22/02/2017

What does determine the allocation of foreign aid to the MENA countries ?

By Chloé de Radzitzky

Introduction

The aim of foreign aid is to help developing countries facing issues affecting their economic development. However, this article argues that in the case of the allocation of aid in the region of the Middle East and North Africa (MENA), the needs of recipient’s countries for economic development do not seem to be the most important determinant. As the Department for International Development has said, MENA receives more aid per poor person compared to other regions,  »but poverty reduction is not the primary motivation for many donors’ assistance » (DFID 2003: 11). Several studies emphasizes that economic, ideological, and political interests of donors determine the allocation of aid in this strategically important region.

 

To critically discuss which factors influence the allocation of aid in MENA, this paper will first look at a definition of foreign aid, how it can help developing countries to economically develop themselves, as well as at three explanatory models that identify the major motives determining allocation. The second section will look at different donors: the European countries, the United States, the IMF and the World Bank and the Arab donors as well as their principal motivations in the allocation of aid to MENA.  It will argue that, the fulfillment of donors economical, ideological and political interests (especially the political ones) is a more important determinant in the allocation of aid than the recipient’s needs.

 

Theoretical model on aid-allocation

 

This essay will start with the definition of aid which has been proposed, by the Development Assistance Committee (DAC). In this one, aid consists of the  » transfer abroad of public resources on concessional terms (with at least a 25 percent grant element), a significant objective of which is to bring about an improvement in economic, political and social conditions in the developing countries » (Lancaster, 2000:9). It can be bilateral or multilateral.

 

Several models have been developed in order to assess which factors influence the allocation of aid among countries. The most popular are the « recipient’s needs model » and the « Donor’s interests model » as well as the « hybrid model ». This paper will focus on these models for the reason that they encapsulate the more prominent factors described by the literature. Others have been developed but the word count does not allow us to develop them all.

 

To understand the recipient’s needs model, it is necessary to discover how developing countries can benefit from aid. The DAC definition emphasizes the importance of aid in contributing to the economic development of the poorest countries. It has been argued that aid can promote economic development because it can help to bridge two gaps. A country can experience a first gap in savings and investment because of its low level of capital. Consequently, foreign aid can help to bridge those problems. (Harrigan, 2002). The second gap that foreign aid can bridge concerns the foreign exchange gap.  It occurs when  »domestic production is not a perfect substitute for foreign production »  (Harrigan, 2002 :87). Those developing countries then need to import technology and materials from abroad; and need foreign currency.

 

Following the idea that foreign aid can help economic development, the recipient’s need model is based on the belief that it exists in an implicit social contract on the international sphere arguing that the world should be made more equitable (Riddell, 2007). Aid is then allocated for this model according to the recipient’s needs to bridge the two gaps described above. Factors such as the level of poverty of the recipient country, the size of its population, ect,  would illustrate recipient’s need.

 

The second model is based on the idea that the donor’s interests  mainly influence the allocation of aid. The general purpose is to create a favorable climate for the donor country. It can use aid as a tool for foreign policy, or to influence political ties with developing countries (Hjertholm and White, 2000); or as a way to promote an ideology (such as democratic or neoliberal values). Aid can also be used to satisfy donor’s economic interests. They will select countries that are the  »most likely to absorb donor exports and investment » (Harrigan, 2011 :4). This is the principle of tied aid’ : the recipient has to use part of the fund to purchase goods produced by the donor country, sometimes at an uncompetitive price. Finally, aid might be more easily granted if the receiving country has special diplomatic bond with the donor, for instance, the existence of a colonial past.

 

The hybrid model is born from criticisms that have been expressed toward the donor interests/recipient needs model. Since each of them would only respectively take in consideration the donor interests or  the recipient’s needs variables, the hybrid model represents a merger between them. It argues that both factors intervene in the allocation of aid; and that only the prevalence of one or the others vary among the different cases. The conclusions of this article will be taken from analyses using this kind of model.

 

Donors

This paper will demonstrate that donor’s interests influence the allocation of help more than the recipient’s need. Firstly, it will look at the Western donors including the IMF and the World Bank, the United States (US) and the European donors. Then, it will look at the allocation of aid by Arab donors.

 

According to Maizels and Nissanke (in Hjertholm and White, 2000), the allocation of help in the case of multilateral agencies can be explained by the « recipient’s needs » model. It is due to the fact that these agencies are less governed by political considerations than the bilateral one (Rodrik in Hjertholm and White, 2000). However, IMF and World bank aid was not only motivated  by recipient’s need. The two Washington based agencies are often influenced by the interests (economical and political and ideological) of  »their major Western shareholders, especially the USA » (Harrigan and El-Said, 2011:10).

 

Harrigan and El-Said have used the Probit model to account the weight of recipient’s need factors and the donors interests in the allocation of IMF and World Bank aid to MENA. They take into account three independent variables (economic need, US influence and domestic political factors) to explain the dependent one (obtention of a loan from the IMF). The test depicted that apart from the cases of Egypt (1976) and Jordan (1989), there was little proof illustrating recipient’s need for such programs. Ideological and political factors, on the opposite, seem to have an important impact on the distribution of the IMF and World Bank loans.

 

Concerning the ideological factors, it is important to remember that IMF and World Bank loans  are attached to the commitment of the recipient country to some conditions reflecting the spirit of the Washington consensus (Riddell, 2007). Hence, as Harrigan and Wang say that the the conditions attached to IMF and World  Bank  loans through the stabilization and structural adjustment programs  »are often based on pro-globalisation and market liberalization ideologies » (Harrigan and Wang, 2011:4). They are then non likely to help countries which would need support if they refused to implement neoliberal reforms. However Jordan, which was considered as a model in the implementation of reforms did not entirely complied to them, proving than their might be more important factors  playing in aid flows to the MENA countries.

 

The most important determinant of the IMF and the World Bank to the region is the donor’s interests in the region, especially by the political one. The results of the Probit model has depicted foreign policy considerations and their similarities with US interests, like the signature of a peace treaty with Israel, influence the probabilities for a country to obtain a loan from IMF. For instance Egypt received help in 1987 from those agencies while its macroeconomic variables seemed to be stable. Another case is Jordan : the IMF aid was suspended during the 1990-1991 because the country did not want to openly support the US led coalition against Iraq (Harrigan and El-Said, 2009).

 

 »Washington desire to support pro-Western regime » (Harrigan and El-Said, 2006 :446) is another kind of political (and ideological) influence. For instance, Algeria was considered hostile and communist by Western countries during the 1970s and 1980s (El-Said and Harrigan, 2009). While the country started a process of liberalization that was quiet similar to the one advocated by the Washington based agencies in the 1980s, it barely received assistance. It finally received aid from the IMF in 1989 when the macroeconomic indicators showed that it was not living in a particular time of crisis compared to the last five years (Harrigan and El-Said, 2009). The beginning of World Bank and IMF aid coincides with the entry of Algeria in Arab Maghreb Union. This group of countries aimed to have good relations with European Union, as well as to prevent the advancement of radical Islam (Harrigan and El-Said, 2009). This change occurred at a time were the American discourse about security in the MENA began to shift from the fear of Communism to the threat of radical Islam.

 

Having looked at the aid coming from Western dominated multilateral agencies, this paper will look at the factors deterring the allocation of aid by the US and the European countries.  European donors are influenced by three main factors which are historical (presence of a colonial past or not), political and economical. Even if the Barcelona process emphazises some ideological goals, such as the establishment “of peace and stability based on respect for human rights and democracy” (DFID 2003: 11), it is possible to notice a particular importance of the economic interests. Hence, »In nearly all of the European donor assistance, though less in the case of Scandinavian countries, commercial considerations play a major role » (Nonneman, 1988 :84). The objective is to create a dependency for some commodities produced by the donor country, to have a better access on the local market, as well as to secure their access to oil. For instance France, the biggest European donor, tends to favor transfers to Algeria, Tunisia and Morocco for economical, historical and political reasons (Harrigan, 2011). The political reasons can be understood in terms of migration. European countries might be reluctant to open the borders and economic aid can be seen as a more acceptable response to that kind of political problem. It helped to reduce incentive for migration by tackling economic problems at the source (Reynaert, 2011). All those interests can be found in the Barcelona agreement of 1995 which established a European-Mediterranean partnership. It is interesting to see that the multilateral aid coming from the European Union has increased since its signature (Harrigan, 2011).

 

Concerning US aid to MENA, the economical and political motives are determinant. Ideological factors do also matter but they are so connected to the political interest that this article will consider them together. From the economic perspective, aid can be tied to some conditions that lead to economical benefits for the US.  Hence, for Nonneman,  »The domestic economic interests- higher market prices and quasi-grantee sales for US famers; reduced storage costs for US government, penetration of US firms into local market- are obvious  » (1988 :85).

 

Political interests is the greater determinant concerning the flow of US aid. For Harrigan and Wang, they have an  even bigger impact in the allocation than for the other Western donors (2011). It favors for instance, countries who would accept to have diplomatic relations with Israel. The purpose of aid doubles : First of all, the US tends to allocate help in the Middle East in order to maintain friendly regimes in power. Secondly,  in the case of Egypt, Morocco, Jordan, and Tunisia,  US aid had been granted to give them an incentive to orientate their foreign policy in accordance to the US interests (Nonneman,1988). During the Cold War, the United States gave aid to countries that would participate in the containment of Communism in the region; but at the end of it, the new threat became the spread of the radical Islam.

 

For instance Egypt started receiving aid from the US once they turned away from the Soviet Union and became one of the favored destination after the signature of the peace treaty with Israel. The country has also received money for having participated and supported the US coalition against Iraq in 1990. As it has been developed in the part explaining the IMF and World Bank determinants for aid, Egypt has had some trouble in 1976, but the situation has improved and does not justify these automatical transfers. Another example concerns the suspension of the US aid to Jordan in 1978 because the king did not want tot sign a peace treaty with Israel. Once King Hussein signed it in 1994, Jordan became one of the largest US aid recipient (Harrigan and El-Said, 2009).

 

The prevalence of US interests over the recipient’s needs in its allocation of aid to MENA has been verified by the results of the model elaborated by Harrigan and Wang. It takes into account measures that allow the evaluation of recipients needs (such as the size of its population, its GDP per capita…) and benefit from help as well as the  » rate of return to the donor from the impact on beneficiary j. This is determined by economic, political and other linkages between donor and recipient » (Harrigan and Wang, 2011:17). The equation illustrates that compared to other donors, the US are particularly influenced by its interests. Harrigan and Wang have given  particular attention to the MENA countries since the US is concerned with the War on Terror. They conclude that

 »donor interest […] has a strong positive effect in the allocation of US aid to Israel and Jordan, two of the most strategically important US allies in the region, and a strong negative effect on US aid allocation to Iran, Sudan, and Yemen, countries traditionally hostile to US foreign policy in the region. » (2011:31).

 

The first part of this second section assessed that donor’s interests play a major role concerning the allocation of Western aid to the MENA region. Shihata has argued that Arab donors where less motivated by their own interests than the Western donors (in Neumayar, 2004). Neumayar uses Heckman’s estimator to look at the motives of the allocation of Arab aid. Its work emphasizes that the poor, Islamic and the Arab countries are more likely to receive Arab aid. The fact that poverty is an important factor in their distribution of aid indicates that recipient’s needs are taken in account at the decision moment. The fact that Nonneman emphasizes that  »Commitment to Third World development and long-term economic motives should not […]be discounted »(1988:155) while speaking about the allocation of Saudi aid is revealing. Nevertheless this analyses argues that political and ideological motivations also matter.

 

Still using the work of Neumayar, the absence or the existence of diplomatic relations with Israel is a major determinant in the allocation of the Arab aid in the MENA region. For instance Kuwait, Saudi Arabia and the United Arab Emirates have favored countries like Egypt, Syria and Jordan during the 1967 war (Nonneman, 1988). Arab aid to Egypt stopped after the Camp David Agreement. Another instance indicqting Israel as a factor is the fact that Kuwait kept giving aid to Syria because of its borders with Israel, despite the fact that the Kuwaiti Foreign Minister had declared that aid to that country would be cut because of its support to Iran during the 1980s.

 

Another important political factor influencing aid allocation is the similarity with Saudi foreign policy (similar votes at the UN). Saudi Arabia is the most important arab donor and,  according to Nonneman, two factors influencing the allocation of its aid  are ideological and political. This is illustrated by the fact that the Yemen Arab Republic has started to receive Saudi aid during the 1970s when they turned away from the Soviet block for security and ideological motives (Nonneman,1988). Saudi Arabia wanted to keep them away from the USSR as well as protect them from the threat caused by South-Yemen.

 

Neumayar concludes by saying that the donor’s interests intervene (for both bilateral and multilateral aid) during the selection of potential recipients and the amount that will be granted, while the recipient’s need only account in the selection process.

 

Conclusion

The purpose of this analysis was to demonstrate that, even if it plays a role, recipient’s needs is not the major factor determining the allocation of aid in the MENA region. Compare to other poorer region of the world, MENA is receiving a high level of aid flows and the biggest recipients are lower-middle income countries as well as upper-middle income countries. As the hybrid model teaches, both recipient’s needs and donors interests determine the allocation of aid, even in the MENA region . However,  donors political interests  always plays a major role.

 

The IMF and the World Bank are significantly influenced by the political interests of the western shareholders, especially by US ones, despite the general belief that multilateral agencies are less influenced by donors interests than the bilateral one. The US, for its part, is the donor which is influenced the most by its foreign policy concerns. Those ones have vary over time: it made transfer first to countries who would resist to the Soviet influence during the Cold war before to switch toward the countries containing radical Islam. The existence of a peace treaty with Israel also strongly influence allocation of US aid. The European donors are less influenced by their interest than the US, but this component remains an essential determinant in the allocation of their aid to MENA. The claim saying that Arab donors pay more attention to the need of their neighbor has been challenged by the influence of political factors. Hence Arab donors are more likely to allocate aid to country having a similar foreign policy. The position toward the conflict between Israel and Palestine is also determinant. To conclude, political interests of the donor is the main factor determining the allocation of aid in MENA.

 

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