The reverse cycle of aid politics

The Millennium Development Goals (MGDs) and many other development proposals that form part of the UN activities and other bilateral or regional agreements have always advocated that the developed and rich countries lend support – financially and technically – to the developing and poor countries to help them come out of poverty, underdevelopment and backwardness.

We have long been told the richer countries have manifested their Godly gestures towards poor countries and helped them financially. The generosity of the rich countries has always been a compelling story for us. This story is supported by the vision that holistic human civilisation is impossible if the rich countries failed to act to eradicate poverty and backwardness in the under-developed countries.

In other way round, this has been interpreted as compensation by the rich countries that extracted most valuable resources from these poor countries during colonial era.

According to OECD data, rich countries give more than US$125 billion in aid each year to the poor countries. The data is a perfect example to show rich countries’ goodwill gestures. The aid industry and western media circulate this in such a fashion that we take it as real.

Are these real? To what extent?

The US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics recently published some fascinating data the aid politics.

The outcome was the comparative analysis of the transfer of financial resources between rich and poor countries. The tally does not only include aid, foreign investment or trade flows but also non-financial transfers such as debt cancellation, unrequited transfers like workers’ remittances, and unrecorded capital flight.

According to GFI, in 2012, the developing countries received a total of US$1.3 trillion in aid, investment, and income from rich countries. And in the same year, US$3.3 trillion flowed from poor countries to rich countries. Part of this outflow form the debt repayments by the poor countries. Developing countries have paid over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London.

This figure tells us a different story – poor countries are making rich countries richer each year by US$2 trillion.

The other bigger contributor for this outflow of financial resources is in the form of foreign investments. The western conglomerates invest in poor countries and the big chunk of their profits from these investments is taken away, never returned to the country where the profit was made.

Never to mention the capital outflows, unrecorded, from developing countries in the form of illicit capital flight which is estimated to be well over US$13 trillion since 1980s.The unrecorded flows are mostly by trade misinvoicing – false trade pricing with intentions to avoid taxes and customs.

Multinational companies also shifts capital and profits between subsidiaries and major profits are concentrated where tax regime is either weak or tax component is very low.

GFI estimates that profit shifting and unrecorded capital flight costs the developing countries over $1.4 trillion a year – which is well over the annual aid, investments an donations that rich countries provide to the developing nations. This figure is based on exchange of goods, not services. GFI estimates if services were included, financial losses for developing countries would exceed $3 trillion.

This statistics tells us why developing countries continue to derail from their plans to improve financial situation and advance development activities at a faster rate. Most revenues they generate are taken away to accumulate wealth in developed countries and the developing countries are left with declining economic growth rates.

The aid enterprise that emerged in 1950s had initially attempted to address the political sensitivity and sovereignty concerns by lending support only for socioeconomic objectives — economic growth and other public goods like basic infrastructure and health care.

However, by 1990s, the nature has drastically shifted to lend directly to competing groups in the developing countries blaming governments for failure to implement programs effectively and generate substantiated results. The shift gradually polarised the community making it easier for the richer countries to influence the socio-political environments through aid regime. This shift also promoted advancements of democracy and decline in communist governments. Huge amounts were poured in the name of election assistance, political awareness, good governance, civic education and legislative support.

The political influence through aid regime because so powerful that political leaders started sensing it could change government and tighten electoral process. Closure of USAID in countries such as Bolivia, Egypt and Russia was result of such political manoeuvring.

The aid enterprise that started with pure objectives to help the underdeveloped countries attain financial needs and accelerate growth ended up being a political tool to impose political interests. The current competition between US and China to provide financial assistance to developing countries in the form of grand and aid gives us larger picture of who aid regime is influencing dialogue and nature of society we intended to live in.

The normal rhetoric of the helping poor countries to accelerate economic growth, provide political stability and improve socio-economic status of the citizens is in fact running reverse.

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