How Effective Is International Aid and Assistance? The Rise of Debt Traps

Yves here. The post starts with the still-twisting-in-the-wind “aid” package to Ukraine, and reviews high profile past cases where international aid did not prevent, and in many cases enabled, crippling debt loads. Hard to think this is not a bug but a feature.

By John P. Ruehl, an Australian-American journalist living in Washington, D.C., and a world affairs correspondent for the Independent Media Institute. He is a contributing editor to Strategic Policy and a contributor to several other foreign affairs publications. His book, Budget Superpower: How Russia Challenges the West With an Economy Smaller Than Texas, was published in December 2022. Produced by Economy for All, a project of the Independent Media Institute

On February 1, 2024, Ukraine secured a 50 billion aid package from the European Union (EU), aimed at bolstering its defense capabilities and facilitating the country’s reconstruction. Dozens of other countries, along with Western-dominated multilateral lenders like the International Monetary Foundation (IMF) and the World Bank, as well as private investors, have contributed billions of dollars in aid to Ukraine since Russia’s invasion in 2022. Billions more are pledged.

While international support has been crucial for Ukraine, Kyiv will be expected to pay much of this back. Approximately half the global population now live in countries where debt payments exceed spending on education and healthcare. While wealthier countries can manage debt sustainably, poorer countries face challenges in avoiding the detrimental effects of excessive debt, leading to stunted development.

Ukraine remains in desperate need of foreign financial assistance, humanitarian aid, infrastructure development, military support, and technical capacity building. However, quiet caution has emerged among various international supporters. Ukraine’s capacity to implement Western-backed political, economic, and corruption reforms, expel Russian forces, and repay loans is being questioned. The hesitation underscores the challenges of coordinating a diverse array of donors over time.

The EU has been the primary source of financial assistance for Ukraine, and the recent approval of its latest aid package followed months of debates between member states. The IMF also provided a $15.6 billion loan in 2023, marking the first IMF loan awarded to a country at war. Foreign investors have meanwhile increasingly sought guarantees and insurance for investing in Ukraine, with the Ukrainian government working with the World Bank to implement such policies.

The U.S. has provided the bulk of Ukraines foreign military aid, but the most recent $60 billion in military assistance has been stalled for months due to opposition in Congress. Republican support for Ukraine has declined markedly since the early days of the war, leading proponents of the pending military aid package to emphasize its benefits for U.S. companies, job creation, and reducing the maintenance costs of holding or destroying U.S. weapons stockpiles.

However, this line of thinking has ignited pushback from across the political spectrum. Republican politicians have become increasingly critical of providing Ukraine with a “blank check,” while accusations of potential money laundering have been raised. The lack of a long-term, bipartisan strategy toward Ukraine from Washington has left defense contractors hesitant to increase arms production, already under scrutiny for price-gouging during increased demand.

Adding to this reluctance is concern in the U.S. over establishing long-term outlets for defense contractors. For instance, since 1979, the U.S. has given Egypt roughly $50 billion in military aid, including fighter jets, helicopters, tanks, armored personnel carriers, surveillance aircraft, counterterrorism training, and border security assistance. After Congress canceled half of the annual payment of $1.2 billion to Egypt in 2013 following a military-led coup (as well as $250 million in annual economic aid), U.S. officials noted that the U.S. government would have to pay for the missed shipment and the costs of winding down the programs. Aid to Egypt was later fully reinstated in 2015,

Despite the resumption of military aid to Egypt, persistent questions surround the allocation of these funds. It has helped prevent Egypt from becoming adversarial, but Cairo has nevertheless grown closer to China and Russiasince 2013. U.S. weapons manufacturers maintain lucrative export opportunities, but this assistance has also helped enrich and strengthen Egypt’s military and has empowered it to absorb other forms of foreign aid. The IMFs conditions on giving Egypt a $3 billion loan in 2023 hinged on the military government’s commitment to political and economic reform, but this remains unlikely.

Egypt, with a debt of $11 billion, stands as the IMFs second-largest debtor country, following Argentina ($32 billion) and ahead of Ukraine ($9 billion). The World Bank counts India ($39 billion), Indonesia ($19 billion), and Pakistan ($18 billion) as its top debtors. The combined global debt owed to the IMF and World Bank tops $300 billion, with their global reach having expanded significantly from their original focus on rebuilding Europe after World War II.

These organizations began large-scale crisis intervention in developing countries in the early 1980s to address their foreign debt challenges. As the U.S. raised interest rates to combat inflation, dollar-denominated loans caused significant defaults and debt restructuring, particularly across Latin America.

The IMF and the World Bank advocated for privatization of industries and export-driven industrialization, eliminating trade barriers and granting foreign corporations easier access to raw materials. Beginning in the 1980s, conditions associated with Structural Adjustment Programs (SAPs) saw economic growth return, but aid recipients became more market-dependent and reliant on the IMF and World Bank, while wages remained low through devalued currencies.

The end of the Cold War and the establishment of the modern global financial system saw credit-hungry governments shifting their reliance on countries and multilateral organizations to embrace private lenders, including private equity and venture capital.

The impact of broad lending strategies became evident in Pakistan’s loans in the Private Power Policy in 1994. The World Bank took a dominant role in the project, which provided guarantees, alongside the Asian Development Bank and the Export-Import Bank of Japan. The Benazir Bhutto government in Pakistan offered sovereign guarantees, attracting considerable foreign investment with assured, repatriable dollar-pegged returns.

However, changes in Pakistani governments altered the long-term political direction of the project, while local independent power producers (IPPs) engaged in price-gouging and an oversupply, plunging the country into debt. The World Bank was criticized, alongside Pakistani governments and IPPs, for a lack of oversight and the misappropriation of funds. Today, Pakistan faces acute energy shortages and its debt level has surged.

Pakistan can also rely on other sources of funding. Saudi lending to Pakistan goes back to the 1970s while China entered Pakistan’s debt market in the 2000s. Over the next few years, Pakistan will need to issue major repayments to Saudi Arabia, China, and private investors, which has led to standoffs over the issuing of additional loans and deciding whose, along with Western loans, get repaid first. This has raised concerns about the sustainability and strategic wisdom of Pakistan’s growing reliance on external debt.

China’s assistance to countries often serves as a solution for its surplus labor, savings, and the industrial capabilities of its state-owned enterprises. Chinese steel, cement, coal, and other sectors accumulated enormous capacity, and China’s Belt and Road Initiative (BRI) enables China to export these resources. However, this often results in contracts for projects being awarded to Chinese companies, marginalizing local industry and intensifying dependency, while minerals and natural resources are extracted and exported to China. Despite debates over the outcome of some projects, they have proven effective in enhancing Chinese influence and garnering favor from foreign governments and populations.

Diverse sources of lending have also converged in the 21st century in what were labeled “frontier markets.” In the 2010s, investor interest surged in frontier bonds, where developing countries issued debt in their own currency, diverging from the commonly used “Eurobonds,” often denominated in U.S. dollars. Frontier bonds shielded developing countries from volatile currency swings, allowing them to adjust payment terms beyond the jurisdiction of London and New York courts, and provided the option to manage debt through currency printing.

With enticing low debt-to-GDP ratios and the allure of high-yield securities, Wall Street encouraged these countries to borrow. The debt of African countries surged as their governments issued sovereign bonds in prominent global financial hubs like London and New York, coupled with a rise in lending from Chinese state-owned banks. Despite their self-assumed roles as global financial watchdogs, the IMF and World Bank also encouraged these loans and failed to sound the alarm over this growing source of debt, focusing more on foreign currency-issued debt. By 2015, African governments received $32 billion in loans but were paying $18 billion in interestper year, with debt continuing to rise.

Mozambique’s 2016 default unfolded as substantial amounts of previously undisclosed debt were exposed, highlighting the foreign links of the country’s declining financial situation and a lack of oversight in dealings with private investors. In a prominent case from 2013 and 2014, a senior Credit Suisse banker signed an $850 million loan agreement with French Lebanese businessman Iskandar Safa. The loan was designated for the construction of a coastal patrol force and tuna fishing fleet in Mozambique. A total of $17 million in fees were granted to banks, and the remaining $836 million was funneled to Abu Dhabi Mar, a company linked to the Safa family and based in the United Arab Emirates. The Credit Suisse banker left the bank shortly after the deals, and found employment under Safa.

This controversy left Mozambique burdened with incomplete economic projects and outstanding loans. Following the takeover of Credit Suisse by UBS, the institution has paid hundreds of millions of dollars in settlements and debt forgiveness. Two hedge funds, VR Capital Group and Farallon Capital Partners, also initiated lawsuits against both Credit Suisse and the Mozambican government for their roles in the scheme. Furthermore, the Russian investment bank TVB Capital paid over $6 million to the Securities and Exchange Commission for its involvement, while Mozambiquecontinues to seek $3 billion in compensation from Safa.

The effects of COVID-19 on supply chains and spending had already weakened Africa’s financial stability, and the Russian invasion of Ukraine in 2022 further exacerbated the situation. The U.S. quickly raised interest rates, prompting international investors to begin divesting from local-currency debt in favor of dollar-denominated bonds. This led to the depreciation of local currencies and escalated debt repayment costs as inflation soared.

These effects have been felt across Africa. A 2023 meeting in New York between Nigerias top financial officials and Western lenders highlighted Nigerias financial challenges. In 2022, the countrys debt repayments surpassed its revenue by almost $1 billion, necessitating further borrowing to meet existing payment obligations for Africas largest economy.

IMF funding has been partially reliant on the Nigerian governments commitment to removing 50-year fuel subsidies in favor of spending on energy and transportation infrastructure, education, and healthcare. The measures have put further pressure on inflation and a soaring cost of living, leading to significant nationwide protests. Historically, local corruption, coupled with that of Western energy firms such as Halliburton, the involvement of politicians like Dick Cheney, and complicity of banks like HSBC, alongside the expanding influence of China, has led to the concentration of much of Nigerias resource wealth flowing to a select few beneficiaries.

Multilateral lenders like the IMF have had successful interventions in the past, including South Korea (1997), Mexico (1995), and working with the World Bank, the Inter-American Development Bank, and the Development Bank of Latin America (CAF) in Colombia from 1999-2001. China has also successfully bailed out several countries in recent years.

But it is crucial to note that in these instances, the beneficiary countries were already established allies and trade partners, enjoying privileged access to markets and previous subsidies that bolstered their industries. Additionally, criticism has been levied at the conditionality of the assistance, which increased the influence of lending countries and institutions on local economies.

The overall effectiveness of assistance to Ukraine will be difficult to determine so long as its conflict remains ongoing, and reconstruction is delayed. But attention has been brought to Ukraines rising debt being used as leverage by investors to increase privatization and liberalization across the economy. Ukraines increasing difficulty in securing funding and assistance only highlights the lack of a long-term strategy by lenders and the fragility of the country

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  1. CA

    February 6, 2021

    The Chinese ‘Debt Trap’ Is a Myth
    The narrative wrongfully portrays both Beijing and the developing countries it deals with.

    China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they can’t afford and that will yield few benefits, all with the end goal of Beijing eventually taking control of these assets from its struggling borrowers. As states around the world pile on debt to combat the coronavirus pandemic and bolster flagging economies, fears of such possible seizures have only amplified.

    Seen this way, China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb…

    Deborah Brautigam is Bernard L. Schwartz Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University. Meg Rithmire is F. Warren McFarlan Associate Professor at Harvard Business School.

    1. CA

      December 6, 2019

      A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme
      By Deborah Brautigam

      A meme is an idea that spreads from person to person within a culture, often with the aim of conveying a particular phenomenon, theme or meaning. On 23 January 2017, a Chinese debt-trap diplomacy meme was born in a think tank in northern India and was furthered by a paper written by two Harvard University graduate students who called it Chinese ‘debt book diplomacy’. The student paper was enthusiastically cited by The Guardian and The New York Times and other major media outlets as academic proof of China’s nefarious intentions. The meme began to take deep root in Washington, DC, and ricocheted beyond Delhi to Japan, all along the Beltway and again into The New York Times and beyond. Later, it was amplified, it was thundered by a US Secretary of State, it walked quietly into intelligence circles, it hovered in the US Congress and it settled in the Pentagon. All these people became very worried about this idea, about this meme. By November 2018, a Google web search generated 1,990,000 results in 0.52 seconds. It was beginning to solidify as firm conventional wisdom and to be accepted as a deep historical truth…

      1. JonnyJames

        Yes, it all fits together perfectly. The Guardian and NYT: good for laughs. Ol’ Kruggie is doing a helluva job as mouthpiece of oligarchy as well. Who are we to dispute the newspaper “of record” and a Nobel prize holder? (snicker)

        Meanwhile the US govt. openly funds and supports genocide. But China/Russia are “brutal autocracies” “communist dictatorship” blah blah blah. Michael “Fat Mike” Pompeo, Mafia boss, wanted to put a hit out on Julian Assange, but it would have been too obvious. He will be extradited and die in a US prison instead.

  2. Feral Finster

    In the case of Ukraine, nobody seriously believes it can pay or will ever pay. The aid was packaged as “loans” in order to make the big numbers easier to sell.

    1. CA

      Ukraine from 1988 through 2022 struggled economically, and had lost about 40% of its real per capita GDP. Real per capita GDP in 2022 was only $12,886. By contrast per capita GDP for Georgia was $22.357.

      August 4, 2014

      Real per capita Gross Domestic Product for Georgia and Ukraine, 1988-2022

      (Percent change)

      August 4, 2014

      Real per capita Gross Domestic Product for Georgia and Ukraine, 1988-2022

      (Indexed to 1988)

      1. CA


        Ukraine from 1988 through 2022 struggled economically, and had lost about 40% of its real per capita GDP. Real per capita GDP in 2022 was only $12,886. By contrast, real per capita GDP for Georgia was $20,243 in 2022…

  3. Cristobal

    Paging John Perkins.

    This is all mind boggling. It has been said that economics is really based on nothing more than faith, and the apparent faith of lenders that all these billions of dollars of loans all over the world will be repaid is touching. In addition to African countries we have Argentina? Equador? Ukraine? I have been thinking of the situation of Ukraine lately since I am among those who think that the country will no longer have the potentially productive resources those loans may have been based on. The assets that were sold or pledged will also belong to someone else. What effect will the eventual defeat and probable dismemberment of that country have on its creditors? If a bunch of liars loans in the US nearly brought down the house in ´08, what might be the effect of this default? Admitidly I know next to nothing about the no doube immense size of international finance, but I wonder if these coming defaults would be too small to matter – or not? From the article above, it all looks like a house of cards. Like Alice in Wonderland, if we can continue to believe in the impossible it will all be ok.

  4. JonnyJames

    Definitely a feature, that’s for sure. All of this rhymes almost perfectly with the historical pattern.
    Having read a lot of Michael Hudson, this is all more financial imperialism and dollar hegemony and as mentioned already, John Perkins’ work describes this as well.

    Also the myth of Chinese debt traps, Hudson has also talked and written about that..

    The author here calls IMF “successful interventions”. Success for whom exactly?
    He does admit who the beneficiaries are, but does not go into much detail on the larger context.

    I thought “lending” money to war-torn countries like Ukraine violated IMF rules? How naive of me, what am I thinking? They changed the rules just for Ukraine, how convenient.

  5. Froghole

    Unable to generate sufficient income for pension funds in low or slow growth economies in the stagnating West? Stuck with defined benefit obligations payable to entitled boomers under generous contracts of employment negotiated in the 1970s or 1980s? Worried that your investors will withdraw from your fund if you don’t post above-average returns? The solution is simple: lend cheaply to developing nations at variable rates of interest in USD using contracts that are subject to your law and jurisdiction, and watch the cash flow in. Also cream a portion of the profits for yourself. And if anyone at home starts talking about the need to resolve (i.e., reduce or cancel) these debts in the name of some silly idea like ‘justice’ or ‘equity’, or if your developing nation raises the prospect of re-scheduling or default, threaten to take them to court to enforce the debts and hold out for as long as possible until they buckle. They will in the end. They almost always do. Moreover, why should their problem become yours or that of the pensioners you have to keep in clover?

    There has to be a better way.

  6. CA

    Ethiopia is a naturally landlocked country of 120 million, but among other critically important projects Ethiopia was finally opened to the ocean in 2017 and the tangible and psychological effects were profound from the beginning:

    February 7, 2017

    Joyous Africans Take to the Rails, With China’s Help

    DJIBOUTI — The 10:24 a.m. train out of Djibouti’s capital drew some of the biggest names in the Horn of Africa last month. Serenaded by a chorus of tribal singers, the crush of African leaders, European diplomats and pop icons climbed the stairs of the newly built train station and merrily jostled their way into the pristine, air-conditioned carriages making their inaugural run.

    “It is indeed a historic moment, a pride for our nations and peoples,” said Hailemariam Desalegn, the prime minister of Ethiopia, shortly before the train — the first electric, transnational railway in Africa — headed toward Addis Ababa, the Ethiopian capital. “This line will change the social and economic landscape of our two countries.”

    But perhaps the biggest star of the day was China, which designed the system, supplied the trains and imported hundreds of engineers for the six years it took to plan and build the 466-mile line. And the $4 billion cost? Chinese banks provided nearly all the financing…

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