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Trade is better than Aid!

July 25, 2007

I think its not such a bad thing that the the U.S. has decided to call India a “transforming country” instead of developing one and as a result is going to cut aid. I think its a matter of pride.

Basically, I am glad that the US has not clubbed India with countries such as Iraq, Afghanistan, Pakistan or even Israel, which receive dollops of aid. It says here (about U.S. aid):

Iraq’s aid has been boosted fivefold for 2008, while Afghanistan and Pakistan together will receive more than 85% of the $2.2 billion aid budget for 12 countries in South and Central Asia. This is besides the hundreds of millions of dollars Washington provides these countries in budgeted military aid and loosely accounted money for the war on terrorism…some estimates put US economic and military assistance to Pakistan at $ 2 billion a year now.

The bulk of the $23 billion in annual US foreign aid goes to a handful of key countries, leaving about 120 nations to battle over the remaining $3 billion…. Overall US aid to India is slated to be cut to $81 million in 2008, a 35% cut from the previous fiscal, on the theory that it has one of the best-performing economies in the world.

This same article goes on to say ‘Trade rather aid.’ Now, that’s music to my ears.

Another thing to feel proud about – India which has been a donor country for some time now and in fact recently gave almost $1 billion to Afghanistan.

What I do feel sorry about is that aid to some ongoing projects in India will be cut, but really, I believe that in the long run they will be able to sort out their funding problems. Its not as if there are no other sources of aid. We have our rich corporates…

Looking at it from on overall point of view, the US anyway was not a big lender to India – Japan is. But I feel that this message from the U.S. is a reminder to us that we are capable of managing on our own, we have to slowly free ourselves from the shackles of foreign aid.

Why did I say shackles? Well, I believe the economists who say that foreign aid does not always help:

Kenya and Tanzania were both recipients of large amounts of aid from 1970-1996. Both countries pursued flawed economic policies, such as price controls, marketing boards and import substitution. Their extreme poverty was entirely due to those policies, and reforms have not been forthcoming in recent years because of entrenched economic interests.

In contrast, millions of the poorest people in the world live in China and India, whose economies are growing rapidly despite receiving trivial amounts of aid.

An example of a country that has received aid and pursued the right policies is Uganda, which liberalised trade, opened its economy to foreign investors and privatised state-owned enterprises. In this case, aid helped to lock in reforms that were already in place, and donors have not interfered with Uganda’s domestic political agenda. Although this is positive, Uganda’s economy is fragile because it is far too dependent on aid and its production is unsustainable.

The study concludes that economic growth depends not on the level of foreign aid given to a country, but on underlying, qualitative factors…

A country is poor because of the kind of government it has…once the government gets it’s hand on the money (foreign aid) it will invariably misuse the funds. How can you trust a government which has already messed up the country?? And poor countries are usually poor because the government usually plays a large role in the economy (this was the case in India before liberalisation) and usually wastes aid funds. Not just that – “…aid is spent on projects that benefit the political leaders at the expense of the citizens.”

As for India, we still receive aid (in the form of loans for developmental projects) from other countries besides the US (Japan is a big lender) as well as the World Bank. US aid has always been a small slice of the pie.

I cannot help but see this reduction of US aid as the beginning of a new era for India. We have been officially recognised as a “transforming” economy and I look forward to a time when India will be a giver rather than a taker.

Related Reading: India to be number two economically by 2050
Globalisation ahoy!
Indians want more money to be spend on health and education
Highest pay hikes to be in India in 2007
Failed Countries of the world

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10 Comments leave one →
  1. B Chopra permalink
    July 25, 2007 11:45 am

    Oh it sounds to me as if India is playing double standard.. I think that’s true if I see from outside view.. At one hand we are recieving and on other hand we are donating… in simple words… he he.. I think It’s illogical role or may be confusing to me.. donno that’s right or wrong!!!

    Anyways I am impressed with your post Title that “Trade is better than Aid”.. Yes.. If you really wanna help a poor country then help them enhancing their trade.. there are lot of ways.. That’s nice thought.


  2. July 25, 2007 3:39 pm

    I agree that trade is better than foreign aid, Nita. I think all too often foreign aid comes with strings attached. And even when it doesn’t come with strings attached, it can make people dependent on it. Foreign aid may be humane and necessary at times — I am not stubbornly opposed to it — but trade is much better I think.

    I am excited by the economic growth in India. The thought has occurred to me that when India lifts itself out of poverty, the world will see a flowing of human potential.

  3. July 25, 2007 4:05 pm

    Though this post doesn’t intend to, it suggests that Indians should consider US’s statement on India whether we are transforming or developing is like a benchmark achieved. We can directly feel and see more transformation in the country(though nothing big compared to china) since some time now, not necessary that US has to confirm it.

    Also, I don’t think US ‘donates’ money for india’s growth.. may be only like opening more trade channels or being lenient on trade policies like outsourcing especially for india…
    or, am i wrong.. can you point to something confirming that US donates money for india, and if so how is it being used (probably some budget notes link if possible).

    About why a country is poor… the government can be one of the reasons for it. not all the reasons..
    For us in india, we have grown i think because of our interest in opening up our services sectors to the world market… 15 years back our services sectors where mentoring the ‘be, buy, by indian’ strategy.. now we are looking at providing international quality services even in selling groceries… hiring non-indians in our management boards to keep the right mix to succeed internationally, and we are learning big time to transform ourselves to do things better … all with more money coming in through our businesses.

    Also In India, Poor get still poorer.. because corporates and the growing society in general are still taking time to understand the importance of involving the lower class in the growth somehow.

  4. July 25, 2007 4:22 pm

    Bharat, I was fascinated with that line ‘trade is better than aid’ myself and I confess that sentence is not mine. I took it from an article…I have mentioned that later in the post. Also, about the giving and the taking, we have to remember that there is a difference between donating and borrowing. India basically borrows and what it gave to afghanistan was a donation…at least that is my understanding of it.
    But as Paul pointed out all aid has a political motive. It is in India’s interest to see Afghanistan as a stable country….just as it is in the US interest to see countries like Israel and Pakistan do good.
    Paul, I feel excited about this change that is happening too…it wasn’t there when I was growing up. I see the difference…its great to see someone from outside India sharing this excitement!
    Harish, let me answer your points one by one:
    Actually I admire the US in many ways, its economic power for example and in that sense I do consider their opinion a benchmark. If someone is at the top in a certain field, then what the someone says does become a benchmark. I am only talking of economics here…
    Secondly, all countries have their own political and economic agenda. Whats wrong with that? Its their money they are spendng! Look, I am a pragmatist. I am not saying that the US has noble motives. Not always. Maybe not most of the time…but the US does give loans to India, for purposes other than trade. While researching this post I had come across about some educational project they were funding in bangalore.
    I agree with you about why India is growing. there are many reasons, there cannot be one reason as you said.
    But actually in India the poor are not getting poorer. I have written several posts on this very blog. True, we have a long long way to go, but if you are comparing with the past, we are much better off. And one has to compare with our own past isn’t it? Here are the links:

    The difference between rich and poor
    and this one:
    India to be the largest consumer market by 2025
    and one more:
    Is poverty declining in India

  5. July 25, 2007 6:02 pm

    Harish, one more important point I want to make. The way forward is more investment in the educational, specially the primary education sector if we are to bring the poorer sections into our economic miracle. There are provisions in the budget this year (again, I have written a post on this, if you search for budget you’ll get it) and I have also written a fair amount of posts on the need for improving primary education. You can check the category…
    And when you said that the US does not have to confirm the fact that India is developing…I am sure that this was not the intention of the US. There are sufficient global studies on this (some I have written about on my blog). I am sure that what the US was doing was giving a reason for reducing the aid…

  6. July 25, 2007 6:13 pm

    Give a man a fish vs. teach a man fishing!

  7. July 25, 2007 8:28 pm

    I was happy to see the news article!! It doesn’t matter much to me if US calls us developing or transforming, but it surely will change view of some other nations.
    Again cut in aid means USA is willing to do more trade than aid. They are offering whatever they can to increase trade with India, be it latest fighter jets or nuclear technology!!

  8. Ebi permalink
    July 25, 2007 11:45 pm

    I am not sure whether this is good news for India. It will depend on whether American aid was to government funded programs or to NGOs which were engaged in development activities. 50% funding cut to some of these NGOs is going to cause a lot of problems to the people employed by them. It is not a good thing as some of them might have given up lucrative careers to make a difference. I am sure with the current economic development in india we should be able to fund these things ourselves. Some how my feeling is that general awareness is very less. May be you can use your blog to make a difference.

  9. July 26, 2007 7:36 am

    Ebi, yes there are some programs which are going to suffer and lives are going to be affected and I feel really bad about that. But I believe that in the long run these problems will be sorted out. Also, I feel India can afford it. The problem is less of affordability and more of lack of will (on the part of the govt I mean). They are more interested in doing things to get votes.


  1. University Update - Iraq - Trade is better than Aid!

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