Foreign Aid in the Asian Century

Should advanced countries like Australia still be giving official assistance to Asia's emerging and developing countries in the Asian Century?

After all, most of Asia's economies have now achieved middle income status, and most of Asia's poor live in middle income countries like India, China, Indonesia and the Philippines, rather than in poor countries.

Most definitely yes, responds Stephen Howes, Director of the Australian National University's Development Policy Centre, in three excellent blog articles. This is in sharp contrast to Professor Hugh White and others who argue, for example, for a cut in aid to Indonesia

First, there is a strong humanitarian case for giving aid according to Howes, and this will be the case for at least the next couple of decades. There is still a large number of poor people in Asia -- despite all the hype about the Asian Century.

According to the World Bank's latest estimates, 33 per cent of East Asia's citizens live on less than $2 a day, and for South Asia the figure is a horrendous 71 per cent! Overall, this amounts to 1.8 billion. Asia has the world's largest number of poor people.

And Asia's poor have many other deprivations. For example, half of all Indonesians live in a house without a proper toilet. Half cook on wood or dung. Two-thirds get by without access to clean water.

As Howes says, we have a profound obligation to poor people everywhere. But does aid do any good? Again, yes! Even the detractors like Bill Easterly concede that aid can help improve education and health outcomes.

Many types of aid can be effective, and one of the benefits of aid is that it can facilitate innovation and experimentation. In Indonesia, for example, one of most effective aid projects Australia has financed has been to help Indonesia create a large tax payers' unit. This has resulted in huge increases of revenue to the Indonesian government, much larger than our aid, collected in a relatively clean, non-corrupt way. And these tax revenues can be spent on education, health or infrastructure to the benefit of the poor.

Aid for Asia, which fosters development, also helps Australia. But the strongest public policy case for aid to Asia is as an effective response to our obligations to Asia’s poor.

History teaches us that sooner or later successful economies graduate from aid, even when they are still poor by our standards. Korea and Taiwan were the first countries to graduate in the 70s. Thailand and Malaysia were the next in the 90s. China has pretty much graduated. But Indonesia and most other Asian countries are some 20 years or more off from enjoying the level of income Thailand and Malaysia had when they graduated.

Beyond the humanitarian case for aid, aid will still remain relevant in the Asian century as an international problem-solving tool, for financing global and regional public goods.

The global climate has become the most famous international public good. Countering international terrorism, disease eradication, and epidemic control are all international public goods.

Since we don’t have an international government to provide international public goods for developing countries, we have to finance international public goods through aid. And rich countries are able to finance a greater share of the burden of these public goods. This aid helps both developed and developing countries.

As Howes says "we provide humanitarian assistance to displaced people in Sri Lanka to stop them coming to Australia. We focus TB assistance on the part of PNG which is closest to Australia to stop the transmission of TB to Australia." There will continue to be many issues in developing countries where we have a direct stake in the outcome.

Howes finishes his discussion of aid in the Asian Century with a rebuttal of several arguments that are commonly put forward against aid to Asia. These arguments are: giving aid inhibits a mature relationship between countries as it encourages an unequal donor-recipient relationship; we should spend aid funds on things which would more directly advance our national interest; aid displaces government spending, so that the only impact of Australian aid for education in Indonesia is that the Indonesian government spends less on education; aid has become irrelevant in today’s globalised world, as it is now dwarfed by foreign private capital flows or remittances; countries in Asia are middle income and therefore no longer need aid -- but in fact middle income does not mean middle class; and it is arbitrary to have an aid target (such as 0.5% of GDP).

One argument that Howes does not make is the following. Most of Asia's rapidly developing economies are at best fragile democracies and the future course of their development is far from certain, and Australia certainly has a major stake in that. Giving aid provides us a lever, and enables us to influence policy developments in these countries.

Another relevant issue, though beyond the scope of Howes' remarks, is trade and other protectionism by Western governments which adversely affects development prospects. Although Australia is very proud of its free trade stance, there are many anecdotes in South East Asia about fruit and other exports to Australia being blocked by health and other standards, which are basically disguised protectionism.

Although I basically agree with Howes' arguments, I do have a moral dilemma. In most Asian countries, the gap between rich and poor is widening, corruption is rife, and capital flight enormous. The very rich elites of these countries often show no interest in their own poor citizens, and are happy for their countries to receive aid from developed countries. This doesn't seem right.

There is an old saying along the following lines -- foreign aid amounts to taking money from poor people in rich countries and giving it to rich people in poor countries. Unfortunately, there is still now some truth in this argument.