Monday, 29 May, 2023

Does Foreign Aid Really Act as Debt Trap?

M. Ashiq

Quite a long time back, I remember, our respected teacher at Dhaka University started his talk on the role of foreign aid as a development strategy by saying: "Remember, my dear students, if your friend offers you ice cream, it means he wants a king-size burger from you". This rhythmic statement produced instant laughter in the entire class. However, as the session proceeded, it took little time for the students to understand that foreign aid is not just aiding, it certainly is an exchange with a big target. More precisely, foreign aid is not always altruistic as it sounds; rather it is mainly transactional and wrapped with strategic motives.

Today's contention about foreign aid is not just related to its effectiveness in ensuring viable economic development of the recipient countries, but also the need to settle whether using foreign aid goes against national interest. That foreign aid has advantages and disadvantages for the aid-receiving countries is a settled matter. Tons of research and writings have so far been made on the efficacy of foreign aid, but these research findings have all along produced mixed answers. And therefore the debate on the use of foreign aid by economically backward countries has now shifted from "how far foreign aid is really effective for the recipient countries" to "how to make foreign aid work for the recipient countries".

Foreign aid is identified as a transfer of financial and non-financial resources from the governments of the developed countries and from the donor agencies like the International Monetary Fund, World Bank, etc. to emerging and poverty-stricken developing countries. Foreign aid is classified in several ways: loans or grants, bilateral (aid from the government to government) or multilateral (aid from international financial institutions), project-based or specific program-based, hard or soft loans, tied or untied, etc. Whatever the classification, it is a matter of serious question, how far does foreign aid promote national interest and development?

These days foreign aid has increasingly become a big source of panic for the people and the government of the aid-seeking countries because of the much-talked-about "Debt trap diplomacy". According to Wikipedia, “debt trap diplomacy is an international financial relationship where a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender's political leverage. The creditor country is said to extend excessive credit to a debtor country intending to extract economic or political concessions when the debtor country becomes unable to meet its repayment obligations." So, this is quite clear from the aforesaid words that foreign aid can seriously undermine a country's vital interest if it is systematically designed to trap the aid-receiving country by the donor country or institutions.

An Indian academic, Brahma Chellaney, introduced the term "Debt trap diplomacy" which describes how the Chinese government leverages the debt burden of smaller countries for geopolitical ends. It is said that China prefers to give hefty amounts of loans to vulnerable countries because, with heavy loans burdened, it will enjoy a clear opportunity to dictate the terms and conditions of loans. In addition, loan terms are not allowed to be made public by the recipient country. It is reported that China's big project loans to several African and Asian countries have fallen into 'debt trap' syndrome. For example, China's infrastructure loans to Angola earned them greater control and ownership of vital oil blocks (China's Aid to Africa: Monster or Messiah? BROOKINGS, Yun Sun, February 7, 2014). Similarly, Brahma Chellaney reported that in failing to repay loans on the stipulated terms, Tajikistan lost 1158 kilometres of strategic territory to China. Similar has been the fate of Sri Lanka when, in default of repaying loans, it had to surrender Hambantota port for a 99-year lease to a Chinese Company. On the same grounds, Pakistan, the ace ally of China, had to hand over Gwadar Port for four decades, which allowed China to grab valuable revenues from the use of this important port. (Brahma Chellaney, THE TIMES OF INDIA, May 11, 2021). These are just a few examples of the Chinese foreign aid fallout.

Equally, donors from Western countries, whether an individual government or international financial institutions (primarily funded by the capital of the rich Western countries, particularly by the US government), have ulterior motives behind the decision to offer aid to a particular country. These motives are straightforward: to invest the surplus capital of the powerful Western countries as loans and grants and perpetuate their sphere of influence on the recipient countries or gain some geopolitical advantage or achieve some other objectives by imposing stringent terms and conditions (e.g., carrying out structural adjustments in the economy, such as withdrawing subsidy, stop devaluing national currency, raising rates of utility services etc.) that may contravene the national interests of the aid-receiving countries. So, loans coming from rich Western countries or international financial institutions or from China achieve their respective strategic interests.

That loan-giving countries and international financial institutions have their strategic motives behind extending loans to developing countries is only one part of the story. But another part of the story is about the borrowing countries' dealing with foreign aid issues. Yes, there are compelling reasons for poor developing countries to take financial and non-financial support from donor countries and agencies and countries with huge foreign currency reserves (e.g. China). It is claimed that developing countries need to take loans because of overcoming the low level of domestic savings compared to the level of investment required to increase economic growth and development and also make up for the shortages of foreign currencies to pay for rising import bills.

So far, so good. But these countries overlook the fact that once the loans are taken, particularly for mega projects, they will be saddled with a hefty amount of debt burden. Loans, whether small or big, must be paid back to the lenders on due time. Otherwise, they have to embrace the stigma of being a defaulting nation with consequent undesirable interferences by the lending countries and institutions, besides facing economic hardship like foreign currency turmoil, inflationary pressures, rising unemployment, falling national output, lower living standards, etc. In addition, they have to earn even more foreign currencies from their export earnings to service the debt burden every year which turns out to be a really difficult task with their narrow export base and facing a highly competitive international market in a globalised world. This is a familiar story in most Asian and African countries.

What is the way out of this dire state? Borrowing countries have to increase the ability to repay the loans, and this calls for enforcing an extraordinary amount of discipline in the eco-political system. This implies that they have to ensure the best utilisation of foreign aid and gradually reduce a country's dependency on it by mercilessly eliminating corruption at home as much as possible, ensuring efficient management of the economy and establishing political stability by bringing everyone together. This will enhance the economic strength of the country and help thwart the attempt of the donors to trap aid recipient countries into an unsustainable debt burden. They have to accept the bitter truth that if their house is deeply divided and in deep turmoil, even massive external financial support will not bring much-needed relief and comfort to the people.

So, foreign aid has the potential to turn a poor developing country into a defaulting nation and this creates a fertile ground for the donor countries and agencies to cast a debt trap of unsustainable debt burden. It is, therefore, imperative to enforce national unity and eco-political discipline before considering the use of foreign aid as a strategy for economic and social development.


The writer is a former teacher of SCHOLASTICA and SUNBEAMS