish between the interests of the West, which it should support and those of particular members of the West, which it normally should not. Both argued for compromise, for co-operative approaches to Third World views and for ways to satisfy the practical possibilities underlying Third World objectives. This is an improvement on Australia’s previous frequent uncritical acceptance of Western attitudes, often leading in rejecting Third World proposals without offering constructive alternatives. Yet, although Australia’s stated political attitudes may now be constructive, responses in practice on economic issues remain unhelpful. Although Australia’s economic and political relations are now more interlinked, Australia has a much smaller strategic role as counterweight to the great powers and is increasingly judged in the region by its contribution to the trade and development efforts of Third World countries, even if outside Asia its political attitudes are more important. Yet its renewed interests in Third World development evidenced in policy statements have not reflected themselves in economic terms. Support from the Common Fund was already in place, but aid has not increased. Some downwards pressure on industrial tariffs may ultimately eventuate but decisions made in 1980 were discouraging.

Frequent entreaties for outward-looking Third World policies have not been paralleled in Australia’s policies nor, with the deterioration in the post-war international co-operative system, and the West’s inward-looking attitudes, do the chances of outward-looking approaches globally seem high. Moreover, outward-looking policies alone are insufficient for the Third World. There are disadvantages as well as advantages for developing countries in their links with developed countries; these disadvantages may have to be reduced before positive gains are recognized by developing countries. Arguments for an outward approach which start by largely denying any disadvantages are unlikely to achieve that.

For various reasons, Australia’s position warrants a constructive, moderately reformist, approach less aligned than currently, with the West which, while improving world productive efficiency, would make some concessions to income and power distribution inequalities of the Third World. ³⁶ First, the Third World’s case against the existing international system has some substance. Secondly, reduced protection would benefit Australia directly and, by international example, indirectly. Thirdly, Australia benefits from accepted rules for international relationships, which developing country support would reinforce. Fourthly, it cannot avoid close relations with Third World countries. Finally, rational accommodation with the Third World will improve world stability. If power is shifting to developing countries, orderly negotiated changes might be desirable; even if Third World countries fail to achieve greater power, Australia could be vulnerable in that failure, with its resource abundance, its geography and its immigration and racial policies.

The Harries report argues that Australia should support measures mutually beneficial to developed and developing countries alike. The debate, however, is largely about what policies benefit mutually the Third World and the West. If, like the Harries report, few imperfections are acknowledged in the existing system, few changes are mutually beneficial; unsurprisingly, mutuality arguments favor the status quo in such circumstances. This is even more so if each issue is decided on its merits as the Harries report proposed for economic issues: long-term national interests – which the Senate report emphasized may have to be pursued at the expense of short-run interests – will then normally be ignored. Most importantly, whether or not there are mutual benefits is ultimately decided by the West. The mutuality argument therefore either simply reaffirms the West’s power or it lacks policy value since it begs all the important questions.

Even then, limited moves by Australia in supporting its interest Third World development such as support for the Common Fund, stimulated surprise and scepticism among Western spokesmen. If the West continues to assume that Australia’s interests in Third World development are identical to its own a constructive approach by Australia to the Third World could involve some cost in terms of Western relationships. Australia has therefore a long way to go in clarifying its interests in Third World development. It is a major step that the debate has at least started.

Hattori, Tomohisa (2003), “The Moral Politics of Foreign Aid,” in Review of International Studies, Vol. 29, pp. 229-247.

To briefly summarise this inquiry into the moral dimension of foreign aid, this article has identified the donations of states to multilateral grant-giving organizations as the ethical core of a larger institutionalisation of foreign aid in the postwar era as a collective endeavour of the former colonising states. What in a bilateral face-to- face relation merely signals and euphemises the material hierarchies of the postwar world is transformed in this process into a virtuous practice, ethically justified as contributing to the peace and prosperity of the community of states. This article has further argued that the key organisation behind this institutionalization process is not the multilateral grant-giving agencies but the Development Assistance Committee of the OECD. By setting the standards, monitoring, evaluating, and ranking the aid programmes of member states, the DAC has assumed the new role of ‘moral bookkeeper’, authenticating and encouraging foreign aid as a virtuous practice. Finally, this article has argued that such ethical discourses and forms of public scrutiny and praise have indeed created an incentive, if not to increase, then to conform the practice of foreign aid to more beneficent standards. It is this institutionalisation process, in short, that constitutes the empirical substance behind President Truman’s original claim that foreign aid is a moral practice, embodying moral vision and intent.

There are two implications of this specification of the empirical substance behind the ethical claims for foreign aid. First, it extends the metatheoretical insight of Alexander Wendt that states are ontologically real by demonstrating that they are also capable of ethical justification. The ethical discourses and forms of public scrutiny and praise described in this article not only attribute virtue to states but have real effects: they have encouraged a collective practice where none would have existed; and they have disciplined existing bilateral practices to higher ethical standards.⁶⁵ The institutionalisation of foreign aid in the postwar era constitutes, in short, an empirically significant moral dimension of interstate relations.

The second implication is that these particular ethical discourses and practices are fostering a very old pattern of moral distinction across material lines: they are helping to legitimise the dominant role that donor states have assumed in the postwar world as an ethically justified desert, over and above the imperatives of power politics or market forces. Like the civic virtue identified with the practice of foreign aid above, this larger process can also be identified with Aristotle, only in this case, not his virtue ethics but his politics. A closer reading of Aristotle suggests, in fact, that he compromised his ethics of giving in service of his larger political ideal of civic republicanism, or the rule of the virtuous few over the mass.⁶⁶ Although Aristotle’s encouragement of giving extended to all citizens, he created two special categories for ‘great gifts’, arguing in numerous passages that they deserved greater praise. The virtues expressed – magnificence, or ‘great deed’, and magnanimity, or ‘greatness of soul’ – were regarded as superior to the liberality of ordinary citizens.⁶⁷ In short, he strategically embraced ‘the sweet bait of honor’ in the service of his city.⁶⁸ Though the archaic language of virtue is absent, the public ranking and peer review processes of the DAC have similarly set the great givers of the postwar era against one another, establishing the conditions and purposes of a competition for honour in the community of states.

Liberal political theory, of course, has moved substantially beyond civic republicanism in the modern era.⁶⁹ In contemporary interstate relations, it provides the basis both for a political discourse of rights that strongly resists any claim of virtue on the part of the wealthy states and for a substantive political agenda of international taxation and other measures that, it is argued, could rectify current inequalities and better realise such rights.⁷⁰ The arguments in this article imply that the actual practice of foreign aid is fundamentally at odds with this liberal project. This opposition emerges, first, as a basic categorical distinction in the type of resource allocation entailed: whereas a liberal project of rights requires some form of centralised apparatus to redistribute resources from the wealthy to the poorer states, foreign aid remains a gift, a voluntary gesture of the wealthy states.⁷¹ It also follows from a further specification of aid practice within the anthropological literature of giving: as an unreciprocated gift, foreign aid works not to mitigate but rather to euphemise the existing material hierarchies between the North and the South.⁷²

Finally, the opposition between foreign aid and liberal ideals characterises even the most beneficent portion of foreign aid, the multilateral grants of states, where symbolic domination shifts to ethical discourses. As this article has argued at some length, the institutionalisation of foreign aid as collective endeavour of the former colonising states works to confirm the virtue of donors as opposed to the rights of recipients. What the successive specifications of the practice of foreign aid add up to is a fundamental political opposition: whereas a liberal project of rights entails a real shift in power from the industrialised states, the moral politics of foreign aid legitimises the power they already have.⁷³

By extension, this article reveals a fundamental confusion in the ethical justifications for foreign aid in the liberal tradition noted in the introduction. Identifying foreign aid as an ‘imperfect obligation’ of the wealthy to the poorer states, for example, fails to see that it is the recipient’s obligation – specifically the failure to reciprocate a gift – that operationalises this practice, compelling gestures of gratitude and acquiescence in the status quo, instead.⁷⁴ Identifying the motivation to give foreign aid as a humanitarian ‘moral vision’ fails to see the ‘moral hierarchy’ that can arise when such a practice is institutionalised across material lines.⁷⁵ Finally, identifying the donor-recipient relation as a ‘moral doctor–moral patient’ relation misses the necessary fiction of moral agency on the part of recipients in a virtue-centric world. Only by treating recipients ‘as if ’ they had moral agency can the superior moral agency of donors emerge.⁷⁶ In short, while all of these ethical justifications identify with liberal ideals of rights, humanitarianism, and improvement, the aid practice they justify tends towards the opposite effect, anticipating neither the eventual perfection of donors’ obligation into a right, the mitigation of a material hierarchy, nor the remedy of a diseased condition.

In the 1996 DAC report, Chair, James H. Michel, warned of ‘deeply entrenched gaps between theory and practice’ and ‘patterns of donor activism and recipient passivity’ consistent with the argument I have just laid out. To ‘change incentives’, he went on to argue, required substantially more than a new programmatic focus or greater recipient participation in development planning and implementation. It required self-discipline and hard work – yet another virtue ethic that has infused the discourse of foreign aid from the start. As he put it:

If, as partners, we can exercise the disciplined will to address the contradictions and to implement the strategy, its vision will come to be seen as a realistic prediction of a better future. If we do not make the effort, it will become equally apparent that the strategy projects no more than a cruel mirage.⁷⁷

Hatzipanayotou, Panos, Michael, Michael S. (1995), “Foreign Aid and Public Goods,” in Journal of Development Economics, Vol. 47, No. 2, pp. 455–467, Elsevier.

Most trade theoretic studies that examine the terms of trade and welfare effects of international income transfers assume that these transfers are lump-sum distributed to consumers in the recipient country. But, most non-private international aid, especially to LDCs, finances public consumption goods or public inputs in the recipient country. This paper examines the terms of trade and welfare effects of an income transfer when it is used by the recipient country to finance a public consumption good.

The paper demonstrates that if (i) the imported and public goods are net complements, (ii) the consumer's marginal willingness to pay for the public good exceeds its unit cost of production, and (iii) the marginal propensity to consume the imported good in the recipient country exceeds the marginal propensity to consume the same good in the donor country, then an income transfer improves (worsens) the donor (recipient) country's terms of trade. Under conditions (i) and (ii) a small transfer can raise the welfare of the donor, and can reduce the welfare of the recipient country. Under condition (ii) a small transfer increases world welfare, in which case it is possible for welfare to increase in both the donor and the recipient countries.

Since the level of public goods is small in most LCD's, it is expected that the consumer's marginal willingness to pay for the public good exceeds its unit cost of production, thus when foreign aid is used to finance a public good, it can lead to a welfare improvement not only for the recipient developing country, but also for the donor developed country. This result may be of policy relevance for the, once again, timely issue of international economic aid (e.g., foreign aid to Russia and to former Eastern European Countries).

The present analysis considers the case where the public good is only produced in the recipient (e.g., developing) country, while the donor (e.g., developed) does not produce a public good of its own. The same or qualitatively similar paradoxical welfare effects (e.g., welfare immiserization for the recipient and welfare improvement for the donor country) due to an income transfer can arise whenever the recipient country supplies the public good at a suboptimal level using foreign aid to finance its production. For example, the same results emerge when the donor country produces its own public good at a fixed level independent of the amount of the transfer. Qualitatively similar paradoxical welfare effects can emerge if the donor developed country is producing its own public good at an optimal level (i.e., at the level where the consumer's marginal willingness to pay for the public good equals its unit cost of production), while the recipient country produces a public good at a suboptimal level.

If, however, in the pure theoretical rather than practical case where both countries are capable of financing and producing the public good at its optimal level, and the income transfer is lump-sum distributed in the recipient country, then the transfer is always welfare immiserizing for the donor country, welfare improving for the recipient country and does not affect world welfare. ⁸