FOREIGN ASSISTANCE

CDDRL SUMMER PROGRAM AUGUST 2013

Foreign Assistance is a new international development

Prior to WWI finance was tied to specific foreign policy objectives

Germany financed Ottoman Railways to get port access

German lending to Russia decreased after 1887 and virtually stopped after 1907 Russian British agreement

Potential adversaries eg Germany were not given access to French capital markets

As relations between Russia and France warmed Russia turned to French capital markets in the 1890s.

British loans to Russia increased after Anglo-Russian treaty of 1907

Foreign Assistance Begins After WWII

•Economic conflict and deprivation could lead to political conflict

•The Great Depression and Nazi Germany

•Need to rebuild Europe

•Creation of the World Bank and other IFIs which insulated some aid from the preferences of specific donors

Aid Commitments Mirror Domestic Attributes of Donors

•Aid as a percentage of GNP correlates strongly with social welfare expenditures as a percent of GNP

•Left leaning government give higher percentages of aid

•Small European social democratic countries are largest aid donors

FOREIGN ASSISTANCE HAS NOT SUCCEEDED, AT LEAST NOT VERY WELL•Very very few countries have graduated from foreign assistance, perhaps only Korea and Greece

•Africa has received $568 billion over 42 years.

•Per capita growth rate of median African country is near 0•Debt forgiveness has not been correlated with higher growth.

•Recent statistical studies have found

• Modest relationship between aid and growth (1 percent)• No relationship• A negative relationship

WHY FOREIGN ASSISTANCE HAS FAILEDLack of accountability for donors

• Multiple donors• For large objectives, ending poverty, multiple causal factors• Outcomes cannot be associated with specific programs

Aid substitutes for taxesAid encourages corruption by providing unaccountable fundsAid undermines social trust by weakening ties between government and citizensAid weakens pressure for reform because donors always provide fundsDonors rarely enforce conditionalityDonors are incapable of taking adequate account of local institutions and circumstances:

• Weakening traditional property rights, for instance, before conventional property rights are in place can leave a society worse off

Three Approaches to State Building

Modernization Theory

Institutional Capacity

Rational Choice Institutionalism

MODERNIZATION THEORY Economic and social development leads to

political development Economic development requires more capital Foreign assistance can provide more capital Implications for foreign assistance

Meet the 0.7 percent of GDP target Provide more funds to meet the MDGs Most types of foreign aid are consistent with

modernization theory Budget support Infrastructure Resources for social services Debt forgiveness Structural adjustment

INSTITUTIONAL CAPACITYEconomic and social mobilization without greater institutional capacity political decay

Implication for foreign assistance

• Build state capacity• Training • Technical Assistance

RATIONAL CHOICE INSTITUTIONALISMPolitical and economic outcomes reflect strategic choices made by key actors (usually elites)

Better outcomes achieved through pareto improving initially self enforcing deals among key players

Implications for Foreign Assistance:• Change Incentives for Leaders

• Millennium Challenge Account• Trade Agreements• Mo Ibrahim Prize

• Support independent actors • Civil society, religious organizations, lawyers, even companies

• Accept external control where Pareto improving deals are impossible

• Shared sovereignty• Charter cities• Neo-trusteeships• Examples: RAMSI, GEMAP

DISTRIBUTION OF US AID FUNDING 1999-2007 (PERCENTAGES)

United States Foreign Aid by Percent (Excluding Iraq and Afghanistan)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

1999 2000 2001 2002 2003 2004 2005 2006

Years

Per

cen

t Modernization

Institutional Capacity

Rational Choice Institutionalism

SACHS, EASTERLYSachs: Give more money (modernization)

Easterly: Planners vs searchers (rational choice)

• Planners fail; searchers sometimes succeed• Think small; think local

THE MILLENNIUM CHALLENGE ACCOUNT

•Proposed by President Bush in March 2002

•$5 (almost 5 percent) billion increase in foreign assistance by Fiscal Year (FY) 2006

•Actual budget for 2007 was $1.75 billion•Appropriation for FY 12: $898 million

• MCA is good policy without a constituency

•Countries to be selected on the basis of “clear, concrete, and objective criteria”

•The MCA was to supplement not replace existing assistance programs which are used for many different purposes including:

•Strategic objectives (Egypt, Israel, countries on the UNSC)

•Humanitarian Assistance

•Post conflict reconstruction and stabilization (Afghanistan)

•The purpose of the MCA is to jump start economic growth in better governed countries

Better Performing Countries Originally Identified by 16 Indicators in Three Categories (There are now 17 indicators)

Governing Justly: _Civil Liberties (Freedom House)_Political Rights (Freedom House)_Voice and Accountability (World Bank Institute)_Government Effectiveness (World Bank Institute)_Rule of Law (World Bank Institute)_Control of Corruption (World Bank Institute)

Investing in People:_Public Primary Education Spending as Percent of GDP (World Bank/national sources)_Primary Education Completion Rate (World Bank/national sources)_Public Expenditures on Health as Percent of GDP (World Bank/national sources)_Immunization Rates: DPT and Measles (World Bank/UN/national sources)

Promoting Economic Freedom:

_Country Credit Ranking (Institutional Investor Magazine)

_Inflation (IMF)

_3-Year Budget Deficit (IMF/national sources)

_Trade Policy (Heritage Foundation)

_Regulatory Quality (World Bank Institute)

_Days to Start a Business (World Bank)

To make the list of better performers countries must:

-- Score above the median on half the indicators in each policy basket

-- Be above the median on the corruption indicator

Separate competitions for countries above and below $1435 because scores correlate with income

Final Recommendation to the President from the Millennium Challenge Corporation Board of Directors Composed of:

•Secretary of State

•Secretary of the Treasury

•USTR

•Administrator of USAID

•President of MCC

•4 public members appointed by president with consent of Senate

MCC Compact Countries

MCC Threshold Programs

UNDERSTANDING THE MCAMCA appears to be a fully rational program consistent with the best available social science knowledge when the program was first proposed.

Aid only effective in good policy environments

The real story is much less neat

JOHN KINGDON: POLICY STREAMSThree Policy Streams

1. Problem generation: • Crisis, Budget, Legislative renewal, Feedback that an existing

program is not working

2. Policy Alternatives• Bureaucrats, think tanks, academics• Proposals survive if they are:

• Technically feasible• Conform with policy makers ideology• Can survive budget constraints• Policy stew world operates through persuasion

3. Politics• National mood among attentive publics• Elections or changes in key players such as cabinet secretaries or

committee chairs in Congress.• Political stream operates through bargaining

KINGDON (CONT.)Policy Windows:

• Opened by political stream or problem generation stream• Last for a limited period of time

Policy Entrepreneurs

• Bring Streams together• A policy alternative must be ready to go when the policy

window opens

MCA AND POLICY STREAMSProblem Generation Stream

• 9/11, US Security, DevelopmentPolicy Alternative Stream

• Relationship between governance and development.• Position articulated by World Bank and academics

Political Stream• President Bush’s commitment to attend Financing for

Development Conference• Relationship with President Fox• Need for a deliverable

POLICY ENTREPRENEURDeputy National Security Advisor, Gary Edson

Stanford BA

Chicago Law and MBA

Edson is sherpa for G 8 meetingGood governance discussed at preparation meeting for Canada G-8 summitEdson discusses idea for new aid program with small number of people at State and NSC