Case Study: ‘Demand Side’ of Aid Responsible for East Asian Success, Middle Eastern Failure

The "East Asian miracle" often acts as a sort of Rohrschach test for various economic theories. Depending on who you ask, the rapid growth that occurred in East Asia in the postwar era is attributed to freewheeling capitalism, prudent protectionism, or an example of industrious cultural norms. Anne Peters, a doctoral student at the University of Virginia's Woodrow Wilson Department of Politics, cited an often overlooked factor - U.S. foreign aid.

According to Peters, the bureaucracies of Korea and Taiwan were able to use foreign aid to create efficient institutions that led to long-term economic development. This stands in stark contrast, she stated, to Egypt and Jordan where foreign aid was used to re-entrench political patronage networks.

In a new study, Peters explored the differences in the way U.S. foreign aid was used in the four countries. She presented her findings at a Feb. 20 event held by the Center for Global Development.

Certainly, it is hard to make generalizations about foreign aid based on the experience of a few countries, but Peters chose these test cases carefully. All four countries were recipients of large-scale U.S. aid motivated in geopolitics, and each was run by an autocratic regime. Peters singled out the internal dynamics of ruling coalitions to explain why foreign aid led to such divergent results.

Peters argued that "state building can be a politically painful process" as it requires rulers to extract more resources from the elite in order to finance strong institutions. But in Egypt and Jordan, which required tacit support from a wide coalition of elites in order to stay in power, any government demand that upset a particular interest group could undermine the stability of the regime. 

Instead, aid was used to finance "side payments" in the form of subsidies, protectionist trade barriers, or tax breaks that appeased key members of the coalition of elites. 

Aid also helped create "parallel state" structures, in the form of infrastructure projects or special economic zones. Though many such projects were successful, they were never successfully incorporated into the recipient countries' own governments, which prevented the benefits from leading to long-term development.

Peters maintained that in the East Asian case, governments comprised a tight coalition of bureaucrats and technocrats. Because there were relatively few parties that had to be paid off in order to maintain the coalition's grip on power, the government used aid to upgrade institutions in a way that promoted long-term capital accumulation. Although the U.S. helped to set up some parallel state institutions, such as Taiwan's Economic Stabilization Board or Korea's Combined Economic Board, the technical expertise and control over the institutions were appropriated by the national governments a few years after they were established.

Peters believed that there has been too much focus on the "supply side" of foreign aid, i.e., how the donor agencies are structured. Though skeptical that aid conditionality can impose change from the outside, she urged that more attention be paid to the internal political conditions of recipient countries.

"We really need to focus on the demand side - which countries are receiving aid," Peters said. "There might be limits to what donors can achieve regardless of the volume of aid or how well it is organized in Washington."

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