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March 18, 2018

Untying aid


March 18, 2018

Foreign aid has been utilised and is still being employed by donor countries to accomplish a broad set of objectives that range from commercial and trade interests to political and security objectives.

Let’s focus on the economic and commercial interests of US aid to Pakistan and how America has made efforts to extract maximum benefits from the aid programme, alongside pursuing its multifaceted foreign policy goals.

The US has undoubtedly remained the largest provider of both economic and security assistance to Pakistan over the last 15 years or so, even though US aid has considerably decreased in recent times. While the US has also disbursed considerable aid to Pakistan in the form of cash or direct budget support, the majority of its aid has been in the form of projects that are often conceived in Washington by US policymakers.

Almost all projects have been implemented by US-based contractors and firms despite the fact that public and private sector organisations in Pakistan have some role to play in identifying the broader sectors and areas where attention is required.

In order to obtain commercial benefits for domestic business lobbies and firms, some bilateral donors ‘tie’ their aid to the procurement of goods and services. This practice incurs extra costs on countries receiving aid. As a result, goods bought from donors may not be appropriate and of good quality in comparison to those procured in the open market. The World Bank – in its 1998 report on aid-effectiveness titled ‘Assessing Aid: What Works, What doesn’t and Why’ – has estimated that these practices reduce the actual value of aid.

Nevertheless, the US has mandated by law that almost all its official aid be spent on the procurement of goods in America on US-produced items. At the OECD, an exclusive club of bilateral donors, the US remains at the forefront to exempt food and technical assistance from ‘untied aid’ policy. This ensures that US aid recipients purchase all food items in America rather than buy them in the open market at comparatively lesser prices.

Under the current legislation, Section 604 of the Foreign Assistance Act, often referred to as the ‘Buy America’ provision, restricts the utilisation of US aid outside America. The act, which is related to the procurement of goods and services, ensures that a maximum amount of aid is spent on commodities that are made in America. It also stipulates that US nationals should be employed as consultants and project officials.

In addition to setting out provisions on goods and services, Section 604 also deals with the transportation of commodities in US flag carriers and it states that all goods must be shipped through American freight companies. In this context, it is also relevant to recall that in the early 1950s, when Pakistan received considerable US aid in the form of food commodities, shipping wheat from the US to Pakistan in American ships used to cost $26 per tonne while the prevalent market rate was between $12 and $14 per tonne. Pakistan had no option but to transport all the commodities in US vessels.

Let’s consider another example to illustrate the issue of aid in the form of cash and ‘in kind’. The 2010 floods in Pakistan had affected 20 million people, damaged 1.6 million homes and rendered 7.3 million people homeless. Following the humanitarian crisis, numerous aircraft were sent by donors containing various kinds of relief items.

Around 316 aircraft arrived in Pakistan with variety of food and non-food items from a number of international donors. The US also provided 436,000 halal meals worth $3.5 million to flood victims. It is not clear whether this included transportation costs. It seems quite irrational to distribute packed and cooked food items from America in US planes rather than arranging such food items within Pakistan, which would have been easier and cheaper to do.

But in that case, the money would have been invested and utilised in the local market and not in America to purchase US items – a tangible commercial enterprise. Even the NDMA had appealed to the international donor community to purchase their relief goods from within Pakistan where possible as this would save logistical costs of transport; expedite the delivery of relief goods to the affected population; and strengthen the local economy. But how could donor countries support their own businesses and promote their commercial interests if they bought these items from developing countries?

Although there is no doubt that the US has provided substantial funds to various socioeconomic sectors, most of these funds were utilised via US-based organisations, firms and companies.

In the aftermath of the 2005 Kashmir earthquake, interventions were carried out in almost all its projects in the reconstruction phase in partnership with US-based international firms. In the earthquake-hit areas, four major areas included reconstruction, education, health and the rehabilitation of economic activities to improve livelihoods. These interventions were carried out in partnership.

While the US has financed numerous projects in Pakistan, most of these were carried out through US-based firms and consultants in order to get more financial and trade benefits for American companies. Government line ministries and provincial and district departments were not given a central role to exercise leadership over US-financed development projects. Given the minimal role of Pakistani institutions, the overall administrative cost of USAID projects was also quite high, which dwarfed the actual development budget spent within the country.

A development practitioner quoted in the Asian Development Bank’s country report on Pakistan has pointed out that the cost is Rs1 if projects and activities are implemented with community self-help. The report states that: “the cost is Rs3 if [a] local government handles it; Rs7 if [a] provincial government handles it; and Rs28 if it is donor-funded”. Therefore, giving a limited role to international partners where it is indispensable and delegating more vital authority to national institutions would substantially minimise the administrative costs of donor-funded projects.

But donors clearly have commercial and trade interests in giving aid ‘in kind’ rather than in hard currency and implementing projects through their own partners. In addition, the lack of appropriate capacity and the prevalence of corruption is another major constraint that persuades donors to delegate less authority to local organisations.

If donors do not exhibit some degree of selflessness and continue to prioritise their own foreign policy as well as trade and commercial interests in allocating development and humanitarian aid, then the alleviation of global poverty will remain a distant dream.

The writer is a postdoctoral research fellow at the German Development Institute at Bonn, Germany.

Email: [email protected]

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