Donors Helping Themselves

by David Sogge

Chapter for Handbook on the Economics of Foreign Aid, Mak Arvin (Editor),

Cheltenham: Edward Elgar Publishing, 2015, pp 280-304

It is a truth almost universally acknowledged that a donor with money to spend will do so primarily

in pursuit of its own interests. “Virtually without exception,” two scholars have stated, “the research

so far has found that the political and economic interests of donors outweigh the developmental

needs or merits of the recipients” (Hoeffler and Outram 2011: 240). Yet while the fact of their

primacy has been acknowledged, those interests remain out-of-focus or discreetly off-camera.

Which interests get what, when and how are seldom identified systematically, assessed or put up for

public discussion1. Instead, attentions and emotions concentrate overwhelmingly on aid’s

downstream realms of policies and projects. Even today’s efforts to ‘follow the money’ and promote

aid transparency largely ignore interests upstream. Given the primacy of those interests, this

structure of attention is bizarrely inverted. It creates deficits in knowledge and obstacles to

understanding. There is a challenge here for scholars, and for those wishing to see public

accountability required of all actors along aid chains.

This chapter has no ambitions to remedy such deficiencies. Rather, it seeks to probe what is known

and unknown about aid’s deployment ‘upstream’, and thereby to identify issues that merit deeper

scholarly work and perhaps even public investigation. It has been further motivated by a hope that

better knowledge of aid in the service of upstream interests can help explain why, even in

unfavourable times and places, the aid industry continues to flourish and to reproduce itself even in

countries that were once at its receiving end.

The chapter begins by placing donor ‘self-help’ against a backdrop of other net flows, and some of

their geo-politics, during the foreign aid system’s current epoch, conceived at the outset of the Cold

War. It then turns to research correlating aid flows with changes at macro-economic levels in donor

country economies. It discusses mercantilist aims and outcomes, highlighting correlations of donors’

development aid with their exports, imports and foreign direct investment. Finally it reviews

findings about returns to donor economies in several specific fields, noting gaps in knowledge and

potentially productive lines of scholarly or activist inquiry. This chapter does not discuss the many

self-regarding uses of foreign aid in diplomatic, political or military statecraft. That is not to imply

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that those uses are irrelevant to the economics of foreign aid. But the thematic focus of this

Handbook, and limited space, dictated their omission here.

References to aid data require a general word of caution, given the frequency of their appearance in

this chapter. Official aid statistics notoriously overstate what donors actually provide to recipients.

Re-jigged official definitions, such as ‘Country Programmable Aid’ data, offer only a little more

realism. Such metrics fall short of providing a true and comprehensive picture. A British NGO

specialising in aid information recently concluded:

The truth is that we do not know exactly how much aid is actually transferred to developing

countries – in whatever form. The volume of aid that donors reportedly disburse (recorded

by the DAC) typically exceeds the aid reported as received by recipient governments in their

own records – and by some margin (Development Initiatives 2013: 77).

By the same token, then, we do not know exactly what parts of aid claimed as allocated for poorer

lands are in fact retained by or returned to entities and persons domiciled in donor countries, or to

the secrecy jurisdictions that donor country tax laws make possible. Plausibly, some aid monies

simply elude data-gatherers altogether, becoming part of the ‘dark matter’ of global wealth

(Hausmann and Sturzenegger 2007), a notion not unrelated to the historical background sketched in

the following section.

Counter-currents: Some history

Wherever aid is said to flow to the poor, a bit of probing will usually uncover larger counter-flows to

the rich. A major illustration is the movement of capital across the Atlantic in the earliest years of

the modern foreign aid system. Massive capital flight from Europe at the outset of the Cold War

provoked calls on US officials to control and indeed to recoup fugitive monies needed for the

reconstruction of cash-strapped European countries. But those proposals met forceful resistance

from American bankers and some European elites. Marshall aid to Western Europe provided a

shrewd way out of this dilemma. The political economist Eric Helleiner makes the case that the chief

significance of Marshall aid was in offsetting the flight of private capital out of Europe. That public

aid benefited private US financial interests and wealthy Europeans by relieving them of obligations

to repatriate funds or submit to official controls over capital. At the time, journalists calculated that

the outflow from Europe exceeded total Marshall aid (US$13,3 billion, or about US$103 billion in

2014 dollars) allocated for Europe (Helleiner 1996:58-62). The economist Ragnar Nurkse and other

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senior figures monitoring global finance at the time were aware of aid’s interplay with capital flight.

A senior economist of the Federal Reserve Bank of New York, writing in 1954, concluded that “…a

significant part of the foreign aid of the U.S. government has in effect gone to finance hot money

movements from the recipient countries to the United States and elsewhere” (cited in Helleiner

1996: 58 fn18).

An equivalent but more lopsided pattern ensued after the collapse of the Soviet Union. In the 15-

year period up to 2005, according to World Bank and OECD-DAC data, donors provided about US$21

billion for the Russian Federation. At the same time, colossal amounts of capital departed Russia. In

the eight-year period up to 2002, an estimated US$148 billion – about seven times what Russia was

allocated in official assistance – left Russia as capital flight, overwhelmingly to Western jurisdictions

(Liuhto and Jumpponen 2003: 30).

Hence at the inception of the aid system, but also at later moments, a poorly-illuminated but

detectable pattern has arisen: foreign aid operates in the foreground, advertised as public largesse

for the needy, while in the background substantial counter-flows work discreetly in behalf of the

wealthy.

The Giant Vacuum Cleaner

Counter-flows from lower-income lands gained momentum in the 1970s, when the United States

moved to cover its external trade and internal fiscal deficits, both of which were constraining

America’s geo-political autonomy. The strategy was essentially predatory: to draw in resources,

financial and otherwise, from beyond its borders at little cost and risk. The strategy worked, and for

a number of reasons beyond sheer coercion: the depth and sophistication of the US financial sector;

the size of the American market; the US government’s ‘exorbitant privilege’ of controlling the

world’s reserve currency; and from its power to shape the rules affecting the rest of the world.

Those rules constituted the post-war global financial architecture. US negotiators had rejected

Keynesian proposals (that would have curbed beggar-thy-neighbour mercantilist competition) in

favour of a system pivoting on the US dollar and on freedom for capital to move in and especially

out. Led by the IMF, whose rules conformed chiefly to US interests, a coalition of aid-and-

development agencies sought full convertibility of currencies and ‘openness’, that is, policies

permitting Western transnational corporations to gain bigger market shares in non-Western

economies. Donors made their aid conditional on acceptance of those policies, making major

exceptions only in the cases of post-war Europe, Taiwan and South Korea. As a result, “the

developing world has increasingly come to pursue policies that resulted in current account surpluses

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and thus net capital exports—destined primarily for the capital-rich United States” (Bibow 2008). In

more colourful terms, America’s external and fiscal deficits “operated for decades like a giant

vacuum cleaner, absorbing other people’s surplus goods and capital” (Varoufakis 2011).

In net terms, therefore, poorer countries have become creditors to richer ones. Total financial

outflows from non-Western economies have surpassed inflows at accelerating rates since 1999 (UN

DESA, various years), to the benefit of public and private asset-bearers, especially those

headquartered in the United States (Lane and Milesi-Ferretti 2009; Zucman 2013). As they are

inconsistent with neoclassical axioms that capital will move ‘downhill’ toward places where it would

gain higher returns due to its scarcity, these dynamics pose challenges to conventional economic

theory, based on earlier epochs of global capitalism. In the period 1880-1914, for example,

substantial amounts of money flowed in net terms from richer to poorer places. But a hundred

years later, capital in net terms has commonly flowed ‘uphill’, from poorer places to richer2. In that

perspective, an unadvertised principle of contemporary aid has been in effect to ‘Go with the flow’.

Aiding Counterflows

It is commonly supposed that foreign aid leverages additional resources from abroad or domestic

savings within recipient countries. Yet research reveals a quite different role for aid, namely that of

facilitating net transfers from recipients. “Current account deficits of low-productivity developing

countries have been driven by government debt/aid. Once aid flows are subtracted, there is capital

flight out of these countries…. The failure to consider official flows as the main driver of uphill flows

and global imbalances is an important shortcoming of the recent literature” (Alfaro and others

2011:1). In a study of aid’s failure to boost savings rates in sub-Saharan Africa, two economists

concluded: “We found that, at the margin, 35 per cent of ODA simply financed capital outflow. And

only 24 per cent financed domestic investment. The remaining 41 per cent financed domestic

consumption” (Serieux and McKinley 2009: 1). During the period 1974-1994, when aid flows were

generally rising, the proportion of “ODA used to finance capital outflows jumped to 48 per cent”

(Serieux and McKinley 2009: 1).

Consistent with those findings is the story of “petro-aid” granted after 1973 by OPEC donors. Much

of that oil-backed windfall went to recipient government treasuries only to depart rapidly to pay for

consumer imports and to fill private accounts offshore. For every one percent of their GDP received

as aid from OPEC governments, recipient countries saw monies equivalent to about 0,35 percent of

their GDPs take flight (Werker and others 2009). Such studies may be read as more indicative than

definitive, as their authors refer to gaps in knowledge. Especially scarce is systematic information

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about the destinations or beneficial owners of the outflows; that is probably due to secrecy rules

shielding assets of corporations and wealthy individuals.

In facilitating counter-flows, foreign aid has also played roles as a ‘supporting actor’. An example is

the case of The Netherlands Antilles, one of many of the West’s offshore jurisdictions. Successive

Dutch governments, using aid as a crucial instrument, have closely supervised those Caribbean

possessions for generations. In the 1950s Dutch authorities began working with local elites to

develop financial laws and services to serve wealthy interests abroad. That strategy emerged in an

ambiguous context: the Antilles operated as a free-wheeling semi-sovereign jurisdiction, yet its

commercial law was at the same time reassuringly anchored in the Dutch legal system. An especially

potent invention was the notorious “Antilles Sandwich”, later to become the “Dutch Sandwich”, a

legal gimmick under tax treaties with the USA. Official aid from the Netherlands, later supplemented

by EU monies, provided for the physical and institutional setting in which the strategy could develop.

These investments paid off well, benefitting interests in The Netherlands and its Caribbean

dependency. But the major beneficiaries were elsewhere. In a detailed review, two American

professors of law conclude: “An important lesson of the Antilles saga is that for nearly two decades

financial intermediation in the Antilles benefitted the United States economy by lowering the cost of

capital for U.S. firms and channeling foreign investment into the U.S. real estate market.” (Boise and

Morriss 2009: 455). As in the cases of other island jurisdictions serving as tax havens, foreign aid to

the Antilles helped make possible that redistributive financial role.

Such cases underscore needs to look beyond the conventional dyad of donors and sovereign

recipients. Often there is at least a triadic relationship. In today’s evolving contexts of networked

enterprise and policy captive to wealthy interests, those interests can make use of the aid system to

advance their agendas and operate autonomously from national authorities and national politics.

Those interests may thus sometimes be taken as de-nationalised, responsive less to national public

institutions and more to ‘global assemblages’ (Sassen 2006) that transcend national boundaries.

Trade and Investment

That economic self-interest helps drive foreign aid has long been acknowledged, but routinely

downplayed in public discussion. Yet there is little doubt that aid has served as a camouflaged

weapon in trade wars. Since at least the 1950s, donors have deployed aid on economic battlefields,

sparking rivalry, reciprocal accusations of unfair commercial practice and successive negotiations

and re-negotiations. Yet tied aid/mixed credits (discussed below) have been merely one of many

vehicles for donors to pursue their own interests. Within a global regimes of interlocking financial

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and trade rules, aid serves as a collective lever to shift policies of recipient countries. As two senior

insiders have written,

Developing countries were told they must reduce their own tariffs if they were to reap the

benefits of engagement in the global economy. Influenced by advice from the international

financial institutions and cajoled by aid conditionality, whereby aid was extended on the

condition of trade liberalisation, many developing countries shifted their strategy to

participate more actively with the WTO (Stiglitz and Charlton 2013: 6).

With trade liberalisation as a main requirement imposed on recipients, aid has helped promote

transnational counter-flows favourable to jobs and output in donor economies. However,

systematic knowledge about returns benefitting donor countries – or rather, certain interests in

them -- is not widespread. One of the few economists regularly gauging aid’s upstream benefits

explains the knowledge gap as follows: “The paucity of research on the economic return to foreign

aid may be due to the difficulty to get hold of the relevant data. But it also reflects the political

sensitivity of the issue in donor countries: both low and high return rates may weaken the domestic

coalition in favour of foreign aid” (Carbonnier 2013: 1). That author has headed a number of Swiss

studies begun in 1994, which have shown a consistent pattern of net gains for Switzerland’s

recorded domestic output. The fifth and most recent of these studies, geared to outcomes in the

year 2010, shows that for every 100 francs in aid disbursed in the past, the Swiss GDP gained

between 129 and 151 Francs. The study attributes about 20 800 full-time jobs in Switzerland to

Swiss official aid. It further notes some multiplier effects beyond aid’s payoffs for Swiss exporters of

goods and services. Among these is spending in Switzerland by aid-based employees (for example,

an estimated 65 percent of salaries of those working overseas in aid-based jobs are eventually spent

in Switzerland) and by international agencies. Swiss aid helps non-profits grow and spend more; for

every 100 francs of official aid allocated to them, Swiss NGOs gain another 50 francs in revenue from

other sources (Carbonnier and others 2012).

Procurement and Tying

Donors’ most notorious strategies for helping themselves are in procurement of goods and services

from their own countries’ firms, and making such procurement obligatory for recipients. However

information about those matters is in short supply and may suffer deliberate distortion. As one

researcher into aid procurement put it, “donor countries continue to mislead their own citizens and

those of developing countries, by passing off what is essentially state aid to donor country firms, as a

genuine contribution to poor countries’ effective development” (Ellmers 2011: 14). Nevertheless

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veils over domestic returns to foreign aid are sometimes lifted, such as when officials publicly defend

aid as a profitable use of taxpayer money. A United States Treasury Secretary left no doubt that

multilateral development banks (MDBs) are important for American businesses when he told a US

Senate sub-committee,

The MDBs support policy changes, such as reduced tariffs in Mexico and opening up the

Indian economy, which enormously benefit U.S. producers. There are also more direct

benefits for US companies: in 1998 alone, US firms received $ 4.8 billion from contracts

arising from MDB investment and adjustment programs” (US Dept. of Treasury 2000)3.

Such moments of public candour are exceptional, however; details of domestic benefits and

beneficiaries are usually kept out of public view. Despite pledges in the post-Busan period to

promote transparency in the aid system, private sector wishes not to disclose ‘commercially

sensitive information’ continue to receive great respect, and official statements suggest little

appetite for openness about aid’s upstream realms (OECD-DAC 2012: 4 and 7). Nevertheless, some

scattered clues emerge from data on aid reported as tied or partially tied, or simply uncategorized

either way. In the year 2007, aid identified within those categories made up between 20 and 30

percent of all commitments in each of the following sectors (in order of magnitude): Economic

Infrastructure, Government & Civil Society; Social Infrastructure & Services; and Commodity,

Emergency & Food. Unsurprisingly, nearly 80 percent of donor administrative costs were tied,

partially tied or unreported (Clay and others 2009: 14). Discussion of two varieties of aid system

procurement – of services and of food – appears later in this chapter.

Promoting Donor Country Exports

Aid promotes a donor’s exports. Econometric studies show that greater bilateral aid disbursed for a

given country will increase the donor’s earnings from exports to that country, especially in the

longer run. Based on a study of OECD/DAC aid payouts and changes in exports over the period 1988-

2004, a research group based at Göttingen concludes that “the long run average return on aid for

donors’ exports is around $ 2.15 US-dollar increase in exports for every aid dollar spent.” (Martínez-

Zarzoso and others 2010: 23). The same research group finds that “aid causes exports and not vice-

versa” (Nowak-Lehmann and others 2009: 1), a conclusion echoed by others (e.g. Silva and Nelson

2012). The Dutch foreign ministry’s evaluation unit, in cooperation with the Göttingen research

group, estimates conservatively that for the period 1999-2009, the total value of Dutch exports to

the average recipient country grew in the range of €0,70 to €0,90 for every Euro the Netherlands

paid out for that recipient (IOB 2014). Aid spending by certain donors, notably France, UK, Japan, US

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and Australia, shows exceptionally strong causal associations with growth of exports to their

respective aid recipients (Berthélemy 2006).

These kinds of studies are based on aggregate data. Probing the specific, disaggregated make-up of

donor exports and the interests benefited remains a challenge. A study of OECD/DAC donors for

example goes no further than to indicate “economic infrastructure and production” sectors as main

beneficiaries of aid-induced export drives (Barthel and others 2013). Somewhat more revealing are

studies of domestic economic impacts of respectively German and of Dutch foreign aid. In the

German study, covering the period 1978-2011, aid-induced exports yielded at least 150 000

additional jobs in German enterprises, distributed among three sectors: non-electrical machinery, 64

percent; electrical equipment, 26 percent; and transport equipment, 10 percent of additional jobs

(Martínez-Zarzoso and others 2013: 25). The Dutch study estimates that bilateral aid yielded about

13 000 jobs in the Netherlands in 2008 alone, of which 30 percent fell in the category

“manufacturing & recycling” and 39 percent in “services” (IOB 2014: 56). Meanwhile in the Dutch

case as in other donor economies, the multiplier effects and resulting institutional impacts of aid

spending, whether via businesses, universities or NGOs, remain to be mapped and analysed.

Trade promotion programmes, an aid approach long pursued by the USA and Japan but gaining more

practitioners after 2005, have indeed increased trade between donor and recipient economies.

During the period 1990-2010 in the cases of Asia and Latin America, aid-for-trade’s chief

beneficiaries were exporting interests in recipient countries. But in the case of Sub-Saharan Africa,

where such programmes were supposed to have the most significance for recipients, aid-for-trade

helped boost sales of exports from donors to recipients (Hühne and others 2013).

Aid-for-trade programmes commonly target transportation, energy supply and telecommunication

sectors in recipient lands. These programmes have been especially rewarding for large corporations,

especially mineral exporting firms, as they can take advantage of improved infrastructure and

resulting lowered costs (Cali and te Velde 2010). While types of beneficiaries may be detected in

broad terms, published knowledge of specific interests benefitted by aid-for-trade is scarce. Some

characteristics of those interests emerge, however, from probes of aid-for-trade’s interplay with

global value chains (GVCs). The field is clouded by a policy climate that:

ignores the fact that global production is often governed by oligopolistic lead firms or first -

tier supplier firms which have for years successfully generated rents from their

subcontracting relations. The asymmetry of market structures across GVCs creates the

possibility that rents from lower trade costs resulting from Aid for Trade will flow to these

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lead firms instead of those enterprises, households and communities that are its intended

recipients (Mayer and Milberg 2013:15).

Aid serves as a tactical tool in the strategic politics of trade. Seeking advantages over their

commercial competitors, donors deploy their aid to gain Preferential Trade Agreements with

recipient countries. These comprehensive trade deals can be highly lucrative for interests in richer

countries (such as investors pushing for tax breaks; see Eurodad 2014), but they pose political risks

in targeted lower-income places, as they introduce policy changes (trade liberalization, privatization,

enforcement of intellectual property rights obligations, etc.) often costly to organised domestic

interests. Donors usually manage to overcome resistance, however, by using official aid as “side

payments” in order to make the deals more palatable to domestic leaderships (Baccini and

Urpelainen 2012).

Meanwhile donor action to curb the market powers of Western trade cartels vis-à-vis lower income

countries has not been vigorous (Gal 2009). Yet rents extracted from those countries thanks to this

‘market failure’ are among the largest drains on their resources. Indeed by one estimate,

overcharges stemming from cartel arrangements may surpass total Western aid for the countries

victimized (Sokol 2007: 53-54). Especially lucrative are monopolies for pharmaceutical companies

created by the intellectual property rights regime, discussed later in this chapter.

A global regime to combat price-fixing and other commercial malfeasance is only slowly being built.

Its scaffolding is made weak by secrecy rules, fragmentary legislation and the under-resourcing of

means to investigate and share information, according to a recent survey of international antitrust

enforcement cooperation (OECD Competition Committee 2013). Yet despite their potential impacts

– lower prices for consumers and producers, lower inequality, improved public finances – the

curbing of international anticompetitive practices is hard to detect on IFI or donor policy agendas. It

has yet to appear in their statements about ‘policy coherence for development’. This state-of-play is

consistent with findings by a Sussex University professor of economics regarding competition policy

and poverty reduction. He concludes: “controlling international cartels and standing up to abuses by

multinationals is very important for developing countries, but is unlikely to be promoted very

actively by developed ones” (Winters 2013: 11).

Promoting Recipient Country Exports

Boosting exports from low-income countries is another objective claimed for aid. Yet achievement of

that aim remains elusive. Indeed careful research indicates that “the net effect of aid on recipient

countries’ exports is insignificant” (Nowak-Lehmann and others 2013: 505). Reasons for this non-

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achievement are many and diverse, but the weakness of lobbies promoting aid-assisted imports is

common to most donor countries. However systematic evidence about the distribution of benefits

of aid-induced commodity exports, as others have noted (e.g., Mayer and Milberg 2013: 11), is still

scarce. The following cases are more suggestive than definitive in tracing links between aid and

recipient exports.

Donors have long sought to promote their aid recipients’ agrarian exports, both traditional crops

such as coffee and cacao, and ‘non-traditional’ commodities such as ingredients for pharmaceutical

products. But once inserted into such global commodity chains, rural producers do not necessarily

enjoy the rising incomes that advocates have projected so enthusiastically. A rigorous study of

benefits of aid-supported ‘fairtrade’ schemes in Ethiopia and Uganda, for example, detected no

substantive benefits for wage earners (Cramer and others 2014). Instead, value is routinely captured

elsewhere, mainly at high levels of commodity chains, where oligopolistic systems led by large firms

operate. Sometimes power can move down a bit toward producers; but the general trend is

upward. Coffee value chains are a case in point. A researcher surveying decades of global politics of

coffee noted swings in power balances: “producers' collective action and the resulting international

regulation of the chain led to increased levels and stability of benefits flowing back to the producing

countries. Once the coffee TNCs had consolidated their control over the consuming markets and

international regulation had collapsed, the shift of benefits away from producing countries and to

the TNCs was massive and rapid” (Talbot 2009: 104).

The export of tropical hardwoods is a further example of a commercial circuit whose benefits accrue

high on value chains, far from consumers and producers in the exporting land itself. Indeed overall

returns may be negative, given the impacts forests. In 60 low and middle-income countries in the

period 1990-2005 loss of forest cover was strongly associated with policy-based lending by the IMF

and World Bank to in those countries (Shandra and others 2011). Plausibly, hardwood export

growth is not detected in conventional aid-trade impact studies because it takes place in global value

chains that are illicit.

Coastal fisheries are yet another source of rents for rich country interests. Aid facilitates access to

them. In West African waters, aid figures in deals benefiting European industries profiting from

fisheries (Kaczynski and Fluharty 2002), while in South Pacific fishing zones it eases access for

Japanese fleets: “The Pacific island countries are heavily dependent on foreign aid, essentially

exchanging aid for cheap access to their fisheries and poorly-directed foreign direct investment”

(Petersen 2003: 3). Looming larger are rents accruing from the import of “strategic materials”

(Johansson and Pettersson 2009), especially for the hydrocarbon and nuclear power industries. A

sign of aid’s role in lubricating those industries’ access to those rents and mineral resources appears

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in the gravitation of bilateral aid toward countries with proven oil reserves; aid flows to them surged

during the fuel crisis of the 1970s and then again with special intensity after 2000 (Carbonnier and

Voicu 2014).

Foreign direct investment

Foreign direct investment (FDI) can also be highly lucrative for donor country interests, while

delivering only modest returns, and spillover effects, for countries hosting that investment. In 2011,

recorded FDI profit outflows of US$420 billion from poor to rich jurisdictions were equivalent to

about 90 percent of recorded FDI inflows in the same year (Griffiths and others 2014: 12). To what

extent does aid play a path-breaking or ‘vanguard’ role on behalf of FDI? While some studies of aid’s

interplay with FDI show ambiguous results (e.g. Donaubauer 2014), it has long been evident that the

aid system never ignores the interests of foreign investors. Under IMF leadership, austerity policies

promoted by most donors have been associated with greater FDI inflows, suggesting that aid system

policies are satisfying investor interests in general (Woo 2013). At more specific levels, a study of aid

and FDI from France, Germany, Japan, the UK and USA in the period 1990-2002 identifies Japan as a

clear case of how aid can routinely create profitable opportunities for the donor country’s private

investors. Drawing on their inside knowledge of how the Japanese system works, the researchers

write:

In practice, the Japanese government employs a number of measures to promote FDI through aid. Most notably, when Japanese aid is provided, there is close coordination between the public and private sectors through, for example, the participation of representatives of the private sector in government committees on foreign aid and exchange of personnel between aid agencies and private firms…. Such close interaction between the public and private sectors should lead to spillovers of information on the recipient country’s business environment to private firms through foreign aid, encouraging FDI. In addition, private firms can easily propose aid projects that facilitate implementation of business standards, rules, and systems specific to Japanese firms, such as kaizen. The Japanese government in fact provides technical assistance to teach such Japanese business systems and funds to transplant certification systems for management and engineering skills developed and used in Japan. Those types of aids are likely to promote Japanese FDI but not other countries’ FDI. (Kimura and Todo 2010: 492).

A parallel econometric study (Kang and others 2011) indicates that Korean official aid benefits

Korean companies in roughly the same ways as in the case of Japan.

Subsidies for FDI exemplify ways by which aid helps redistribute public resources upward to private

interests. Numerous evaluations of private sector development programmes (some of them

reviewed in Griffiths and others 2014: 25-26) confirm that many aid-subsidised private investments

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would have gone ahead anyway without public aid monies. That is, rather than adding to or

catalysing development processes, official aid for the private sector often substitutes for private

initiative. It thus serves as a covert source of rents to business interests, with no developmental

justification. Such aid measures can create occasions for corruption and other malfeasance. Yet such

possibilities, and who actually benefits from these superfluous subsidies are seldom if ever publicly

investigated and discussed.

Beyond their direct support to investors, major aid institutions have routinely used lending, technical

assistance, training and other measures to promote ‘enabling environments’ for FDI-related private

interests. In 2006, after several years of secretive preparations, the OECD launched its Policy

Framework for Investment (PFI), a set of guidelines it now describes as “the most comprehensive

and systematic approach for improving investment conditions ever developed” (OECD PFI website).

For donors, the PFI and its operations (such as country-by-country research on investment climates,

emphasising the ways public policy should meet the PFI ideal) serve to persuade recipients to adopt

stances on such matters as taxation and protection of intellectual property rights.

Policy-based lending, often accompanied by technical assistance and training, has helped to

reconfigure recipient country policies and laws, bringing them into closer alignment with foreign

investor preferences. Econometric analysis indicates that US investors, for example, respond to FDI-

friendly incentives created in countries under IMF supervision (Biglaiser and DeRouen 2010). British

aid has helped transmit the business-backed Public Finance Initiative model to Eastern Europe and

other lower-income places “in order to lay the basis for the winning of consultancy, construction and

other contracts by British firms” (Holden 2009:313). Emphasis on investment-promotion occurs

even where other matters might logically take precedence, such as in low-income fragile and

conflict-affected countries. A recent internal evaluation of the World Bank Group’s work in such

countries found that the Bank Group made “investment climate reform” geared to foreign firms a

key focus of its work. Given the World Bank Group’s neglect of job creation in those places, the

evaluators evidently saw the Group’s attentiveness to the wishes of foreign investors as lopsided

(IEG 2014). Finally, a ‘creeping securitization’ of aid, seen in conflict-prone places where investor

interests are at stake, can reflect yet another kind of support to foreign firms. European Union aid

for Niger, for example, effectively subsidizes a uranium mining venture by the French energy

company AREVA, which has faced security threats (Furness and Gänzle 2014: 9).

These measures generally deliver short-term gains to donor country interests, but their pay-offs are

usually even greater over the longer term. That result is thanks in part to contacts, force of habit and

commercial goodwill (as shown by Arvin and others 2000). New business linkages, according to an

evaluation of Belgium’s aid-supported trade promotion agency, FINEXPO, were the key outcomes for

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participating Belgian firms. The agency’s achieved this by “allowing companies to enter relatively

closed markets (where concessional loans are necessary) and improving the image of / confidence in

Belgian products companies among recipient countries’ banks and authorities” (SEC 2010: 51).

Returns on FDI from lower-income countries to rich country interests are substantial and appear to

be accelerating: “Developing countries lose a consistent and large proportion of GDP to investors

repatriating profits from their FDI investments – over 2% of total GDP since 2005 (Griffiths 2014: 20).

Donor self-interest in promoting foreign direct investment is thus evident. This might be excused if

such investment could be shown to be indisputably beneficial for poorer countries. But this is not

the case. In an interview focused on sub-Saharan Africa, the French economist Thomas Piketty

likened foreign investment to “a drug or slow poison”, pointing out that “basically no country in

history has become rich through foreign investment” (Norbrook 2014).

Trade and Investment Finance

Soft loans or credits for trade and investment are key to aid’s deployment in pursuit of commercial

ends. Disguising mercantilism in the cloak of altruism is as old as the aid system itself. In the case of

the United States, the two main official agencies for export- and investment-promotion, the U.S.

Trade and Development Agency and the Overseas Private Investment Corporation (OPIC), draw their

formal mandates from the Foreign Assistance Act of 1961. These agencies essentially subsidize

private sector interests of donor countries. They enable national firms, at little risk to their balance

sheets, to gain protected footholds in non-Western markets.

Soft loans for donor country businesses have for decades been disputed, their rules negotiated and

re-negotiated among OECD donors (Evans 2005: 108-158). Yet to identify precisely which interests

benefit from them is not straightforward. The OECD regime of export credits does not promote

transparency, nor do the cartel arrangements that influence it; on the contrary, norms of secrecy

prevail. An exhaustive review of OECD country soft loan programmes, including in-depth studies of

the Austrian, German, Danish and Dutch cases, was unable to probe specific interests served, since

crucial information about participating firms is routinely classified as secret. At best, data are

available in aggregated forms. In the period 1995-2005 those donor country businesses benefitting

from soft loans, in order of overall allocations, were in the following sectors: transport and storage,

water supply and sanitation, energy generation and supply, and health (Fritz and others 2014: 168).

If undertaken, scans of industry associations and chambers of industry and commerce might reveal

more. Those lobbies’ routine interaction with aid institutions and parliaments is vigorous and

sustained (Fritz and others 2014: passim.)

13

Mixing aid and commerce has long been standard practice among OECD-DAC donors. Will ‘new

donors’ behave any differently? In their aid programmes, might they pursue paths of South-South

solidarity ahead of trade interests? Econometric research indicates that in the case of India, at least,

the answer is negative. “Commercial and political self-interests dominate India’s aid allocation”,

according to researchers, who identify India’s oil, water engineering and transport sectors as

favoured by India’s foreign aid programmes (Fuchs and Vadlamannati 2013: 4).

Financial Sector

Banks and other financial sector actors based in core countries have long enjoyed priority treatment

from the top of the foreign aid system. The International Financial Institutions (IFIs) have worked

assiduously to facilitate and ‘lock in’ Western business access to markets for financial services in

non-core countries. Routine but well-financed lobbying, but also the availability of ‘revolving doors’

and personal networks in the public-private careers of senior IFI staff have helped bring about the

capture of the ‘commanding heights’ of the foreign aid system – and indeed much of the global

financial architecture – by financial sector interests.

IFI leverage has operated, often imperfectly, through the conditions those institutions attach to their

loans, as well as through their shaping of policy formulas, knowledge and information. Those

conditions have helped the penetration into aid recipient countries by foreign banks, insurance

companies and shadow banking operations. The rapid multiplication of stock markets in peripheral

countries and the explosive growth of portfolio investment flows – developments welcomed by

institutional investors in core countries – had enthusiastic backing from the top of the aid system.

An econometric study of the period 1980-2005 leaves no room for doubt that “IMF and World Bank

aid was a conduit for the creation of stock markets” (Weber and others 2009: 1341). Yet their

developmental relevance is anything but self-evident, given than portfolio flows fuel boom-and-bust

cycles, felt especially in lower-middle income economies such as that of Nigeria.

A priority condition of IFI and some bilateral donor aid was the requirement that recipients relax

controls over and taxation of capital movements. In both direct and in signalling roles, donors have

helped to market loans and credits; their sentinels were quick to identify any country thought to be

‘under-borrowed’. Not content with seeing money flow only to the ‘real sector’, they helped

introduce ‘financialized’ circuits. Portfolio investments, manifested in ‘hot money’ circuits and the

‘carry trade’ were favoured. To promote ever-milder tax climates to attract those monies, the

European Union was careful to insert clauses in its ‘Post-Lomé’ trade agreements, whose acceptance

by poorer countries has been a condition of full access to EU aid (EU Observer 2014).

14

Resulting policy shifts created vulnerabilities to ever-greater financial volatility, capital flight, more

borrowing (at higher cost), exchange rate fluctuations and the crowding out of longer-term

development strategies by short-term expedients to cope with crisis. That architecture did nothing

to shield poorer people from shocks such as swings in food, energy and commodity prices. Today

the weight of evidence, although disputed by some, suggests that IFI-led financial liberalisation has

failed to benefit most people in recipient countries, especially the poorer ones (Rodrik and

Subramanian, 2009; Stockhammer, 2013). Indeed in foreign aid’s main theatre, Sub-Saharan Africa,

its impacts have been called “unambiguously adverse” (Rashid 2013: 321; see also Ahmed 2013).

Yet apart from acknowledgement that these policies promote ‘uphill’ flows of finance, there is little

systematic analysis and discussion of just where flows have gone, and of just who has been

benefited.

The aid system’s own banks, together with wealthy interests who buy and sell their shares or bonds,

have themselves been important beneficiaries of aid. Led by the World Bank, multilateral

development banks have built up massive dollar reserves in order to reassure holders of their bonds

and to satisfy financial market players generally. Borrowing countries have had to foot the bill; they

must pay higher interest rates as a consequence of bank reserve accumulation efforts (Humphrey

2014:621). Financial institutions benefit in other ways. The US General Accounting Office once

reported with satisfaction about World Bank funds, “the temporarily idle balances waiting to be

disbursed are often invested in US capital markets” (US GAO 1986: 19).

From the outset in the 1980s, IMF austerity programmes helped make reserve accumulation an

imperative for recipient countries. As a result, much aid was displaced away from public goods such

as health services and toward reserves held abroad (Stuckler and others 2011). After 2000, the

growth of those countries’ reserves accelerated. The average sub-Saharan African country under IMF

supervision put 37 percent of its increased aid into foreign reserves; IMF-supervised countries

outside Africa put even larger proportions incoming of aid into foreign reserves (IEO 2007).

America’s expanding current account deficits were “a natural concomitant of the demand for

increased reserves” (Stiglitz and Greenwald 2010: 5). Held mainly in US dollars, reserves benefitted

Finance, Insurance, Real Estate (so-called FIRE) interests in the USA, including semi-public and

private players in housing finance. Estimated to run into many tens of billions of dollars, reserves

contributed to financial bubbles that began to burst in 2007, triggering a global financial crisis. Yet

this mismanagement and resulting losses seem not to have reduced the influence of bankers and

shadow bankers over Western political classes. For the top of the aid system, both before and

throughout the ensuing crisis, the primacy of financial sector interests has been apparent: “Most of

15

the crises occurred in developing countries, with the IMF and the G-7 bailing out Western banks that

had made bad lending decisions—but with the burden of the bailout falling on the citizens of the

developing countries” (Stiglitz and Greenwald 2010: 21).

Moves to protect financial sector interests against loss can be seen where loaned monies are not

being repaid and default risks are rising. A study focused on the post-Cold War period (Morrison

2011), found a distinct pattern of ‘defensive lending’ by the International Development Association

(IDA), the World Bank’s soft loan branch, in order to cover loans by the Bank’s non-concessional

branch, the International Bank for Reconstruction and Development (IBRD). A subsequent study

focused on the longer period 1982-2008 (Marchesi and Missale 2013), found “no evidence of

defensive lending but strong evidence of defensive granting”, including debt relief, by both

multilateral and bilateral creditors. In short, there is abundant evidence that major foreign aid

bodies operate at virtually no risk to themselves and their bond-holders.

Official donor engagement with banks and other financial intermediaries has accelerated in the 21st

century. The emphasis on the financial sector as such is apparent in the strategies of key multilateral

financial institutions, notably the European Investment Bank and the International Finance

Corporation (IFC) of the World Bank Group, but also bilateral Development Finance Institutions

(DFIs) such as CDC (UK), FMO (Netherlands), KFW (Germany) and Swedfund (Sweden). These semi-

public aid agencies have expanded their ‘arm’s length’ practices of financing international and

domestic private banks and other financial intermediaries, which are in turn supposed to boost local

enterprise by easing their access to credit. However, a recent evaluation of DFI activities in five sub-

Saharan African countries found almost no evidence to back that supposition. ‘Arm’s length’ aid

from DFIs indeed benefits financial intermediaries, but delivers little for local enterprises, whose

limited access to credit justifies the aid (Horus Development Finance 2014). These development

banks talk about their concern for small enterprise, yet in practice they favour large investors; close

to 40 percent of firms they support are listed on stock exchanges. They also prefer private equity

deals, geared to deliver rapid returns to private interests (Bretton Woods Project 2014:11; Romero

2014).

These studies reveal reasons to doubt claims of DFI ‘additionality’, that is, that their aid provides

goods and services that market actors would not have provided without aid. The Dutch foreign

ministry’s evaluation unit also expresses scepticism about such claims. Its study (in Dutch) of aid for

private sector development in the period 2005-2012 concludes that the half-dozen semi-official

Dutch business-oriented aid agencies cannot show that their subsidies are the sine qua non for

16

private sector growth, in part because those agencies pay little or no attention to additionality in the

first place. The study refers to many instances where Dutch-funded private sector activities would

have gone ahead anyway without any official aid subsidy (IOB 2013).

The Netherlands is not alone in subsidizing financial and other firms through public-private

partnerships and aid ‘blending’. The European Court of Auditors probed 30 projects in low-income

countries that ‘blended’ public monies of the European Investment Bank, among other European

DFIs, with that of private investors. The Court of Auditors found that in half the cases “there was no

convincing analysis” to justify grant aid, given the likelihood that “the investments would also have

been made without the grant” (ECA 2014:20). In presenting this damning report (whose main

conclusions the European Commission dismissed), a member of the Court of Auditors called

attention to risks of further waste as state-supported DFIs become “sponsors” of private firms, and

of added debt burdens for recipient countries.

Evidently, official aid in the name of private sector development is riddled with rents. That category

of aid effectively promotes rent-seeking by large firms, particularly those acting as financial

intermediaries. In addition, revenues applied or generated by DFI activities are unlikely to be fairly

taxed or otherwise ploughed back into local economies. That is because DFIs and the financial

intermediaries they support make routine use of offshore financial centres and secrecy jurisdictions.

As a result, potential tax revenues get siphoned off, while obligation to repay the external loans

remain. Beyond the redistribution of wealth, such mechanisms create occasions for corruption and

legal impunity (Murphy 2010). Routinely attracting attention is Britain’s CDC, whose dealings on

behalf of its shareholders and self-dealings by its management are regularly pilloried in public media

(e.g. Brooks 2010). Few aid donors have moved to stop their DFIs or other aid agencies from using

secrecy jurisdictions (Eurodad 2013).

Meanwhile donors today continue to ratchet up their development lending and provision of credit in

support of their national exporting firms. They show no signs of abandoning defensive practices that

assure creditors of virtually risk-free operations. As some have predicted (for example, Dijkstra

2003), moral hazard keeps manifesting itself as loaned monies get allocated adversely. This includes

capital flight departing via ‘revolving doors’ to secrecy jurisdictions, thus nullifying the loans’

developmental purposes. From Africa in the period 1970-2004, within a year of a loan’s receipt, an

estimated 50 cents fled for every dollar borrowed. To expose this and other kinds of collusion

between elites and financial sector actors, there are calls for formal ‘debt audits’. As advocated

officially by Ecuador and Tunisia, such audits would establish the legitimacy of debts to donors and

others, and would identify those debts that could be repudiated under international law as ‘odious’

17

(Boyce and Ndikumana 2012). Among donors, Norway stands alone in having commissioned an

independent audit of its official export credits. It has also pioneered research and international

pressure to curb secrecy jurisdictions and related mechanisms, such as transfer pricing, that

effectively legalize transfers of substantial amounts of money from poor to rich.

Other Upstream Branches

In light of the findings sketched in foregoing sections, the following paragraphs briefly note research

about upstream flows in specific sectors, including the aid industry itself.

Procurement of Services

Donor country interests loom large where aid is furnished in the form of technical assistance.

Procurement of services from big companies, especially consulting firms, figures prominently in aid

from several western donors, notably the USA. To design and operate aid projects, the US routinely

hires firms such as the Development Alternatives Group, Creative Associates and Partnership for

Supply Chain Management. These large companies stand out in a large field of competing and

cartelized, profit and not-for-profit organisations whose combined annual turnover runs into the

tens of billions of dollars, Euros and Yen. Paradigms of privatization, private sector development and

‘tertiarization’ (Kleibl 2013) in donor countries, exemplified in New Public Management thinking,

have all helped to drive aid industry demand for services of global consulting firms. For auditing and

other financial services, there are the world’s ‘big four’ firms: Deloitte Touche Tohmatsu,

PricewaterhouseCoopers, KPMG and Ernst & Young, about which questions of integrity and of

market dominance continue to be posed, and to be met with vigorous pushback.

Developed and promoted from the top of the aid system, the privatization of state-owned firms and

public services and the introduction of public expenditure management systems have furnished the

West’s consultancy industry with lucrative sources of income (Hilary 2004; Fyson 2009). Donors may

report consultancy services as untied, yet in practice those services are tied de facto. Clay and

others (2009: 55-56) found that at least three-fifths of all contracted bilateral spending went to

donor country firms. Some curbs on rent-seeking may be present, however; a review of USAID and

State Department contracts from 2000 to 2010, a period of rapid growth in demand for services

from private suppliers, described the market as “a very competitive environment” (Sanders and

others 2011: 57). Yet in these procurement systems, whether with or without tendering procedures,

domestic firms enjoy major advantages. These can stem directly from aid policy such as up-scaled

projects and programme dimensions or from rules such as high-threshold technical or language

18

criteria to qualify for tendering. A seasoned observer describes outcomes in the British case as

follows:

This means that DFID and other donors are now in the hands of very large consultancy

companies who charge higher rates per day, but can afford to cover the expenses required

in advance. This has inflated many of the rates paid, and led to the dominance of the sector

by very large companies, including financial multinationals with no previous experience

except in auditing. These companies are driven by profits and are more concerned about

meeting the last letter of their TOR rather than achieving lasting social change (Pratt 2013).

Other advantages can stem from asymmetric access to information, such as “knowledge of the

donor’s procedures, the focus of the project and in early informal access to information about the

contract” (Clay and others 2009: 44). Mergers and cartel-like arrangements are not unknown. Some

contexts are ripe rent-seeking. Unregulated micro-systems of personal contacts and ‘revolving

doors’ between consultancy firms and official aid bodies, a phenomenon termed “inside aiding” in

Norway (Tvedt 2007: 629), make such rent-seeking a low-risk, high-return pursuit. Similarly in the

UK, Pratt (2013) sees consultancy companies “being set up by former DFID staff with comfortable

links to their ex-colleagues. Hence they faced very little competition at this level”. Further

anecdotal information from seasoned aid industry insiders is available in memoires, consulting

industry histories such as Barclay (2013), and in blogs such as ‘Dev Balls’4.

Procurement of Food Aid and Shipment Services

For certain businesses and non-profits, food aid brings substantial benefits, some of them bearing

the hallmarks of economic rents. In the USA, these interests have been termed an “iron triangle”:

agribusiness, shipping companies and charity-focused NGOs. For many decades this bloc has held

sway over US law and policy on food aid. Among the achievements of the ‘iron triangle’ beyond

maintaining US dominance as a source of food aid, is to have helped advance market penetration

and expanded market shares for such agribusiness giants as Cargill and Archer Daniels Midland; and

to have added to profits of such corporations as Waterman Steamship and Liberty Maritime (Clapp

2009). A major study of food aid concludes:

For agricultural and maritime interests, profits are the bottom line. … [T]hey fare well under

existing food aid policies. Food aid procurement regulations create effective market power

that generates considerable economic gains for these constituencies. Producers and

processors earn a premium on sales of commodities into the food aid distribution system,

while shippers receive significant mark-ups on food aid cargo. The consequence of these

19

premia is the abysmally poor financial efficiency of food aid as a means of providing overseas

development and humanitarian assistance (Barrett and Maxwell, 2007: 87-88).

Aid furnishes rents to shipping interests. In the United States in fiscal year 2006, agricultural cargo

preference (ACP) “requirements for USDA and USAID programs cost US taxpayers roughly $140

million, a 46 percent markup over competitive freight costs” (Bageant and others 2010: 2). However

this mandatory preference for American merchant shippers, from which US taxation might be

expected to recoup at least some revenues, is frustrated by global secrecy jurisdictions. That is

because “US flag vessels are commonly held within complex structures of nested holding companies,

many of them privately held, such that we conclusively pinned down the ultimate ownership of less

than half the vessels in the ACP program” (Bageant and others 2010: 3).

Intellectual Property

Since the 1990s aid donors have joined in efforts to protect intellectual property rights (IPR).

Guiding these efforts is a major policy beacon: the WTO’s multilateral agreement on Trade Related

Aspects of Intellectual Property Rights (TRIPS). Following enactment in 1994, it has become a major

fulcrum for leveraging change and extracting rents. Since 2000, adherence to TRIPS has been

compulsory for all states in the WTO; by 2016 even the Least Developed Countries should have

made their laws TRIPS-compliant. That agreement came about in the wake of vigorous lobbying by a

private sector coalition, the Intellectual Property Committee, composed of 13 large Western-based

multinational corporations. Follow-up pressure has come from such bodies as the International

Intellectual Property Alliance (representing copyright industries) and the Pharmaceutical Research

and Manufacturers of America (PhRMA). Those lobbies pursue their work on many fronts, including

the ‘capture’ of public authorities tasked with issuing patents and other types of intellectual

property. Thanks to IPR legal constructions, market power and corruption, the pharmaceutical

industry’s profits have been substantial. Rents are high and rent-seeking incentivized in large part

because, in the words of a specialist,

Despite the very real differences between all the types of intellectual property—copyright,

patent, and trademark—contained in the intellectual property enforcement agenda’s ‘big

tent’ approach, there is one thing that Kate Spade bags, copyrighted software, games, music

and movies, and patented pharmaceuticals do have in common, and that is high prices (Sell

2010: 459).

Current and prospective flows derived from IPR have proven to be unexpectedly large. In the year

2009, high-income countries – mainly the United States, but also Germany, Japan, France and the UK

– received about US$177 billion in royalty and license fees (up from US$71 billion in 1999)5, while

20

low and middle income countries paid out about US$32 billion in royalty and license fees (up from

about US$7 billion in 1999). Globally, throughout the period 1999-2009, firms based in rich

countries took in about 98 percent of all intellectual property receipts (Athreye and Yang 2011: 29).

Aid donors promote these flows. They help finance recipient government agencies tasked with

enforcing IPR provisions, thus advancing the core business of collecting fees on behalf of the patent

and copyright holders. Donors promote bilateral and regional trade agreements reinforcing IPR

imperatives. They disseminate policy guidelines, such as the OECD Policy Framework for Investment,

noted above, which stress obligations to pay for patents and other kinds of intellectual property.

Some donors promote the IPR regime with focused operations, such as USAID’s Intellectual Property

Rights Assistance Project.

Resistance to the intellectual property regime has surfaced in regard to essential medicines and their

rational use, from the governments of India and Brazil and from activist organisations such as

Médecins Sans Frontières and Health Action International. To cope with these rebukes and

setbacks, some donors have tried to show less affinity with the agendas of pharmaceutical

corporations. In 2008 the British government launched the Medicines Transparency Alliance (MeTA)

to reduce corruption and unfair dealings by pharmaceutical firms. Although a World Health

Organisation report, The World Medicines Situation 2011 (Kaplan and Mathers 2011), notes progress

in gaining donor pledges to procure and distribute cheap, generic medicines such as through pooled

regional procurement, problems in transparency and efficiency persist. Positive measures are

detectable but on balance the aid system has reinforced the global intellectual property regime. In

an allusion to dispossession of common property in an especially predatory phase of capitalism,

some have termed this regime the “new enclosures” (May 2013).

Agricultural Research

Advertised as one of the triumphs of foreign aid for poor countries, ‘green revolution’ technologies

from the International Maize and Wheat Improvement Center (CIMMYT) and the International Rice

Research Institute (IRRI) have also benefitted business interests in donor countries. Researchers in

the 1990s “documented evidence that benefits from wheat and rice research conducted in

international centers have yielded major payoffs in Australia and the United States … as well as in

less-developed countries. These studies have shown huge rates of return to this investment…”

(Alston and others 1998:1060). Specifically, those returns have been estimated as follows:

[B]y the early 1990s, about one-fifth of the total US wheat acreage was sown to varieties

with CIMMYT ancestry, and around 73% of the total US rice acreage was sown to varieties

21

with IRRI ancestry. This meant, for example, that US wheat producers gained at least $3.4

billion over 1970-93 from CIMMYT wheat variety improvements, which implies a ratio of

benefits to costs borne by the United States of at least 40:1 (Alston and others 1998: 1069,

footnote 5).

As green revolution technologies have interlocked with food aid, a perverse circuitry is detectable:

aid-subsidized bio-engineering has boosted output of crops (such as rice) in rich countries whose aid-

subsidized export to West Africa, Haiti and other scenes of crop output collapse have left many

small-scale producers impoverished and Western agribusinesses enriched. These may illustrate

what one writer termed a “Gresham’s law of subsidies” whereby “the ‘good’ subsidies will over time

be politically outmanoeuvred by the established groups to redirect public spending to themselves”

(Steenblik 2006: 25).

Health

One of the most common claims made for foreign aid is that it has helped improve the health of

people in low-income places. Yet aid’s pay-offs for health in high-income places are never forgotten.

Two kinds of aid for health with positive returns for donor countries are disease-specific research

and medical education. Win-win outcomes in both cases are not impossible, but surveys of donor

spending indicate that aid to combat specific diseases is geared more to health risks in rich countries

than to health risks in low-income countries.

Contrary to the idea that disease specific development aid for health is allocated with the

intention of alleviating suffering for the greatest number of people in recipient countries, these

results … suggest that bilateral disease specific development aid is intended to alleviate the

threats to populations within the donor state. Indeed, of all of the variables included in the

model, only those representing donors' interests are significant even when controlling for other

indicators that typically influence foreign aid decisions. (Steele 2011: 73)

In a review of donor funding priorities for communicable diseases, another researcher poses the

following hypotheses:

A strong correspondence between industrialized world disease burden and donor funding for

control of developing world diseases may indicate the influence of provider interests, as donors

may be targeting diseases that industrialized world political elites believe to be threats to their

own citizens or that pharmaceutical companies perceive to be sources of potential drug sales

profit (Shiffman 2006: 415).

22

A survey of UK-funded research on communicable diseases shows gross disproportions, with most

research failing to match the global ‘burden of disease’, that is, death and disability caused by

gastrointestinal infections, antimicrobial resistance, trachoma and other diseases affecting people

(especially children and the elderly) in poorer countries (Smith 2012).

Foreign aid often steers policy for the education of health professionals, sometimes subsidizing that

education. Yet many expensively-trained health workers end up migrating to richer countries, in

some cases thanks to official recruitment drives by health authorities. A recent study of medical

‘brain gain’ concludes, “Many wealthy destination countries, which also train fewer doctors than are

required, depend on immigrant doctors to make up the shortfall. In this way developing countries

are effectively paying to train staff who then support the health services of developed countries”

(Mills and others 2011: 2). The study focused on nearly 20 000 doctors from nine sub-Saharan

African countries working in Australia, Canada, UK and the USA. It estimated that together those rich

countries have gained about US$4.55 billion, mainly through savings in education costs borne by

others. Health services of the United Kingdom, which take on the largest number of doctors, have

been major beneficiaries. Major differences in salaries and working conditions, borne of global

inequalities and failure to generate decent jobs, explain these flows of skilled labour from poorer to

richer lands, including ‘south-south’ circuits such as Philippine nurses working in Saudi Arabia and

Gulf States. In the face of these transfers of vital human resources, leadership of the aid system has

no response commensurate with the problem. Indeed some do not see it as a problem at all; for

example, a World Bank education policy unit portrays the out-migration of young women from the

Philippines, mainly as care providers, as an indicator of Bank programme success (World Bank 2012).

As long as major aid institutions keep applauding this drain of skilled persons while at the same time

failing to address the push factors – mainly the lack of decent employment on home ground -- then

these kinds of human resource losses will persist.

Higher Education

Since the 1960s, aid-supported scholarship programmes have brought hundreds of thousands of

young people from Asia, Africa and Latin America to universities and other tertiary-level institutions

in rich countries. Although self-financing is today the norm, aid’s role remains important. Of the

US$5.4 billion OECD donors disbursed annually in the period 2006-2011 for tertiary education, about

three-quarters paid for tuition and living costs of students in donor countries. Canada, France,

Germany and Japan accounted for 81 percent of this spending (UNESCO 2014: 134). In the USA,

where foreign aid ‘primed the pump’ decades ago by way of scholarship programmes for Africans

23

and for Latin Americans, overseas students have become important sources of income for

universities and local economies. Aid-based scholarships support many of them. Monitoring of

foreign students’ economic impacts in the USA reveals that “819,644 international students and

their families at universities and colleges across the country supported 313,000 jobs and contributed

$24 billion to the U.S. economy during the 2012-2013 academic year” (NAFSA 2014). Because

monies for scholarships and imputed student costs are spent almost entirely in donor countries, calls

are now heard to stop counting them as official foreign aid. Who ultimately benefits from

scholarship programmes is hard to ascertain in the absence of adequate follow-up studies of ex-

scholarship holders (Mawer 2014). Indicators thought to be unambiguous, such as proportions of

former scholarship holders who return home, are muddied by the fact of ‘institutional brain drain’,

that is, employment in the service of transnational businesses or international agencies. These

matters, and related issues such as the bonding of returnees to public service in order to gain some

social or collective returns, remain to be probed in depth.

Conclusion

There can be little doubt that helping oneself – that is, providing benefits to interests within one’s

own political economy – is for donors a central pursuit. Indeed it may a central purpose. In contrast

to its many elusive quests in its downstream realms, foreign aid has met considerable success in its

upstream realms. Payoffs for interests based in donor countries help explain why the foreign aid

system continues to grow despite its lack of success in promoting far better-known goals such as

equitable growth and good governance. The foreign aid system continues moving its policies, goods

and services downstream toward poorer places while at the same time casting an indulgent eye on

large amounts of money and other resources moving ‘upstream’ to richer places.

Aid system institutions are often aligned, if not in active collusion with interests gaining from these

counter-flows. This is a paradox, but also no great surprise in a context where leading architects of

both the world’s financial system and the foreign aid system share the same institutional addresses

and circulate in the same social and political spheres. In the realm of study and debate, another

paradox presents itself: despite a scholarly consensus that donor self-interest is of primary

importance in any understanding of what drives the aid system, research about the workings and

specific beneficiaries of that self-interest does not begin to match its primacy. This asymmetry helps

shape attention such that rich-to-poor flows remain floodlit in the foreground while the far larger

poor-to-rich flows remain poorly-lit or disappear altogether.

24

Spurred by these anomalies and gaps in knowledge, this article has reviewed some findings of

scholars, evaluators and policy activists about upstream realms of foreign aid and how the primacy

of donor country interests are pursued or protected there. As an overview it is highly incomplete.

Systematic and precise information about those realms is not abundant. Much of it is withheld from

the public under various pretexts such as commercial sensitivity. Often, perhaps, it simply escapes

attention and is not assembled. Together with the many questions about the aid system’s interplay

with counterflows, upward redistribution, rent-seeking and hidden subsidization of the rich , the

politics of who knows what, when and how about aid’s upstream realms are in themselves an

intriguing terrain awaiting fresh scholarly work.

25

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1 Among those calling attention to these information and knowledge deficits are Powers, Leblang and Tierney (2010), and Lancaster (2006).2 For adherents to neoclassical theory this was a puzzling anomaly. After publication of an American economist’s article (Lucas 1990) it became known as the “Lucas Paradox”. Prefiguring this discussion had been scholarship about periphery-to-centre flows, chiefly by a number of 20th century international political economists (see Bichler and Nitzan 2012).3 Earlier, a US General Accounting Office report (US GAO 1995) on U.S. firms' market share of business with MDBs was likewise bullish about what aid yields for US business. Since 1995, no comparable report on US business gains from the aid system seems to have been published.4 Dev Balls (blog) available at: http://devballs.yolasite.com/page-3.php 5 Receipts from intellectual property rights have exceeded official projections. The World Bank estimated that if TRIPS were fully implemented, transfers of IP rents to firms headquartered in major OECD countries for patents, royalties, licenses and other intellectual property would amount to about $41 billion annually, in US dollars of the year 2000 (World Bank 2002: 133).