The changing dynamics of aid dependence

In 1980s Bangladesh's aid dependence was over 10 per cent of GDP and financed nearly 100 per cent of our Annual Development Plan (ADP). This meant that no Finance Minister could frame a budget without first being assured of aid pledged at the Paris Consortium meeting in April. This dependence on donors gave them a disproportionate leverage over our policies. The World Bank, in particular, used this leverage to impose an extensive programme of Structural Adjustment Reforms (SAR) on the Government of Bangladesh (GOB), based on the neo-liberal economic philosophy associated with the so called Washington Consensus. Bangladesh, readily accepted this advice though many of these reforms were unsatisfactorily implemented. This raised tensions with the donors but did not lead to any discontinuity in aid. The donors and successive governments played a discrete game where Bangladesh accepted and promised to implement all reforms whilst the donors turned a blind eye on our failure to do so. The era of aid dependence built up its own class of beneficiaries who prospered from aid and acquired a vested interest in its continuity. Aid dependence, thus, generated its own dynamics which influenced the political behaviour of successive regimes and the workings of the administrative as well as the business community. The SAR process impacted on the political economy of Bangladesh where new social forces were financially and politically empowered whilst large numbers of people, from desubsidised poor farmers to disemployed factory workers, became its victims.

The unsatisfactory and often unjust outcome from the SAR did not persuade donors to rethink their reforms. Rather it pushed them to increase the burden of reforms. The poor results from the reforms were now ascribed to poor governance. Thus, issues of governance, covering corruption, the judiciary, even the state of democracy were added to the ongoing need for structural adjustment reforms. In this new phase poverty reduction was prioritized over growth by both the World Bank and the IMF. The GOB was invited to prepare a Poverty Reduction Strategy Paper (PRSP) which was presented to the donors at the recent Aid Group meeting in Dhaka.

This rethinking of aid priorities by the donors did not extend to greater introspection over the impact which such aid dependence, which was dictating our policy choices, was having on the political economy of Bangladesh or other aid dependent countries.

I was, in the early 1990s, invited by SIDA, the Swedish Aid agency, to visit Tanzania to examine the consequences of their growing aid dependence and compare this with Bangladesh's experience. It was quite educational to see that many of the consequences of aid dependence which had affected Bangladesh were being replicated in Tanzania. I subsequently wrote a book on this subject. The pathology of aid dependence obviously transcends national boundaries and even cultures.

This policy influence of the donors over the GOB persists today, even though aid dependence has declined from over 10 per cent of GDP when Mr M Saifur Rahman was first Finance Minister in 1981 to under 3 per cent when he has become Finance Minister for the third time. However, we still seem to give the same regard to donor advice as we did when we were heavily aid dependent. Today, aid finances less than 50 per cent of the ADP so we are no longer totally dependent on aid to frame our budget. Nor are the donors regarded as the universal font of all wisdom. The Washington Consensus is heavily discredited whilst Structural Adjustment Reforms are seen to have brought neither sustained growth nor poverty reduction across much of the Third World. The increasing ferocity of the attacks on the global institutions such as World Bank, IMF and WTO, both on the streets and at a professional level, suggests that these organisations no longer command the credibility or authority they enjoyed in their golden age of the 1980's. In these changed circumstances there is scope for Bangladesh to forge an entirely new pattern of relations with its aid donors.

The GOB cannot begin to develop a more equal relation with its donors unless it is able to get its own house in order and design its own policy agenda. The donors themselves, in principle, encourage governments to make their own policy choices. However, the available experience suggests that the exercise of such policy independence by aid recipients is only welcome if countries such as Bangladesh choose policies which concur with donor policy advise. Thus even after 20 years of unfruitful Structural Adjustment Reforms (SAR) few Third World governments have challenged the assumptions underlying the SAR. As a result even today the SAR remains at the core of the World Bank's Country Assistance Strategy to Bangladesh as also for most LDCs and has been incorporated into the PRSPs of virtually all these aid dependent countries.

Aid and foreign policy

Aid dependence under the tutelage of the World Bank should not have impacted on Bangladesh's foreign policy in the same way as it did on our economic policies. After all the World Bank is a multilateral organisation, which is supposed on have neither an ideology nor a political position. It was therefore noteworthy that a changed stance in the World Bank's lending philosophy in the early 1980s to push SAR coincided with an ideological change in the policy regimes of the US after President Reagan came into office in the US and Margarat Thacher became Prime Minister in the UK. These two leaders may be deemed as the political god-parents of the neo-liberal revolution across the world. The messianic commitment to a neo-liberal philosophy within the World Bank and IMF originates from this period.

The embrace by the World Bank and IMF of the political philosophy of some of its principal financiers encouraged the belief that what Washington thinks today the World Bank thinks tomorrow. As a result, successive governments in Bangladesh have come to believe that the World Bank and IMF are extensions of the US States Department and Treasury. This view gained currency when the United State intervened time and again on the Board of the World Bank and IMF to pressure them to participate in the bail out of strategically important countries such as Mexico, Russia and other victims of rapid globalisation deemed of strategic interest to the G-7 countries. Acceptance of Bank-IMF advice was thus believed by the policymakers of Bangladesh to have some approbation from the United States and even the European Union whose goodwill remained of importance to the GOB.

The US, which was once Bangladesh's principal donor through the 1960s and 70s is not even our principal bilateral donor, which today happens to be Japan. The GOB is however persuaded to believe that Bank/IMF largesse is contingent on good relations with the US government. This assumption is not entirely a fantasy. The Pakistanis have already noted that their alignment with US strategic interests in Afghanistan and provision of logistical support to the US invasion of Afghanistan won them significant collateral benefits from the IMF. The IMF, reaffirmed its credentials as a foreign policy instrument of the State Department by assuming a much more favourable perspective on Pakistan's policy reforms compared to the hard line taken prior to the change in Pakistan's external posture. The World Bank too has become much less jaundiced in their perception of Pakistan. The US has backed up the IMF's generous loans by enhancing their own bilateral aid commitments to Pakistan and rescheduling Pakistan's debts. The lesson from the recent experience of Pakistan suggests that aid commitments as well as their terms, even from multilateral bodies such as the World Bank and IMF, remain linked to foreign policy alignments with a superpower even where countries such Bangladesh and Pakistan remain far less dependent on aid.

The political economy of trade dependence

This paradox of genuflecting to aid donors, even as aid dependence declines, may be linked to the new trade dependence which is influencing the external relations of Bangladesh and many other Third World countries. In the case of Bangladesh the US remains our largest single market, absorbing around 40 per cent of our exports, mostly in the form of Readymade Garments (RMG). The EU accounts for a further 40 per cent of our exports. Since Bangladesh's exports along with remittances currently finance over 80 per cent of our foreign exchange expenditures, our trade relations have a much stronger impact on our economy than does aid. Access to the US and EU market and the continuance of the absorption of our migrant labour in the Middle East, as also in East Asia and the United States, remains an important foreign policy objective for Bangladesh. As a result, RMG exports to the US and EU have acquired a special significance in our foreign policy choices.

At the same time we should also take note of the fact that India is the fastest growing and today the largest source of Bangladesh's imports (official and unofficial), closely followed by China. Whilst this growing import dependence on our two large neighbours is less concentrated than our export dependence and there is greater scope for diversifying our import sources than there is for exports, our import trends also remain relevant to the political economy of our external relations. Bangladesh's ongoing search for greater access to the Indian market is therefore not just an issue of commercial relations. The political economy of Indo-Bangladesh relations has its own special features which merits separate discussion.

What we are learning to our cost is that, as with aid, trade is also politicised. Once upon a time we were led to believe that trade relations were forged in the market place. Our own experience, as indeed our experience at the WTO jamborees in Doha and Cancun, have exposed us to the importance of political variables in determining trade relations. The notion of the WTO taking us towards a rule-based, market-driven, global trading regime has proved a fantasy as the major powers and even regional powers are increasingly responding to political stimuli to both deny and provide access to their markets.

The US, in particular, has discovered the strategic significance of its market since it presides over the world's largest market. The terms and conditions on which Bangladesh accesses this market can influence our economic fortunes as a country and can impact on the lives of a million poor families. If the US were to reduce our RMG export quota and continues to give trade preferences to our prospective rivals, as it has done to Sub-Saharan and the Caribbean countries, this could impose severe economic as well as social costs on Bangladesh which in turn could have a political fallout at home. If the US were today to give us duty and quota free access to their market, as they have done for Sub-Saharan Africa, this could possibly double our exports of RMG and provide additional jobs to a million poor women. Given the far reaching implications of its policy decisions, the US may expect to extract a significant political rent from Bangladesh for the privilege of providing enhanced market access. This rent may range from a demand that we let UNOCOL export the gas from its Bibiana fields to India, we send peace keeping troops to Iraq, we recognise Israel or we even abandon our commitment to the LDCs in regard to sensitive global issues such as agricultural subsidies and the so called Singapore issues. All such decisions involve serious political consequences for Bangladesh at home and in our relations with neighbouring or partner countries. Fortunately for Bangladesh, the US is not yet ready to recognise Bangladesh as a strategic partner with whom such political horse trading can be negotiated. But this day may not be far off and Bangladesh may well have its notions of foreign policy independence severely tested in the days ahead.

Asserting autonomy over foreign policy

The scope for countries such as Bangladesh's escaping from such strategic pressures exercised by its principal trading partners is limited. Such demonstrations of autonomy have not come easily even to big countries such as China and India. Even China has to calibrate its external relations with the US to take account of the fact that it provides the destination for over US$ 100 billion of Chinese exports. It is not surprising that even where China has strong disagreements with the US in the Security Council they have never exercised their veto to frustrate the strategic decisions of the US. China too has had to become aware of the political economy of its relations with the US.

In such an unequal world order countries such as Bangladesh have to rethink their notions of sovereignty and reassess their domestic policy options to see how far they can assume greater autonomy in their external relations. To be able to enhance our freedom of choice, we need to commit ourselves to a process of structural change not just in our economy but our politics. We would, thus, have to drastically diversify the composition and destination of our exports, enhance our domestic savings and significantly improve the quality of our policy making and governance. This will have significant social and political implications within Bangladesh.

To initiate all of the above changes and to then demonstrate policy independence vis-a-vis the US and other major trading partners would demand the building of a strong political consensus within Bangladesh underwritten by massive support from the common people. To develop such support will require a major structural adjustment in our politics as well as in the direction of our economy. We will have to begin to correct the deep injustices of our social orders so that ordinary people develop a stake in the growth of the economy. Only then will they provide the political support needed to assert autonomy in our external relations and to bear the short term costs of our search for policy change. Bangladesh will have many rivers to cross before we move from our state of political atrophy and structural stagnation to assume the trapping of a sovereign nation state.

Rehman Sobhan is Chairman, Centre for Policy Dialogue.