The paradox of aid to resource-rich countries

In 2012, an Angolan hospital doctor, Dr. Almeida Chitungo, made a dramatic appeal for outside help. The “government is trying hard to replenish food stuffs but it is being overwhelmed by the demand of supplementary food to almost all hospitals in provinces hit by the drought,” a 2012 fundraising piece posted on the Christian charity World Vision’s website quoted him as saying. “We need partners to urgently come to our rescue with supplies of supplementary food like milk and flour, otherwise children’s lives are at stake here.” Others were less convinced that the main culprit was drought or that the Angolan government was “trying hard” to help its people but unable to afford milk and flour, let alone that more donor funds were the answer. In the same year World Vision was urgently appealing for more outside money to save children’s lives, a whopping $32 billion were not properly accounted for in Angola’s public finances, causing Human Rights Watch and the National Resource Governance Institute to publicly call on the International Monetary Fund to withhold a scheduled loan disbursement. “This is a government that has the resources to respond to the needs of its people … and yet is not doing so,” Leslie Lefkow, the deputy director for Human Rights Watch’s Africa division, explained to Foreign Policy. While the debate on whether and how the aid industry should engage with resource-rich countries and their often corrupt and undemocratic governments is far from new, it has gained new urgency in the wake of massive natural resource discoveries across much of the developing world in recent years. According to a recent World Bank study, the rents created by oil, gas and mineral extraction now amount to $4 trillion a year, about 7 percent of global gross domestic product. Worldwide, over 1.5 billion people live in the more than 50 “resource-dependent” countries that concurrently receive international aid. Also at stake is the future of aid in the post-2015 landscape. Will institutional donors become increasingly irrelevant in a world in which over 70 percent of all poor people live in middle-income countries whose governments have access to alternative sources of funding and expertise, and where in country inequality, rather than lack of capital, is often the main cause of poverty? The case of Angola and Azerbaijan Take Angola, which now produces 1.5 million barrels of oil a day, holds over $30 billion in international reserves, and has launched a sovereign wealth fund with a $5 billion endowment that is envisaged to continue growing by the cash equivalent of 50,000 barrels of oil every single day. The country simultaneously has the world’s highest infant mortality rate, and fully 94 percent of rural dwellers live on less than $2 a day. Led by an autocrat who has clung to power for 35 years, the country is notorious for top-level corruption on a grand scale perpetrated by a tiny elite noted for its racially tinged contempt for the poor. At the same time, Organization for Economic Cooperation and Development data show that Angola received $288 million in net development assistance in 2013, the latest year for which figures are available — a drop in the ocean compared with the government’s $40 billion in annual hydrocarbon revenues, for sure, but enough to buy a lot of milk and flour. “Is a poor person in Angola less deserving of help than a poor Ethiopian just because Ethiopia doesn’t have oil?” Alan Gelb of the Center for Global Development asked, defending the continued engagement of humanitarian nonprofits in the country. The situation is similar in Azerbaijan, which pumps out nearly a million of barrels of oil a day, holds nearly $16 billion in international reserves, and has sovereign wealth fund assets expected to reach $55 billion in value this year. Despite the oil bonanza, and the government’s track record of top-level corruption, stolen elections and human rights abuses, some donors remain heavily engaged. In 2013, Azerbaijan, an upper-middle-income country, received more than $1.6 billion in loans plus $13.4 million in grants. For this year, the World Bank has committed a further $300 million for projects that range from curriculum reform over motorway construction to water and sanitation works. The Asian Development Bank and the European Bank for Reconstruction and Development also have large portfolios in the country, even while the president is splashing out billions of petrodollars on pharaonic prestige projects in the capital city of Baku. Billions of petrodollars plus millions of donor dollars An analysis of international aid to oil-producing countries co-authored by Rabah Arezki, the head of the commodities unit in the IMF research department, surprisingly shows that donors neither increase nor decrease their financial support in the years after major resource discoveries. So why do donors allocate scarce aid funds to countries sitting on multibillion-dollar trust funds? “The point of a wealth fund is not to spend all money immediately,” a senior development bank official based in Baku told Devex. “I have a savings account, but I also have a mortgage at the same time. Government resources are not enough to cover all needs.” The official said that her institution remained active in the country to support the translation of oil wealth into broader-based and sustainable growth, and to build the capacity of public institutions. An expatriate working with local companies on behalf of a different development bank in Baku meanwhile told Devex that “we’re here to blaze a trail for the private sector.” He argued that the emergence and growth of independent indigenous private businesses would not only generate employment and wealth, but would also change accountability dynamics in the country for the better in the long run. “That momentum is already visible, and it is unstoppable,” he claimed. Both pointed out that in contrast to Angola, Azerbaijan had made very significant progress in poverty reduction over the past decade. Country specialists interviewed for this article concurred that foreign aid was not shoring up oil-rich regimes or undermining domestic accountability in either Angola or Azerbaijan, as aid funds were dwarfed by the massive income stream from hydrocarbons in both countries. “Aid is not prolonging the power of the Angolan government. They just don’t care,” CGD’s Gelb told Devex. An Azerbaijan expert said that while donors’ influence was limited, they should at least try to bypass corrupt elites by avoiding “the notorious subcontractors owned by the ruling family” in Azerbaijan. ‘World Bank versus McKinsey’ Similarly, there seems to be broad agreement between aid and country experts that donors are no longer in any position to force major reforms upon countries, such as Angola or Azerbaijan, let alone onto larger middle-income states. “The really interesting thing for me is the clash with the ownership agenda” of the aid industry, Gelb mused. “These cases offer a real test for the principles of aid.” Development banks’ negotiating position is further weakened by their internal rules. “Like cooperatives, multilateral donors cannot simply exclude single members. Plus, they need to make sure to have some winners in their lending portfolios,” Gelb explained. Konstantin Atanesyan, who recently led a World Bank evaluation team looking into the relevance and effectiveness of aid across four natural resource-rich countries, confirmed that donor-client dynamics are changing fast. “Demand for donor assistance is heavily demand driven in some countries, maybe even too demand driven,” he told Devex. “The World Bank is just one of many players today, and we need to identify issues where there is traction with the government, which is firmly in the driving seat and decides whether to pick up or not pick up our advice.” Atanesyan added that this new dynamic of policy dialogue and joint action — dubbed “true partnership” by a colleague — should generally be welcomed, citing contentious and unpopular diktats by the Bretton Woods institutions that later turned out to be ill-advised. “Countries today have more capacity, including intellectual capacity,” he said. As an example of what post-2015 aid might look like, he pointed to Kazakhstan, whose government sought to re-engage with the World Bank years after it had put a stop to their cooperation. The result was the Joint Economic Research Program, which delivered policy advice straight onto the doorsteps of senior decision-makers on demand, and reportedly enabled a “frank dialogue” with high-ranking Kazakh officials. The host government commissions and pays most of the cost of the studies — and then sometimes turns to commercial consultants for a second opinion as well. “World Bank versus McKinsey,” Atanesyan called it with a chuckle. Expertise, prime selling point When developing country governments use petrodollars and commercial credit to pay for development programs designed by McKinsey and implemented by multinational companies, what role does that leave for development banks? Several interviewees emphasized that as the banks were losing their monopoly over development funds, their expertise was becoming their prime selling point. “Our client [government] wants to know how much it actually costs to build a kilometer of road,” one donor official confided, alluding to widespread corruption in the host country. “And the minister of economy recently told me that he learned from our social and environmental safeguards. I was absolutely surprised, usually governments complain.” A colleague recounted the story of a prime minister who saw donor involvement in programs as a way of “bringing discipline into line ministries” during implementation. “Anyone can find solutions on the Internet these days,” a World Bank official told Devex, “but quick and dirty solutions are not always the best. We have the benefit of global experience — including direct implementation experience — and we have excellent local staff that can translate these models into nationally appropriate solutions.” Donors need to push back, promote accountability As the scales of power tip from unelected international donors toward undemocratic national governments, and the scope of donor engagement is increasingly being driven — and circumscribed — by local elites, donors may lose the ability to publicly challenge host governments over their track records on democracy, human rights and corruption. “What conditions donors should to apply to their aid is their own business,” Anders Tunold Kråkenes, spokesman for the Extractive Industries Transparency Initiative, commented. “However, what is clear is that in countries that are poor but resource-rich, cleaning up the governance of their resources will clearly matter more that financial aid.” A regional expert working on resource transparency and accountability issues, who also asked not to be named as his institution works with local nongovernmental organizations in the country, thought that bilateral donors in particular could — and should — have significant political influence. He pointed out that over the course of 2014, the government of Azerbaijan locked up many of its remaining critics. Bilateral donors should push back, the expert advised. “[They] should do exactly opposite of what the government is trying to achieve,” he said. “It is important that [the] international donor community finds alternative ways to support critical voices in Azerbaijan.” However, energy politics and commercial interests may make bilaterals reluctant to push polarizing agendas in oil- and gas-producing countries. Ricardo Soares de Oliveira, the author of a highly acclaimed book on grand corruption in Angola, told Devex that “as late as a decade ago, most Western embassies had significant commitments toward Angolan civil society. That has receded, with a few exceptions, and now Western donors have an almost exclusively economic focus that avoids touching on rights and governance issues. However, the key question is how to use the lingering donor influence; cutting off aid entirely would be pointless.” In Azerbaijan, some bilateral donors, including the European Union, do have a record of funding local NGOs and media organizations. Over the past 12 months, however, the government has thrown many of these formerly Western-supported activists and journalists behind bars while tightening NGO legislation and publicly declaring that foreign aid of this kind would no longer be welcome in future. “I understand why the government is concerned, especially after the Maidan [protests in the Ukraine],” a Baku-based donor official commented, while deploring the “not very nice” way in which the authorities had implemented the clampdown. “Donors should prioritize promoting accountability,” Alexandra Gillies, director of governance programs at the National Resource Governance Institute, said. “In resource-rich countries, donors should counterbalance the overpowerful executive by supporting civil society activists and journalists. Is that always feasible to do? No.” Donors had to beware of becoming accomplices in autocrats’ efforts to launder their reputation on the global stage, she warned, but conceded that if donors just packed up and left, they would be unable to take advantage of opportunities to make small incremental changes. “If donors cannot promote domestic accountability, they should consider withdrawing,” she said. Drawing the line Angola’s top corruption-busting journalist, Rafael Marques de Morais, is currently fighting a defamation lawsuit and may soon get sent to jail for up to nine years. Azerbaijan’s top corruption-busting journalist, Khadija Ismayilova, is already behind bars as part of what Global Witness called a campaign of “harassment and intimidation” aimed at civil society groups and journalists. Last week, EITI’s board took the unprecedented step of downgrading Azerbaijan’s status from “compliant” to “candidate,” citing “deep concern for the ability of civil society to engage critically in the EITI process.” The country now has 12 months to undertake “corrective actions relate[d] to the environment for civil society” or face suspension, clarified EITI’s Anders Tunold Kråkenes. Angola has received no such punitive measure as it never applied to join EITI in the first place. So where exactly should donors draw the line? “I don’t think there’s an answer to that,” Gillies said, pointing to the example of Nigeria, where HIV programs had saved many lives, and donor support for EITI had at least “helped to introduce the idea of transparency into a previously completely opaque sector.” The rules of engagement in this brave new world of demand-driven aid deals and “true partnership” are still being written. Donors should not provide grant finance to oil-rich countries, Gelb told Devex, “unless it directly helps the poor.” Equally, he noted, they should not provide concessional finance to big infrastructure projects — at least not “unless there is massive government co-financing.” Donor officials, he suggested, should weigh costs and benefits carefully from case to case as they struggle to decide where, when and how to get on board the host government’s development train, assuming they are invited on board at all. “There are no easy answers on this one,” Gelb concluded. Check out more insights and analysis for global development leaders like you, and sign up as an Executive Member to receive the information you need for your organization to thrive.