Reasoning behind foreign economic assistance

Though Foreign Direct Investment is widely welcomed yet foreign aid has become an intractably complex issue that arouses highly charged emotions with people particularly Pakistan. Foreign aid comes in a variety of forms and emanates from a host of sources. Its purpose and efficacy are a matter of consistent and bitter debate.

Amongst its multiplicity of sources are included transfer of funds, credits, goods, technical assistance and knowledge. It is primarily civilian in nature, but is certainly not barred from taking form of military assistance. It is not only that foreign aid policies are pursued by governments but they can also include international organisations, private voluntary organisations and charities. Public funds can be used public funds as well as the donations of private individuals.

Amongst may sources the focus however remains on the extension of official foreign economic aid. In assessing the role and impact of economic aid one needs to: define and explain the concept of economic aid by describing the emergence of aid as policy while placing it in its historical context. In this context economic aid consists of transfer of resources from the government and public agencies of one state, or those of a group of states, to the government and public agencies of other states for any purpose other than the fulfillment of an obligation. Such a transfer of resources can only be considered to be aid if it involves no element of mutuality, bargain or quid pro quo.

Aid is a government-to-government exchange of public economic resources, not commercial flows of loans and credits and comes in two forms: bilateral, from one state to another; or multilateral, from one or more states or international institutions to a state or group of states.

Aid can be tied to the purchase of certain products from the donor state, or untied. Most bilateral aid is tied. Quite often foreign aid is double-tied, in that not only does a portion have to be spent on goods and services from the donor state, but also on specific projects within the recipient state.

Tied and double-tied aid is common in the case of bilateral aid. Hence there is much merit in the received wisdom that multilateral aid is fairer to the developmental needs of recipients, in that they have greater leeway in the use of the funds and how they are apportioned.
In characterising economic aid as a form of statecraft, the implication is that aid is a means to an end, and by definition this end is for the most part political rather than economic (or humanitarian). Economics, in this case, is an instrument of politics.

It is the utilisation of economic resources as a tool designed to influence the internal or external behaviour of other states and thus achieve political ends. Unlike the other main instrument of economic statecraft, economic sanctions, economic aid is intended to influence or change the behaviour of the target by offering an inducement rather than imposing a penalty. Consequently, economic aid is not purely, or even mostly, a form of ‘international do-gooding’.

It is not simply a manifestation of altruism on the part of the wealthier, more developed countries in the international system towards those less well off. At times, economic aid does have ends that are not strictly speaking political. The extension of humanitarian assistance, emergency relief and the meeting of basic human needs is one such instance.

There is, therefore, a clear moral dimension to the extension of economic aid but by giving economic aid, states are implicitly or explicitly attempting to influence other states. A further argument suggests that aid is a spur to the generic development and growth of the international economy and in this respect is primarily intended to achieve economic rather than political ends.

Even if there is a strong economic rationale for the extension of economic aid, this too does not detract from the basic argument that, for the most part, the intended ends of aid are political. But these arguments do lead to the conclusion that any examination of aid policy must take into account the existence of a complex interplay between its political, economic and moral dimensions. The rationale behind the extension of foreign aid can be broken down into four basic components.

In the first instance, economic aid is given for political and strategic considerations. During the Cold War, for example, both the US and the USSR spent billions of dollars and roubles either to entice regimes into their respective spheres of influence or to cement the friendship of existing allies.

This was especially true of their relations with states in the developing world, which were more susceptible to economic inducements but not exclusively so if one bears in mind the important example of the Marshall Plan which involved the US and the states of Western Europe. On the other hand, many states aid countries that follow the policies supported to them considering them furthering their policy perspectives.

In the second form, aid is utilised for the purpose of promoting international economic development. In the aftermath to the Second World War, aid was extended to increase the number of states participating in the liberal international trading order. Greater participation in the free-trade system would generate, it was felt, greater volumes of trade, a broader market and hence greater prosperity in the world as a whole. This was a particular hallmark of much US thinking on foreign aid to the developing world until the 1960s and the country still adheres to the requirement of providing financial assistance to the countries that falls within its zone of influence.

Another aspect is the provision of aid for humanitarian and moral purposes. Aid has been extended in the form of emergency relief operations to alleviate suffering in the wake of natural disasters and famines. Significantly, this is the only kind of aid that is normally wholly untied to the purchase of specific products or engagement in specific projects. Aid has been provided with the intention of alleviating poverty on the basis of shared humanity according to which it is the duty of the better off to help the less well off. Guilt has also proved a weighty motivation for the extension of economic aid.

In parts of the developed world, aid is considered a way of making good a wrong, such as past colonial exploitation. Former imperial states such as Great Britain and France have long used economic aid packages to smoothen the transition of former imperial possessions to full statehood and participation in the international system, feeling a sense of moral duty and responsibility towards former subjects.

Yet another component encompasses conditions of the post-Cold-War period, in which aid has become a tool for the pursuit of a wide variety of other goals. These include the fight against corruption, the development of good governance, the promotion of human rights, and the development of democratic institutions and practices in the less developed world and the post-communist transition states.

The structural adjustment policies of the IMF are also a more contemporary phenomenon, in which both Western economic and political values are strongly recommended to recipient states in the form of reform packages upon which the aid is conditional.