Australian aid in the Asian century: part two – international public goods

Written by Stephen Howes

This post continues my case for aid to Asia, begun last week in this post, and based on my July 11 debate with Professor Hugh White on the topic (podcast here).

The argument I sketched last week – based on the three simple points that Asia is still home to many poor people, that we have an obligation to the world’s poor, and that aid in general an effective way to fulfill that obligation – should take us through perhaps the next 20 years. But even supporters of aid must concede that history teaches us that sooner or later successful economies are graduated from aid, even when they are still poor by our standards. Korea and Taiwan were the first countries to graduate in the 70s. Thailand and Malaysia were the next in the 90s. China has pretty much graduated. India and Indonesia may be the next. The humanitarian argument for aid, as powerful as it is, can only be sustained politically for so long.

The time to think about graduation for Asia’s remaining aid recipients is not now. Indonesia and most other Asian countries are some 20 years or more off from enjoying the level of income Thailand and Malaysia had when they graduated. And, even then, there will still be Asian countries in distress who need aid, whether it is Burma or North Korea, or Indonesia after a natural disaster.

But is there a longer-term case for aid, one that survives the prospect of graduation? I believe there is. Even when countries such as Indonesia graduate, aid will still remain relevant in the Asian century as an international problem-solving tool, used to finance global and regional public goods.

Public goods are things like national defense, law and order, and new ideas. Markets will underprovide them. This is because, since we can’t exclusively appropriate the benefits from these goods for ourselves, we are not willing to pay what they are worth. That’s why we have a government – to make us pay for public goods through taxes.

That works well for national public goods, but there are also many important international public goods. The global climate has become the most famous, but is just one example. International terrorism, disease eradication, epidemic control – these are all international public goods (or bads). International public goods are not just global. Some are regional. Any action of one country which has spillover effects on another can be considered an international public good. Think of the flow of TB, possibly multi-drug resistant TB, from PNG to Australia. Think of the complex, multi-country problem of the movement of asylum seekers.

Now, for better or for worse, we don’t have an international government to provide international public goods. We finance national public goods through the tax system, but we have to finance international public goods through aid.

Example after example shows that when we identify a problem with international spillover effects we send aid to the rescue.

Again climate change is the prime but far from only example. Developed countries agreed at the 2009 Copenhagen climate change conference to pay $10 billion a year to support developing countries respond to climate change. How is that money being financed? Nearly entirely through aid.

Aid has also led and continues to lead the charge in other international public good provision exercises, whether the eradication of smallpox earlier or polio now, or the training of police forces to combat terrorism.

Why do we see the widespread use of aid to fund international public goods? Developed countries finance international public goods not primarily for the humanitarian reasons I stressed in my previous blog, but because of our national interest – we seek the flow-on benefits for ourselves. We seek to reduce emissions in Indonesia to save the Great Barrier Reef in Australia.  We provide humanitarian assistance to displaced people in Sri Lanka to stop them coming to Australia. We focus TB assistance on the part of PNG which is closest to Australia to stop the transmission of TB to Australia.

There will continue to be many issues in developing countries where we have a direct stake in the outcome, and are therefore prepared to foot at least part of the bill.

Of course, such an arrangement, in which richer countries foot part of the bill, is also equitable, and this is of fundamental importance. Just as in any one country one would expect rich individuals to pay more in taxes, so in any international cooperative arrangement the richer countries will need to pay more.

What about in 10, 20 or 30 years time? On the one hand, Asian countries will be richer and they will be expected to contribute more. But that will only supplement, not eliminate the need for aid. Even in 20 or 30 years, Asia will continue to be significantly poorer than we are. The basic requirement of international progressivity will remain intact. We will continue to look to contributions from countries to finance international public good provision, and those contributions will come disproportionately from the better-off countries.

Furthermore, as the world becomes increasingly interconnected, the need for international problem solving will only increase. We have promised to find not $10 but $100 billion for climate change for developing countries by 2020. Not all of that will come from aid. But a large chunk will.

More generally, in climate change and elsewhere, we lack tools for international action. Military action is a last resort. Diplomatic persuasion often carries little sway. International binding agreements seem to be a thing of the past. But money talks. Aid talks.

Embedded in Asia, Australia will continue to find aid to be a very important tool to advance cooperation on the many regional issues we will continue to want to pursue.

The case I have presented in this and the previous post for Australian aid to Asia is a stylised one. For the sake of simplification, I have presented one argument for aid today – based on our international obligations – and one for aid in a couple of decades – based on international public goods. In reality, both apply today. While that reality makes the practice of aid more complex, it also makes the case for aid to Asia even stronger.

In my next and final post in this series, I will consider and counter the various arguments made against aid to Asia.

Stephen Howes is Director of the Development Policy Centre.

Stephen Howes

Stephen Howes is the Director of the Development Policy Centre and a Professor of Economics at the Crawford School.

3 Comments

  • I think we create a problem in this discussion with the use of the word ‘aid’ which has a defined meaning in the DAC/OECD context and in the public mind. Rather, the word investment might be better – we invest in disease control, climate change mitigation and other examples that Stephen gives primarily for good self-interested and not humanitarian reasons. Australia invests in tfe Northern Territory in Biosecurity management to prevent the entry of damaging invasive species for Australian public good reasons It helps the NT but we would hardly call it aid. Our private sector invest in mining in Africa that will generate private returns but will deliver substantial economic and social benefits to the countries concerned. Would we define this investment as aid if done by a government agency?

    I think an interesting discussion emerges from the transition of countries out of aid. We lost a big opportunity when Korea almost overnight fell out of the aid category and an extensive set of cooperative partnerships built up in aid arrangements were lost through the absence of sustainable partnerships because we had no successor arrangements in place.

  • Robin,

    That’s an excellent set of comments. And I must concede I have contradicted myself by asking what sort of aid might go to, say, Indonesia after it has graduated. What I should have written is what sort of aid we might give to Indonesia after it has graduated from a conventional aid program.

    The future of aid is very uncertain. Countries such as Thailand and Malaysia have been pretty much graduated. Will aid fade away all together from Asia if and when countries such as Indonesia graduate? I both hope not and doubt it. But it will be difficult. As you say, at the moment aid is such a useful tool for international action “because the funding pool is there [and], because it can be used for almost anything” Things will be more difficult if we lose that flexible funding pool. Still, my sense is that the need for funding around issues of common interest will remain strong, and that as a result somehow a way will be found through. I think you agree.

    What about the multilateral dimension? I agree with you that we will still need multilateral approaches. But these might fall short of binding treatries. Rather they might provide frameworks for bilataral and regional deals (as we are seeing in climate change). And for regional public goods we will continue to see purely bilateral and regional approaches.

  • Stephen,

    I have found your three posts on the case for aid to Asia admirably clear and comprehensive. It seems to me that this second post, which enters into the increasingly busy debate about the role of development agencies in supplying international public goods, is quite different in character from the other two. I offer the following three comments on it.

    First, this post is presented as complementing the humanitarian case, or in fact largely superseding that case within two decades. However, I’m inclined to think that it’s not in the same line of business – that it makes a case for something that is not aid as we know it. This point almost makes itself in the post when you say that “sooner or later successful economies are graduated from aid” but then ask “is there a longer-term case for aid, one that survives the prospect of graduation?” The subsequent argument, therefore, might be better described as an argument for continuing international public financial transfers in a post-aid world (leaving aside, for now, the fact that there will always be a residual group of stubbornly unsuccessful economies) rather than an argument for aid. If we do speak of such transfers as aid, we’re using the term in a new sense.

    Second, the post argues that, even as Asian countries get wealthier and traditional aid is no longer warranted, countries substantially wealthier than they are should still bear a greater share of the burden of supplying international public goods. Why, exactly? If the substantially wealthier countries are, in this scenario, no longer obliged to help Asian countries achieve their domestic policy goals, why would they still obliged to help Asian countries meet their share (however measured) of the costs of supplying global or regional public goods? If the economic differential creates a moral obligation to help in this way, then one might wonder why that obligation would not extend to helping them provide ever better social security systems, safer roads, etc.

    Presumably the argument is not based on the moral obligation owed by the richer to the poorer, but rather on the principle of fairness in international burden sharing. That principle seems clear enough in general terms, namely that the contribution of each country should be based on the expected benefits to it of the action financed, adjusted to take account of its current capacity to pay (and perhaps also its historical responsibility for whatever international public bad might be at issue). This is where your reference to the requirement of progressivity seems relevant – the richer should be required to contribute more than is required to secure their share of the benefits, and the poorer less, with this surplus/deficit effectively defined as aid.

    While there’s nothing problematic about the above proposition, it only makes sense if there exist multilaterally or regionally agreed policy goals, financing targets and associated burden-sharing frameworks. However, the post proceeds on the assumption that aid, in this sense just defined, is an alternative to, rather than an ingredient of, multilateral agreement-making. You say, “International binding agreements seem to be a thing of the past. But money talks. Aid talks.”

    And third, a case for international public financial transfers based on equitable burden sharing in pursuit of international public goods is probably never going to be a strong case for bilateral transfers. Given the need for coordinated action across all countries with a stake in the outcome, it will generally make sense for the bulk of the resources to be concentrated in multilateral funds and institutions, who then finance action where it is most needed in an integrated way. Certainly some bilateral technical assistance will continue to be useful, but this won’t be costly and won’t really be distinguishable from technical cooperation between developed economies.

    Currently aid is a useful tool for international action because the funding pool is there, because it can be used for almost anything and because its use in support of international public goods is not particularly prominent. However, the presence of the funding pool is dependent on the humanitarian case. In a scenario where that case no longer applies, or only applies to a residual group of countries, the pool will shrink. Contributions toward the cost of supplying international public goods will have to be extracted painfully from consolidated revenue on a case-by-case basis, with lengthy battles about what benefits we can expect from the action financed, what is our relative capacity to pay, and what is the cheapest and most effective way of achieving the relevant goals.

    I don’t think there’s any escaping the pain of multilateral negotiation – which is not meant to imply any optimism about it! (A converse point here is that one might expect the humanitarian case for aid to be heavily stressed by those wanting to defer the pain for as long as possible, including finance ministries.)

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