AID FOR DONORS? HOW LOCALLY OWNED COMPANIES IN THE DEVELOPING WORLD ARE MARGINALIZED IN THE INTERNATIONAL DEVELOPMENT ASSISTANCE SYSTEM
By Sudi M. Mauti Reality of Aid Network Africa: June 8,2019
Why don’t local companies benefit from foreign aid?
It is perhaps telling when Ricardo Michel, Director of the Center for Transformational Partnerships in the U.S. Global Development Lab at USAID on December 8, 2015 at a USGLC forum in Nashville, Tennessee said:
“…less than 1 percent of the $4 trillion federal budget goes to foreign aid. This is a fact that few people know. And fewer still realize the benefits to Americans and American companies that stem from foreign aid. Here in Tennessee, over $33 billion in goods and services was exported to foreign markets in 2014, and trade supports more than 22 percent of jobs–that’s 830,000 local jobs….”
According to the OECD statistics the United States of America has consistently been the largest giver of aid (Official Development Assistance) to developing countries.
Official Development Assistance comes in different forms. The OECD defines it as including grants, "soft" loans (where the grant element is at least 25% of the total) and the provision of technical assistance. Similar terms can be said of the quality of development assistance from the South-South Development Cooperation. China for example, at its Forum on China-Africa Cooperation (FOCAC) this September pledged to invest $60 Billion in Africa towards the latter’s development, thereafter adopting the Forum on China-Africa Cooperation Beijing Action Plan (2019-2021), the keyword being “Invest”. The European Community on the other hand is keen on taking a business model approach to development assistance. It has adopted what is known as “Blended Financing” where financing for development is leveraged in order to mobilize investment from private actors into development initiatives. One may be inclined to think that, with so much investment for development taking place, the developing world’s local industries must have gained much in the recent past; not so much!
One of the problems that face local businesses when it comes to participating in development cooperation is the issue of “tied aid”. Tied aid is aid given on the condition that the recipient will use it to purchase goods and services from suppliers based in the donor country. This of course means that local businesses will not participate in the fresh injection of capital from these aid resources. The investment goes back to the donor’s coffers increasing its own GDPs and GNIs. This policy of tied aid is obviously at odds with the aims of development assistance; the aim for which taxpayers from the donor countries are moved to contribute towards. Development for recipient countries are constrained to be marginal benefits for the recipient country. The recipient country registers increased economic activities but nothing changes for the citizens of the recipient. In any case, the situation becomes worse for the recipient countries as such a system have been proven to result in poorer governance, increased corruption levels and environmental degradation as well as unlawful displacement of people. This policy is conventionally associated with China, as the biggest player in the aid landscape of the global south. However, the west was at it long before their Chinese counterparts learnt the ropes of such aid policy. For example OECD/DAC statistics in the year 2002 show that approximately £6.2 billion of EU Member States’ aid was tied every year and at that point only the UK had untied its aid. In 2002, the EU had been discussing on how to untie its aid, at the very least for the least developed countries; a proposal that was highly contested. China was making its first declaration towards African development cooperation only in the year 2000.
On one hand China prides itself for its policies of non-interference, solidarity and mutual benefit. This becomes attractive to recipient countries as issues of local politics and governance are not interfered with by donor countries, something the west is notorious for. But on the other hand China underscores greatly mutual benefit in its development cooperation policies the only problem being that the benefits are skewed, China receiving the lion’s share through tied aid. Conditionalities by the west is generally touted as beneficial to the underdeveloped world. The package offered in aid is packed with requirements of adherence to international human rights standards as well as environmental protections, but such aspirations remain pipe dreams; never materializing. What however is implemented, monitored and evaluated are the priorities of the Donor countries. For example much of European countries’ aid has been dedicated to maintain programs that keep immigrants in their home countries rather than recipient countries’ development priorities; despite the humanitarian principle of non-refoulement. So much of USAID’s intervention is dedicated to prioritizing security for the United States. The problem? Development assistance is diverted to priorities of the donor rather than those of the recipient; much less to corporations owned and run by the citizens whom development is aimed at. This onslaught of development results goes on despite the efforts of the Global partnership for effective development Cooperation in adopting the principle of country ownership as one of the principles of effective development cooperation.
SOCIO-POLITICAL ENVIRONMENT OF RECIPIENT COUNTRY
Part of the blame should be apportioned to recipient countries themselves. Weaknesses in the political space and in governance structures have caused further marginalization of locally owned companies from benefitting from the aid system. An example is that when aid resources are transferred to the recipient country, they are diverted to the political leaders’ personal coffers and beneficiaries of their patronage. The companies that do not fall under these patrons stand to remain forever out of the game. On the other hand, cultures of corruption and poor political practices such as electoral nepotism result in the further diversion of benefits from aid. Society fails itself, perpetually. With transparency thrown out of the window, local businesses will never know about aid resources, and those which do know must “pay the piper” to remain without political interference from the local country’s government officials. As such a lot of resources are lost and gains in development disappear.
Perhaps it is time real solidarity is shown to locally owned businesses by involving them in the aid system. They are, after all, a great option in driving development. Here local companies should be envisioned not just owned and ran by citizens of a country but more so by the segments of the citizenry that are not political or the economic elite. All in the name of development.