Since 1990s, global poverty has declined and democracy has spread. But these global trends have failed to strengthen fragile states, and they continue to be impacted by extremism, conflict, forced displacement, pandemics, corruption, climate change, and food insecurity. Most of these fragile states are not on track towards sustainable economic development, effective service delivery — and are dependent on aid because they lack capacity to carry out basic functions as well as protect citizens from shocks.
It is said that foreign aid shapes incomes and investment patterns that ultimately lead to growth and reduction in poverty. But, paradoxically, the 9/11 attacks in 2001 show that the flow of aid, which was expected to improve growth, has in fact fuelled and financed corruption, inflation and debt burden. For example, after 9/11 the flow of aid in Afghanistan reflects that on one hand aid contributed to economic growth and expansion of public services, on the other hand, its dependence on aid, including overconcentration and overreliance on off-budget funding, effected accountability and state-building adversely. It made the government accountable to donors.
In some cases, this type of accountability exaggerates the gap between state and society. The main problem with aid is that it severs the link between individual and governments and erodes sanctity of a democratic contract. Like in Muslim sub-Saharan Africa around 70 percent of the government revenues are financed by aid flows. The governments of these states rationally focus on donors.
Similarly, if we look at the role of the IMF in Pakistan in 2001 when the US was looking for a foothold in Afghanistan, Pakistan received a huge loan from the Fund, twice its previous loans. It shows that the political and strategic importance of a country can result in larger loans and softer conditions. Perhaps such politically-influenced loans and aids empower the government of the time, enable it to survive, and infuse foreign currency reserves — but the country eventually pays a high price for it.
Despite 61 years of engagement with the IMF, foreign assistance has not produced the desired results in Pakistan. In fact, it has only increased our debt burden and distorted our economic development.
Despite 61 years of engagement with the IMF, foreign assistance has not produced the desired results in Pakistan. In fact, it has only increased our debt burden and distorted our economic development. Approximately 60 percent of the government’s revenues are spent on debt-servicing. Increased debt payments and cutbacks in government spending make it more difficult for the states to provide decent public services and to reinforce quality reforms in education, health, and social sector. Policy decisions made by the IMF and World Bank have led to traumatic consequences for the least developed countries. Poverty and inequality have increased, and poor states are deprived of resources crucial for their survival.
The major reason for this inefficacy of aid in Pakistan, Afghanistan, and other less developing countries seems to be corruption. The CPI index consistently places these countries at the bottom. Their administrative machinery is incompetent as politicians pursue vested interests and are not committed to economic growth. Performance is not incentivized, domestic institutions are inefficient and structural reforms are negligent.
Aid also brings paradoxical tax outcomes. The overconcentration of government and international development partners on revenue-generating targets has neglected the politics of taxation and has prevented the emergence of a harmonized taxation system. For example, in Africa aid has contributed to the killing of entrepreneurship. Every year African countries are among the worst places to do business, according to the World Bank report on Doing Business. There are countries like Australia where it takes a day or two to get a business license whereas in Africa it takes up to two years. So, neither are jobs nor systems for business or entrepreneurship created – because these states rely on aid rather than tax revenues.
Pakistan’s case is the same. The state is unlikely to meet several Sustainable Development Goals (SDGs), such as those concerning hunger, education, gender equality, poor sanitation, and child and maternal mortality. And, there is a lack of social structures to harness better ideas.
The effectiveness of aid is not isolated from the effectiveness of development. The states should set priorities right, to accomplish the objective of effectiveness of aid. It is important to improve the capacity of developing countries and to incorporate all the development partners for economic gain. Politically influenced aid should be ruled out and accessibility of aid should be in the hands of common men rather than the state – for, better aid management focus should be on “bottom to top” rather than “top to bottom” approach. The recipient countries should give appropriate attention to their policies as well as to how aid resources are prioritised, delivered, and handled. Lastly, the most appropriate measure would be to allow recipient countries to take the decisions about where aid should be invested — depending on their priorities.