The effects of aid dependence and the recommendations of the World Bank draft Discussion Note ‘Pacific Futures’

Written by Richard Curtain

The World Bank draft Discussion Note ‘Pacific Futures’, July 2011 (available here), offers some new ideas based on the constraints imposed by the economic geography of the Pacific. However, what is missing from the analysis is any discussion of the impact of the past failure to use foreign aid productively on each country’s political and economic institutions. In particular, has aid dependence over many years shaped key institutions in recipient countries, giving the recommendations of the draft Discussion Note little chance of success?

The Discussion Note points out that foreign aid has had limited impact on the rate of economic growth and so calls for donors to move away from a narrow preoccupation with promoting economic growth and to focus aid instead on achieving better socio-economic outcomes. These are stated as:

Outcomes in health, education and employment, and the breadth of opportunities available to Pacific Island people – including those living outside of their home countries.

Despite the acknowledged limited impact of aid, the World Bank proposes that Pacific countries ‘leverage’ the high levels of aid that can be expected for the future based on historical ties and key strategic location. Specifically, the draft Note proposes that Pacific Island countries ‘mainstream aid’ by recognising its long-term role as a major source of funds for state budgets. Three ways are proposed to do this. First, donors should increase their use of country budget and purchasing systems to disperse aid. Second, recipient countries need to give the private sector a greater rôle in delivering aid-financed goods and services. And third, where key capacity gaps now exist, donors  provide ‘capacity support’ for the medium-term, rather than ‘short-term capacity building’.

However, the draft Discussion Note does not acknowledge the insidious effects on Pacific Island countries of a long-term dependence on aid. I have just visited the Federated States of Micronesia, country which has strong historic ties with the US (a former US trust territory) and a key strategic location for the US in relation to the US Territory of Guam and the build up of US forces there. The US has provided extensive aid since 1986 through the US Compact of Free Association, initially for the first fifteen years with conditions but since 2004 specific goals for the aid have been set.

However, as a FSM government economist notes [pdf], the long-term effect of this aid dependence has been “so dire that the economy is beyond the point of self-correction.” Despite the fact that the FSM citizens have open access to the US to work, there has been little evidence of a reverse flow of remittances. The ADB has commissioned studies of institutional barriers to policy reform in Marshall Islands (available here) and Kiribati (available here) which also show the damaging effects of aid dependence.

Samoa also is dependent on aid, and has good access to the New Zealand labour market and yet appears to be a counter example of less harmful effects on its economic institutions. However, over time its political institutions have become more exclusive. As Duncan and Hassall note in their chapter on ‘How pervasive are clientelist politics in the Pacific’ (available here, p. 274), Samoa is the most extreme example of the capture of government by a political process that has made it virtually a single party state. The political process is dominated by the traditional chiefs – the Matai who are at the centre of clientelist ties based on the Samoan extended family. This begs the question of what impact a closed political elite will have on how economic institutions operate and whose long-term interests they will serve.

As the recent book ‘Why Nations Fail’ by Daron Acemoglu and James Robinson emphasises, institutions are important and how they function depends on how political elites shape them.  Many Pacific countries have had a long-term dependence on aid and other resource rents which has distorted how their political and economic institutions now operate. A key starting point for any analysis of ‘Pacific Futures’ has to be whether these institutions now are capable of serving the common good or they are exclusive, serving the interests of a narrow elite.

The Note on Pacific Futures needs to provide answers to at least two questions. First, has the form that aid has been delivered in caused the deep-seated aid dependence? This seems to be the case with the US Compact which has a defence objective rather than a development focus. The USA has acknowledged this belatedly and is reducing the amount of funds available to 2023 by 10 per cent a year to ensure that recipient governments find alternative funding sources. However, the increased concern in the US about the military expansion of China may give the Federated States of Micronesia which already receives significant Chinese aid considerable bargaining power to have US aid extended in different forms.

The real test of AusAID’s Partnerships for Development with pacific countries is the setting of realistic performance outcome indicators and whether aid will be withdrawn if they are not met. Will Australia’s desire to be a dominant strategic power in the pacific override its concerns about the impact of aid. Will the temptation be too great in the face of Chinese efforts to win favour through less demanding conditions for aid.

The second question the Note on Pacific Futures needs to address is whether the effect of dependence on aid cannot be easily reversed. To what extent can the institutions of Pacific countries deliver inclusive outcomes?  What changes are needed for institutions to act more in the interests of the wider society and less in the interests of a closed elite?

Richard Curtain is a Melbourne-based, public policy consultant, who has spent 18 months in Timor-Leste in 2008 and 2009, working on projects funded by USAID, UNICEF and AusAID. His current work for two major multilateral agencies in the region relates to Timor-Leste and to pacific island countries.

Richard Curtain

Richard Curtain is an independent consultant with expertise in the areas of skill formation, program evaluation and analysis of youth labour markets. He works closely with Devpolicy on issues relating to Pacific labour mobility and is a regular visitor to the Centre.

3 Comments

  • Truly African countries have greatly depended on foreign aid, this has some impacts to their economies and I can sternly answer Jo Spratt that in many African countries you realize that budgets are made with a side thought of “we will borrow money no worry”. In such a situation failure to be lent money leads to economic degradation of a state.

    This may cause some inflation and even increases in prices in some of basic commodities which in return may not favour many of the countries citizens. Truly foreign aid has advantages and disadvantages but the disadvantages sideline the advantages.

  • Thanks Richard.

    Can you draw out the causal pathway between aid, aid dependence and poorly functioning economies? The title of the post implies that aid dependence has effects, but beyond an assertion that aid dependence exists, and it is bad for economies, the post doesn’t clearly spell out the relationship. Keen to get your reflections on this.

  • Two questions raised by Richard in his article leads to the core of the Aid dilemma. His deep understanding on the region and youth has placed him in a position to critically analyze the issue. The aid dependency and the inability to revive economies of the recipient countries is a common issue in the ‘ever’ developing world.

    The poor countries have failed miserably over generations. In my opinion two factors mainly lead to this situation. Firstly absence of a Vision for the country concerned. The leadership of the country has to formulate it and a proper SWOT analysis has to be done in designing one. Secondly not having a genuine desire among the leadership to achieve the vision.

    Why do donors provide aid? People believe that there are strings attached to them. Do donors have a genuine interest for the citizenry of another country [of which their own leaders have no regard for their own people]? Why some aid are given only to government institutes when donors very well know they are corrupt? Why don’t they go through small NGOs [who are less corrupt] and the private sector? Is this because donors cannot benefit through them?

    If the donors really want and if their monitoring and evaluations are effective they can always see early warning signs before it’s late. Donors should avoid the social elite and go to the beneficiary direct and gather unbiased information.

    And most importantly – they should respect local knowledge and expertise.

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