International Political Economy of Foreign Aid

- A paper I wrote in fall 2013

International Political Economy of Foreign Aid

 

            Foreign aid has become routine among developed countries, used as a political tool to further interests or attempt to gain policy changes in less developed countries. Many factors play into the decision making process for giving foreign aid, and the goals hoped to be achieved also change depending on who is in power in the donor country. Overall, we must first study why countries give foreign aid in the first place, focusing on the type of country, its relative strength in the international structure, and the ideological view of the group in charge of the donor country. Next, seeing whether foreign aid can play the same role as resource revenues in the budget for recipient governments, examining how the aid received is similar to resource rents. Next, how economic reform, whether caused through the politics of foreign aid or not, can lead to political change in the recipient countries. Lastly, we look at how democratic transitions, occurring as a country moves from autocracy to democracy, can be increase the risk of conflict prone.

            Countries have multiple reasons for giving financial aid to developing countries, and those reasons vary as situations and the international power system changes. Not only does it depend on the relative strength of the donor country, but also the ideological position of the group in charge of giving the money. Policy goals can include supporting the internal economic development of a recipient country, getting external reciprocation from the recipient’s government, as well as promoting domestic businesses by strengthening commercial ties with the recipient government (Packer Notes 2013). First, looking at whether a donor country is a major power or minor power in the global power structure is important in determining what the goals might be. Realist security concerns are a genuine worry for larger powers and therefore the aid may be in response to some threats, seeking policy reciprocation from the recipient state. Conversely, minor powers are much less likely to have realist security concerns and therefore are more likely to give the aid with the goal of economic development if the recipient state. However, both large and small powers want to promote domestic businesses and thereby strengthen commercial ties within the recipient state. For instance, “Germany might give a recipient money, but only if they use it to buy German tractors” (Bueno de Mesquita & Smith, 2011). In essence, foreign aid can be a form of subsidy to Germany manufacturing. Next, the ideology of the party in power of the donor country factors into the decision making process of giving foreign aid. On one hand, globalists argue that instability in a recipient country is driven by an external threat, meaning some sort of group like jihadists or communists are behind any domestic instability. Therefore, the donor country, that may feel threatened by those very same groups, will want to give foreign aid to keep a ‘friendly’ or non jihadist government in power of the recipient country. This is also known as external policy reciprocation, foreign aid in exchange for a stable regime that is friendly to the donor country and will fight the external threat (Packer Notes 2013). On the other hand, if regionalists are in power, they view domestic instability of the recipient state driven by internal threats, meaning there is a need for economic reform or political reform. Therefore, foreign aid politics may largely be driven by the demand for policy changes to alleviate those pressures within the government receiving the aid. This promotes stability. Taking all this into account, there are many factors that play into the goals and decision making of donor states in regard to giving foreign aid. Overall, the domestic groups and type of state play an important role in this process.

            Next, now that it is understood why countries will give foreign aid, one must look at what role that aid plays fore the recipient country. Specifically, whether the aid can take the same shape and use as a revenue stream for a government as resource rents. Resource rents are extracted by governments who are able to control the resources within a country, say oil for instance. Since the government controls the oil, it is able to derive large revenues from the resources; it no longer has much of an incentive to tax its citizens. In this sense, the revenue stream is coming from an ‘external’ source, the oil, and not an internal source like the people. The government can get a large enough revenue stream from the resources to pay off its winning coalition without needing extra revenue from taxing the citizens. This has serious implications; first it means that if the government no longer needs to tax its citizens, it will not feel responsible to public demands of any sort. If the government is not responsible to the people, the country may experience political decline and overall less freedoms and protection by the government. Furthermore, a government will have no incentive to provide public goods for its citizens as it is receiving no payment in taxation and can probably stay in power through its winning coalition. This is especially true of a small winning coalition, in which case money will be spent solely on private goods to keep that winning coalition happy. Any spending on public projects is money wasted by the government, as it does not benefit the winning coalition, assuming it is relatively small, and therefore does not keep the winning coalition satisfied. In this sense, a steady stream of foreign aid can take act very much in the same way as resource revenue. The money is coming from an outside source; therefore there is less of an incentive or need to tax the people, very much like a government getting its revenue from a resource. This can be especially true if the aid is coming from globalists, those who are giving the aid in response to external threats and want to see a ‘friendly’ government in power. The donor state will not pay much attention to the policies of that government, so long as they support the donor state in its overall goal of stopping the threat. Put promptly, “political logic suggests that democratic donors are ready to turn a blind eye to theft            and corruption when they need a favor” (Bueno de Mesquita & Smith, 2011). An example of this would be the US giving over $500 million to the leader of Liberia and in return got support for US policy towards Libya and Iran during the cold war. Again, the leader, President Doe, “[gave] far greater priority to short-term political survival… than to any long-term [economic] recovery… President Doe had great allegiance to his tribe’s people and inner circle. His support of local groups on ill designed projects undercut larger social objectives” (Bueno de Mesquita & Smith, 2011). In essence, the leader used the funds much as a leader would use a revenue stream, on pork barrel projects that favored the winning coalition and paid little notice to the public as a whole. This is how foreign aid can actually be very much like a revenue stream, which usually does not play out well for the public and helps leave an unresponsive government in power.

            Economic reform can become a crucial tipping point for many regimes receiving foreign aid that leads to political change. As stated above, foreign aid revenue streams are basically interchangeable with resource rents. So, just as revenue streams from resources can be cut off when commodity prices dip, so too can foreign aid be cut off due to a multitude of reasons. If globalists were in power in the donor country, and then regionalists come to power, the donor country can start to demand economic reform in the recipient country in exchange for aid. Whereas the previous, globalist, donor country was not requiring any policies, now a new donor change can force a recipient government to start making economic reforms. The regime receiving aid has a tough decisions to make, it can either make the changes called for, which may result in political opposition, or face the loss of revenue from foreign aid, which also makes it harder for the leader to continue keeping his winning coalition happy. The reforms may include, devaluation of the currency or privatization of businesses controlled by the state. Both situations result in a loss of control over the economy by the government. Devaluation results in a loss of purchasing power for the winning coalition, which can be especially harsh if the winning coalition is in an urban area. This means ending the monopsony marketing boards that were keeping farm prices artificially low to allow urban citizens increased purchasing power. Once the winning coalition, or the public in general begins to feel the loss of purchasing power they will turn on the regime. Furthermore, privatization of business weaken the grip that a dictator has over the economy and therefore the leader loses another way he could have manipulated the economy to favor the winning coalition. In the end, a loss of revenue from foreign aid can spell disaster for many regimes that were coercing and coopting their citizens while benefiting the winning coalition with that revenue stream.

            Lastly, if the policy changes become political, it may result in a trend toward democratization. Although for westerners this sounds like a good idea, it actually has large risks associated with the process. Put another way, “during the initial phase of a democratic transition, states face a heightened risk of civil war. When authoritarian regimes break down, a panoply of elite factions and popular groups jockey for power in a setting in which repressive state authority has been weakened, yet democratic institutions are insufficiently developed to take their place” (Mansfield & Snyder 2008). Essentially, whether due to the economic reforms being put in place or whatever else is causing internal pressure, a move towards democracy in a previously authoritarian country is susceptible to conflict. Furthermore, if an authoritarian leader sees a democratic transition coming, he may appeal to nationalist or populist motives, which can be drive people within the country against each other. For instance, pitting urban workers against the rural farmers can lead to massive support from one side or the other, but there is also an increased chance of conflict as a result. Mansfield and Snyder find that, “incompletely democratizing countries are more than twice as likely to become embroiled in a civil war as a stable regime…” (Mansfield & Snyder 2008). In the end, this can be for a variety of reasons, whether because groups jockeying for power attest to ethnic, populist, nationalist, or sectarian roots to gather support, conflict can likely erupt over the struggle for power due to the weak institutions inherent in a democratizing country.

            To conclude, the politics of foreign aid are vast and have far reaching implications for the regime of recipient countries and for the people of those recipient countries. Aid is given for a variety of reasons, depending on the goals of the donor country and the type of policy initiative being undertaken. Ultimately, once it is known how aid can affect different regimes, and what policy changes entail for the recipient country, foreign aid can be better tooled and become more effective in its aims. 

References

Bueno de Mesquita, B., & Smith, A. (2011). The dictator's handbook: Why bad behavior is almost always good politics. New York: Public Affairs.

Mansfield, Edward., & Synder, Jack (2008). Democratization and War.