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January 12, 2011

Does India need aid and if so, what kind?

January 12, 2011
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Thought provoking piece on India and aid from Andy Sumner, whose paper showing that 72% of the world’s poor now India peepslive in middle income countries (MICs) caused a big stir last year. Andy has now become a contributor to the Global Dashboard blog.

The UK is currently tying itself in knots over whether to give aid to a country that has a third of the world’s poor people, is the biggest recipient of British aid over the last decade, but also has $300bn in foreign exchange reserves (400 times more than the UK’s aid contribution), and a space programme. Tricky, eh?

Andy proposes three ways DFID and other donors could do things differently:

“i. Focus on poor people, not poor countries If the focus of aid is poor people not poor countries then the low income/middle income country way of looking at the world needs a rethink. DFID could switch its aid allocation metrics to fit DFID’s mission – ie from poor countries (low or middle income countries) to poor people.

ii. Think beyond traditional aid Maybe aid is no longer about money transfers with MICs. There is the ‘do no harm’ agenda – designing favourable and coherent development policies on remittances and migration, trade preferences, climate negotiations and climate financing, as well as tax havens – and a case for making aid increasingly about global public goods (and the importance of MICs support to these) and multilateralism, especially in middle-income countries and where aid might be channelled through the United Nations Children’s Fund, for example, or a new global fund for cash transfers to households as a direct poverty and redistributive measure.

iii. See equity and shared prosperity as a global and donor concern not just a domestic issue More equitable countries reduce poverty faster, and stubborn asset, gender or identity inequality (ie caste systems) might begin to explain persistent poverty amid wealth in MICs. This entails some thinking on what aid is for and it’s role perhaps in supporting political voice of the poor and marginalized in policy processes. Any attempt to discuss inequality will be viewed as an infringement on political sovereignty but is domestic inequality solely a domestic issue if it hinders the effectiveness of aid?”

I think (ii) – do no harm – makes absolute sense, but have my doubts about the other two.

What does focusing on poor people mean? If it’s aid donors delivering services themselves, or subsidizing the Indian government to do so, then it just seems to let the state off the hook (for example by letting it carry on subsidizing the private sector, rather than public services). The standard counterargument is that some Indian states are as large and as poor as many African countries, and so have the same claim on aid, but that strikes me as rather apolitical – Indian states like Bihar are not independent countries, but part of a large, rising power and that changes the equation.

India demonstrationThere is another way to focus on poor people that makes more sense – helping them organize. Development happens through the construction of effective states and active citizenship, and the nature of the interaction between the two. The problem in India is not policy (there’s lots of them, many excellent, on everything from employment guarantee schemes to the right to education), or cash, (remember those reserves). The problem is implementation, and the political priority accorded to poor people. A study in Bihar showed that teachers teach on average only every second day and there are no sanctions. In the same state, one of India’s poorest, 80% of the food that is supposed to reach poor people through the distribution system goes missing (sold by corrupt bureaucrats, etc).

So one role for donors is to support poor people and their organizations in demanding accountability in the implementation of policies. The question then is how far such support can go before provoking accusations of interference in domestic politics, and whether the boundaries on such actions are even tighter for foreign governments giving aid than for multilaterals like the UN or international NGOs. Go too far and it might well be that the Indian government gets tired of the aid donors even before the donors give up on India. India’s finance minister has already dismissed aid as ‘peanuts’, and the government dislikes the aid agencies’ public narrative of 450 million poor Indians, child malnutrition, maternal mortality and so on, rather than its own preferred story of India as an emerging power.

Another option might be for aid donors to pick political winners – spotting and supporting promising exercises in state-building – states or bits of the official system at either federal or state level that are clearly committed to reducing poverty and inequality. Donor cash or technical assistance might have more impact if targeted in this way.

The bottom line is that if the Indian government really wanted to end poverty, it could do so ($300bn in reserves works out at $650 per poor Indian). Whether it does will depend much more on the evolution of domestic politics and the continued mobilisation of the Indian people, rather than whether or not DFID continues to give aid. No easy answers – as Madeleine Bunting wrote in a follow-up piece to Andy Sumner’s, some experts admit ‘changing their minds from backing to ending aid to India every other day.’

I’m with them – if you’re not confused, you aren’t thinking hard enough…….


  1. Someone the other day said to me that to suggest that we should not give ODA to fast-growing middle-income countries is somehow ‘populist’ – I’m not sure, perhaps being populist is to suggest that we need to ‘fight poverty’, no matter in which country those people reside, and regardless of whether that country has the resources to deal with its own poverty problems? (somehow, it all reminds me of Hugo Chavez’s response to the Katrina disaster, of offering to send aid to the US!)

    Over the last ten years, we have seen a vast improvement in the economic performance of many developing countries – and they are growing much more vigorously than the industrialised countries now. Surely it is only right that these countries now take on a much greater responsibility for financing poverty reduction? Countries like India and China have large aid programmes of their own, something which of course goes up against the grain of the old adage that ‘charity should start at home’. Plus, there is a serious backlash in a lot of the (truly) populist press in countries like the UK against ODA at the moment, at a time of severe government cutbacks.

    To me, it doesn’t seem sensible to unnecessarily give them ammunition to further undermine committment to ODA. It seems sensible to continue to offer technical support to middle-income countries with still significant numbers of poor people, but to slowly reduce financial commitments. Official aid could then be better focussed on low income and vulnerable countries which really do not have the resources to deal with the enormity of the social problems that they confront.

    Of course, I am talking only about official aid sources here….private giving to projects and programmes designed to help the poor within middle income countries would still continue.

    Ultimately, giving large amounts of official aid to fast-growing middle income countries, sometimes with low rates of tax collection and with their own aid programmes, also undermines the accountability of governments regarding their responsibilities to assist their own populations. So advice, technical help, yes, but less attached with financial support.

    Then again, maybe I’ll change my mind on this tomorrow…..

  2. You may be interested in my contribution to this debate:

    In my view status as “middle income” is not very relevant to whether aid is useful or not. Other determinants such as overall size of GDP, increases or otherwise in numbers of poor people and in other financial flows (like FDI and equity flows) and the reserves Duncan mentions. The reason people are confused is possibly because they have misunderstood the role aid has played in India and other large countries for the last few decades, not “filling a savings gap” as it has in smaller countries, but basically project aid. This is more about sowing seeds and ideas than actually funding large scale development – growth in India has little to do with aid. But it does require money.

    As I say in my blog, which supports aid to India: “The way the international community provides aid to India is a hint towards a new global aid compact, in which the old top-down donor-recipient relationships are replaced by respectful collaboration between sovereign countries: a state strong enough to say no, but wise enough to accept advice, support and appropriate financing.”

  3. Interesting blog Duncan, you make some good points. It is indeed a far from straightforward issue and there’s room for disagreement among reasonable people. But I don’t think the $300bn foreign exchange reserves are a good reason not to give aid to India.

    These are a function of the balance of payments surplus, and also of the extent to which the govt chooses to manage the exchange rate. India, China etc have chosen to build up large reserves as a cushion against possible balance of payments crises (e.g. the 1997 Asian crisis) and because they do not want their currencies to appreciate. So they buy up the foreign currency flowing in, which then appears on the central bank’s balance sheet as official reserves.

    BUT this does not mean the reserves represent a fiscal resource that govt can use to finance development projects. I suppose the govt could ask the central bank to convert them back into rupees and then lend these rupees to the govt – but then why bother to accumulate the reserves in the first place? In any case the govt could increase its borrowing from the central bank regardless of the level of reserves. It has already chosen to fix its fiscal deficit at a level which it considers appropriate taking into account fiscal sustainability and other factors – this is a policy decision that is independent of the level of reserves.

    So its not as simple as saying the Indian govt could use its reserves to end poverty if it wanted to. If you are trying to find a measure of the amount of domestic resources potentially available for development, this is captured by GDP per capita – which is still rather low in India even though (thankfully) growing fast.

    Or maybe I’m confused…

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