Staying south – trade, aid, and the recession

Ben Garside's picture
Insight by 
Ben Garside
30 March 2010

In the global recession, have so called ‘emerging' economies got a toehold in the trade, aid, and investment big-league?

 A recent article in the UK Economist magazine highlights the increasing importance of south-south ties between middle-income countries and least developed countries (LDCs). The article suggests middle income countries, who are emerging more quickly from the global recession than developed countries, see an opportunity to win new friends and secure long-term influence whilst developed countries are busy with domestic economic problems .

What then is the emerging role of middle income countries such as Brazil, India, and China as development actors and opportunity bringers to the poorest nations?

Not just aid but investment and trade

More important than aid in terms of capital flows, investment and associated trade has soared between emerging economies and LDCs. Brazil claims to have invested $10 billion in Africa since 2003. A recent UNCTAD report finds that one-fifth of global outward investment flows in 2008, a staggering $351 billion, came from emerging and developing countries. This is 50 times bigger than the same statistic in 1990. Not only that, according to the UN, 40 percent of foreign direct investment coming from the south goes to LDCs.

South Korea, as the fifth biggest importer of oil, has put aside $12 billion for state companies to make international acquisitions to satisfy its oil thirst. So is this simply the case of another country exploiting resources in less developed nations? Perhaps, but it does demonstrate the rising economic importance of direct investment from emerging economies.

Not only that, there is evidence that middle income countries´ increasing economic interests in LDC´s is extending into aid and humanitarian assistance. China is now the single largest donor to Cambodia and Sri Lanka, and has promised a doubling of aid to Africa between 2006 and 2009. South Korea was a significant contributor to the Haiti earthquake, sending money, rescue works, soldiers, and medical teams. Overseen by the President himself, this perhaps is a good example of how an increasing business profile and economic might has brought an increased awareness of wider international responsibilities, as well as an opportunity for countries like Korea to punch their weight on the global political stage.

Sour grapes for traditional donor countries?

However, these developments have not been praised in all quarters. China in particular has been criticized for undermining wider global efforts to ensure aid and trade policies do not have detrimental results in LDC´s. For one thing, China has been accused of providing loans to governments at rates only slightly lower than commercial bank rates. This could potentially push LDCs further into debt and undermine efforts to write-off existing debts they have with western nations.

Not only that, most of the projects China has been involved in are based on big infrastructure development such as roads and power plants, and require the use of Chinese producers to source goods as well tie-in contracts ensuring raw-materials exports to Chinese industry.

Claims from traditional development agencies that the likes of China are undermining development strategies and are ‘rogue donors' are of concern. China's policy of non-interference in foreign government policy when providing aid - known as non-conditional aid - whilst also tying aid to Chinese friendly contracts and raw-materials exports - known as tied-aid - is a worrying trend for some. There is also the broader question of whether these 1960's style large infrastructure projects, long since abandoned by the likes of the World Bank, bring the sustainable development benefits that LDC governments hope for - a huge topic in its own right that merits discussion.

Tied-aid in general has long been criticised for providing unfair advantage for companies in donor countries in the world of international trade. Even more importantly it squashes potential for building up new value-added industry in LDCs and in the case of the Chinese contracts for African raw materials, locks African countries into low-value added export of natural resources with a single buyer.

Yet perhaps those in glass houses shouldn't throw stones. In terms of the accusations that China is tying-aid back to support its own companies and goods, developed countries are far from clean-nosed in this department. In 2007, Canada, Italy, Greece and the US all tied over a quarter of their aid to conditions of donor country procurement and other donor country benefiting factors (the US being one third). In the same year, the total volume of tied aid from donor countries that are part of the OECD - group of 30 high-income countries - was $10.8 billion.

At the failed Development Round in Doha one particular form of tied-aid was severely criticised - the dumping of ‘food aid' into developing country markets. Particularly singled out was the US, which was accused of propping up US farming whilst at the same time undermining competition in local LDC agricultural markets.

So tied-aid is one area where emerging economy donors and developed economy donors have much in common. What about policy conditionality - that is direct monetary support to recipient country national budgets on condition that certain policy conditions are met. China says no to interference; many other donors have had a mixed approach. Is conditionality a positive thing for the likes of improving institutions and reducing corruption in which China is missing a trick?

Conditions placed on policy have varied widely - from trade policy, fiscal spending and taxation, to human rights policy and environmental protection conditions. The largest systematic approach to macro-economic policy interference was the structural-adjustment programmes in the 1980's. Arguably the neo-liberal free trade policies of the structural adjustment reforms have had a damaging effect on the ability of developing countries to nurture their own industries to compete on a global stage, whilst not having the desired long term institutional improvements anticipated.

Today conditionality of some form or another is still highly prevalent in western donor strategies despite criticisms that it is largely ineffective. This ineffectiveness is particularly true when the range of conditions on a country from a donor vary significantly across donor countries - lacking any joined-up approaches.

There is also the issue of conditionality, like tied-aid, being driven by donor country foreign policy agendas. To give a current example, there is much debate in the UK donor community as to the fate of the Department of International Development should a Conservative government be elected this May - rumours are abound that DFID will come much more closely under foreign office control. This can only result in further linking policy-conditionality clauses to UK foreign policy agendas.

Another consideration with policy conditionality is that it can undermine a sense of local ownership, with national governments able to blame conditions set by donors for unpopular decisions and failed projects. There is also evidence that for large-scale projects - such as many Chinese-funded infrastructure projects- it is better to support the projects directly with aid rather than with macro budgetary aid donations which have conditions attached.

New approaches are trying to break the conditionality paradox by moving away from policy-based conditionality towards outcome-based conditionality - that is continued aid support based on results rather than trying to influence national policy. The intention is to instil a sense of ownership and improve impacts through clearer outcome definitions and better monitoring. The jury is still out as to whether this form of conditionality will prove to be more effective.

A new pattern for things to come?

So yes perhaps China and the other middle-income countries have their own self-benefiting agenda when forming aid and investment links. However, we should be aware that the developed world does too - and that this is not some relic of the past that is put down to imperialism.

It is also likely that the role of middle-income countries as donors and investors is here to stay, so western donor agencies better get used to it. Some development agencies are already manoeuvring themselves for the rise of emerging economy influence as global development actors. Quoted in a recent article in the UK Financial Times, Helen Clark, the head of the United Nations Development Programme (UNDP) is quoted as saying "I've been consciously positioning UNDP to see ourselves as a central facilitator for south-south exchange. Our history has been one of transmission [of funds and expertise] from north to south but the south-south co-operation paradigm is expanding very, very fast and we need to be well positioned to work with it.".

One possible reason for this strategic repositioning of UNDP is also linked to her claim that the UN itself was being damaged by not having greater participation from large emerging economies like India at its core. Perhaps the UNDP and the countries that currently dominate the UN structure can see themselves being undermined if they do not secure buy-in from the emerging economies.

Looking at it pragmatically, is seems clear that south-south exchange that will happen with or without the blessing of the north so if northern donor agencies wish to have what they consider to be a positive influence on southern donors, engagement strategies such as that of UNDP are probably a wise move. On a positive note, perhaps the rapidly changing dynamics of aid and investment flows will provide an opportunity for all of us to learn - opportunity for paradigm shifts that breaks up old ways of doing things and takes a hard look at how the interactions between aid, trade, and the vast global investment flows can more effectively benefit the poorest nations.

Ben Garside is a researcher in the Sustainable Markets Group