The Economist has a piece outlining the paradox of Indian overseas development assistance (to the tune of 11 billion over the next 5-7 years). With figures from the CIA factbook I have calculated that about 300 million indians live below the poverty line. The Economist piece also touts the emergence of middle income donors, especially among the BRICs.

In this world Europeans and Americans no longer dominate aid. China is the biggest source of investment in Africa and the Gates Foundation is as important as many donor governments (and much more innovative). Private capital flows to Africa outstrip aid flows, contradicting an old justification that aid is necessary because investors hold back.

For the poorest, the new donors are more important because Western aid is shrivelling. Congress is proposing to chop American aid by a fifth. Brazil is giving more to the Somali famine than Germany, France and Italy combined. There are exceptions: Britain and Australia promise to boost aid spending. But they seem like a last hurrah of Western generosity.

Adding that:

In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which fail—and encourage bad government.

I disagree with this latter assessment. It is not aid per se that caused the epic governance problems facing most of the low-income countries of the world. Sure it stunted the co-evolution of accountable government and domestic revenue generation. But the biggest failure of aid was what it was spent on.

Aid being highly fungible meant that most of the money wound up in the private accounts of venal leaders and gun-runners.

Things have since changed a bit. For instance, China’s resources-for-infrastructure deals can be a model for Aid 2.0 (this no doubt needs some tweaking too, as this damaging expose on Sino-Angolan oil deals shows). Plus this time the infrastructure investments are different. In an earlier period most of the investments were overtly white elephant projects (like Moi’s infamous hydro-electric dam in Turkwel). Most of the current projects are in roads, telecoms, and to some extent agriculture – investments that will have a much bigger impact because of their broader reach.

You can find a related earlier post here.