Friday, February 8, 2008

Is foreign aid helping Nepal?

'No' according to this news story. It says that foreign aid, in all its forms, has not made any significant contribution to reduce poverty and support income generation activities in Nepal. Note that it does not say aid is all ineffective; it is just not making 'significant' contribution. So, will Nepal be better off not being dependent on foreign aid and give herself a comfortable space in policy autonomy rather than unnecessarily yielding to donor pressure?

Generally foreign aid, which constitute almost one quarter of expenditure budget, is being used to bridge resource gap in yearly budget. It has neither contributed to generate sustainable income generating activities nor has helped increase productivity in the struggling sectors. This is evident from falling production in the manufacturing sector. Moreover, its neutral effect in poverty reduction is quite surprising. The eleven percentage point reduction in poverty in a decade is attributed to remittances, and growth in agricultural productivity. The new report states that donors are predominant in shaping domestic policies. This led economists like Dr. Pant to question the future role of donors in Nepal. Pretty immature questioning at this moment, but there is definitely a need to harmonize national priority with donor's priority, with emphasis on the former backed by the latter.

Another issue that comes up with this is transparency and accountability. It is said that almost one-third of aid is neither audited nor properly recorded. The monsters of commission, leakage of funds, and fund diversion to other projects come into the picture.

A warning from the authors of the report:

"Unless foreign aid strategies and donors’ behaviour are changed following an overhauling approach, the debt trap situation will perpetuate accompanied by continued dependency on aid with some zero sum game type effect"

DFID strikes back; Insists aid works in Nepal

Bella Bird, the head of DFID Nepal, has reacted in response to a news stroy, published in major dailies in Nepal, about the ineffectiveness of aid to spur poverty reduction and income generation activities in Nepal.

He argues that aid is working in Nepal and "we can do better." He cites contribution of aid in health budget (almost half of it) and the role played by health aid to eradicating polio in 2005. The progress in the fight against tuberculosis, maternal death, infant mortality, etc. is partly due to donor's assistance. No doubts in it.

He further cites the improvements seen in education and infrastructure sector. Almost 90% of Nepali children now attend school. More villages are being linked with cities by roads.

Bird is largely dissatisfied with news stories and editorials published in leading dailies that cited a new report on the insignificant role played by aid in Nepal.

The news report that the newspapers cited said that aid's role in fostering income generating activities was not significant. I think the report was written in a very myopic perspective. Returns from investment in public goods like health, education, and infrastructure is not seem immediately. It takes years to realize the benefit of such investments in the lives of people. And, just looking at the date of eight to ten years does not warrant such a forceful conclusion.

As argued by Bird, it is a tremendous success that we eradicated polio from Nepal. And no one can argue it is not because of donor's assistance and expertise in this sector. Of course, there have been lapses and no visible results and cases of corruption in some donor funded projects. But this does not mean that all the projects are the same.

We do need donor assistance. But it has to be better harmonized so that the neediest people get it. We still need to come up with a system to negate rent-seeking behavior among politicians and bureaucrats to better utilize donor assistance. Aid definitely helps if it is directly invested in the neediest sector, i.e. without cumbersome bureaucratic hassles.