ECOFIN Topic 2 – Issue Briefing Pack

Topic 2 – The Question of the Regulations of Bilateral Aid and Trade Agreements 

Introduction 

Bilateral aid is a form of assistance agreement between two separate countries, often between economically developed and developing nations. This type of aid is mostly condition-based, mystifying the genuine motive behind such actions. Although this may stimulate policy reforms in recipient countries and distribute aid effectively, donor countries potentially set the conditions for their interests and undermine the recipients’ internal governmental system and their people’s will. Being a type of bilateral aid, military aid requires the recipient to buy arms and sign defence contracts with the donor. The US has given more than $5 billion military aid annually since 2009. 

The original aim of aid is to relieve suffering caused by natural or artificial disasters, to promote economic development, to ensure stability of the society and institution and ultimately to ensure the best interest of the recipient countries. Ensuring equality and transparency in the relationship between the donor and the recipient is significant. Should there be a regulatory system for bilateral aid & trade deals or not? What conditionality and selectivity are allowed to impose upon the recipients? What regulations should be in place? Delegates should delineate blueprints for future relationships between countries in aid agreements and should explore the possibilities & potential mechanisms of a regulatory system in foreign aids. 

Background

Aid includes grants, loans  and the provision of technical assistance. The United Nations for Development Policy stated that there is a long-term commitment for developed countries to provide the equivalent of 0.7 % of Gross National Income (GNI) to developing countries in the form of Official Development Assistance (ODA), which is reiterated in the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda of the Third International Conference on Financing for Development and the Programme of Action for the Least Developed Countries for the Decade 2011-2020 (Istanbul Programme of Action). The majority of ODA comes from members of the Development Assistance Committee (DAC) of the Organisation of Economic Co-operation and Development (OECD), which has a list of 150 countries and territories with income per capita below the threshold value of USD 12276 (2010). In 2016, only 6 out of the 29 DAC members have fulfilled this commitment. 

In September 2019, the General Assembly of the United Nations (UN) has adopted a resolution called  “New Partnership for Africa’s Development (NEPAD): progress in implementation and international support” (document A/73/L.96/Rev.1). The resolution emphasises partnership with African countries, including inclusive industrial development, and policies seeking to enhance productive capacities in Africa. The assembly also recognises the need for development partners in Africa to invest in infrastructure. It has been shown that bilateral aid flow to Africa has decreased by 4 per cent in 2018 compared to 2017, but “official development assistance” still remains crucial. 

International organisations such as the World Bank and the International Monetary Fund also gives out aid. For World Bank, their aim is to ‘end extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3% and to promote shared prosperity by fostering the income growth of the bottom 40% for every country’.

Although the main aim of IMF is ‘to ensure the stability of the international monetary system’, the IMF offers lending when a country faces sudden crises, such as sudden drop in the prices of key exports, severe capital outflows leading to loss of investor confidence, budget deficit and debt stock, etc. In contrast to bilateral aid from a donor state, the IMF’s sole intention, at least ideally, is to help the state facing the crisis. For example, low-income countries can borrow on concessional terms with zero interest rate.  A main part of its function is to monitor global, regional, national and economic developments. However, we can see from time to time that bilateral aid can have a negative impact on a region’s economy. Nevertheless, the IMF and the World Bank currently have no control over bilateral aid agreements between independent states. 

From the donor state’s point of view, there are many purposes to giving out aid, from strengthening relationships to seeking approval of the donor state’s various external policies, to rewarding the recipient state for carrying out actions the donor state requested. Often the aim is to align the stance of the recipients with the donor on certain matters. 

Many bilateral aids given by the West, notably the US, have attached conditions on human rights.  Due to lack of attention on this area, we know little about how the US aid, or in general aid aiming at controlling human rights affects practices of the recipient states.  In recent years, there is growing evidence of aid actually having no effect (Regan, 1995; Apodaca, 2001) and sometimes harmful effects (Shoultz, 1981). Even the USAID’s own analysis ‘consistently demonstrated that while spending in the other subsectors of aid…all produce the desired effects, spending on the human rights component…has a strong negative effect on states’ human rights protection…regardless which measure of human rights is employed (Finkel et al., 2006, 2008).’ This leads us to question what is the intended purpose of aid and what can be done to maintain that principle.

While less economically-developed countries welcome support and investment from more-economically developed countries, any donor states that attach conditions to the assistance given create burdens on the recipient states and restrict the scope of development in the recipient states, especially if they are in conflict. However, why should the donor states help them?

This naturally leads to states having different stances on the issue. For example, the EU gives more than 50 billion euros annually in aid.  According to the European Commission, the entire EU is the biggest donor in the world. Interestingly, the EU puts quotas as high as 43% on some countries on processed chocolate bar, while a tariff as low as 2.8% on raw cocoa beans. Such action can hinder industrialisation in countries that produce cocoa, which are mainly developing countries. This seems in contradiction with the effectiveness of the aid the EU gives out. 

In 2010, the International Monetary Fund raised China’s contribution quota, as well as  its voting rights have been increased. This means it now has a more influential voice in the IMF, affecting its future policies and world economic co-operation & development.  China is increasingly using bilateral aid. Between 2009 and 2011, the amount of aid China gave to Africa exceeded the amount that the World Bank gave. Unlike the aid the West gives, the aid China gives usually has no human rights conditions attached. 

TOP BILATERAL AID RECIPIENT COUNTRIES, 2016-2017

Country USD million received
India 3,516
Afghanistan 3,024
Syrian Arab Republic 2,524
Vietnam 2,308
Ethiopia 2,172
Iraq 2,102
Jordan 2,005
Indonesia 1,973
Bangladesh 1,874
Pakistan 1,765

 

TOP DONOR COUNTRIES, 2016-2017

Country USD million provided
United States 34,732
Germany 25,005
United Kingdom 18,103
Japan 11,463
France 11,331
Italy 5,858
Sweden 5,563
Netherlands 4,958
Canada 4,305
Norway 4,125

Questions to consider

  • What are the potential benefits and harm of bilateral aid?
  • Should we regulate bilateral aid? 
  • If so, how should we regulate bilateral aid agreements? 
  • Should any international organisations be granted the rights to regulate bilateral agreements between different sovereign states? 
  • What are the drawbacks of regulating bilateral aid? 
  • What are the current views of the associated international organisations? How to coordinate roles between them? 
  • What are the views of the least developed countries? 
  • What are the views of the more-economically developed countries?
  • Should bilateral aid exist, or should we just allow multilateral aid? 
  • In what currency should the aid be given in and why? 

Further Reading List

https://www.imf.org/external/about/howwedo.htm

https://www.imf.org/en/publications/REO

https://www.un.org/press/en/2019/ga12173.doc.htm

https://euaidexplorer.ec.europa.eu/content/overview_en

https://data.oecd.org/oda/net-oda.htm

https://www.un.org/ldcportal/commitments-regarding-oda-to-ldcs/

https://www.unece.org/fileadmin/DAM/oes/disc_papers/ECE_DP_2007-2.pdf

https://public.tableau.com/views/AidAtAGlance/DACmembers?:embed=y&:display_count=no?&:showVizHome=no#1