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FOREIGN AID AS AN ECONOMIC INSTRUMENT OF POLICY



Foreign aid—the transfer of money, goods, or technical advice from a donor to a recipient—is an instrument of policy that has been used in foreign relations ,for centuries. In the past it was used primarily for short-run political advantages rather than for humanitarian principles or long-range economic development. In the eighteenth century, statesmen regularly offered their foreign counterparts "pensions" or bribes of cash for the performance of certain services. Govern-. ments also used military aid in the form of subsidies and donations of men and equipment. Throughout the eighteenth and nineteenth centuries, the British were often unwilling to sustain the costs of maintaining large standing armies; instead, they provided money, materiel, and naval power while their allies raised troops and fought most of the land battles. Most eighteenth-century alliances included provisions for financial subsidies. In the Treaty of Worms of 1743, for instance, Britain pledged Austria a subsidy of £ 300,000 in addition to 12,000 troops.

Economic needs and expectations today are acute and widespread among more than 65 percent of the world's population. Economic development and industrialization are among the main objectives of public policy in all countries, but many nations cannot hope to achieve these goals without the assistance of those societies that can provide development capital and technological skills. Aid programs benefit simultaneously the donors and the recipients: Recipients receive money, loans, materials, and knowledge, from which they hope to fashion a modern economy, political stability, or military security; the donors, regardless of the types of "strings" they attach to their aid, always hope to receive some political or commercial dividend either immediately or in the long run.

The British were the first to formulate aid policies designed primarily to foster long-range economic development. Through the Colonial Development

227Economic Instruments of Policy

and Welfare programs beginning in the 1930s, they sought to diversify the economies of their colonies and prepare them for both political and economic independence. After World War II, the United States displaced Britain as the main dispenser of foreign aid, first to help reconstruct war-damaged European economies—for which the Americans spent $12 billion in the European Recovery Program—and later to assist the developing countries in creating modern military forces and begin the long road to economic viability and industrialization. After Stalin's death in 1953, the Soviet Union joined the expanding group of states that was donating funds and technological advice to Asia, Africa, and Latin America. Today, almost all industrialized states of the world contribute at least some of their wealth and skills. Most of the programs are bilateral undertakings negotiated directly between donors and recipients; but, in addition, there are multilateral aid organizations and programs, such as the International Bank for Reconstruction and Development and the United Nations Technical Assis­tance Program, through which industrialized members of the organization make available personnel with special skills to the developing members. Although these multilateral programs have grown rapidly during the last decade, their value still constitutes less than 25 percent of the aid that flows from industrialized countries to the Third World.

The Donors

All industrial countries, most of the socialist states, and all members of OPEC participate in a variety of bilateral and multilateral aid programs. While the total sums have passed the $30 billion mark annually, this figure, given inflation and the needs of the poorest countries, is judged by most experts to be grossly insufficient. Moreover, since net flows of aid have not kept up with need or demand, use of this economic instrument for political purposes is probably becoming less effective. For one thing, aid donors distribute loans, grants, and technical assistance over a broad range of recipients. Only a few countries receive large sums of aid from a single source today. For example, although the United States in the early 1980s distributed almost $4.5 billion annually (the largest donor), only a few recipients, such as South Korea and Turkey, are significantly dependent upon the United States for aid funds. Most other recipients obtain funds from a variety of bilateral and multilateral donors, making the American contribution relatively insignificant to their total economic activity. Moreover, given inflation, the decline in the value of the dollar, and the virtual cessation of growth in American aid disbursements, the United States is rapidly declining as a major factor in aid-related politics. Table 9-1 indicates that while the United States still allocates the largest total sum annually, its preeminent position in aid flows, so pronounced in the 1950s and 1960s, no longer exists. For example, three relatively minor donors—France, Canada, and Sweden—provided more aid, combined, than the United States. France and West Germany combined provided in 1980 almost $2 billion more than the United States. In 1977, three

 

 

228 Economic Instruments of Policy

Arab countries—Saudi Arabia, Kuwait, and the United Arab Emirates, which, combined, have less than 4 percent of the American population—donated more total funds to foreign aid than the United States did. The point is not only that many states are active in the aid process, but that should one of the actors threaten to stop aid programs, there are many other donors who would be available to step in. In brief, in many cases, aid stoppages as a form of coercion can be effective only if there is a coalition of donors who coordinate their policies.

Although not directly related to the wielding of political influence, figures on aid by donors also reveal something about the degrees of commitment to aid programs. Table 9-1 indicates that, after Italy, the United States is the lowest donor among the industrial countries, measured on a per capita basis. Recalling that the official United Nations aid target for industrial countries is 0.7 percent of the GNP, the United States approaches only 26 percent of the target. In fact, only a few countries—none of which has important political or security interests in the Third World—have surpassed the United Nations target. They are Norway, Sweden, Denmark, and the Netherlands. Several OPEC coun­tries have also surpassed the target.

The aid programs of the socialist countries are unimpressive. Soviet aid to a few key client states such as Afghanistan, Ethiopia, and the Peoples' Democratic Republic of Yemen is no doubt crucial. Elsewhere, its impact cannot be translated easily into political influence. Even tiny, isolated Albania, which received considerable largesse from China in the 1960s and early 1970s, was able to break off that relationship with minimal negative economic impact.

Our conclusion must be that, despite a few countries which remain highly dependent on a single donor, the patterns of aid flows throughout the world show considerable dispersion and declining vulnerability of recipients. Taken in combination with other techniques of coercion, such as cutting off credits and loans or trade boycotts, aid cessation may be important. But, in most cases, it has become an insufficient means by itself to alter the domestic and foreign policies of most recipients.

Table 9-1Official Development Assistance, 1980, in Million U.S. $

DONOR TOTAL AID PERCENT DONOR GNP
Sweden 1,125 .95
France 3,836 .59
United Kingdom 2,453 .52
Canada 1,151 .46
West Germany 3,581 .44
Japan 3,071 .27
United States 4,567 .18
Italy

Source Data from International Bank for Reconstruction and Devel­opment, World Development Report, 1980 (Washington, DC : World Bank 1980).

Types of Foreign Aid

There are four main types of aid programs: (1) military aid, (2) technical assis­tance, (3) grants and commodity import programs, and (4) development loans. The first is also probably the oldest, for military aid is a traditional technique for buttressing alliances. In the last century, both France and Great Britain spent millions of francs and pounds to strengthen their continental allies. The donors supplied money and materiel, while the recipients provided most of the manpower.7 Since World War II, the United States and the Soviet Union have spent more resources on military aid than on their foreign economic pro­grams—and the objective has been the traditional one of safeguarding their own security by strengthening the military capabilities of allies. By helping recipi­ents build up modern forces, the donors hope to obtain some immediate political or security objective. For example, since the British withdrawal from the Persian Gulf area in the late 1960s and early 1970s, the United States has donated or sold hundreds of millions of dollars worth of military equipment to Saudi Arabia and Iran, in the hopes that these countries could maintain the status quo in the region and prevent any radical Arab governments from gaining control over oil transportation routes. In short, military aid is used to create local power balances or preponderances, thus reducing the likelihood that the donor will have to station troops abroad or intervene militarily to protect its interests.

Most forms of military aid have the advantages of built-in controls. Not only are the recipients dependent upon the donors for creating a modern military force, but they cannot operate the force effectively unless the donor is willing to provide the necessary training support, replacement parts, and maintenance. Thus, the controls provide a partial guarantee that the recipient will use its military forces in a manner compatible with the interests of the donor—unless the recipient can obtain ammunition, spare parts, and training from alternative sources. In 1954, for example, Syngman Rhee's government in South Korea threatened to break the armistice ending the Korean War and invade North Korea to reunify the country by force. The American government strongly op­posed the scheme and threatened to cease all military aid to the Republic of Korea if Rhee carried out his plans. Since the South Koreans were almost totally dependent upon the United States for their military equipment, the Korean government had little choice but to abandon the proposal.

Technical assistance, the least costly of all types of aid programs, is designed to disseminate knowledge and skills rather than goods or funds. Person­nel with special skills from industrialized countries go abroad to advise on a wide variety of projects. Some famous American programs and organizations

7 Hans Morgenthau, "A Political Theory of Foreign Aid," The American Political Science Review, 56 (1962), 303. Monetary and honorific rewards—or bribes—were also used extensively as a means of achieving diplomatic objectives in the eighteenth century. For a humorous lesson on how to use diplomatic bribes and a description of the various European "customs" for proffering and receiving such bribes, see the essay by Francois de Callieres, On the Manner of Negotiating with Princes, trans. A.F. Whyte (South Bend, Ind.: University of Notre Dame Press, 1963), pp. 24-26.

230 Economic Instruments of Policy

such as "Point Four" and the Peace Corps have been associated with such proj­ects as malaria control, agricultural mechanization, public administration, devel­opment of fisheries, teaching programs, land reclamation, road construction, and development of medical and sanitary facilities. The impact of these programs can be very great, particularly in rural areas, while the costs are relatively modest except when they are associated with major development projects.

Until the late 1950s, the preferred method of transferring capital and goods was to donate outright grants or gifts for which no economic repayment was expected. This was the form in which most American funds for the European Recovery Program and the Mutual Security Program were dispensed. But out­right gifts of this type always create problems for the donor and recipient, and lately the governments of the major powers have replaced grants with long-term loans. Grants of military equipment are still dispensed regularly, and special economic grants are frequently made available when countries face such emer­gencies as an immediate military threat, famine, or floods. Under Public Law 480, also known as the "Food for Peace" program, the United States annually distributed abroad several million tons of surplus food for which the recipients paid low prices in their own currencies rather than in dollars. The payments were usually kept in special funds that were lent back to the receiving country for economic development projects. These transactions constitute at once grants, subsidies, and loans.

Foreign aid in the form of loans is not, strictly speaking, aid at all. Loans represent a short-term transfer of funds, but since recipients pay back principal and interest, the transfer is only temporary. Only to the extent that bilateral and multilateral loans are made to recipients with very poor credit ratings, or at interest rates lower than those prevailing in international financial markets, can they be considered aid. And yet, the myth persists that loans some­how constitute an important component of aid programs from the wealthy to the needy.

Considerable disillusionment has spread among recipients of loans. Many are approaching the point where they have to pay more in interest on past loans than they take in on new ones. Loans, in other words, eventually represent a net outflow of funds from the developing countries to the donors. In addition, many loans involve economic "strings" that for a variety of reasons recipients would prefer to avoid. Others are reluctant to borrow abroad because bilateral loans are often "tied." That is, recipients are required to use loan funds to buy products from the donor. Often these are at costs above market rates, or the goods are of inferior quality. Tied loans are, in fact, primarily a subsidy by the donor's government to its own business and shipping interests. Despite these negative features of loans, they can be and have been used to wield political influence over recipients. Regimes that challenge economic ortho­doxy in their domestic policies—for example, by nationalizing foreign firms— are frequently turned down in loan requests by Western governments or even by multilateral institutions such as the World Bank.

231 Economic Instruments of Policy

What proportion each dispensing country devotes to these types of pro­grams will reflect its overall foreign-policy objectives. During and immediately after the Korean War, the United States, fearing military invasions from Commu­nist Russia and China, emphasized military aid and defense support for its main allies. In 1953, for example, the United States allocated $4.2 billion for military grants and only $2.6 billion for economic aid. In the later years of the Eisenhower administration and during the 1960s, the American government reduced military aid and increased lending facilities to support long-range development projects for nonaligned as well as allied countries. In 1961, a typical year of post-Korean War aid programs, the United States spent $5.9 billion on foreign assistance, divided almost equally between grants and loans. But over 75 percent of the sum was made available for economic development loans, technical assistance, emergency relief, and surplus food grants, with the remainder devoted to military grants.8 In the 1970s, American aid appropriations declined in size. They were broken down almost equally between military aid and defense support on the one hand and economic assistance on the other.

Political Objectives of Foreign Aid

Given the dependence of many developing countries on industrialized nations for capital, advice, and occasionally military assistance, how is foreign aid used as an instrument of policy to influence the behavior of recipients? What criteria do governments use in dispensing aid? Are they purely economic and humanitar­ian, or do military and political considerations dominate the foreign-aid policy processes?

Most aid programs are obviously not undertaken solely for humanitarian purposes, for a vast portion of the aid goes to a few countries—and sometimes not the countries with the most pressing needs. India, Pakistan, and Egypt, for instance, are large recipients because of their strategic and symbolic impor­tance in world politics. On the other hand, not all aid policies and commitments have an immediate or exclusive political or security objective. Many aid programs are formulated by trained economists, on the basis of economic criteria. Others are designed to relieve immediate suffering or forestall some economic catastro­phe. Yet, aside from relieving emergencies, economic development is seldom considered by the donors as an end in itself. Even in the long run, it is designed to help secure certain of the donors' political objectives, which it cannot achieve solely through diplomacy, propaganda, or military policies.

Table 9-2 provides some indirect evidence about the political and secu­rity considerations underlying most bilateral aid programs. If most aid funds were committed on the basis of need, then those countries with lowest per capita incomes would receive a substantial amount from donors. The figures

8 Agency for International Development, U. S. Foreign Assistance and Assistance from Interna­tional Organizations: Obligations and Loan Authorizations, July 1, 1945-June 30, 1961 (revised) (Washing­ton, D.C: Agency for International Development, n.d.), p. 1.

Table 9-2Percent Donor Aid to Low Income Countries, 1978

  PERCENT AID TO LOW
DONOR INCOME COUNTRIES
Sweden
Canada
United Kingdom
Japan
West Germany
United States
France
Italy

Source Data from International Bank for Reconstruction and Development, World Development Report, 1980 (Washington, DC World Bank, 1980).

suggest otherwise. Trailing Italy and France, the United States in 1978 distrib­uted only 22 percent of its aid funds to countries designated by the United Nations as "low income." Major recipients of American aid, such as Egypt, South Korea, Brazil, Nigeria, and Turkey, are, in fact, "middle income" countries. In contrast, 39 percent of Sweden's aid in 1978 was directed to low-income countries. It must be recognized, nevertheless, that some low income countries have the capacity to absorb only limited foreign funds, and we must acknowledge as well that important segments of population in the middle income countries suffer equally from want and privation. Yet, these and other figures do suggest that criteria other than need loom important in allocation decisions.

The assumption behind most Western economic development programs is that successful economic development in developing countries will create political stability and reduce the threat of violent revolution and unrest, which can be exploited by Communists. Some also assume, although there is little evidence to support the view, that economic development will help bring liberal democratic regimes into power and prevent the recipients from pursuing adven­turous foreign policies. A healthy economy, they argue, brings about a pacific foreign policy.9

Another prominent theme governments use to justify their aid programs is that economic development helps buttress the independence of the recipients, enabling them to resist dependence on any one state or group of states. The

9 As Hans Morgenthau has argued, "The popular mind . . . and much of the practice of foreign aid has proceeded from certain unexamined assumptions, no less doubtful for being deeply embedded in the American folklore of politics. Thus the popular mind has established correlations between the infusion of capital and technology into a primitive society and its domestic development, between economic development and social stability, between social stability and demo­cratic institutions, between democratic institutions and a peaceful foreign policy. However attractive and reassuring these correlations may sound to American ears, they are borne out neither by the experiences we have had with our policies of foreign aid nor by general historic experience." "A Political Theory," pp. 304-5.

233 Economic Instruments of Policy

stronger they are economically and militarily, the less vulnerable they become to external diplomatic and economic pressures and to subversion. From the American point of view in particular, the presence of a group of genuinely independent states is perceived to have a direct relation to U.S. security interests. It reduces the number of military commitments—including interventions—that the United States must make, and also precludes the necessity for stationing even more troops and bases abroad. From the French and British perspectives, foreign-aid programs are also regarded as a continuing commitment to improve­ment of former colonial holdings, as a means of expanding commercial opportu­nities, and as a method of maintaining some diplomatic influence in regions formerly under their exclusive control.

The Soviet Union, even though it often claims the opposite in its propa­ganda, dispenses aid to help support its political objectives and, like some West­ern countries, occasionally threatens to cut off aid as a punishment. Not only can the aid be used for short-run political advantages as a reward or punishment and means for increasing Soviet prestige among developing countries, but the Soviet government also conceives of aid as a method by which it can speed up the process of industrialization, create an urban proletariat, and pave the way for eventual liquidation of capitalism and transformation of new countries into socialism.10

No matter what the original objective of an aid program, whether eco­nomic development or human betterment, it can be used for rewarding, threaten­ing, or punishing—that is, for wielding influence over the behavior of recipients in such a manner as to help the donor achieve certain short-run political objec­tives. When donors manipulate aid programs for immediate political advantages, economic and humanitarian criteria, although still relevant, give way to political desiderata.

It may be difficult, finally, to speculate on all the consequences of an aid program. An economic undertaking, for example, may have considerable effects on the character of local or national politics. American aid to Thailand has had as its main objective the integration of the poverty-stricken and isolated northeastern regions with the rest of the country. Aid programs have helped finance hundreds of miles of all-weather roads in the area. These programs have had an economic impact by making it possible for the peasants, for the first time, to market cash crops in other regions of Thailand. On the other hand, the roads also permit the government in Bangkok to extend both services and control into the region and to police the areas against guerrilla activities.11

10 See, for example, Friedrich Ebert Institute, The Soviet Bloc and the Developing Countries (Hanover, W. Germany: Verlag fiir Literatur und Zeitgeschehen, 1962). Both the American and Soviet governments view each other's aid programs as motivated by short-run political consider­ations—particularly to "enslave" the new nations—whereas they commonly refer to their own human­itarian motivations in undertaking aid programs. For the similarity of their views, see J. David Singer, "Soviet and American Foreign Policy Attitudes: Content Analysis of Elite Articulations," Journal of Conflict Resolution, 8 (1964), 446, 450, 461.

11 Joan M. Nelson, Aid, Influence, and Foreign Policy (New York: Macmillan, 1968), p. 22.

 




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