Who Needs Foreign Aid Anyway?

The Monterrey aid summit, organised by the UN to try and double aid to developing countries, hogged the headlines and editorial columns in both recipient and donor countries across the globe. Yet it received remarkably attention in India. Why? Because India receives no net aid.

Interest and amortisation (repayment of principal) of old aid has consistently exceeded fresh inflows since 1995-96, with the result that the dollar flow to India has turned negative. In most developing countries this would be regarded as a disaster. In India it is regarded as irrelevant. That represents an astounding success.

The World Bank is attempting to steal the credit for this. We must resist the theft. At Monterrey, the Bank pleaded for a doubling of global aid on the ground that it had finally learned, from hard experience, how to use effectively-—by increasing it to countries that had good policies and governance, and reducing it to countries that didn’t. It cited India, China, Poland, Uganda and several other countries as having fared well because of aid.

In fact India has done well precisely because it has received so little aid, and depended largely on its own resources and foreign investment. The net aid inflow exceeded $ 2 billion in 1991-92, fell sharply in the next three years, and turned into a net outflow of $ 486 million in 1995-96. The net outflow is estimated at $ 621 million in 200-01. India’s success in the 1990s has been based not on aid but on the lack of it.

This is not to say that the World Bank and IMF made no contribution to India’s success. They provided badly needed emergency assistance when India went bust in 1991. The Bank’s technical studies and suggestions for pushing forward the reform process were valuable, even if not always accepted. Modest loans to back reforms sometimes acted as useful catalysts.

But it simply does not follow from this that India needs more aid, or that more aid will mean faster Indian growth. If anything, it strengthens the case for donors to reduce the volume of aid and focus on improving its quality and selective use. The Indian experience suggests that aid agencies

can be vital in financial emergencies, and can be useful catalysts in countries that are already moving roughly in the right direction. But this is an argument for providing modest sums in the right circumstances. It is not an argument for doubling aid flows.

Even at its peak, the gross aid inflow into India did not exceed one per cent of GDP. By contrast, says William Easterly, a former Bank economist writing in the Wall Street Journal, African countries in the early 1990s received 17 per cent of GDP as aid, converting them into aid dependencies. In small quantities, aid can be a stimulant. In large quantities, it becomes a drug that causes addiction.

The last thing India needs is a flood of aid that rescues our politicians from the consequences of their many follies. The populist policies they followed for decades mean that few states today can pay salaries on time. An empty treasury has been a key reason driving central and state governments to move reluctantly from populist policies to sensible ones. We need to keep up the pressure arising from incipient bankruptcy, not remove it with a flood of aid.

Indeed, the World Bank itself keeps warning that India’s fiscal deficit is too high, and that the government should borrow less. But a large aid inflow will represent a binge of fresh government borrowing. With what face can the Bank argue in New Delhi for less borrowing and in Monterrey for more?

India’s success challenges the core idea at Monterrey that large sums of aid are critical for meeting development challenges. Aid agencies claim that huge sums are needed to meet Millennium development goals, which include unexceptionable aims like halving poverty, enrolling all kids in primary schools, and reducing infant mortality by two-thirds by 2015. But experience shows that large sums are typically stolen or wasted by crooked and incompetent rulers.

The World Bank says it now knows how to use aid productively. The secret, apparently, is to give aid only to countries with sound policies and governance, and deny it to others. But this approach should surely mean reducing aid to most existing recipients. Why then is more aid being demanded from donors? Which recipients can productively absorb tens of billions of dollars of additional aid?

Only India and China can. But both should say no thanks. Indeed, they should get together and propose an additional Millennium goal: the halving of net aid by 2015. After all, development is about reducing aid dependence as much as anything else.

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Table: Indian aid and repayments ($ m)

Gross Aid Amortisation Interest Net inflow

1991-92 4,746 1,491 1,228 2,026

1992-93 3,583 1,562 1,292 729

1993-94 3,756 1,707 1,339 711

1994-95 3,484 1,844 1,476 164

1995-96 3,295 2,262 1,520 -486

1996-97 3,374 1,992 1,372 11

1997-98 3,177 2,031 1,290 -145

1998-99 3,147 2,111 1,234 -198

1999-00 3,299 2,235 1,265 -201

2000-01 3,120 2,553 1,188 -621

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Source: Reserve Bank of India

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