Re-thinking aid strategy

Receiving aids from developed countries has become the mantra for development for nations like ours. Government and policy makers are enmeshed in a psyche that a country has a natural right to request for aid, and donor countries have an obligation to offer it, leading to over-dependence on international assistance. This has led to a failure in the planning and big development projects have remained scarce for decades in Nepal. Hence, a complete re-thinking of the international aid strategy is necessary if we want to progress.

The budget for the current fiscal year targets at receiving around Rs 88 billion as foreign aid, which is about 50 percent of the planned development expenditures. As soon as the necessity for construction of any big project surfaces, we look towards the donors, irrespective of their willingness to support or not. For example, the Chinese government obviously seems uninterested—it has diplomatically said ‘no’ to the assistance at the meeting with government ministers-- in executing the outer ring-road project in the Kathmandu Valley. Nonetheless, we have not stopped chasing them, and have ceased to explore alternatives to make it happen. The policymakers seem to hold that any development project is unthinkable without foreign aids.

However, the global evidence has showen that no country in the world has made a significant economic progress due to the international assistance. The underlying purpose of the aid is to avoid a humanitarian and economic crisis. By its very nature, it cannot be the platform for long-term sustainable growth. Let us look at this from the perspective of the givers. Why do they need to extend their support to Nepal for its economic growth? Let me give you an example: An economically sound boss will not give extra money to his/her house-help or family drivers. My question is, have those drivers and domestic helps ever become rich due to their masters’ generosity? No. This applies to the countries expectant of aids too.

The matters taken into consideration while providing aids are the strategic interests, volume of trade, and political institutions of the recipient country. A research paper by Alberto Alesina, Professor of Economics at the Harvard University, reveals that the pattern of aid giving is dictated by political and strategic considerations. The paper says that an inefficient, economically closed, mismanaged and non-democratic former colony receives more foreign aids than another country with similar level of poverty, a superior policy stance, but without the colonial past. Therefore, there has been little incentive for other counties to support Nepal’s development process as the western world does not have any significant strategic interest here. Consider the meager volume of flow of aid globally. The European Union generally commits itself and its member states to provide aid flows amounting to only 0.56 percent of the gross domestic product. The ultra-rich United States also, only gives a meagre 0.2 percent of its income in aid to foreign countries.

It would not be difficult to promote economic growth and infrastructure building without donor’s support if there is a political will. Studies have shown that economies that rely on open-ended commitments of aid, almost universally fail. But those that do not depend on it succeed. The latter is true for economically successful countries such as Singapore, Malaysia, China, India and Vietnam. Look into the past decade: No significant infrastructure project came into operation in Nepal as donor shifted their priority to basic services like health, education, clean drinking water and sanitation. If we had been continuously building up highways like East-West Highway, Prithivi Highway, and Tribhuvan Highway, connecting hinterlands of western region like Jumla, Bajura, and eastern parts of Bhojpur, and Sankhuwasava, we would have gone far ahead in the race of development And that would have become a lifeline to development and urbanization.

It would not be difficult to promote economic growth and infrastructure building without donor’s support if there is a political will. Studies have shown that economies that rely on open-ended commitments of aid, almost universally fail.

Government of Nepal failed to come up with a comprehensive and concrete plan to run big projects. Moreover, whenever public institutions like banks, Nepal Airlines Corporation (NAC) and the Nepal Electricity Authority (NEA) face troubles, the policy makers do not muster up the courage and smartness to chalk out a strategy to revive them. Instead, they just wait for foreign assistance. This attitude has distorted incentive structure for bureaucrats and, therefore, has delayed pressure for institutional reform. As a result, there has been no example of a big project that was successfully completed and run by the local knowledge and resources.

Look at the latest example. After the unearthing of VAT bill racket, the Ministry of Finance immediately approached the World Bank to plug loopholes in the tax system. This was because the government did not have highly skilled human resources as it never thought of strengthening the institutions itself. In addition, we have the impression that the country is always likely to be bailed out when things go wrong. Consider another example. When economy was fighting with balance of payment deficit of around Rs 20 billion last year, the first approach of the then Finance Minister, Surendra Pandey, was to request the International Monetary Fund for rescue. This dependence tied his hands to take a stronger stand to push forward political and economic reforms to address the root cause of the deficit.

Government and policy makers should begin the process to replace the need of aid with promotion in trade, and new means to finance the development needs through activation of additional sources of revenue generation. Curbing tax evasion and increasing tax base, reducing the red tape and complex regulations for businesses are some of the alternatives it could take. Our tax base is very small due to non-transparent, corrupted tax system and ill-equipped customs and revenue offices. Under the circumstances, even if it is a small political alteration, it can help boost our revenue collection. In this context, the tenure of former Finance Minister Dr Baburam Bhattarai was exemplary.

Undoubtedly, the foreign assistance is always good and helpful for economic growth for the least developed countries like Nepal. However, exceeding expectations of aid has evidently slowed down our development pace which makes it evident that it is now time for change.

Writer is a Ph D fellow of Economics at Lehigh University

krishregmi@lehigh.edu