Rethinking our relationship with western largesse

By Mahtab Haider, NewAge, February 27, 2009

EVERY year Bangladesh pays an average of $710 million to its foreign creditors. For every dollar in foreign grant received, the government spends over $1.5 in debt service to foreign creditors annually. These debt servicing payments come at a tremendous cost. In 2003, for instance, the debt service bill of $672 million exceeded the total government spending on health that year by nearly $200 million and was about two-thirds of the government’s total spending on education. While there is no denying that Bangladesh has in the past been heavily dependent on foreign aid and loans to finance its annual budget, it is also true that aid agencies and multilateral lenders in the west have to carry a lion’s share of the blame for

Bangladesh’s burden of debt. Between 1980 and 2004, Bangladesh’s total outstanding international debt quadrupled. What is of immense significance in that statistic is that it was between 1980 and 1990 – during a decade of military dictatorships characterised by rampant corruption and political oppression – Bangladesh’s debt figure tripled from $3,921 million in 1980 to $12,439 million in 1990. The bulk of this surge in lending to the autocratic regimes came from the International Development Association, the soft-loan window of the World Bank. Can the World Bank and the International Monetary Fund morally impose the burden of this debt on the Bangladeshi people when, in fact, that money provided valuable succour to an autocratic regime that the people were struggling to topple at the time? Today, nearly two decades later, Bangladesh is still paying back loans that the dictatorial regime of General Ershad availed from the World Bank and the IMF in the 1990s, much of which was pillaged and squirreled away to foreign bank accounts.

For those of us who live in a country which has for decades had to rely on foreign aid to finance balance of payments and budget deficits, the question that really needs to be asked is: Has the time now come to wean ourselves off foreign loans and aid, given that it now accounts for so little of our GDP and allows multilateral lenders and donors to issue diktats on policy matters? To contextualise the evidently charitable intentions that aid and grants seem to have, it is important also to ask whether the purpose of this largesse is indeed charitable.

The apparent altruism of the aid industry is perhaps best exposed as a sham in the revelation that in no time in modern human history have such loans and aid been offered more generously as the era of the Cold War. As one country after another in Asia’s south and far east either braced Soviet-style or China-style socialist or communist economic systems, 50 per cent of all US aid (loans and grants) were going to countries like South Korea, Vietnam and Thailand, India, Pakistan and Iran to resist the ‘red wave’. In 1952 when the US noted rising Soviet penetration in Europe, $13.3 billion went to countries in eastern European states to prevent them from switching allegiance to the USSR. So apprehensive was the US that the Soviets would find a foothold in their backyard, Latin America, that it, along with the World Bank, which has traditionally served US geopolitical interests, lent heavily to Latin American governments, pushing the region’s external debt from $12.6 billion in 1960 to $28.9 billion in 1970, a 230 per cent increase in a decade.

And there was no pretence in the way this was done. A US National Security Council memo from 1965 reads: ‘USAID [the US government’s aid agency] should be used as a political weapon with major assistance going to African friends of the US.’ Another USAID brochure states, ‘The principal beneficiary of American foreign assistance programmes has always been the United States. Close to 80 per cent of USAID’s contracts and grants flow back to American firms’ (quoted in Berrios, Contracting for Development). While USAID makes no secret of this aim, most aid agencies and multilateral lenders do. In fact, as economist Salim Rashid points out, the fact that aid from national entities is often driven by the altruism of common people, governments are held accountable – at least to some extent – for how the aid money is spent. When it comes to multilateral lenders such as the World Bank, the IMF and the Asian Development Bank, the lack of a questioning constituency makes them the more likely violators of the mission.

During the Cold War, the battle for influence was a three-way fight which included China’s struggle with the Soviets to support and establish Beijing-friendly regimes across the world. In 1965, during the US war in Vietnam, while Moscow was funding Hanoi’s purchases of arms to fight the South Vietnamese funded by the US, Beijing offered Hanoi a massive $1.6 billion loans if it agreed to abandon all ties with Moscow.

Much of the weapons used in Angola’s civil war – which cost over 500,000 lives and is the longest running civil war in African history – were bought with rival funds that the US and Soviets made available to the rival warring factions. While the Soviets gave the MPLA faction loans to buy weapons, their enemies, the FNLA and UNITA rebels, were bankrolled by the US government.

Perhaps one of the most tragic examples of how Western aid – used to advance its geopolitical interests – resulted in the loss of hundreds of thousands of lives is borne out by the Saddam-era Iraq. Saddam Hussein was lent over a $100 billion by the US through proxy loans channelled through the Arab states to support his invasion of Iran. While the Europeans lent to Saddam’s government in order to bankroll his purchase of weapons from Europeans manufacturers, the US had specific geopolitical interests in mind when it secretly channelled hundreds of millions of dollars from the US Department of Agriculture to finance Iraq’s secret rearming, in order to gain leverage for the rescue of fifty or so US hostages that Iran was holding from the revolution that overthrew the Shah.

On February 5, 2003, the then US secretary of state, Colin Powell, presented a dossier to the UN Security Council to build the case for why the US and its allies should use force to neutralise the Saddam Hussein regime in Iraq. One of the ‘chemical weapons plants’ that Powell claimed was a key component of Iraq’s chemical weapons arsenal was the ‘Chlorine Plant Faluja 2’ located 50 miles outside of Baghdad. It is an irony that 17 years before, in 1985, it was the British government that had financed the $28 million plant for Saddam’s regime. When senior British bureaucrats, in the Ministry of Defence no less, flagged the possibility that Saddam’s regime might manufacture the chemical weapon mustard gas at the plant, the then British trade minister, Paul Channon, remarked that withdrawing the financing would do Britain’s other trade interests in Iraq – mainly weapons sales – ‘no good’.

But what about the benign aid that does not finance chemicals weapons plants or prop up dictatorships such as the Ershad regime in Dhaka or more recently the Musharraf regime in Pakistan? What about the kind of aid that targets environmental degradation or rural livelihoods diversification. What about the money the United Nations spends in the third world to educate more children or protect them from abuse? How could aid like that possibly harm the beneficiary country? While it must be conceded aid has financed a remarkable degree of progress in Bangladesh, be it in rural access to public health services or tackling infant mortality, the conventional process of aid has had an insidious effect on governance that is often difficult to identify and quantify.

In 2004, Robert McNab, an assistant professor at the Defence Resources Management Institute in the US, and Stephen Everhart, who is a chief economist at the Overseas Private Investment Corporation, a US government agency, studied the possible effects that the conventional aid process can have on a country’s social and economic fabric. The results of their empirical study confirm what could be described as ‘intellectually commonplace’ conclusions about the effects of aid.

In the 2004 book Rotting from the head (UPL), McNab and Everhart write, ‘We found that international aid directly increases corrupt activities and retards the rate of economic growth. We also found evidence to support the hypothesis [that] international aid through increased levels of corruption, lowers the quality of governance. Coupled with the empirical finding that the quality of governance and economic growth are positively related, this result provides evidence of an indirect channel of international aid and corruption through governance to economic growth.’

In an essay titled ‘Corruption, International Donors, and Governance’, McNab and another economist Francois Melese write: ‘Politicians of developed countries provide financial and political support to the donor organisations to further their own foreign policy objectives. For the donor organisations, soliciting and disbursing aid provides a rationale for their existence and employment of their personnel. Politicians in the developing and transitional countries view international aid as a means of garnering and maintaining political support. International donor organisations, in effect, capture local politicians who thus have an incentive to support the agenda of the international organisation over the local needs and preferences of their constituents.’

The authors go on to point out how working with and cooperating with international donor organisations comes with strong financial and reputational incentives. Emerging democracies are particularly susceptible to these temptations and pressures as resources are typically quite scarce and aligning oneself with donor organisations offers a degree of control or influence over aid flows. This especially applies to the bureaucracy where anyone who criticises international aid agencies may find himself alienated and cornered because of the influence the donors wield over political lobbies, whereas currying favour with donors cannot only lead to financial rewards but also improved career prospects. The agencies themselves are often protected by secrecy clauses that restrict the access the press (and thus the public) have over information on expenditures. The result is, as empirical studies have confirmed, that countries that receive lower levels of international assistance relative to the GDP over time grew faster than countries with higher levels of assistance (Easterly 2002).

Bangladesh is perhaps one of the best examples of how a culture of foreign aid dependence may have achieved development, but also created a culture of corruption that spread to the bureaucracy – even at the highest levels. Against this backdrop, perhaps it is time for us to rethink our relationship with foreign loans and grants.


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