Aid for Power in New Cold War

Jonah here. As the article below describes, in recent years, there has been a lack of follow through on Western promises of aid to the developing world. Now, China is stepping into the breach, raising the prospect of a new front in the global conflict between East and West.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website


SYDNEY and KUALA LUMPUR, Jul 12 2022 (IPS) – Long a means for powerful nations to influence developing countries, development finance has gained renewed significance in the new Cold War. Unlike during the US-Soviet Cold War, the rivalry now is between mixed market capitalist systems.

Development Aid Rivalry

After reneging repeatedly on development aid and climate finance promises, the G7 big rich nations dutifully lined up behind US President Biden’s Partnership for Global Infrastructure and Investment (PGII) at their 2022 Summit in Schloss Elmau, Germany.

With a $200bn US commitment, the G7 promised to mobilize $600bn in public and private funds for infrastructure investments in developing countries to compete with China’s multitrillion dollar Belt and Road Initiative (BRI).

The White House denounces BRI, claiming the PGII offers “values driven, high-quality, and sustainable infrastructure”. Hence, G7 funding is more likely to have strings attached, e.g., taking sides in the new Cold War.

Chinese foreign ministry spokesman emphasized, “China continues to welcome all initiatives to promote global infrastructure development”, but insisted China is “opposed to pushing forward geopolitical calculations under the pretext of infrastructure construction or smearing the Belt and Road Initiative”.

US National Security Priority

At the 2021 G7 Summit, Biden had unveiled a similar Build Back Better World (B3W) initiative, insisting it would define the G7 alternative to China’s BRI. Based on his domestic Build Back Better (BBB) programme, B3W was soon ‘dead in the water’ when the Senate rejected BBB.

The White House’s claim that with the B3W, the “United States is rallying the world’s democracies to deliver for our people, meet the world’s biggest challenges, and demonstrate our shared values” has also been dropped from PGII.

With few B3W details forthcoming, the European Union (EU) launched its own Global Gateway for developing countries in December 2021, promising €300bn in infrastructure investments by 2027.

At the EU-African Union Summit in February 2022, the EU announced €150bn financing for the Africa-Europe Investment Package, half the Global Gateway budget.

EU leaders have touted their Global Gateway, suggesting G7 initiatives should be not only complementary, but also mutually reinforcing. But the EU’s African priority is not necessarily shared by other G7 members.

EU funding of €135bn will be from the European Fund for Sustainable Development. The UK Clean Green Initiative, from the 2021 Glasgow Climate Summit, and Japan’s $65bn for regional connectivity may also not be additional.

Acknowledging scepticism about how much is new money, German Chancellor Olaf Scholz urged G7 members to present their pledges consistently to allay doubts about double-counting and the low grants share viz loans.

When the PGII was announced to replace the B3W, it “created significant confusion”. Making clear its purpose, the White House unequivocally asserted PGII will “advance U.S. national security”.

Far-fetched, risky, conditional

The G7 also urges using public money to leverage private sector funds. But such initiatives have previously failed to mobilize significant private funding – hardly inspiring hope of meeting the trillion-dollar financing gap.

The Economist has found blended finance – mixing public, charitable and private money – “starry-eyed” and “struggling to take off”. Even the International Monetary Fund (IMF) and World Bank warn public-private partnerships (PPPs) incur contingent fiscal risks.

Worse, PPPs distort national priorities, favour private investors and worsen debt crises. They have also not improved equity of access, reduced poverty or enhanced sustainability.

Developing country debt crises typically involve commercial loans or private sector money. For example, the 1980s’ Latin American debt crises were triggered by US Fed interest rate hikes to kill inflation.

Private sector loans usually involve higher interest rates and shorter repayment periods than loans from governments and multilateral development banks. Unsurprisingly, they lack equitable restructuring or refinancing mechanisms.

Ignoring yet another UN resolution, powerful nations disregard developing countries’ appeals for fair and orderly multilateral sovereign debt restructuring arrangements. Similarly, the West refuses to fix unfair trade, tax and other rules disadvantaging poorer countries.

Trust Deficit

Over half a century ago, rich nations promised 0.7% of their gross national income (GNI) as development aid. But total overseas development assistance (ODA) from rich Organization for Economic Development and Cooperation (OECD) members has barely exceeded half the promised amount.

Worse, the share has actually declined from 0.54% in 1961, with only five nations consistently meeting their 0.7% commitment in many years. Oxfam estimated 50 years of unkept promises meant a $5.7 trillion aid shortfall by 2020!

At the 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking $50bn yearly for Africa. But actual delivery has been woefully short, with no transparent reporting or accountability.

Most development aid is neither transparent nor predictable. After some earlier progress in untying, aid is increasingly being ‘tied’ again – requiring recipients to implement donor projects or to buy from donor country suppliers – compromising effectiveness.

The US ranked lowest among the G7, giving only 0.18% in 2021. To make things worse, US aid effectiveness is worst among the world’s 27 wealthiest nations. Clearly, besides aid volume shortfalls, quality is also at issue.

The Syrian refugee crisis and Covid-19 pandemic have provided some recent pretexts to cut aid. Some powerful countries have turned to ‘creative accounting’, e.g., counting refugee settlement and ‘peace-keeping’ military operations costs as ODA.

Unsurprisingly, the UN Deputy Secretary-General is “deeply troubled over recent decisions and proposals to markedly cut” ODA to service Ukraine war impacts on refugees.

Controversies over what climate finance is ‘new and additional’ to ODA have not been resolved since the 1992 adoption of the UN Framework Convention on Climate Change at the Rio Earth Summit.

G7 countries also fell far short of rich countries’ 2009 pledge to annually give $100bn in climate finance until 2020 to help developing countries adapt to and mitigate global warming.

The OECD’s reported $79.6bn in climate finance in 2019 was the highest ever. But OECD estimates are much disputed – e.g., for double counting and including non-concessional commercial loans, ‘rolled-over’ loans and private finance.

Cooperation, Not Conflict

Although China is new to development finance, it is now among the world’s biggest development financiers. Following broken promises and duplicity, even betrayal, China’s significance has increased as OECD donor funding declined relatively.

China is now a bigger player in international development finance than the world’s six major multilateral financial institutions together. Many developing countries have few options but to engage with, if not rely on, China.

Undoubtedly, there are justifiable concerns over China’s development finance and practices. These have included adverse environmental impacts, poor transparency and a high share of commercial loans – even if at concessional rates.

In 2019, IMF Managing Director Christine Lagarde suggested the new BRI phase would “benefit from increased transparency, open procurement with competitive bidding, and better risk assessment in project selection”.

Lagarde approved of China’s new debt sustainability framework and green investment principles to evaluate BRI projects. She expected “BRI 2.0 … will be guided by a spirit of collaboration, transparency, and a commitment to sustainability that will serve all of its members well, both today and tomorrow”.

The new Cold War may well spur more healthy and peaceful rivalry, inadvertently improving development aid and prospects for developing countries.

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  1. Hickory

    This is in such stark contrast to the stories of The Economic Hitman, when the us really knew how to use aid as a cover for global exploitation. Now it’s like the empire doesn’t care if it maintains its power – although its desperation in Ukraine shows that it does. Hence a widespread belief that the elites in the us are so disconnected that they really are both clueless and desperate.

    I’d feel a lot better if the rulers were connected, competent and cruel – at least there’d be lesss risk of nuclear war.

    1. JTMcPhee

      Seems like a huge amount of wealth is heading to Ukraine. Unaudited and unsecured. I wonder how much will end up in the pockets of the Hunter Biden set, let alone into the retirement fund of Zelensky and his gang. The current demand from Zel is $9 billion a month for the “operating fund” of the Ukie government. That is on top of hundreds of billions in weapons and training and unaccounted cash. That $9 billion a month is twice the visible ANNUAL “aid” to Israel.

      Not sure about how using Ukraine as a fire hose to spread looted loot from a pretty much spent “Combined (sic) West” to favored players constitutes “desperation to maintain power.” More like the looters know the jig is about up, and they are grabbing the silverware and artwork on their way to their private islands.

      1. Tom Stone

        At least 25% of the “Aid” is being skimmed off the top,at the height of the Vietnam war half of the goods shipped there were stolen off the docks.
        Multiple ship loads,daily.
        Take a look at a pic of the man in charge of procurement for Ukraine if you want to see corruption personified.
        I wonder if any of those stingers will make it home and be used before the midterms?

  2. The Rev Kev

    Looking at the record over the past few decades, I am not sure what the western countries can offer the global south for example. More IMF loans? More destructive demands of those countries? If the IMF had never demanded that countries destroy their own ability to feed themselves with their own crops for example, a lot of them would be in a far better condition to deal with what is coming down the road. Countries like the US, Australia, etc. are running around the South Pacific right now, talking about the South Pacific family but from what I have seen, these very same countries were happy to see them undeveloped and in desperate need to not only control them but to get cheap workers from them as well – until they are swallowed by the waves. It is only because that China came knocking that they are willing to offer those countries anything at all.

  3. David

    The weakness of this argument, of course, is the built-in assumption, evidently shared by the author, that ODA has been effective in the past, and there should be more of it. But there’s very little evidence that that’s true, or, if you prefer, there’s very little objective basis for measuring success or failure in the first place. There’s a large literature that questions whether ODA has even been effective, and, as Ha-Joon Chang and others have pointed out, actual cases of genuine economic growth and development in history rarely depend on foreign aid.

    ODA was originally seen as enlightened self-interest: helping newly-independent states develop would create larger markets and boost trade. But since the end of the Cold War, it’s become increasingly ethereal and normative, and increasingly unrelated to the needs of ordinary people . Rather, it’s become an enormous, self-sustaining, inward-looking, and fundamentally corrupt system for transferring public money through networks of consultancies, agencies, independent “experts”, specialised journals, and local and international NGOs, often to little purpose that anyone on the ground can see. The fundamental problem is that aid priorities are set by donors, because donors have to answer to their parliaments and public. So what states get is what donor want them to have. ODA is also shamelessly used as a foreign policy tool by some countries: Japan, Germany, Canada, Sweden, even Norway and Switzerland, have an outsize influence on the policies of a number of small states, because they are prepared to fund projects – as long, of course, as those projects meet their normative criteria.

    So I’m not sure we need a competition in this area between the West and China. The Chinese have many of the same disadvantages as western donors (though they are less ideological), but they also tend to be very mercenary, as large countries often are. Something like 15 years ago, after the end of the Civil War in Sudan, I was staying in a hotel in Juba, built by the Chinese. The locals were not terribly impressed with it. The quality of the construction (by a Chinese company) was poor because the work was carried out by unskilled labourers from China (criminals serving sentences according to the locals), the hotel was Chinese-owned and most of the profits went back to China. And you find this kind of thing all over Africa. In theory, Africans and others could, and probably should, try to play different donors off against each other for political advantage, but in practice a lot of governments don’t have the capability or even the motivation.

    1. JTMcPhee

      And those local governments end up being owned by oligarchs and corrupt professional politicians or warlords who have “done a Bolton” and seized raw power, then auctioned off the nation’s resources for huge bribes and slices of the action.

      My questioning would be whether any other set of behaviors, built to support a decent life for everyone, would even or ever be possible. Looks to me like the species seems to have some apoptotic process coded into its generic systems, triggered by the flash of cash, the gleam of gold, the rush of oil…

  4. Susan the other

    So if big economies must colonize themselves like bacteria, spread out and grow, what happens when the petri dish is full and pushing up the lid? Clearly economies need stimulus. All economies need demand to justify their growth. But stop. This is insane. Planet Earth cannot colonize the space around it. Earth is contained. And that should be the model. We need to curb our enthusiasm. Containment should take on a new meaning. Apply it to the universal economic imperative to limit (we need to admit to this) expansion; to create synthetic demand – because that kind of growth is both impossible and illogical. And very deadly to all life as we know it. We need a new Economic Limits Forum.

  5. Another Anon

    A friend of mine who once worked in the foreign aid business said that “foreign aid takes money from poor people in rich countries and gives it to rich people in poor countries”

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