Foreign aid III: BRICS as donors

EDITOR’S NOTE: While aid from traditional donors fell in 2011, foreign assistance from emerging economies is growing fast — but how fast, exactly? Council on Foreign Relations senior fellow Isobel Coleman discusses in her article in the Democracy in Development blog.

As I discussed in an earlier post, spending on foreign assistance by developed countries decreased in real terms in 2011, the first such decrease since 1997. Given ongoing economic troubles in the United States, Japan, and Europe, flat-line or declining aid budgets from OECD countries are likely to be the new normal. But foreign assistance from emerging economies is growing fast, albeit from a low starting point.

How fast is hard to say, since the numbers vary widely. Estimates of total official development assistance (ODA) disbursed by non-traditional donors range from $11 billion to $41.7 billion per year. The biggest swing factor is China, with a low-end estimate for 2009 of $1.5 billion versus a high-end estimate of $25.1 billion. (This higher estimate would make China the second largest provider of ODA after the United States.) Estimates for Brazil also vary widely, from a low of $356 million to a high of $4 billion. Part of the reason for this wide range is that some emerging donors, such as Brazil and China, conceptualize foreign assistance differently than traditional donors (those that are members of the OECD’s Development Assistance Committee, or DAC), making it very hard to compare aid flows. ODA as defined by DAC includes only grants and highly subsidized loans. The upper estimate for China’s ODA probably includes foreign direct investment and in-kind transfers that DAC countries would not consider development assistance. As a recent IMF working paper on the BRICS makes clear, “estimates of BRICS ‘aid’ and comparisons with traditional donors need to be treated with caution.” Another reason is that there is a general lack of transparency on foreign assistance statistics for many emerging country donors, no doubt somewhat intentionally. China and India, for example, have large populations of the very poor inside their borders and don’t necessarily want to publicize their foreign assistance programs.

Given their own development needs, what is the objective of foreign assistance from emerging countries? (Of course, this is a question that some pose to the United States.) First, it is important to recognize that many of these “new donors” are really not so new at all: the BRICS have been providing assistance to low-income countries since the 1950s, even though some of them at the time had a lower GDP per capita than those receiving their assistance. Russia was guided by Cold War considerations; Brazil, China, and India moved into aid-giving as part of their South-South cooperation in the wake of the Bandung Conference. That spirit of South-South solidarity still infuses their aid programs today, at least rhetorically. They like to position themselves not as donors but rather as “development partners,” and pointedly adhere to the principle of “non-interference.” As such, they shy away from conditionality. The majority of their aid, however, is tied to specific business outcomes – such as access to natural resources for the donor country, or contracts for donor-country companies. This has led to concerns that, just as the DAC countries are moving toward greater transparency, some of these emerging donors will turn a blind eye to corruption and bad governance.

Much of the focus of BRICS development assistance is on infrastructure, which recipient countries need to be able to extract and export the natural resources that the donor countries want. This is little different from what motivated DAC countries in their earlier “development assistance” efforts. Then as now, there is debate over how much economic growth this results in for the recipient country, but clearly it is having a growing impact. As the IMF report notes, Chinese and Indian infrastructure financing to Africa is now of a similar magnitude to that from DAC donors. Some studies estimate that BRICS investment in low income countries has increased electricity supply by 35 percent.

In a paper from the Center for Global Development, Julie Walz and Vijaya Ramachandran caution us not to expect that all emerging countries will adopt the DAC model of assistance. The BRICS are unlikely to want to aspire to join the DAC club since that would limit their ability to include grants, loans, in-kind transfers, and foreign direct investment under the umbrella of assistance. However, this reality shouldn’t let them off the hook for increased transparency. On a very practical level, increased transparency is required to avoid undesirable outcomes such as unsustainable debt burdens for recipient countries, duplicated projects, and corruption. The involvement of the BRICS in international development is both needed and fraught. While the performance of traditional donors has been far from perfect, their experience does offer valuable lessons that the BRICS would do well to heed.

Republished with permission from the Council on Foreign Relations. View original article.