Donor competition in fragile states

Briefing Note: shorter version 

Donor competition in fragile states: in search of better tools for the promotion of democracy.

Issue

The entry of new donor states like China and other BRIC-countries has led to the increased donor competition in developing countries. In fragile and conflict-prone states, competition between old and new donors has undermined Canada’s efforts to bring good governance. For example, the entry of China as a donor to Sri Lanka has completely sidelined Canada and other Western donors. This brief analyses the reasons for donor competition and outlines possible options for action.

Background

Fragile states are the overwhelming source of the world’s refugees and internally displaced peoples, as Canada has experienced with Tamil refugees from Sri Lanka. Because Canada hosts the largest Sri Lankan diaspora in the world, we are the natural destination for these refugees. Processing the claims of one boatful of Tamil refugees costs Canada approximately $25 million. More over, conflicts resulting from human rights abuses in those countries can spill over to neighbouring countries, likely to demand action under ‘responsibility to protect’ clause, which again is a costly endeavour.

In belief that democracy and respect for human rights would avoid armed conflicts and wars, Western development assistance has over many decades been linked to good governance conditionalities. However, as of 2005, two OECD documents, which define the aid-related conduct of traditional donors, encourage the recipient countries to set their own development goals and policies. Both the OECD’s Paris Declaration of Aid Effectiveness and The New Deal for Engagement in Fragile States mandate the donors to align behind the locally initiated development agenda, and not to set their own demands to the development. Canada, as a signatory has agreed to follow these norms.  Clearly, setting aid conditionalities regards to democratization is no longer feasible under the conditions of these declarations. This implies that other means should be found for promoting democracy.

The major difference between the old donors and (re-)emerging donors like China is their different attitudes towards the local governance. China does not set policy conditions to the recipient countries and that could explain China’s ‘competitive edge’ over traditional donors. Some local governments prefer doing business with the new donors, as – in the words of Sri Lankan Minister of Foreign Affairs – “they don’t go around teaching others how to behave[1]”. Therefore, doing business with the Chinese does not force the local governments in conflict-prone and fragile countries to choose between continuing their bad policies or securing an attractive infrastructure investment through aid funds. With the Chinese, they can have both.

In fragile states, good governance is not viewed as a means to be serving their ultimate goal of economic development. The countries are foremost interested in economic advancement not in democracy. Therefore, in those countries the promotion of democracy should be framed as an economic argument.

Policy options

One option would be to urge China to follow the OECD rules on aid delivery. However, as a non-member of the OECD, the Chinese definition of ‘aid’ differs from the one of traditional donors. China is a very significant source of finance for developing country governments – but only a small portion of this is actually ‘aid’ as understood by traditional donors. Unlike OECD donors, Chinese have not distinguished aid from other financial flows (like FDI, loans and trade) to developing countries and they do not report about their aid spending.[2] Therefore, the traditional donors (like Canada) and the new donors (like China) play different games in recipient countries, following completely different rules. Demanding China to give up its game is likely not going to succeed.

Secondly, there is a temptation to exit the countries where competition between the traditional and new donors has resulted in a hostile attitude on behalf of recipient governments, like Sri Lanka. The aid exit may be wise considering the current budget restrictions at home, but it may prove short-sighted considering possible expenses of likely humanitarian interventions in the future or administering claims of boatfuls of refugees.

The best option for Canada is to rephrase its good governance rhetoric and instead of framing it as the end in itself, the demands and recommendations for democratization should be portrayed as a tool to achieving economic success. Instead of ‘democratization’ and ‘good governance’, Canada should be using economic vocabulary and discontinue to tie favourable policy change to aid delivery.

On that note, Canada could use the key words like ‘inclusive political and economic institutions’ in the dialogue with recipient countries. The economists Acemoglu and Robinson[3] have claimed that inclusive institutions are the key to the lasting economic success. According to them, the countries, which set up ‘extractive institutions’, are set to fail. Extractive institutions allow only a limited number of people to access the benefits of economic success, and therefore create conditions where those excluded are likely to challenge the rule of the government, making it unlikely to survive.

Acknowledging that undemocratic countries (like China) are able to achieve significant economic growth, the authors nevertheless caution that over time it becomes difficult to maintain the momentum. They reason their argument of sustained growth with the need to innovate, and they argue that innovation can only take place in the countries with inclusive economic and political institutions. 

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The work of economist and Nobel Prize laureate Amartya Sen offers other useful key words for successful rhetoric. His notion of ‘capabilities approach to development’ is likely to be understood better in fragile countries than the ‘democratization’. Sen views poverty as a capability-deprivation, which means that countries in low-income bracket could develop better and faster if they removed their internal obstacles for free participation in economic activities. This involves exclusion of lower caste, women, ethnic and sexual minorities from political and economic participation and decision-making.

To support those claims, Canada could refer to the empirical evidence, which proves that equal rights lead indeed to the rise in incomes and productivity. Economists Chang-Tai Hsieh, Erik Hurst, Charles Jones and Peter Klenow^[4] argue that as much as 20 percent of the growth in productivity in the United States over the past 50 years can be attributed to expanded opportunities for women and blacks. Lowering ‘discriminatory barriers’ can be tremendously beneficial to the economy, they claim: greater equality results in better use of available talent, and therefore it leads to increased productivity and wealth.

Conclusion

The old models of aid conditionalities regards to achieving democratic governance in fragile countries are no longer viable. As both the Chinese and the governments of fragile countries are foremost concerned about their economic development, the change in rhetoric is needed. Instead of framing democratization as a ‘tool for greater justice’ and using it as a persuasion for access to aid funds, good governance should be portrayed as an economic argument. That type of change in rhetoric is likely to reduce the frictions between the donors, as well. Referring to the empirical evidence of improved productivity and therefore wealth could prove more productive in terms of achieving gradual policy change.

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[1] Campbell, I., Wheeler, T., Attree, L., Butler, D. M., & Mariani, B. (2012). China and conflict-affected states, Between principle and pragmatism. SAFERWORLD.

[2] For example, it is estimated that China’s aid to Africa in 2008 was approximately US$1.2 billion. In contrast, the U.S. provided US$ 7.2 billion, the EU $US 6.0 billion, the World Bank US$ 4.1 billion and France US$ 3.4 billion. Ibid.  

[3]Acemoglu, D., & Robinson, J. (2011). Why Nations Fail, The origins of power, prosperity, and poverty.

[4]Hsieh, C.-T., Hurst, E., Jones, C., & Klenow, P. (2012). The Allocation of Talent and U.S. Economic Growth.