More Ideas on Aid to Pakistan

By Anjum Altaf

An intense discussion on foreign aid to Pakistan took place amongst a small group of individuals following the exchange on the subject between the Center for Global Development and The South Asian Idea (links to all the documents can be found at the end of this article). Here I wish to record the ideas presented in the discussion in order to refer to them at a later date.

The almost universal acceptance of the extremely poor utilization of aid in Pakistan and its negative impacts on governance leave little need to repeat the evidence. This acceptance marks the starting point for the discussion under review and yields the two main topics that form the core of the debate: How can the utilization of aid be improved and how can the negative impacts of aid on governance be reversed?In order to keep the discussion simple, we have excluded consideration of multilateral development loans and focus only on official bilateral assistance (for definitions, see our three-part series on aid).

Two perspectives dominated the discussion. The first, articulated forcefully by those deeply involved in the aid business, claimed to represent the political reality of the current situation. The salient features of this reality were that bilateral aid was not going away and that, other things remaining unchanged, governance in Pakistan was not going to improve given the experience with all prior attempts at reforms at the national or sector levels. In this scenario, the best hope would be to channel all bilateral aid into one or two mega infrastructure projects and ring-fence them to the maximum extent possible. Even if implemented at the existing efficiency standards of the Pakistani establishment, they would yield some benefit to the country and its citizens. The examples of the Mangla and Tarbela dams were cited favorably in support of this strategy.

The argument against this strategy was that as far as the citizens of the country were concerned, the returns to improved governance far outweighed the benefits that would accrue from the completion of a mega-project ten years down the line. Therefore, if continuing assistance, even if it were ring-fenced, contributed to the postponement of reforms, it was a losing proposition. This argument emphasized the point that there was a link between assistance and governance that the insiders were ignoring. By condoning the extremely poor governance of key sectors and continuing to assist new projects, the signal being communicated was that there was no penalty for poor governance. Aid would have a far greater impact if it could be used as leverage to drive the minimal reforms that would determine eligibility for assistance. Of course, the government could reject such conditions in which case it would have to compensate by raising domestic resources. That by itself would be a positive outcome leading to an increased obligation to citizens for which governments could be held accountable.

The gap between the two sides was narrowed with agreement that the link between assistance and governance was too obvious to ignore. The insiders themselves conceded that even minor improvements in management efficiency, procurement, and worker productivity in key sectors like energy would yield significant impacts on service delivery. Costless indications of seriousness on the part of the government could include the appointment of competent heads of organizations, merit-based promotions, and third-party verification of procurements. The discussion then moved on to elaborating the modalities for using assistance as leverage for improved governance.

A suggestion that emerged was to specify an end-date for bilateral aid. During the intervening period, the assistance could be focused on those areas that would be most critical for the country in the post-aid scenario. The elaboration of such areas would by itself be a useful exercise that an organization like the Planning Commission could undertake.

It was recognized that this strategy would be critically dependent on the credibility of the aid being terminated at the pre-specified date. As long as recipients believed that donors would find some loophole to continue their financing, the leverage would be ineffective. As it is, previous attempts to disburse assistance in tranches based on meeting specified performance milestones have foundered on the eagerness of donors to find reasons to circumvent their own conditions. Lenders and donors are perpetually visualizing a new dawn or articulating a ‘this time is different’ scenario. The strategy would also fail if a recipient government adopted the après moi le deluge position which cannot be ruled out in the case of Pakistan.

The bottom line that emerged was that in the existing situation where Pakistani governments cannot realistically be expected to do anything to help Pakistan, the onus for helping Pakistan rests on the donor governments. It is their integrity that is at stake and their actions would send a clear signal to the citizens of Pakistan. If their intention is to continue assistance under all circumstances, the gap between rhetoric and reality would be obvious.

There was agreement amongst the participants on a number of ancillary issues. First, it was agreed that the fragmentation of aid in a very large number of very small activities ought to be discontinued in favor of focusing on a few large and critical interventions. If this could not be avoided for some reason, at least the direct administration of micro-activities by donors ought to be discontinued. Instead, an umbrella organization governed by a panel of credible Pakistanis should be the recipient of the funds and should then be responsible for funding local activities. In this context the experience of the Infaq Foundation serves as a good model.

In the specific case of aid from the USA, there were additional suggestions to overcome the huge trust deficit that has been further dented by the recent revelation of a vaccination program being used as a cover for intelligence gathering. It would be a convincing gesture of good faith if the US disbanded its aid bureaucracy in Pakistan but continued assistance by pooling its contribution with the financing of multilateral institutions like the World Bank and the Asian Development Bank. The pooled grants could be used to soften the terms of loans from the multilateral banks which should themselves be conditional on credible prior reforms.

The consensus of the discussion was that the reform of governance in Pakistan had a higher priority than plugging any specific deficit in any specific sector. If aid hindered reform, it was a disservice to the citizens of the country and therefore to be questioned on a simple benefit-cost criterion. The focus of further discussions should remain on finding convincing and effective ways to use aid as leverage for improving governance. In this endeavor, it is the integrity and credibility of the donors that is on trial. Aid without reform is worse than the termination of aid which would at least force a change in the calculus of recipient governments.

In this connection, it should be recognized that relative to the size of the Pakistani economy, its export earnings and foreign exchange remittances, the quantum of bilateral assistance is not large enough to cause the macroeconomic collapse that many cite as a reason for the continuation of aid. The impact of aid is primarily on domestic incentives and governance and at present it is overwhelmingly negative. The burden of aid needs to be lifted from the backs of the Pakistani people.

The following documents are referenced in this post:

The Center for Global Development’s report on US Aid to Pakistan.
The South Asian Idea’s critique of the CGD report.
The CGD’s response to the critique.
The South Asian Idea’s rejoinder to the response.

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