Sunday, August 14, 2011

The emergence of India as a donor

India is planning to set up its own aid agency to distribute its own US$11 billion over the next five to seven years, according to The Economist. South-South aid is increasing and the aid dynamics is changing. Here is a post on South-South aid to Nepal (India being the largest donor).

For decades, India was the world’s biggest aid recipient. Now, it is likely to join Brazil, Russia and China in using aid to win friends and influence people abroad. The rules of aid are being turned inside-out and long-standing donors—governments and non-governmental organisations (NGOs) alike—must change, too.

[…] But India’s proposal shows that donors, like generals, are still fighting the last war. The old binary division of the world—between rich countries which give aid and poor ones which get it—is gone. Fewer countries are poor and eligible for cheap loans. Two-thirds of the world’s poorest people—those with less than $1.25 a day—live in middle-income countries, such as India, which increasingly are donors as well as recipients.

[…] As India also shows, middle-income countries no longer need financial transfers to help their own people. That was clear before: India has a space programme and $300 billion of foreign reserves. A new aid agency would ram the point home. Once, Westerners could say they needed to help India’s poor because India’s own government could not afford to. Not now.

Now, the Southern and the Northern donors should focus on their comparative advantage—the former in infrastructure and the latter in promoting good governance.

In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which fail—and encourage bad government.

For Westerners, justifying aid will be harder. But there is a reason to give: like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for). There is a new world of aid but over a billion people remain poor; they still need help, even if some of them live in countries that now give aid as well as get it.