The Politics of Development Aid
“Power always thinks it has a great soul and vast views beyond the comprehension of the weak; and that it is doing God’s service ….”
John Adams, Second President of the USA (1797-1801) and a founding father of the republic.
The imperial legacy
Throughout recorded history, powerful races have sought to re-fashion the weaker in accordance with their world vision and their interests. The spread of the present world religions[1] by the great empires of yesterday to the farthest corners of the globe as part of imperial policy is only the most conspicuous example from the past which is the forerunner to the present day gospel of globalisation proclaimed by the Washington Consensus[2]. Today’s promise of salvation for the developing nations is prosperity, Western-style, through international aid and advice on economic integration with the current world economic order led by the developed countries. While the Conquistadors or other Western and Middle Eastern conquerors advanced with “The bible (or other holy book) in one hand, and the sword in the other”, today’s travelling missionary is often likely to carry a laptop computer rather than a religious text and preach the currently orthodox dogma of their development sciences to people in developing countries, right up to the remotest Pacific islands.
While Adam Smith brilliantly propounded the philosophy of capitalism and private enterprise in business development and national wealth creation in the late 18th century, it was Vladimir Illyich Lenin who foresaw in the early 20th century the growth of globalization as we see it today, with the dominance of transnational corporations and finance capital. Adam Smith’s vision of competing modest-sized businesses operating in orderly markets for the benefit of consumers and efficient enterprises is obsolete but he is still the founding guru of modern economics. But the prescience of Lenin and his vision of the transformation of capitalism taking the current form of a new global economic and political structure based on the dominance of transnational corporations and the financial institutions of the richest countries backed by the imperial authority of the former colonisers are all but forgotten due to ideological bigotry[3]. V.I. Lenin anticipated what we now refer to as globalisation before the word was invented.
“We have seen that the economic quintessence of imperialism is monopoly capitalism. This very fact determines its place in history, for monopoly that grew up on the basis of free competition, and precisely out of free competition, is the transition from the capitalist system to a higher socio-economic order. We must take special note of the four principal forms of monopoly, or the four principal forms of monopoly capitalism …… Firstly, monopoly arose out of the concentration of production at a very advanced stage of development. …. Secondly, monopolies have accelerated the capture of the most important sources of raw materials ….. Thirdly, monopoly has sprung from the banks. The banks have developed from modest intermediary enterprises into the monopolists of finance capital. Fourthly, monopoly has grown out of colonial policy. ….”
V.I. Lenin, Imperialism, The Highest Stage of Capitalism, first published in 1916. This quotation is from Chapter 10 of the edition published by International Publishers, New York, USA, 2000.
While the numerous management and development texts cover many theories related to the development of economies, industries, agriculture, political systems, administration, education, etc., the core doctrine for developing countries remains an ideological Structural Adjustment: a programme broadly encompassing strict fiscal policy discipline to balance government budgets, anti-inflationary measures with high interest rates and restrictions on money supply, the privatization of state economic activity, liberalization of imports, de-regulation of markets and liberalization of capital markets, reduction of import duties, abolition of subsidies for industry and agriculture, reduction of corporate and individual taxes while broadening the tax base, reduction of public services, reduction of public social services, provision of legal protection for foreign investors, privatization of infrastructure services by their sale to Western transnational corporations[4], etc. Structural Adjustment programmes were applied throughout most of the developing world and the economies in transition[5] in the last three decades of the 20th century. More recently, two more caveats for aid giving are being applied on a selective basis: democratic institutions, human rights and the building of civil society (favoured nations being exempt). The immediate hardships caused by these radical measures such as increased unemployment, closure of national enterprises in the face of foreign imports, restrictions on local business due to tightened credit and high interest rates, hardships due to removal of social benefits, high consumer prices due to removal of subsidies, rural poverty resulting from removal of agricultural subsidies and cheap food imports, etc., are glossed over as the pain before the gain. Alan Greenspan, former chief of the US Federal Reserve, calls it felicitously, from his perspective, creative destruction.
Hypocrisy and double standards
The demands made on developing countries as a condition of development aid[6] often exceeded what the aid-givers were prepared to do in their own countries. While the aid-givers required developing countries to remove subsidies on their small-scale agriculture, the European Union (EU) and the USA are the biggest continuing subsidisers of their agriculture, subsidising their agriculture to the tune of around $600 billion a year[7]. While powerful Western aid-givers and the international agencies they control[8] demand open markets from developing countries, developing country products face numerous hurdles in the form of high taxes[9] and Non-Tariff Barriers when entering EU or American markets. Developing country corporations from BRIC countries[10] or the Middle East find political obstacles when they attempt to buy into large Western corporations though development aid encourages developing countries to create special facilities and concessions for the entry of Western investment and businesses. Significantly, the USA runs the biggest national debt in history and is intent on continuing to allow it to grow at the expense of the rest of the world while aid agencies admonish developing countries to balance their budgets by reducing public expenditure as a condition of aid.
From the 1950s, international aid agencies touted the theory that the Law of Comparative Advantage decreed that poor nations were better off developing small-scale agriculture into the cultivation of exportable products (exotic tropical fruits, cut flowers, pharmaceutical raw materials) or developing agricultural or mineral commodity exports (tea, coffee, cocoa, coconut, spices, rubber, bauxite, rutile, etc.) while rich nations engaged in the manufacturing and sophisticated marketing of products and services. This has its roots in colonial subjugation. When entrepreneurs like Jehangir Tata set out to become iron and steel manufacturers in 19th century India, colonial laws forbade the import of new factory machinery by Indians and denied them bank credit. The colonies were designated to produce raw materials while the imperial centres manufactured and marketed finished products and made the bulk of the profits. This mindset is still strong in a world economy which is grandiosely described as globalized.
The hypocrisy inherent in these double standards is best seen by the reaction of the Washington Consensus and Western governments to the East Asian financial crisis of 1987/88 and the much more damaging US led financial disaster of 2008 that has engulfed the US and the EU[11]. When East Asian financial institutions and business corporations were facing a damaging credit crisis due to volatile financial markets, strict market principles were demanded and applied: international loans were given only to pay off international creditors; banks and business corporations in financial trouble were to be sold off at bargain prices to foreign investors or allowed to collapse; no subsidies were to be given to the cash strapped business sector; interest rates had to be increased; credit regulations were tightened, etc. Malaysia alone, which refused Western advice and World Bank/IMF aid, came out of the crisis within a year by following a course contrary to the proffered advice. The others who accepted Western advice in good faith were mired in recession for over half a decade. But when the gigantic financial debacle began in September 2008, resulting from unregulated markets and outright fraud by high profile institutions in the USA, and spread to the EU and Japan, the prescription was the very opposite: gigantic trillion dollar allocations for the bailout of financial institutions and corporations in trouble[12]; liberal credit availability for business and consumers; reduced interest rates even up to zero percent; expanded money supply on the basis of more public debt; huge public works funded by equally huge budget deficits and demands that developing nations must also contribute their reserves to maintain the failing world financial system that the West created.
Political expediency underlies charity and is often the guiding principle of foreign aid. That “Aid is an extension of foreign policy” is generally attributed to President Richard Nixon of the USA but it is a truism that describes the aid policies of the present time. After all, we are dealing here with nation states that have their own national interests governed by political beings. Economists may argue that in an economically integrated world the failure of some states is to the detriment of all others. But to the general population in a country, national pride and power takes precedence over internationalism. Countries that are leaders of the world community are not likely to give up their dominant position. Every country is entitled to follow its own self interest first. But if developing country leaders fail to see through the subterfuges inherent in some of the aid policies, we may say that these nations are unwittingly destroying their countries.
Self-serving basis of international aid
Though the maxim that economic growth is more achievable through the private business sector rather than through state enterprises is well accepted by developing countries, both international aid agencies and Western bi-lateral aid agencies clearly defined that the development aid sectors most appropriate for developing countries are these: small & medium enterprise development, rural development, women in business, poverty alleviation and environment protection. All these, being low technology-based business to supply poor local markets for populations living in poverty, are no threat to the developed country based giant transnational corporations that control over 75% of the world trade and dominate consumer markets even to the remotest regions of developing countries. In remote poverty-stricken regions of the world, people may barely have one meal a day but could obtain cigarettes and Coca-Cola in the village stores.
Much has been made by business writers that small and medium enterprises (SMEs) are major contributors to economic growth and employment and that this alone justifies the focus on SME development by Western aid givers. No one has cared to explain that SMEs in developing countries bear no comparison to SMEs in developed countries. A small business in a developed economy will approximate to the size of a medium or large business in a developing country. The majority of SMEs in developed countries complement and depend on the existence of big business: acting as materials suppliers, service providers or providing services to communities where big business provides the economic backbone of the region. Manufacturers of automobiles and aircraft have tens of thousands of small and medium sized businesses that provide components, technical services and marketing services. In the event of a big business closing down (as in the case of the Detroit Three), thousands of these smaller businesses collapse together with local restaurants, barber saloons, bars, gas stations, cinemas,[13] etc. SMEs in developing countries serving poor communities with simple low value items for household use have a fragile existence. There is no historical evidence of any country that developed only through SME growth, certainly not in this age of high technology and big business dominance.
The success stories
Nations have not prospered and advanced because of the efforts of the poor living on the margin of subsistence. Nations advanced and abolished poverty because of the efforts and enterprise of the rich and the powerful sections of society (often with state backing), through huge investments, expensive research and new technologies which built up large-scale production networks or advanced services that were competitive in affluent world markets and provided direct and indirect employment to large numbers. The resulting wealth carried through the rest of society and built the basis for developed economies. The spectacular growth of the East Asians was due to huge investments in modern technology, infrastructure, human development and the creation of big business conglomerates with strong initial government support. The successes of East and South Asian nations are a lesson in how to succeed and the story of international aid to sub-Saharan Africa seems a lesson in how to fail.
The shining success stories that are popularly quoted now – East Asia, and now China and India – have not depended much on international donors for their remarkable growth but on their own economic policies and their own people. Africa, which received the highest level of aid in the 1990s, had the lowest growth rates till the rise of commodity prices resulting from higher demand created by growing manufacturing industries in China, India and other regions of Asia.
The widely accepted economic assessments of the 1970s listed China and India as hopeless cases because they refused to liberalise (read, open up to foreign interests), especially their financial markets, at the pace demanded by Western experts and their aid agencies. Growth was forecast in most of Latin America and Africa and later, after 1990 and the fall of the Soviet Union, in the so-called economies in transition (read ex-communist states)[14]. But the Asians confounded the pundits by their later phenomenal growth while the favoured darlings languished. During the 1990s the economies in transition lost around half their GDPs and were mired in poverty while some of the promising Latin American nations ended in bankruptcy. Economic forecasts by experts must often seem as good as that of the pronouncements of a gypsy counting tea leaves.
[1] With the exception of world religions emanating from India: Hinduism, Buddhism and Jainism
[2] The trinity of the most powerful economic institutions that guided economic and aid policies and defined the gospel: the US Treasury Department, The World Bank and the IMF, all headquartered in close proximity to each other in Washington, D.C. Created in 1945 in the aftermath of World War 2, its power base still represents an elite club such as those that existed in the European colonies in former times.
[3] This critique of capitalism by Lenin does not in any way endorse the communism of the Stalinist era in the Soviet Union and its practice of state terrorism.
[4] The most egregious case being the privatization of water in poor countries
[5] The crisis-ridden ex-communist countries were called this in the nineties after the fall of East European communism.
[6] Development aid must be distinguished from humanitarian aid which is often given without prejudice.
[7] In 1990 I was involved in a study of the fertilizer market for the Government of Sri Lanka. The government had just removed the fertilizer subsidy at the behest of the World Bank. The price of rice immediately doubled and farmers abandoned marginal lands growing tea, rubber and rice as being too expensive to cultivate.
[8] From their inception in 1944 in Bretton Woods in the USA, the President of the World Bank is appointed by the President of the USA and the President of the IMF is appointed by the EU.
[9] Import levies on textiles and garments from developing countries are among the highest duties in the USA, sub-Saharan Africa excluded.
[10] Brazil, Russia, India and China form the BRIC, comprising the largest of the fast developing countries.
[11] Often referred to as the US Financial Tsunami by the East Asians
[12] The US alone has allocated over US$2.0 trillion for such bailouts so far.
[13] The failure of the Big Three US carmakers of Detroit in 2008 threatened such a big crisis for small and medium businesses in that region that US lawmakers were seen scrambling to avert.
[14] The UK Economist magazine, the highly regarded economic journal, forecast repeatedly in the nineteen eighties and nineties that China’s economic growth was a bubble that was bound to burst because its economic fundamentals were not right. Many Western economists and politicians still cannot forgive China for its phenomenal growth in many sectors. There was hardly a Western economist who foresaw the historically unprecedented economic growth of China. Peter Drucker, the foremost management guru of that era, in Managing in Turbulent Times, in 1980, regarded India, Africa and Jamaica as developing regions. He forecast that in 25 years China would only be exporting petroleum, if at all, and that it wouldn’t even have resources to buy food without charitable assistance from other nations!