Sunday, November 15, 2015

The Debt Trap: And When the Gravy Train Stops, Aid-Dependent States Won’t Know How to Cope

By Irfan Husain
November 14, 2015
IMAGINE a world in which there is no foreign aid, and no multinational institutions to prop up faltering economies. The only way to get foreign capital is by borrowing from banks at commercial interest rates.
Actually, this is not such a stretch as this is pretty much how the world was before the Second World War. It was only with the American Marshall Plan aimed at reviving war-ravaged European countries that foreign aid gradually became a feature in the budgets of developed countries, as well as those of the recipients.
The Cold War saw both superpowers vying for influence by doling out military and economic assistance to their clients. Over time this bred dependency, and allowed the rulers of developing — and often dysfunctional — countries to divert domestic resources to grandiose projects and shiny new weapons that kept their armed forces happy.
Aid has created a vast bureaucracy to monitor large amounts.
Pakistan’s early admission to Cento and Seato, two American-led military pacts, has generated much debate and criticism. However, we don’t have to look far for the reason. I was told by a retired three-star general that when Ayub Khan visited Ankara, he saw the brand new American weapons the Turkish forces had been supplied with, and his “mouth started watering”. He was advised to join the American alliances if he wanted similar weaponry.
This influx of modern weapons — and the overconfidence they produced — shaped Pakistan’s policy towards Kashmir and India. Had we been forced to equip our armed forces with our own limited resources, it is doubtful Operation Gibraltar — the ill-judged attempt to cause an uprising in Kashmir — would have taken place. And the 1965 war would never have happened.
These are the ifs and buts of history, but it is a fact that military aid has seldom led to peace. Take Israel as an example. Had it been forced to stand on its own feet and pay for its own military hardware, it would have been forced to make peace along its borders and arrive at a settlement with the Palestinians. As it is, scores of billions in American grants and loans have encouraged it to act as the bully on the block, launching wars and extending its oppressive occupation.
Even when assistance is of a purely social and economic nature, it allows rulers to divert internal resources away from these sectors for other, less useful, purposes. Among donors, aid has created a vast bureaucracy whose purpose is to dole out and monitor large amounts. To justify its existence, it churns out endless reports and evaluations that few read. Consultants on obscene contracts fly around the world — usually business class — and stay at five-star hotels. All these costs are naturally part of the ‘aid’ being transferred to a developing country.
Much has been written about the way foreign aid is used, and the wastage inherent in the system. In fact, it can be argued that in many cases, aid has been counterproductive by allowing corrupt and inefficient rulers to hang on to power by providing them with a lifeline. Despite their mismanagement of the economy, they are still able to channel a trickle of development funds to their beleaguered citizens thanks to foreign aid.
But as ever, there is no such thing as a free lunch. By taking on a vast amount of loans, they burden future generations with the responsibility of repaying them. Currently, Pakistan uses nearly half its budget to service its foreign and domestic debt. And every year, we have to borrow to pay the interest and instalments on past loans, despite the hundreds of millions of dollars of loans written off after 9/11. This is known as the debt trap.
Apart from the financial costs, aid imposes political costs as well, and these are perhaps even more damaging. During the Cold War, Washington and Moscow handed out vast sums to prop up their proxies, orchestrating coups when it suited them. In most cases, these chosen leaders were despots who hung on to power, thanks to the external support they received. Obviously, the policies they followed — often dictated from afar — were not designed to benefit the countries they ruled.
So the question to be addressed is whether the world is a better place as a result of foreign aid. Obviously, humanitarian aid has saved countless lives in the aftermath of natural and manmade disasters. But military assistance, in particular, has made the world a less safe place as it enables recipients to adopt more aggressive policies than they otherwise might have done.
It can be argued that military aid can enhance security for weaker states that are confronted with more powerful adversaries. But at the end of the day, geography is one thing we can’t change, and smaller powers have to make accommodations and compromises.
And when the gravy train stops, aid-dependent states won’t know how to cope.

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