The accumulated debt burden of developed countries doesn’t give any hope to believe that pre-crisis export-led growth level of the region would be revived any time soon. There is a need to explore new sources of domestic as well as regional demand just to compensate the loss incurred from the weakened Western demand for the region’s exports. A recent survey of United Nations Economic and Social Commission for Asia and the Pacific – Economic and Social Survey of Asia and the Pacific, 2010, Sustaining Recovery and Dynamism for Inclusive Development – recommends, “parts of the solution could be to develop a more consumer-centric economy in the region – one in which rising consumption is increasingly fed by production from within the region. By allocating financial capital more efficiently within the region, more jobs could be generated and the benefits of economic growth could be spread more equitably, in turn stimulating increases in private consumption”.
As foreign aid is a function of both demand and supply factors, the ever increasing flow of foreign aid can be attributed to both increase in developmental activities and increase in number of donors over the years. The policy issues often raised in foreign aid reform programs include, significance of foreign aid; priority based assistance; possibility of replacing external assistance through domestic resource mobilization; opportunity costs; impact on inflation and exchange rates; elimination of donor-driven assistance; linking governance with aid effectiveness; the possibility of ‘new donors’; and long-term exit strategy for aid. These indicators should revolve around the question of equity implications, impact on poverty and income distribution and managing and sustaining the concept of inclusive growth.
Study shows aid is positively related to per capital real Gross Domestic Product (GDP) in the long run. Its effectiveness increases largely with the increase in good policy environment. The prime issue is not whether foreign aid has contributed to GDP and development of Nepal; rather the issue is whether foreign aid has been used effectively? Has it been able to channelize most productive sectors so that development activities can be accelerated? Is there any scope for improving allocative efficiency of foreign aid?
Nepal has historically been practicing deficit budgets as a part of its fiscal policy. The fiscal deficit, which is defined as difference between total expenditure and total revenue, was nearly 50 percent of total expenditure in the early 1990s. With reform in public expenditure and success in revenue front, the data shows a decreasing trend in the deficit, which decreased nearly to 35 percent in Fiscal Year (FY) 2000/01 and declined further to 33 percent in FY 2007/08. However, Nepal has still not been able to meet the saving-investment gap through domestic sources to finance its expenditure as the total consumption is seen growing over the years accounting nearly 88 percent of total GDP. It makes difficult to take exit from foreign aid in near future.
If the objective of foreign aid is to reduce cost, increase benefits and enhance domestic savings, efforts should be made to accept assistance to supplement deficit rather substitute existing resource potential.
The aid targeted for developmental projects is often times alleged to have been directed toward political and strategic interests. Administering foreign assistance has usually been quite poor in terms of providing aid to needy countries in general and targeted beneficiaries in the recipient countries in particular. The conditional aid loans based on policy reforms provided to Africa and many other countries including Latin America just remained discouraging. There is evidence that US$568 billion were spent on aid to Africa, and yet the typical African country is no richer today than 40 years ago. If the key objective of Official Development Assistance (ODA) is to promote development, and consider aid effectiveness with economic growth, it should be a measure to link aid to the priorities of the recipient countries. In many cases, this has not happened since external assistance is not value free.
The rich donors always lag behind their commitment to offer 0.7 percent of their Gross National Income (GNI) as official development aid. The level of aid did not increase when GNI of rich countries increased. Instead of 0.7 percent, the amount of aid has been around 0.2 percent to 0.4 percent, some US$100 billion short during 1990-2009. Net ODA in US dollars term is not, however, discouraging but net ODA as a percent of GNI is still below the commitments. The Organization of Economic Co-operation and Development reveals, when aid is broken down by regions over time, the poorest countries get less of the foreign aid. For example, of the aid that has been delivered since 1970, roughly a quarter seems to have gone to the poorest regions from all Development Assistance Committee aid.
Nepal’s macroeconomic difficulties have put heavy pressures, which are reflected in high price rise in food and non-food products. Consecutively, for the last two years, Nepal has been suffering from double-digit inflation. Domestic borrowing is constrained by liquidity crunch and declining credit flow to the private sector. Higher side of total public spending is covered by recurrent expenditure because capital expenditure hardly covers 30 percent of the budget estimate. Secondly, disbursement from development partners is steadily declining as compared to their commitments because current political instability is contributing more to declining aid utilization. This strengthens the case for analyzing impact of foreign aid by diagnosing relationship between political instability and foreign aid regime.
Besides humanitarian interest, the benefit and cost of external assistance largely depends on donor-recipient strategic interests. At times, strategic interest of the donor may overlook economic concerns, and aid, at whatever level it is executed, the cost may exceed benefit. The US has earmarked US$75 billion for Afghanistan, US$65 billion to Iraq, US$3.25 billion to Pakistan and US$3 billion to Israel respectively in 2010 annual budget. Therefore, it is not that easy to precisely justify the relative merit of such assistance.
In the past, many of the biggest recipients of foreign assistance have been among the globe’s worst economic performers. A 100 nations’ review shows that long-term aid is not a means to create growth. During the year 1980 to 1994, countries with a rating of A or B, averaged real per capita GDP growth of 2.4 percent, however, 27 countries whose economy was graded F actually shrunk. The benefit and cost may therefore, be expected in terms of policy success and policy failure.
USAID admits much of the investment financed by them and other donors between 1960 and 1980 has disappeared without a trace. The government-to-government transfers could not generate self-sustaining economic growth. Over US$2 billion investments in Zaire served no purpose. Similarly, a recent survey shows that out of Rs 100 foreign aid extended to Nepal, only Rs 74 passes through national budgetary system. The remaining Rs 26 is outside government’s information. This should be a case for elaborating emerging policy issues in Nepal’s forthcoming foreign aid policy.
If the objective of foreign aid is to reduce cost, increase benefits and enhance domestic savings, efforts should be made to accept assistance to supplement deficit rather substitute existing resource potential. The ultimate aim of aid policy is therefore to link it up with trade, investment and private capital inflow where the donors’ role is like that of facilitator and not a rescuer.
bishwambher@yahoo.com
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