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The political economy of foreign aid in Bangladesh has
undergone important changes over the last decades, so
has its focus, magnitude, composition and operational
modalities. There has been an important shift in the
focus of foreign aid to Bangladesh, particularly in the
context of a gradual reduction in Bangladesh’s aid
dependence. Over the past several years, the
perspectives of our development partners (DPs) have also
undergone a significant metamorphosis, both globally and
in the context of Bangladesh. On the other hand, the
range of policy conditionalities imposed on the
recipients is being extended to areas far beyond the
traditional structural adjustment policies derived from
the so-called Washington Consensus. Among the new areas
of interest to donors, as either preconditions for or as
corollaries to aid, is the growing emphasis on dealing
with the non-government sector, on upholding human
rights, promoting democracy, and on emphasising good
governance. This reconstruction of the aid agenda is now
being incorporated into the design of the PRSP, where
aid recipients are expected to assume ownership over
this marriage between the Washington Consensus with the
newer aid priorities of the DPs.
Although both the political economy and technical
attributes of the aid regime in Bangladesh have gone
through important changes during the 1990s, the issues
surrounding the changes in the regime have not been
subjected to any comprehensive analysis recently. This
has not happened since the publication of two landmark
monographs in the 1980s: The Crisis of External
Dependence: the Political Economy of Foreign Aid to
Bangladesh (1982), and From Aid Dependence to
Self-reliance: Development Options for Bangladesh
(1990). CPD felt that there was a need for a fresh look
at the issue of aid as an important variable in
Bangladesh’s development. It was reckoned that an
assessment of Bangladesh’s recent experience with
foreign aid would be instructive in providing an
in-depth understanding about such issues as the current
role of external assistance in the economy and its
implications, changing structure and delivery mechanism
of aid and its efficacy, the shifting dynamics of the
aid-recipient relationship, and the evolving reform
agenda. The Independent review of Bangladesh’s
Development of 2003 (IRBD2003) captured the issue of
foreign aid for its thematic part. IRBD2003 was greatly
enriched by contributions from a distinguished set of
authors who have joined CPD colleagues in preparing the
volume. CPD could draw upon their rich practical
experience blended with an in-depth understanding of the
concerned issues. It is to be noted that the IRBD2003
continues the tradition of producing an annual home
grown assessment of Bangladesh’s development process, an
initiative that was launched by the CPD in 1995. Over
the years the IRBDs have put under scrutiny policies
that had been pursued by successive governments in
Bangladesh, and have endeavoured to come up with policy
suggestions that were informed by alternative
perspectives on the country’s development. Along with
the traditional macroeconomic assessment, CPD provides
thorough analysis on important issues of developmental
concern.
The chapters in the thematic part of IRBD2003 captures a
wide spectrum of issues related to foreign aid situation
in Bangladesh which includes political economy of
foreign aid, macroeconomic dimensions of foreign aid,
role of aid in public investment, utilization of foreign
aid, impact of foreign aid, aid and poverty alleviation,
and aid and NGOs. The key findings from the chapters are
presented below.
Dwelling upon the issue of changing importance of aid in
Bangladesh, it was argued that Bangladesh is now
evolving from an aid to a trade dependent economy. The
fact of growing regional export concentration during the
1990s in the markets of the EU and the USA, with a
single product, namely the readymade garments, is now
playing a more important role in defining Bangladesh’s
foreign policy than its need for aid. In contrast,
during the 1980s Bangladesh’s foreign policy was
targeted to ensure an uninterrupted flow of foreign aid.
Today, Bangladesh’s aid dependence is focused on the
international and regional financial institutions. Only
a few bilaterals, such as Japan, are largely delinked
from Bangladesh’s trade relations whilst remaining an
important source of FDI. In contrast, the EU, which is
Bangladesh’s principal trading partner, lets its
individual members develop their own bilateral aid
relation with Bangladesh, whilst their role as an
individual aid donor is much less significant.
This juxtaposition of declining aid contributions of
Bangladesh’s development process with the widening of
the DPs’ policy conditionalities is leading to growing
tensions. Aid relations between the Government of
Bangladesh (GOB) and the DPs remain “publicly cordial,
but discordant in practice”. The strong stance of China,
India and Vietnam in their interface with the
development partners regarding matters of domestic
governance shows how donor-recipient relationships will
evolve has less to do with the state of the governance
in the country and more to do with the capacity of the
recipient country to set the terms of their relationship
with the DPs. The DPs need to develop a more globally
consistent policy on donor-recipient relation before
they develop a specific policy towards Bangladesh which
can spell out how extensively political concerns such as
malgovernance and dysfunctional democracy should remain
within the domain of aid policy. Within the context of
Bangladesh, an in-depth enquiry and dialogue among the
GOB, the civil society and the DPs are needed on the
issue of the political dimensions of aid policy.
A contrasting feature of aid flows to LDCs and
Bangladesh is observed in terms of the commitments of
the international community and the ground reality.
Under the Monterrey Consensus 2002 there was a fresh
commitment to meet the target of 0.20 per cent of GNP to
be committed as ODA to the LDCs, in reality throughout
the 1990s there was a 25.5 per cent decline in aid flows
to LDCs, even in nominal terms. Presently bilateral aid
flows dominate the aid flow to LDCs, which is contrary
to the assumptions underlying the Washington Consensus.
Aid flows have largely been determined by political and
strategic considerations of particular DPs rather than
development objectives. Market-oriented policy reforms
implemented at the behest of aid-providing institutions
does not necessarily guarantee a flow of accelerated
aid. There is also hardly any association between levels
of aid flow and levels of poverty. Based on a
disaggregated analysis of aid flows during the last
decade, one can trace the dynamics of the aid and
foreign exchange gap in Bangladesh, and the diminishing
but critical role of aid in government finances.
Presently Bangladesh’s food aid is not an important
element of our aid flow, rather aid should now be
targeted towards improving human development indicators
as part of the global commitment of Bangladesh to attain
the Millennium Development Goals (MDGs). An Inter-sectoral
Analysis shows that over the past decade there is
continuing erosion in the importance of aid for public
investment in Bangladesh. However, foreign aid remains
critically important for the MDG-related sectors (e.g.,
health and education) as well as for rural income and
employment supportive sectors (e.g. transport and
communications).
Policy reforms in Bangladesh have slowed down despite
donors’ increasing emphasis on conditionalities, the
main reason being the government’s attitude towards
reforms. This attitude has been characterised as
“political perception” and not because of sensitivity
to, or agreement with, the inherent merits of these
reforms. Most of the reforms undertaken by successive
governments appear to have been taken under donor
pressure. The question is whether Bangladesh could have
done better “without aid” or “with aid, without
conditionalities”. There is need for strong domestic
institutions and a capacity to interact with the
formidable international financial institutions.
While the flow of foreign aid is on the wane in
Bangladesh, the absorptive capacity of foreign aid has
become a serious concern. A low aid absorption capacity
in developing countries, particularly the least
developed ones, often leads to a vicious cycle of “low
absorption-low development-low aid”. The government
should not look at aid as a source for overcoming
weaknesses in fiscal management, rather it should be
seen as a source for enhancing investments. Multiple
controls, ad hoc procedures, the divergence between
development and revenue budgets, and the fuzzy
delimitation of ministerial jurisdiction are the major
factors contributing to the weak implementation of aid
financed development programmes. Only institutional and
procedural reforms can enhance Bangladesh’s aid
absorptive capacity. The state of implementation of
projects tends to be measured based upon aid utilisation
data, which is expressed in the form of funds released
within a project year. However, this can hardly serve as
a proxy for project implementation.
ODA for private sector promotion is a relatively new
phenomenon in Bangladesh and it is important to explore
the interface between aid and the private sector in
Bangladesh, examining the effectiveness of aid in terms
of promoting private sector interests. Foreign aid
intervention is performing two functions with respect to
the private sector development (PSD): the first function
relates to the assistance for creating an enabling
business environment through market-oriented reforms,
and the second one entails the supply of equity, loans
or guarantees for private sector participation in the
development sectors. Power generation is one of the few
areas of PSD where the aid-private sector partnership
has met with success. However, it is observed that
bureaucratic procedure in the donor agencies may
seriously jeopardise PSD objectives if it fails to match
the private sector’s business cycle. The privilege
seeking behaviour of the private sector in Bangladesh is
dangerous; the private sector should rather demonstrate
better corporate governance.
Dwelling on the complex interface of aid and poverty
alleviation, four key questions have been raised: the
effect of aid on economic growth and the distribution of
its fruits among various socio-economic classes of
society; the extent of bias in aid favouring the richer
class of society and the leakages that deprive the poor
from the benefits of the programmes designed for them;
the role and impact of food aid on agriculture
production; and finally, how far the PRSP departed from
the earlier Structural Adjustment Programmes (SAP)
promoted by the DPs in the 1980s and 90s. Some findings
suggest that foreign aid was not essential for bridging
the savings-investment gap, nor can poverty reduction,
whatever the level that has been achieved in Bangladesh,
be attributed to the increased volume of aid. SAP has
generally resulted in poor economic and social outcomes,
with only a few exceptions. The analysis identified nine
groups of direct beneficiaries of aid who could not be
termed as “poor” by any measure. At the global level
many poor countries remain “under-aided”, whereas some
rich and geo-politically important countries were
receiving more than what they should have received if
poverty alleviation was the priority of the DPs.
It has been widely noted that globally, an increasing
amount of aid is being channelled through the NGOs. This
is also true for Bangladesh. Donors tend to believe that
aid disbursement through NGOs is more effective in
reaching the target group, as well as most
cost-effective for realising poverty alleviation in
developing countries. In the context of the new global
political economy, the NGOs have created a “space” for
themselves, usually complementing, and sometimes
displacing, the state’s functions. However, NGOs are
facing challenges in realising their declared objective
of poverty alleviation in Bangladesh. Efficacy of donor
support towards NGOs will improve if the capacity of the
NGOs to design poverty alleviating programmes and their
ability to effectively utilise the funds are enhanced.
As a whole the analysis of the issues in the IRBD2003
will provide valuable food for thoughts to all
stakeholders in Bangladesh, and will continue to serve
as an important reference for policymakers,
parliamentarians, DPs, researchers and students, both on
the state of the Bangladesh economy and in promoting
constructive dialogue on the aid relationship.
Contents of IRBD 2003
Part One
State of the Bangladesh
Economy in 2002-2003 – A Macro-Economic Overview
Dr. Debapriya
Bhattacharya
External Sector
Performance in FY2003: Recovery and Beyond
Professor Mustafizur
Rahman
Finalisation of the
Poverty Reduction Strategy for Bangladesh: A Review
Process and Interim Measures
Dr. Uttam Kumar Deb
Dr. Ananya Raihan
Mr. Syeed Ahamed
Chronology of Major
Economic Events
Mr. Mabroor Mahmood
Mr. Asif Anwar
Mr. Touhidul Hoque
Chowdhury
Mr. Shahnur Rahman
Part
Two
The
Political Economy of Aid
Professor Rehman Sobhan
Chairman, CPD
The
Macroeconomic Dimension of Aid Dependence
Dr.
Mirza Azizul Islam
Former
Director, UN–ESCAP, and Chairman, Security &
Exchange Commission (SEC)
The
Sectoral Composition of Aid and Sectoral Dependence
Dr.
Debapriya Bhattacharya
Dr. Ananya Raihan
Mr Wasel Bin Shadat
Aid
Absorption
Dr.
Mashiur Rahman,
Former
Secretary, MOF Impact of Aid
Dr. A. K.
Abdul Mubin
Aid and Policy
Reforms
M.
Syeduzzaman
Member, CPD
BOT &
Chairman, Bank
Asia Aid and Trade
Professor Mustafizur Rahman
Aid and
Private Sector Development
Dr. M
Fouzul Kabir Khan
ED & CEO,
IDCOL
Aid and
Poverty Alleviation
Professor M. M. Akash
Department of
Economics
University of
Dhaka
Aid and NGOs
Dr.
Salehuddin Ahmed
Managing
Director, PKSF
Annex C: Concept
Note
Dr. Mirza Azizul Islam
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