Demystifying foreign aid

To have a serious conversation about foreign aid to Pakistan, one doesn’t need to be a rocket scientist. However, a basic appreciation for the subtleties that distinguish different kinds of donors, different kinds of aid, and the different ways in which aid is spent is important. These distinctions are important for citizens to understand because each one of them has a significant bearing on the depth and breadth of impact that aid can have on Pakistan.
Loans are not the same thing as aid-regardless of official definitions. Loans are funds that Pakistan’s government borrows, acting on behalf of Pakistani citizens. The most important thing to remember about a loan is that it is money that has to be paid back. In any rational and linear space, the loans Pakistan takes would be subject to some kind of parliamentary authority-given that the taxpayers are the ones on the hook for these loans. Invariably, and increasingly, Pakistan takes on debt not only without parliamentary authority, but also without any real public debate on the issue. Most loans are negotiated not by politicians worried about being accountable to voters, but by bureaucrats, most of whom are eager to please past and future employers-like the World Bank and the Asian Development Bank. Unfortunately, with democracy exacting a penetrating revenge on the Pakistani economy, and Wall Street constrained by the global financial crisis, the government has little choice but to seek the help of the keenest lender of all, the International Monetary Fund (IMF).
The bottom-line is that the money government gets from loans does not constitute “assistance” any more than the money given to the government by taxpayers. When Pakistanis are enraged by the terms and conditions of loans taken by Pakistan, it is important to remember where those terms and conditions come from. They only nominally come from Pakistan’s creditors. They come from the desks of the Ministry of Finance. No loan-making entity

can force the Pakistani government to accept conditions that are unacceptable to the people of Pakistan. In short, loans are taxes that your children will pay in the future. This is Irving-Fischer-time-value-of-money territory, not evil-global-domination-by-the-Bretton-Woods consensus. Any country uncomfortable with IMF, World Bank, ADB or IDB prescriptions can simply choose not to take the money. That Pakistani government keeps taking loans and its people keep whining about those loans indicates broken circuits within Pakistan’s political system. Those circuits are not the responsibility of monetarists at the multilateral banks or the IMF. To fix Pakistan’s institutional circuitboard, we need to look closer to home.
The real crux of the matter, in foreign aid, is grant money. The overwhelming majority of grants made to help Pakistan are made by governments of other countries. No matter which country is making the grant, there is a simple laypersons’ principle that can explain why aid is given. It is given in pursuit of national interest.
Traditionally, countries pursue national interest beyond their borders in terms of security, in terms of politics (including culture, faith, language etc.) and in terms of economics. In the post-modern, twenty-first century narrative between rich countries and poor countries, a new dimension to international relations has been the role of foreign aid or international assistance. Let us call these the four Ds-defence, diplomacy, dhanda and development. The proportion of each of these in the sum total of a country’s relationships is a critical informant of that country’s place in the world.
Whatever other countries do with Pakistan, they do so in pursuit of one or more of these four dimensions. All bilateral action seeks to achieve outcomes related to either one or some or all of the four Ds. The unique thing about aid or assistance however, is that it almost necessarily excludes the dhanda, or trade dimension. Countries seek to do dhanda so that their nationals can make money. When a country gives money to another country, it is making a statement about that country. That statement could be, “We want things from you, but you’ve got no money. So here’s some money. Now let’s talk about those other things.”
In the post-modern development context, any country receiving large amounts of aid or assistance constitutes a country which is important either politically (diplomacy), or militarily (defence) to the donor. The importance of a country is largely state-based, or simply put, the things that other countries want from Pakistan are rooted in, based on, and actionable by the Pakistani state. This is not to suggest that countries don’t have non-state interests in Pakistan. They do. The US State Department wants the media to take a benevolent view of Pakistani civilian casualties from drones. The Saudi government wants madressahs to be reflective of the Saudi view of Islam. China wants Pakistani businesses to depend on Chinese technology and innovation. But ultimately, other countries’ interests can be supported by non-state actors only on the margins. To really get what other they want from Pakistan, countries have to deal with and go through the Pakistani state.
This is where it gets interesting. One of the most crucial distinctions in foreign aid or international assistance is the distinction of who it is provided to. Aid or assistance can be put through government systems, or it can be spent through non-state actors.
As the government stated at the PDF last week, since 2005 only 47 per cent of all international assistance to Pakistan has been spent through the government, and its systems. The remaining 53 per cent has been spent outside government systems, largely by contractors and NGOs-notably the overwhelming share of money provided to NGOs is for international organisations, and not local ones. This grant money (just over $4 billion) does not include any of the humanitarian assistance nor the military assistance Pakistan gets, and refers only to traditional development assistance.
The objective of international assistance or foreign aid for to Pakistan is to support the Pakistani state (which implicitly or explicitly is how both the defence and diplomatic objectives of other countries will be met). Yet the trail of money to Pakistan indicates the dominance of non-state actors as the recipients of this aid. This is only the tip of the iceberg in terms of the irrationality of the development paradigm. It gets worse.
When other countries put stock in the narrative of Pakistani state as one that is beset by corruption and mismanagement, they diminish the chances of putting their aid through government systems. This is deeply self-defeating, and irrational. We cannot simultaneously highlight the Pakistani state’s weaknesses, and express the need for a more effective and stronger Pakistani state, unless we provide assistance to the state. Non-state actors, no matter how cute and cuddly, cannot deliver on the diplomatic and defense needs of other countries. Only the Pakistani state can.

(To be continued)
The writer advises governments, donors and NGOs on public policy.