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Aid 2.0
India is thinking about setting up its own aid agency. Why should others give aid to India?
EVERY so often something comes along which shows that almost everything you know about a subject is wrong. Such a development is happening in the world of foreign aid. It is a proposal by India to set up its own aid agency to distribute $11 billion over the next five to seven years. Thats aid from India.
This would be a departure. For decades, India was the worlds biggest aid recipient. Now, it is likely to join Brazil, Russia and China in using aid to win friends and influence people abroad. The rules of aid are being turned inside-out and long-standing donorsgovernments and non-governmental organisations (NGOs) alikemust change, too.
For the past decade Western donors have been campaigning to boost the amount of aid they give to poor countries and to try to make better use of it. These twin aims are embodied in the UNs millennium development goals and the Gleneagles agreement to double aid to Africa. They guided recent reforms to the aid budgets of America and Britain.
But Indias proposal shows that donors, like generals, are still fighting the last war. The old binary division of the worldbetween rich countries which give aid and poor ones which get itis gone. Fewer countries are poor and eligible for cheap loans. Two-thirds of the worlds poorest peoplethose with less than $1.25 a daylive in middle-income countries, such as India, which increasingly are donors as well as recipients.
In this world Europeans and Americans no longer dominate aid. China is the biggest source of investment in Africa and the Gates Foundation is as important as many donor governments (and much more innovative). Private capital flows to Africa outstrip aid flows, contradicting an old justification that aid is necessary because investors hold back.
For the poorest, the new donors are more important because Western aid is shrivelling. Congress is proposing to chop American aid by a fifth. Brazil is giving more to the Somali famine than Germany, France and Italy combined. There are exceptions: Britain and Australia promise to boost aid spending. But they seem like a last hurrah of Western generosity.
As India also shows, middle-income countries no longer need financial transfers to help their own people. That was clear before: India has a space programme and $300 billion of foreign reserves. A new aid agency would ram the point home. Once, Westerners could say they needed to help Indias poor because Indias own government could not afford to. Not now.
So where does that leave aid?
In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which failand encourage bad government.
For Westerners, justifying aid will be harder. But there is a reason to give: like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for). There is a new world of aid but over a billion people remain poor; they still need help, even if some of them live in countries that now give aid as well as get it.
Official development assistance: Aid 2.0 | The Economist
