Foreign Aid: Boon or Bane for Countries?
Kerala Floods and the UAE misinformation
The closest I've followed India's stance on foreign aid was in 2018, when 35 out of 54 dams in the state of Kerala were opened for the first time in history, resulting in severe flooding in 13 out of 14 districts of Kerala. The state received 164% more rain in a span of 20 odd days, along with other spikes in the graphs, which forced authorities to open the shutters of the reservoirs. This was the worst that Kerala had seen after 1924. As mentioned in the Business Standard,
"If the present rain fury has claimed over 290 lives and displaced over 10 lakh people, the massive floods that crippled the state in July 1924 are believed to have claimed a large number of lives and caused widespread destruction. Mahatma Gandhi, through a series of articles in his publications 'Young India' and 'Navajivan', had urged people of the country to generously contribute for the relief of the flood-hit' Malabar' (Kerala)."
Kerala State Disaster Management Authority (KSDMA) published a report in September 2018, with a detailed analysis of what happened that year.
For context, this was during the Pinarayi Vijayan-led communist government's first term in the state, which started in 2016, and Narendra Modi's first term in the centre, which started in 2014. If you don't already know it, these parties live on either end of the political spectrum and, thus, have never gotten along. It's also worth noting that Kerala is the place of politics, football, beef and, as of May 2024, ~94% literacy. Kerala has never had a BJP Chief Minister, and for that matter, they even elected their first BJP MP, Suresh Gopi, in June 2024. And as bitter relationships go, there was a lot of hate in people against the BJP government when the supposedly Rs. 700 crore aid from the UAE was declined by the Government of India. I have no shame in admitting that, as a lesser-aware citizen, I was on the same boat of hatred.
On 13th August, through the Press Information Bureau, the Ministry of Home Affairs put out a press release to convey and remind the following:
"The first charge of relief expenditure is on SDRF and in the cases of calamities of severe nature, it is supplemented from NDRF as per established procedure. Financial assistance under SDRF/ NDRF in the wake of natural calamities is by way of relief and not for compensation of loss as suffered/ claimed. Additional expenditure, if any, incurred over and above or on other than approved items/ norms, is required to be met by the States from their own resources."
The document also mentioned that the centre allocated Rs. 562.45 crore, which was made available through the SDRF, for relief efforts. The centre mobilised it's resources, carried out one of the largest rescue missions in the region and had several central ministers, along with the prime minister himself, visit to evaluate the situation. In a press release on 23rd August, the Ministry of Home Affairs mentioned that they were releasing another Rs. 600 crore in advance without waiting for the submission of additional memorandum by the State. They also clarified that "Rs.600 crore released by Centre is the advance assistance only. Additional funds would be released from NDRF on assessment of the damages as per laid down procedure." But the state government apparently wasn't happy with the support. I don't have data backing this, but from what I was hearing living in this region, the state received just 600 out of the 2000 crores it asked for.
As with any other time of crisis in the world, a lot of friendly countries came forward to help with aid. Support came from the Maldives, Qatar, and, of course, a lot of other states in India. But things took a surprising turn when, at the time of the 600/2000 issue, CM Pinarayi Vijayan announced in a press statement and posted on Facebook informing everyone that UAE had come forward with Rs. 700 crore as support for Kerala and expressed his gratitude for the same. This later turned out to be Lulu Group Owner, MA Yusuff Ali's promise and not one from the government of the UAE, but by then, the Government of India had already reacted, politely refusing the aid. For people suffering in the state, this was enough to get them even more furious.
India's experience with foreign aid
If you've been following my blog for a while, you'd have noticed this article from The Print about PL480 and Green Revolution. There came a moment, post independence, when India was literally begging the US for food, and that is believed to be the motivation of the famous Green Revolution. The last time a formal appeal for help was sent globally from the GoI was in January 2001 by PM Atal Bihari Vajpayee following the Bhuj earthquake. It is important to understand that aid often has political motivation and results in aid-offering countries interfering in aid accepting country's internal affairs. Mohan Kumar, a retired ambassador, chairman of RIS and dean/professor at Jindal Global University, mentions in his op-ed, The evolution of India’s pragmatic policy on foreign aid, on Hindustan Times, the different times India has asked/received aid and how that led to the position paper on external assistance received by India in March 2008 that still works as a framework for India's foreign aid decisions. It's a scarily lengthy 75 page document that surprisingly explains things well. I'd highly recommend reading it if ever you end up in a situation like mine where your bias against the GoI doesn't let you think beyond a headline of printed media. The TLDR of the position paper was that India would decrease it's dependence on aid, and countries could provide assistance to autonomous institutions, NGOs and UN agencies, among others. Even during COVID, all the aid was directed to autonomous institutions and other procured equipments were paid for. Ultimately, the GoI did release Rs. 3000 crore for Kerala, but because of how connected Malayalis feel with the Gulf, I am sure their scars have not healed.
But why do countries prefer to receive foreign aid through NGOs and UN agencies? I asked ChatGPT and here are a few things it said:
1. Efficiency & Expertise: These organisations can design and implement aid programs more effectively than governments, including logistics, monitoring, and evaluation mechanisms.
2. Credibility & Trust: Aid through them is often seen as less politically motivated and generally holds a reputation for impartial and fair treatment.
3. Accountability & Transparency: These institutions have rigorous accountability and transparency standards, allowing donors to bypass corrupt systems (if at all) in a governmental structure.
4. Flexibility & Capacity: These organisations work more closely with local bodies as compared to governments and can often respond more quickly to changing conditions and emergencies because of their little or no bureaucratic structure.
Foreign aid's effect on markets
If you've ever read about the effect of inflows on markets, you're probably already thinking of what is called the "Dutch disease". Long story short, in the 1950s, the Netherlands discovered significant natural gas reserves in the North Sea, the exports of which made the Dutch guilder (currency until 2002) stronger. When a currency becomes stronger than the others, it becomes expensive for other countries to import goods from you, and you also find it cheaper to import most things than produce them yourself. As a result, the market suffered heavily and became an important study for years to come. This was also talked about in the IMF working paper on Local Financial Development and the Aid-Growth Relationship by Nkusu and Sayek (2004).
While researching about foreign aid, I came across Tsaurai, Kunofiwa (2018) : Complementarity Between Foreign Aid and Financial Development as a Driver of Economic Growth in Selected Emerging Markets, Comparative Economic
Research. The paper, which quotes several other studies, explains three theoretical rationals between foreign aid and markets, namely "the foreign aid‑led positive growth hypothesis, foreign aid‑led negative growth hypothesis and the mixed results hypothesis."
1. Foreign aid-led positive growth hypothesis: Foreign aid's serve as savings that can later be used for growth.
2. Foreign aid-led negative growth hypothesis: Foreign aid has resulted in an increase in rent-seeking activities in poorest of governments.
3. Mixed results hypothesis: Positive impact in short term but negative in the long run.
While it's obvious that donor countries are mostly at an advantage, they can still be at a loss when opportunity costs and related domestic backlash is concerned. Things mentioned above don't give the best picture of things in totality, but, I believe, this sets a different perspective on how foreign aid can go right or wrong for countries.