Can a Country be a Donor and a Recipient of Aid?

1. Can a Country be a Donor and a Recipient of Aid? Ravi Kanburwww.kanbur.dyson.cornell.eduIGIDR Silver Jubilee Conference December 1-3, 2012

2. Outline • Introduction: The Politics of Aid to Middle Income Countries • Moral Salience of the National State: Global Rawlsians versus Rawls • Global Poverty Minimization • Some Operational Considerations: The Case of IDA • Summary and Conclusion

3. Political Optics (1) • Recent spats over British Aid to India. Also, India and IDA is a live issue right now. • Northern taxpayer perspectives—India is now a MIC, it is a nuclear power, it has a space program, its business leaders are buying up northern factories. And they have their own aid program! Why can’t they help their own poor? • Arguments are particularly sharp for bilateral aid, but they apply equally to multilateral concessional assistance.

4. Political Optics (2) • Perspectives of Indian Policy Making Elite: • Receiving aid is not in keeping with MIC status, G20 status, demand for permanent seat on UN security council etc. In fact, India should give more aid to other developing countries. • India is a MIC, but it has 400 million poor people. If resources are available from the outside to address this, we should access them. • Pragmatic faction: if there is money on the table, why not access it if it can done at not too much cost to geopolitical ambitions. (This argument has more weight in financially difficult times) • Note: arguments are particularly sharp in the case of aid from former colonial power; but they should apply equally to aid from multilateral agencies.

5. Political Optics (3) • Ultimate resolution of all this will of course be in the political domain, and political optics will be crucial. • But in this paper I look at the issue from an analytical perspective and ask three questions. • How is the moral responsibility to help a poor person mediated by the average well-being of the countryin which that person lives? • Given equal moral responsibility to help the poor in the world no matter where they are, is it a rational outcome for a country to be a recipient and a donor of aid? • How, operationally, should the World Bank’ concessional assistance window, IDA, handle the forthcoming graduations of MICs from its ranks?

6. Global Rawlsians versus Rawls (1) • A powerful line of argument in political philosophy has been the application of Rawls to the Global arena. • First, recall the (simplified) Rawlsian “maximin” argument. Alternative proposals for just constitutions are put forward, and the choice that a society of individuals would make “behind a veil of ignorance” is argued to have a special claim on our moral intuitions. • Further, it is argued that such individuals would choose the arrangement that would focus on the wellbeing of the worst off individual. “There but for the grace of God…..” Thence the Rawlsian “maximin.”

7. Global Rawlsians versus Rawls (2) • Rawls wrote in the context of a nation state. Applying the same argument to the global stage—citizens behind a global veil of ignorance etc—many argued that we would thus focus on the least well off in the world, no matter where they lived (egPogge, Beitz, Singer). • There are of course many issues with the Rawlsianmaximin (eg Arrow’s point on degree of risk aversion). But the criticism of Global Rawlsianmaximin focused not so much on the “maximin” as on the “global.”

8. Global Rawlsians versus Rawls (3) • And the major critic of Global Rawlsianism was—Rawls himself! (A series of arguments culminating in The Law of Peoples). • The essence of the criticism is that contractarian theories of justice like Rawls’s Theory of Justice, which evolve from Hobbesian arguments in Leviathan, need a prior institutional frame in which the sovereign and subjects are defined and identified. Such a frame exists, however imperfectly, for the nation state. It does not exist at the global level.

9. Global Rawlsians versus Rawls (4) • “…the liberal requirements of justice include a strong component of equality among citizens, but that …..applies to the basic structure of a unified nation-state. It does not apply to the personal (nonpolitical) choices of individuals living in such a society, nor does it apply to the relations between one society and another, or between the members of different societies. Egalitarian justice is a requirement on the internal political, economic, and social structure of nation-states and cannot be extrapolated to different contexts.” (Nagel, 2005)

10. Global Rawlsians versus Rawls (5) • Alternative conception, “cosmopolitanism,” flows from the basis of equal concern and duty that is owed to all human beings (Pogge, Beitz, Singer). • “it would be morally inconsistent not to wish, for the world as a whole, a common system of institutions that could attempt to realize the same standards of fairness or equal opportunity that one wants for one’s own society. The accident of being born in a poor rather than a rich country is as arbitrary a determinant of one’s fate as the accident of being born into a poor rather than a rich family in the same country.” (Nagel).

11. Global Rawlsians versus Rawls (6) • Note that Rawls’s reluctance, in fact resistance, to Global Ralwsianism has echoes in the raw political sentiments in the north: “If they are rich enough to have a space program, if they are rich enough to buy up our factories, if they are rich enough to themselves give aid, why should we give money to help their poor?” • Further discussion on aid to non-poor countries only has validity in the philosophical frame of cosmopolitanism, and I will adopt this from now on.

12. Global Poverty Minimization (1) • Let us take a cosmopolitan perspective, and specifically consider the objective of global minimization of poverty, no matter where it occurs. • How would the manager of a pool of funds allocate resources across nation states? The answer depends of course on the objectives and the instruments.

13. Global Poverty Minimization (2) • Suppose to begin with that perfect targeting of the poor were possible. • Then if the objective were the head count ratio, funds would go to those who were closest to the global poverty line. If these were concentrated in a particular country, then the fund would be seen to be primarily allocated to that country. • If the objective instead was to minimize poverty among the poorest of the global poor, then the fund would be seen to be primarily allocated to countries where depth of poverty was greatest.

14. Global Poverty Minimization (3) • Suppose that there are now two funds, with the same instruments but with different objectives. Then it should be clear that different countries could receive resources from these funds. • If one of these funds is a fund managed globally or by a northern donor, and the other fund is managed by a southern country, then it is easy to see that of objectives of the two funds differ it is quite possible in a rational allocation of resources for the southern country to be both a recipient of aid and a donor of aid.

15. Global Poverty Minimization (4) • Up to now I have assumed that the objectives of the two funds are different but the instruments are the same. • But what if the instruments are different. What if the managers of one fund are better at some things and worse at other things than the managers of the other fund? • Then it should not be too difficult to see that aid can flow in many different directions.

16. Global Poverty Minimization (5) • As The Economist recently noted: “…like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for).” • However, I recognize that the “donor and recipient” argument is a killer argument in the political domain. It is particularly so with northern publics for bilateral aid. It may be less so for multilateral aid, and I now turn to operational dimensions of continuing such aid to MICs.

17. The Case of IDA (1) • The current operational cutoff for IDA eligibility is per capita gross national income of $1,165 in 2009. • Other considerations such as capital market access, but I will focus on GNI per capita. • Inflows: “The borrower will continue to access IDA resources on regular terms until the GNI per capita continuously exceeds the cutoff for three years.” • The “accelerated repayment clause” is also triggered when the operational cutoff is breached three years in a row.

18. The Case of IDA (2) • Some IDA Graduates: • Chile (1961) • Korea (1973) • Thailand (1979) • China (1999) • Indonesia (2008) • Montenegro (2008) • Some “reverse graduates” • Cote d’Ivoire (1973, 1992) • Honduras (1980, 1991) • Congo (1982, 1994) • Zimbabwe (1983, 1992)

19. The Case of IDA (3) • Graduation Simulations by Moss and Leo based on WEO growth projections. (IDA’s own simulations do not present country specific detail in the public document, but are likely to be similar). • Who graduates?

20. The Case of IDA (4)

21. The Case of IDA (5) • So, who’s left? • 31 countries • with 40% of current allocation • with one third of the current population • largely African • many currently fragile and poor performing • IDA will be disengaged from the bulk of the world’s poor (three quarters of the world’s poor now live in MICs). • Remaining countries will get a bonanza—absorptive capacity problems (their allocation would double).

22. The Case of IDA (6) • What is the answer? • If IDA is to remain engaged with the vast bulk of the world’s poor, its rules need to change. • A possible broad framework is to have three windows (along the lines of the proposal of recent CGD taskforce): • The standard window, for countries below the income cutoff. • A second window for countries below twice (or three times?) the cutoff, for projects focused on poor regions or sharply poverty focused sectors. • (A third window, for interventions with Global Public Goods dimensions.)

23. The Case of IDA (7) • Of course, there are a whole series of operational problems, eg • What about countries that have already graduated? • How exactly to define poor regions or poverty focused sectors for second window? • How much to be allocated to second window? • How exactly will performance criteria differ in the second window from the first window? • But these operational questions only become relevant when the higher level decision has been taken to continue concessional assistance to MICs.

24. Summary and Conclusion (1) • Aid to MICs is a live political issue. • The politics, in donor and recipient countries, seems to be geared towards ending this aid. But what about the analytics? • The philosophical doctrine of cosmopolitanism can underpin aid to the poor in a non-poor country. Further, the special case of Global Poverty Minimization can indeed rationalize the seemingly incongruous notion of the same country giving and receiving aid. • If we accept this doctrine then a major operational issue is whether, and how, to modify the graduation rules of IDA and other concessional aid funds. There are some specific proposals on the table for debate.

25. Summary and Conclusion (2) • But the Rawls of “The Law of Peoples” stands against globalizing the Ralwsian arguments of “A Theory of Justice.” In the extreme form of this resistance, the Rawlsian argument is held to operate only within each nation state. • This philosophical argument has an echo on northern streets, where the argument that “they should now look after their own poor” has sway. In this political optic, a recipient country having its own aid program provides a killer argument to shut down aid to such countries. Added to this is the self image of the elite in MICs, which finds it demeaning to accept aid despite poverty in their countries. • Some of these political arguments may be less sharp for multilateral aid than for bilateral aid, but I fear that, despite the strong analytical arguments to the contrary, we will indeed see a drastic reduction in aid to Middle Income Countries.

26. Thank You!