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Development Aid: What If We Need to Re-Think the Concept?

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The COVID-19 crisis has increased the feeling of interdependence across the world. Taken together with climate issues raised by the global community at the COP26, the notion of “community of destiny” is supposed to have never been so intense.

However, at the time of calls for collective responsibility and solidarity, the distribution of vaccines has showed crucial inequalities, which questions the philanthropy of states. A failure according to a constructivist approach or an unsurprising scenario for realists.

Looking at this situation through an academic lens leads us to the concept of official development assistance (ODA). This somehow refers to the idea of “state philanthropy”, which is, of course, and without being naïve, not detached from each state’s global influence policy. Assistance is not free, either for donors or for recipients.

The concept originally comes from the Marshall Plan’s idea to re-build Europe in the wake of World War II. It has afterwards continued towards the poorest countries in the world.

Western approach to development

Western nations, represented by the OECD in the field of development assistance, assume a human rights-based approach to development. Primarily, economic development increases social mobilisation, which will then favour democratisation and human rights promotion. This systematic way of thinking development represents how most people in Western countries understand the ultimate aim and sense of development assistance. Therefore, the relationship with repudiated regimes focuses on aid rather than constructive and natural trade based on shared values. Therefore, it actually doesn’t prevent ODA to be spent in the poorest countries, also called “fragile” and sometimes “rogue” states, because of their institutional instability.

However, the development of democracy and the promotion of human rights through economic development is challenged by other development approaches. Nowadays, there are so-called “autocratic” regimes that have great conditions for sustainable economic development and growth of power in the world order. Examples include China or Singapore. Conceptually, we cannot extrapolate these cases by a special affiliation to “Asia”. They are contemporary testimonies that nuance modern theories of economic development through democratisation, which should then promote human rights as the modern Western history is presented.

Institutional capacity is one of the other approaches to development. A country must have strong and well-designed institutions to contain sustainable economic development. This capacity includes the effectiveness of decision making, accountability and the competence of institutions to lead the group.

Yet, the third approach views development through competition and bargaining between elites. Elites must reconcile to enable the group to develop as a whole. This raises the question of development in countries weakened by multi-ethnic conflicts.

These dynamics of development are parallel to the other four main theories whose angle is different: modernisation, dependency, world-systems, and globalisation. In every case, they are simply corresponding to the manner how development is heard in Western societies. Thus, foreign aid policies assume that development corresponds to the above-mentioned theories, which does not mean that it is suitable for all cultures or regions of the world, as some part of the research has pointed out. However, what if, when designing foreign aid policies, development was considered a subjective and biased notion?

Comprehensive approach: assistance shall first assume that development is not a fixed concept

Assistance as understood by the OECD must take into account other development models. However, the current problem is that the measurement grid considers criteria of social, human and cultural norms that are additional to the measurement of material development only. These additional criteria are seen as complementing the material approach. These include, for example, inclusive finance, gender equality or other struggles that some aid recipient countries are not particularly ready or willing to experience.

However, in this model, the relationship between the project parties and the beneficiary is fragile when the values promoted are not shared. The continuity of investments is therefore very limited. Rhetorically, this does not mean that a state needs to extend its values to be successful. This is often the mistake, as values-based businesses can be disrupted by regime changes, the cost of which can become enormous. Therefore, taking into account political alternations and the personalization of foreign relations by each government: an appropriate positioning on a long-term perspective must be based on humility beyond national borders. This assumption in international politics is equivalent to a wait-and-see attitude and pragmatic observation on development issues.

Nowadays, Chinese model vs. Western one

China invests massively in long-term projects, using debt as a leverage for long-term accountability and project-monitoring. Additionally, the Chinese development assistance doctrine insists on a few principles, including the unconditionality of its aid, particularly the influence over the rules. A decade ago, this approach was perceived as a “silent revolution” and it’s become of public notoriety nowadays. The Chinese pledge to contribute to an investment and trade relationship, as opposed to assistance in dealing with injustice. However, of course, when debt repayment becomes difficult, it can become a tool to take control of the strategic sector, a tool used by China, as we have already seen with the Hambantota International Port in Sri Lanka. There may be a gradual material takeover, but China does not directly interfere with values and rules, whereas these should be changed according to Western OECD-based communication. This differentiation of the Chinese approach is a mark of confidence for the counterpart.

In terms of global positioning, China is clear. None of its white papers speak of allies, but partners. Quoting one of them: “history shows that the pursuit of hegemony, alliance and confrontation and the abuse of power in international relations will induce chaos or even war.

Metaphorical comparison with giving coins to a tramp

Most of us are marked every time we see a beggar on the street. When we give, it is either because our heart calls us to do so in a powerful and free-way, or because we trust the beggar’s ability to use the money.

When we don’t give, it is somehow a sign of a lack of desperation in the ability to use a gift well (or simply of greed, of course), and we don’t try – or manage – to understand the functioning of the person in front of us.

The situation that often arises is conditional giving, with the argument that we want to be sure that our coin will be used in a virtuous way. For example, by saying: “You won’t buy alcohol with it, promise? Taking the coin anyway, he may answer “yes, I’ll do some good” to put on a brave face, but in almost all cases he will be upset by this remark. And it is likely that he will ingest this frustration by thwarting the donor’s intended use of the coin.

In this case, the bad outcome is mainly based on the hypocrisy of the donor who in fact does not give unconditionally, which then generates the frustration of the receiver and his irresponsibility.

The method used by development aid can have some of the same effects. Even if states considered ‘rogue’ are enthusiastically helped by activist countries, the feeling that the other wants to change the rules can have the counterproductive effect of rejecting them.

On the other side, Western countries work through an alliance-based model that is reflected in its development assistance policy, whose effects may be questioned.

Conversely, for private sector actors in countries in political conflict, there is often a kind of ‘reward’ for trust, proportional to the risk taken. The case of Total in Russia is a good example. Its projects show very high rates of return. Another broader picture that should be considered is the Belt and Road Initiative, whose development, based on investment rather than aid, is an example (see The Belt and Road Initiative: Towards a New World Order).

The ambiguity of foreign aid: an alternative way of influencing states with non-shared values and without a sustainable institutional relay

Continuing with the ambiguity of foreign aid, its material and reputational returns lead to a rethinking of the coherence between the official intention and the predictable effects. The question “Are we really helping others or just ourselves?” is central.

The promotion of foreign aid is often based on what each nation is and thinks it is. The OECD’s current approach is mainly to seek a global mirror of Western values, ideals and principles. In this logic, when they cannot be found, an aid relationship is established. However, this approach is analogous to the metaphor of giving a coin to a tramp, and poor countries are not tramps.

International interventionism often risks an infantilizing logic

Most commentary and research assume that it is the responsibility of the ‘rich’ to develop the ‘poor’, especially when commenting—in good faith—inequalities in inflows and outflows between rich and poor countries. When was the last time we heard anything positive from the least-developed countries? Although development assistance is tailored to each ecosystem, there is a clear focus on disability rather than capacity, which encourages migration. This approach is contradictory with the idea that each state is sovereign and responsible. Thus, there is an urgent need to defend local capacities and encourage the localism of human capital.

The issue of national responsibility must be taken into consideration. However, some elites obviously have no interest in encouraging this view when they are not themselves responsible. In this case, cooperation with the private sector and civil societies is to be preferred.

Hypothesis: development aid to pre-empt an unfavourable position vis-à-vis developing countries

Finally, it looks like ODA is a way to slight the transformation of world order that demographic dynamics announce nowadays. A way to prepare the next page is to harmonise cultures and prospects of future powers to better bargaining. This bargaining, for former colonial powers, is mainly concentrated around former colonies, as shown by the correlation between ODA volume and former colonies (for instance, see the map of ODA flows to the Arab Middle East and North Africa or Development Assistance As Leverage for Russia’s Footprint in Kyrgyzstan and Tajikistan).

While this is where donors find the most accessible added value, it is also a signal of weakness and limitation of ODA, that remains geographically in the channels of influence of each donor country. For instance, priority countries of the French ODA include Senegal, Ethiopia, Mali and Burkina Faso. Three of these are former French colonies. In its form, ODA is a useful official means of smoothing out future competition between emerging states and dominant states. In substance, it reflects unfavourable trends.

Key values needed in foreign aid policies: humility, prudence and resilience

The following recommendations can be addressed to policy-makers and development aid agencies:

1. Accept the accessibility of development through other ways than the national experience.

2. Acknowledge the cultural or community bias that affects the success of projects, and integrate it into the assistance strategy, not taking it as a risk but rather seeing where it can be leveraged.

3. Be very careful about aid that risks dividing competing communities whose common enemy is potentially the donor country. The ultimate risk is to open up opportunities for hostile rapprochement against the donor country accused of excessive profit and interference.

4. Prioritise the private sector and its metamorphic character to play on interdependence.

5. Use public-private partnerships to interweave strategic projects with economic realism.

6. Use transactional analysis (psychology-based) to put assistance to developing countries and post-colonial treatment into perspective. The damage caused by asymmetries of intent will be alleviated.

From our partner RIAC

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Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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Platform Modernisation: What the US Treasury Sanctions Review Is All About

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Image source: home.treasury.gov

The US Treasury has released an overview of its sanctions policy. It outlines key principles for making the restrictive US measures more effective. The revision of the sanctions policy was announced at the beginning of Joe Biden’s presidential term. The new review can be considered one of the results of this work. At the same time, it is difficult to find signs of qualitative changes in the US administration’s approach to sanctions in the document. Rather, it is about upgrading an existing platform.

Sanctions are understood as economic and financial restrictions that make it possible to harm the enemies of the United States, prevent or hinder their actions, and send them a clear political signal. The text reproduces the usual “behavioural” understanding of sanctions. They are viewed as a means of influencing the behaviour of foreign players whose actions threaten the security or contradict the national interests of the United States. The review also defines the institutional structure of the sanctions policy. According to the document, it includes the Treasury, the State Department, and the National Security Council. The Treasury plays the role of the leading executor of the sanctions policy, and the State Department and the NSS determine the political direction of their application, despite the fact that the State Department itself is also responsible for the implementation of a number of sanctions programmes. This line also includes the Department of Justice, which uses coercive measures against violators of the US sanctions regime.

Interestingly, the Department of Commerce is not mentioned among the institutions. The review focuses only on a specific segment of the sanctions policy that is implemented by the Treasury. However, it is the Treasury that is currently at the forefront of the application of restrictive measures. A significant part of the executive orders of the President of the United States and sanctions laws imply blocking financial sanctions in the form of an asset freeze and a ban on transactions with individuals and organisations. Decrees and laws assign the application of such measures to the Treasury in cooperation with the Department of State and the Attorney General. Therefore, the institutional link mentioned in the review reflects the spirit and letter of a significant array of US regulations concerning sanctions. The Department of Commerce and its Bureau of Industry and Security are responsible for a different segment of the sanctions policy, which does not diminish its importance. Export controls can cause a lot of trouble for individual countries and companies.

Another notable part of the review concerns possible obstacles to the effective implementation of US sanctions. These include, among other things, the efforts of the opponents of the United States to change the global financial architecture, reducing the share of the dollar in the national settlements of both opponents and some allies of the United States.

Indeed, such major powers as Russia and China have seriously considered the risks of being involved in a global American-centric financial system.

The course towards the sovereignty of national financial systems and settlements with foreign countries is largely justified by the risk of sanctions.

Russia, for example, is vigorously pursuing the development of a National Payment System, as well as a Financial Messaging System. There has been a cautious but consistent policy of reducing the share of the dollar in external settlements. China, which has much greater economic potential, is building systems of “internal and external circulation”. Even the European Union has embarked on an increase in the role of the euro, taking into account the risk of secondary sanctions from “third countries”, which are often understood between the lines as the United States.

Digital currencies and new payment technologies also pose a threat to the effectiveness of sanctions. Moreover, here the players can be both large powers and many other states and non-state structures. It is interesting that digital currencies at a certain stage may present a common challenge to the United States, Russia, China, the EU and a number of other countries. After all, they can be used not only to circumvent sanctions, but also, for example, to finance terrorism or in money laundering. However, the review does not mention such common interests.

The text does propose measures to modernise the sanctions policy. The first one is to build sanctions into the broader context of US foreign policy. Sanctions are not important in and of themselves, but as part of a broader palette of policy instruments. The second measure is to strengthen interdepartmental coordination in the application of sanctions in parallel with increased coordination of US sanctions with the actions of American allies. The third measure is a more accurate calibration of sanctions in order to avoid humanitarian damage, as well as damage to American business. The fourth measure is to improve the enforceability and clarity of the sanctions policy. Here we can talk about both the legal uncertainty of some decrees and laws, and about an adequate understanding of the sanctions programmes on the part of business. Finally, fifth is the improvement and development of the Treasury-based sanctions apparatus, including investments in technology, staff training and infrastructure.

All these measures can hardly be called new. Experts have long recommended the use of sanctions in combination with other instruments, as well as improved inter-agency coordination. The coordination of sanctions with allies has escalated due to a number of unilateral steps taken by the Trump Administration, including withdrawal from the Iranian nuclear deal or sanctions against Nord Stream 2. However, the very importance of such coordination has not been questioned in the past and has even been reflected in American legislation (Iran). The need for a clearer understanding of sanctions policy has also been long overdue. Its relevance is illustrated, among other things, by the large number of unintentional violations of the US sanctions regime by American and foreign businesses. The problem of overcompliance is also relevant, when companies refuse transactions even when they are allowed. The reason is the fear of possible coercive measures by the US authorities. Finally, improving the sanctioning apparatus is also a long-standing topic. In particular, expanding the resources of the Administration in the application of sanctions was recommended by the US Audit Office in a 2019 report.

The US Treasury review suggests that no signs of an easing are foreseen for the key targets of US sanctions. At the same time, American business and its many foreign counterparties can benefit from the modernisation of the US sanctions policy. Legal certainty can reduce excess compliance as well as help avoid associated losses.

From our partner RIAC

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