Demystifying foreign aid

There is a carefully constructed mythology in development about how key risks that prevent donors from providing money directly to the government are mitigated by using these alternative instruments to provide international aid to countries.
In truth, however, this mythology requires a basic belief in one egregiously Orientalist lie: that there is something inherently and endemically corrupt about the developing world. This is a lie, not because we must all subscribe to Fanon-esque vitriol about the common colonial heritage of developing countries. It is a lie, because the evidence says it is. Simply put, just because you are providing money outside government systems, does not mean that foreign aid will not be vulnerable to corruption.
Just last week, the Wall Street Journal and Los Angeles Times reported that an American non-profit firm called the Academy for Educational Development (AED) was suspended from any further business with the US government, because USAID has “terminated a 5-year, $150 million cooperative agreement after (investigators) found evidence of fraud” in a project the AED was managing in Pakistan.
The AED hullabaloo has come concurrently with a separate investigation of another American non-profit firm called Sheledia. For the last few years, controversy around USAID projects in Pakistan has not been new. In August 2006, a $26 million USAID project to support local government was initiated with an Australian citizen as chief of party who had not only been convicted of multiple counts of fraud, but had also served jail time, once of nine months for fraud, and a second time, of two years, for theft. He had also been deported from East Timor for having falsified his record.
How did a man who was a convicted thief and who had been deported from another country find a job as the top dog for a $26 million project to help Pakistan figure out how to fix and sustain local governments? It’s a question that tortured the Obama

Administration, and in particular the late Richard Holbrooke (who passed away on Wednesday morning). The Urban Institute fiasco, and reviews of other USAID projects that were unable to demonstrate real, robust and sustainable outcomes convinced Holbrooke that systemic change was required not only from Pakistan, but also from those who claimed to want to help Pakistan, like USAID. This is what sparked the need to dispense with the existing model of using “Beltway Bandits” and instead find alternatives.
Whatever measures are taken to counter corruption in the delivery of foreign aid to Pakistan however don’t fix the fundamental problem. Unless that aid is helping build a better Pakistani state, that money is largely salad dressing – unable to sustain the changes it brings about, and incapable of altering the long-term institutional incentives of key actors in the public policy space in Pakistan.
In the aftermath of Holbrooke’s death, one way to think about how international development assistance can be absorbed more meaningfully by Pakistan is for the Pakistani state to be as bold and honest as Holbrooke was upon seeing the vastly ineffective way in which USAID used to conduct business in countries like Pakistan.
To be effective, the Pakistani state must become structurally rational, meaning that government structures must reflect the functions that they are meant to conduct. On the surface, this seems simple enough, but in fact, when it comes to the absorption of international assistance, or foreign aid, Pakistan’s state structures are functionally dissonant.
Let us first revisit the four Ds that define relations between Pakistan and its “friends” – defence, diplomacy, dhanda and development. The simplest and most linear starting point has to be defining a lead agency for each of these functions. Defence issues should therefore be dealt with by the Ministry of Defence. Diplomatic issues should be dealt with by the Ministry of Foreign Affairs. Dhanda issues, or issues of trade and commerce should be dealt with by the Ministry of Commerce. But where do development issues go to get resolved?
This question is not simply one of identifying a federal ministry or department to deal with the issue of development. It is in fact much deeper. Defence, foreign affairs, and to a large degree trade & commerce issues are all uncontroversially federal subjects. However development is decidedly a non-federal subject.
Should all development relations then be dealt with by the provinces? Well, the provinces would like nothing better. But let’s remember why donors are interested in development in Pakistan – they are interested in development in Pakistan in pursuit of their national interests. National interest is an area that is uncontroversially a federal subject. How then to resolve this internal tension?
One way to approach the structural adequacy of the Pakistani state to deal with foreign aid is to assign aid sources to specific ministries in accordance with the kind of aid being provided. If a donor is providing a loan to Pakistan, that is something that is dealt with best by the Ministry of Finance. If a donor is providing any kind of a grant at all, perhaps the best place for that transaction to take place is the Ministry of Foreign Affairs (MOFA). Similarly, the European Union, the United Nations and other non-loan making multilateral groups can be dealt with by the MOFA. This would mean a reorientation of the Economic Affairs Division (EAD), which currently sits within the Ministry of Finance, to be relocated to the MOFA.
Ironically, there already exists within the MOFA an infrastructure to deal with aid, on a country-by-country basis, as well as separate desks for the UN and other multilaterals. Of course, a merger between these structures at the EAD and the MOFA is not a simple proposition – but neither is the work that they are currently doing, separately.
This is not just an academic discussion. Donors, both bilateral and multilateral, are already contemplating a chaotic few months as the federal government fulfills its requirements to hand over ministries to the provinces. Many of those ministries represent key focal areas for donors. Who will the donors talk to? Almost universally, donors are considering opening provincial offices to deal with the aftermath of the 18th Amendment. This means every donor will eventually have Karachi, Quetta, Lahore and Peshawar offices, and many will have offices in Muzaffarabad, Gilgit Baltistan, and the FATA Secretariat. An important and serious policy question for Pakistan is whether the already paranoid Pakistani state can afford to have a quadrupled donors’ presence – with a new set of donors in each province.
It is hard to say if such a process will do anything for development and economic growth in Pakistan, but it is easy to say, with absolute certainty, that it will add to the arsenal of conspiracy theorists in Pakistan. It will further mystify an already complex and difficult-to-understand foreign aid regime in Pakistan.

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The writer advises governments, donors and NGOs on public policy.