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Foreign Aid: A blessing (or a curse) in disguise?

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12th-Oct-2018       
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Lutfay Tariq Rahman &  Tanzid Nahid Mustafa Sundrin  :
Very recently both the World Bank and the Asian Development Bank have offered ‘financial aid’ to support Bangladesh with the Rohingya refugee crisis. Though it is unclear whether the aid will be provided in the form of grant or loan. Another issue is the signing of the 3rd Line of Credit (LoC) between India and Bangladesh worth $4.5 billion on October 4, 2017. So, there will be lots of capital inflow. However, in reality how much of these financial assistance help us? It is a much discussed and debated topic. Foreign Aid- a term much coined by the people of developing countries is the influx of financial assistance to developing countries from their developed counterparts. It is provided bilaterally or multilaterally in the form of grants, loans or technical assistance. Theoretically, it is provided to enhance the well-being of the recipient country’s citizens. However, in reality expected progress is hindered, and desired target not achieved. Effectiveness of aid is challenged all through the way from the time it is sanctioned till it is used to bring expected development. To highlight some of the few there is delay in loan processing and bureaucratic corruption. In return, countries receiving aid loose economic freedom become dependent and per capita debt increases. In Bangladesh in the year 2007 per head debt obligation was $144 and this year it rises to $169.
In the last two decades there has been a shift in investment from social sectors to infrastructural developments. In most cases, loan sanctions decisions between the donor-recipients involves less informed officials of the latter and therefore, in the long run the recipient country’s citizens become dependent on donation and are subject to domination and exploitation. Moreover, many of us are unaware of the underlying terms and conditions attached to loans and grants, and often foreign experts are hired with high salary to implement the projects. These foreigners are often not aware of the Bangladeshi context of working and interest of the locals.
Since the year 2010, Bangladesh and India have signed 3 Lines of Credit (LoC) worth 7.5 billion US Dollars. But Bangladesh’s utilization of Indian lines of credit has been nothing more than a sorry state of affairs in the past seven years. Till now, only $576 million have been used. Under the Lines of Credit Bangladesh would have to purchase 65 to 75 per cent of the goods and services from the Indian market. The credits carry a 1 per cent interest rate with repayment period of twenty years and a grace period of five years. And only Indian bidders can participate in projects implemented under Indian dollar credit and from now on, EXIM Bank will send a list of 10 to 12 Indian bidders to Bangladesh and the competitive bidding will take place among them. So, locals end up working as sub-contractors in our own country, despite being competent. The toughest and the least profitable part of any work are done by the natives, though we have a pool of talented young generation to support us in higher positions .Additionally, ranks have privileges. Also, in the 1st LoC, there was a condition that Bangladesh has to use Indian bricks for various projects.
The major findings by Paul Mosley, Professor of Economics at the University of Sheffield and others conclude that it is not possible to get any significant correlation between aid and growth rate of GNP in developing countries. One reason for this is the leakage of the aid into unproductive expenditure in the public sector. However, at a micro level, all donor agencies regularly report the success of most of their projects and programs. This contrast is known as the ‘micro-macro’ paradox. Mosley’s result was further confirmed by Peter Boone who argued that aid is ineffective because it tends to finance consumption rather than investments. Boone also affirmed the micro-macro paradox. Noted Zambian economist Dambisa Moyo has been a fierce critic to development aid, and calls it ‘the single worst decision of modern developmental politics.’ Her famous book ‘Dead Aid’ shows how aid has encouraged corruption, aid-dependency and how a series of detrimental economic policies have hindered development in Africa. She argues that foreign aid provides a windfall to governments which can encourage extreme forms of rent-seeking and through providing a positive shock of revenue, lead to ‘Dutch Disease.’ In economics, the ‘Dutch Disease’ is the apparent causal relationship between the increase in the economic development of a specific sector and a decline in other sectors. The mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation’s currency becomes stronger (appreciates) compared to currencies of other nations. This results in the nations other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive. And eventually this will lower a country’s competitiveness in international business and trade.
Now, the question is how to use aid in a more effective way. The Accra Agenda for Action states that transparency and accountability are essential ingredients for development results. Mutual accountability and transparency is one of the five partnership commitments of the Paris Declaration on Aid Effectiveness. Through ‘transparency,’ donors and recipients can be held accountable for what they spend and aid can be made more effective by knowing the three Ws’ of transparency: Who gives money to which recipient? What project is being funded and for what purpose? And where is the money provided?
One challenge for assessing the effectiveness of aid is that not all aid is intended to generate economic growth. Some aid is intended for humanitarian purposes; some may simply improve the standard of living of people in developing countries. Therefore, to make aid effective it is imperative to have sound institutions and economic policies (i.e. open trade, fiscal and monetary discipline), accountable governance and self-sufficient capacity building.
Bangladesh has been receiving foreign aid since independence. Its contribution is evident from rebuilding a war-torn country, alleviating poverty to preventing diseases.
However, as we as a nation is stepping towards upper-middle income economy, we should attract foreign investments rather than being dependant on foreign aid, and also make proper use of our strategic resources in technologically feasible ways .
These will help us to have a self sustained economy, integrate the poor and also help a larger group of youth population become employed, who can work as representatives and in accordance to the interests of our mass population.

(Writers are students of Master's in Development Studies, Department of Development Studies, University of Dhaka)

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