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OECD

Old habits, new donors

by Sebastian Paulo, Helmut Reisen
China, India and other emerging economies with low and middle income levels are gaining influence in global affairs and are acting as “new” donors in other parts of the developing world. Established donors view this trend with scepticism, worried that their rules of the game are losing significance. [ By Sebastian Paulo and Helmut Reisen ]

Around the world, the economic and political balance of power is shifting. That is obvious in the field of official development assistance (ODA) too. Previously, development aid was the turf of the industrialised nations. These “old” donors are organised in the OECD’s Development Assistance Committee (DAC), a body that has established standards and best practices for development cooperation.

Today, however, more than 30 donor countries do not belong to the DAC. Among them are China, India and some Arab countries, but also Brazil, Malaysia, Russia, Thailand or Venezuela.

Diverging perspectives

The former president of Botswana, Festus Mogae, probably expressed what many African politicians feel when he said that the Chinese treat Africans as equals whereas the West treats them as former subjects. Western experts, however, are viewing the new trend with suspicion. Mosés Naím (2007), the editor-in-chief of Foreign Policy, even coined the term “rogue aid”.

Western worries concern several aspects:
– Fragmentation: If aid projects keep growing erratically, recipient countries will run into increasing administrative difficulties.
– Unfair competition: Competition for public tenders in developing countries is distorted because Beijing ties aid disbursements to contracts with Chinese companies.
– Over-indebtedness: Along with aid, new donors are also increasingly granting credit to poor countries, which could lead African countries to once again shouldering too much debt.
– Governance: If developing countries can rely on sufficient financial support from new donors, they could reject aid which the West only grants to governments that promise to improve governance.

Such concerns are well founded. However, there are counterarguments, and they show that there definitely is some common ground for discussion with the new donors. China claims, for example, that its aid is focused and guarantees fast implementation of projects. And as far as tied aid is concerned, that is certainly an instrument Western donors are familiar with themselves. Even without any tied aid, moreover, Chinese proposals are very cheap in comparison with Western ones.

It is true that established donors have been acting on African over-indebtedness for years. But things are more complicated than becomes obvious at first glance. For good reason, China pointed out at the G20 summit in London in April that covert political conditionalities and the obsession with budget deficits have a negative impact on growth. In the end, the language of the final communiqué was not as tough as it would have been had the G8 drafted the text among themselves.
Regarding governance issues, the agenda of the West and those of countries like China, Saudi Arabia or Venezuela clearly diverge. It would, however, be instructive to review how much Western conditionalities have actually achieved in this field. If success was only moderate, activities of new donors would not make much difference.

Even before the global financial crisis, it had already become clear that the international development architecture as defined by the DAC was losing relevance due to the lack of the new donors’ engagement. In the meantime, the international balance of power has changed even more. The world needs to fully realise that China is becoming the largest creditor worldwide.

The Western donor community has already made efforts to bring emerging economies into its fold. In fact, countries such as Brazil, Russia and South Africa are already involved in various OECD activities, either as members or as observers. So far, however, that is hardly true of China and India, two giants that, as a matter of principle, prefer the observer status, which allows them to benefit from OECD exper­tise without forcing them to make any significant commitments.

It would be naïve to expect the new donors to agree to get involved in a structure predefined by Western countries. More likely, we will see a synthesis of established and new approaches. The China-DAC Study Group, which was founded last autumn, is already looking into Chinese aid to Africa, among other things. Eventually, these dynamics could lead to the introduction of a joint peer-review system.

“Soft Law”

In order to overcome the obstacles that arise from diverging interests, international organisations typically resort to what is called “soft law”. Negotiations serve to define common rules where there is no do­minant power strong enough to enforce binding regulations. Soft law relies on compromises reached among the various players, taking into account diverging interests and values as well as different time horizons and levels of power.

The OECD has developed several soft-law mechanisms to enforce its standards. Peer review and peer pressure are two key instruments. In the OECD’s peer review, member governments evaluate and assess each other. In this way, members exert pressure on each other to improve policies, copy successful practices and adhere to shared standards. All this is done by means of soft persuasion: formal recommendations, informal dialogue, public awareness, comparisons and rankings, naming and shaming.

In principle, the new donors could also assume responsibility in talks of this nature. However, any effective system of peer review and peer pressure will require transparency, which is not something new donors have shown much interest in so far.

New donors’ ODA mostly consists of projects and programmes, rather than debt relief or technical cooperation. For example, China usually composes packages that include project proposals, planning, financing, workforce and skills training. In most cases, China’s Export-Import Bank provides the funds. Many African infrastructure projects are financed that way, and disbursements are usually tied to the involvement of Chinese contractors. In 2006, the IMF estimated that China had provided Africa with $19 billion worth of disbursed loans and credit lines. In return, recipient countries often grant Chinese companies the right to exploit natural resources or production licences.

The Chinese approach has certain advantages: aid resources are used for what they are meant for, implementation is guaranteed, and corruption becomes unlikely. Moreover, the one million strong Chinese diaspora in Africa is in a stronger position to oversee projects than are Western development agencies.

China’s “pre-packaged” way of doing business clouds transparency. After all, the individual elements of the packages are not revealed in public. Accordingly, the distinction between development assistance and business cooperation looks quite blurred. Innovative methods are needed to make possible a peer-review system involving China and Western donors. It will simply not do to merely demand that China participate in a joint transparency effort, as the G8 has often done in the past.

Paul Collier (2008), a professor of economics at Oxford University, is right to assert that transparency of China’s development aid will not be achieved by criticising the practice of package deals. Instead, Western donors should virtually bundle their aid too, or at least make clear which benefits accrue in all areas of intervention to all parties involved. Then it would become possible to compare the packages, and transparency would occur as something like a by-product.

Such a process would naturally require the leading OECD countries to radically rethink their approach. First of all, they would need to understand the Chinese model better.

One must not expect, however, that China will eventually join an already established setting. Therefore, it would make sense to become active in a way to prepare for a future set of shared rules that would also work for China. In that context, it will also be necessary to boost the receiving countries’ role in providing transparency and defining best practice. Otherwise, the international aid architecture is unlikely to fit the needs of a fast changing world.