An Assignment on

Development Aid and Economic Diplomacy:

Bangladesh Case

Submitted To

Dr. Md. Afsarul Qader

Course Teacher: Economic Diplomacy
Bangladesh Institute of Governance and Management

Submitted By
Quazi Moshrur-Ul-Alam
Student ID: IER 19
International Economic Relation
11th Batch
Session: 2016-2017

Date of Submission: 6 January 2018

 Development Aid and Economic Diplomacy: Bangladesh Case

Introduction

After the Second World War the world has been severely divided into the developed and developing
countries, allowing the developed countries to dominate international relations and diplomacy for
more than half a century. This division into two worlds eventually leads to the continual flow of aid
resources from the developed countries to the developing ones with the noble aim of minimizing the
division by overcoming their problems. This inflow of resources into the developing countries is widely
known as development aid. Development aid in form of development assistance, technical assistance,
international aid, overseas aid, official development assistance (ODA), or foreign aid is financial aid
given by governments and other agencies to support the economic, environmental, social, and
political development of developing countries. According to the International Development Strategy
for the Second United Nations Development Decade (UNO 1970), development aid should be wholly
aimed at promoting socio-economic development of developing countries.

Development aid has been ineffective in achieving its intended goal of the socio-economic
development of a recipient country (Collier 2007; Easterly 2006). Easterly (2006), for example,
criticizes development aid and its actual achievements while highlighting the tragedy that the donors
are not able to give “twelve-cent medicines to the poor dying children” (p.4) while spending the
significant amount of $2.3 trillion on foreign aid in the second half of the last century. In reviewing a
new United Nations report, the United Nations Economic and Social Council (ECOSOC 2004) also
interestingly notes that foreign aid, to some extent, is hampering the development of the less
developed countries. Similarly, the OECD (2014) highlights that potential successes of foreign aid are
obscured by its general ineffectiveness. This ineffectiveness is the result of a lack of coordination and
political self-interest, as this organization correctly notes.

Aid can be ineffective for many reasons. Aid can be ineffective if it is too small or too much in quantity
in relation to the country’s need. If it is too small and erratic, it may not have any significant impact
on the country’s economy. If it is too large, it can also lead to various economic problems. If it is too
large, it can hit the country’s absorptive-capacity constraint, leading to delays and inefficiencies in aid
utilization. In addition to these inefficiencies, a large inflow of aid may lead to such economic
pathologies such as the Dutch disease--that is, the flow of aid causing an appreciation of the real
exchange rate and thereby impede the expansion of exports and growth of income. Similarly, an easy
availability of aid can obviate the incentive for undertaking genuine reforms and making hard choices,
thereby perpetuating bad policies, poor governance, and endemic corruption. However, poor policies
can also emerge from the donors’ initiative as well. The donor agencies often take a non-
discriminatory cookie- cutter approach to policies and institutions; when such one-size-fits-all policies
are imposed on poor countries as part of the aid package, they can be out of synch with the
requirements of the economy, thereby thwarting economic development.

This paper provides a critical review of aid effectiveness in Bangladesh and its impact on economic
development in Bangladesh. It focuses on the contributions of three major, high-profile donors: the
World Bank, the Asian Development Bank (ADB), and the Government of Japan (GOJ). In assessing aid
effectiveness, the paper uses a qualitative triangulation approach based on the subjective judgments
of donors and recipients.

Foreign Aid Flow in Bangladesh

Bangladesh receives a sizeable amount of foreign aid from its development partner. In 2015,
Bangladesh received $55.5 million grant co-financing from the European Commission, $100 million
grant co-financing from the Global Partnership for Education, $7 million grant co-financing from the
Government of the Netherlands, $0.1 million grant co-financing from the United Nations Children’s
Fund, as well as $220 million loan co-financing from the Islamic Development Bank, $39 million loan
co-financing from the Export–Import Bank of Korea (KEXIM), and $665 million loan co-financing from
the World Bank. The foreign aid stood at $3449.97 million in FY’15-16, an increase of more than 13%
a year earlier, according to the latest data of Economic Relations Division (ERD). The foreign aid
received during the period surpassed the government’s target of $3415 million. Of the total aid
disbursement, $2903.68 million came as credit and $546.29 million as grant while it was $2472.20
million as credit and $570 million as grant in the previous fiscal. In the fiscal year, 2014-25, Bangladesh
made a repayment of $1,044.44 million, including $842.01 million in principal amount and $202.44
million as interests.

Foreign aid receipts and debt repayments

(Million US Dollars)
Particulars FY14 FY15 FY16
1. Receipts 3122 3044 3450
i) Food aid 38 38 32
ii) Project aid 3084 3006 3418
2. Repayments (MLT) 1208 1097 1045
i) Principal 1018 910 842
ii) Interest 190 188 202
3. Outstanding external debt as of end June 24388 23901 25963
4. Outstanding debt as percentage of GDP 14 12 12
5. External debt services (MLT) 4 4 3
as percentage of exports
Source: (i) External Economic Division (ERD), Ministry of Finance;
(ii) Statistics Department, Bangladesh Bank.

Development Aid Effectiveness: Bangladesh as a Case Study

As advocated by the Paris Declaration guidelines (OECD 2014), most donors explicitly promise foreign
aid to Bangladesh to support its national development priorities as envisioned in national documents
such as the Perspective Plan and the Five-Year Plan. The donors’ efforts explicitly aim at reducing
poverty and strengthening the economy of the country. However, the reality appears to be more
complex, with the purpose of aid-giving reflecting a blend of both altruism and self-interest. On the
basis of the strategic interests of different donors to Bangladesh, the particular balance of this blend
varies widely among donors. According to Nelson (1997), foreign aid is mainly viewed by developed
countries as a means of influencing domestic policy in the recipient countries. This argument is
supported by George (1990), who considers foreign aid to be an efficient instrument properly that is
utilized by developed countries to ensure access to “developing countries’ raw materials and the
infrastructures on the cheapest possible terms”.

Therefore, while the donors’ explicit purpose of altruism emerges from philanthropic considerations,
their implicit motivation of self-interest is mainly guided by their strategic and commercial interests.
The strategic interests of donors to Bangladesh can be clearly understood in terms of the USAID
document on Bangladesh, which notes that continued development assistance to Bangladesh is
justified as the United States seeks to maintain support from Bangladesh on a number of important
international questions. The document also highlights that Bangladesh has played a moderate and
reasonable role in regional and international organizations. Importantly, as the document further
highlights, Bangladesh took a strong position against the Soviet invasion in Afghanistan. The document
clarifies that this interest is political and strategic. Such an articulated political motive on US aid to
Bangladesh clearly indicates that the rationale of aid is guided by geo-political self-interest rather than
altruism alone.
Aside from this geo-political self-interest of donors in providing aid to Bangladesh, foreign aid is used
to serve the commercial interests of donors through the practice of tying aid. The tying of aid can
include, for example, mandatory use of foreign machineries, consultants and other items, which
thereby serves the commercial interests of donors to Bangladesh. While discussing the policy of
promoting German commercial interests in developing countries through foreign aid, it is clearly
stated that Germany may do that successfully by only indirectly influencing private investment, which
minimizes the German investors’ risks in these countries and offers more benefits for them (German
Embassy 1994).

World Bank and Development Aid Diplomacy

The World Bank is the coordinator of aid donors to Bangladesh. It is also the largest, as well as the
most influential lender to Bangladesh. The International Development Association (IDA) has been
supporting Bangladesh since 1972, just after the country’s independence. Since then, IDA has provided
more than $19 billion support to advance Bangladesh’s development priorities.

The World Bank support has helped Bangladesh to reduce poverty and improve human development.
Key elements of that support have been the Bank’s long-term commitment to health and education,
its support for rural infrastructure, and its engagement in policy dialogues that have created
conditions for broad-based economic growth. IDA’s support has also included a substantial body of
analytical work and knowledge products that have contributed to the policy debate, IDA-supported
operations, and, ultimately, development outcomes. Forty years of partnership have built a solid
foundation for improvements in growth, empowerment, and social mobility. It is obvious that, the
World Bank group withheld their loan commitment for the Padma Bridge creating allegations of
corruption and that created a negative image to the foreign investors and our growth rate was below
expectation. The World Bank frequently prescribes different policy to our government and compel the
government to bring necessary amendment in policy framework to get their committed loan. This
development aid diplomacy somehow reflects their naked interfere in our internal policy.

Asian Development Bank and Development Aid Diplomacy

The Asian Development Bank (ADB) has been supporting Bangladesh since 1973, with its first field
office established in the country in 1982. The ADB is the second largest lender to Bangladesh after the
World Bank. ADB has provided Bangladesh with $17.2 billion for 259 loans, $244.55 million for 411
technical assistance projects, and $787.10 million for 35 grants. Bangladesh is a major recipient of
concessional resources from ADB’s Asian Development Fund. ADB will support Bangladesh’s efforts to
achieve the objectives in the government’s Seventh Five Year Plan. These objectives include faster,
inclusive, and sustainable growth; the newly endorsed Sustainable Development Goals; and
attainment of middle-income status by 2021. ADB will provide assistance for largescale,
transformational infrastructure projects, especially in transport and energy. This includes projects
contributing to regional connectivity, which will foster the development of economic zones and
corridors, and generate associated development benefits. ADB will help to develop Bangladesh’s rural
sector, education and skills, water and municipal services, and access to finance for industrial
development and export diversification, inclusive job creation, and human development. ADB
knowledge services will support adoptive technologies, and capacity development, among others. In
2016–2018, ADB has planned 35 projects covering the sectors and subsectors mentioned. The
technical assistance program for 2016–2018 includes 24 projects and stands at $19.9 million (including
co-financing). Good governance, environmental sustainability, and gender equity will remain major
pillars for ADB operations in Bangladesh.

The Government of Japan and Development Aid Diplomacy

As the largest single bilateral development partner, the history of JICA in Bangladesh goes parallel with
the history of the inception, development and growth of Bangladesh. JICA began its operations in
Bangladesh immediately after Japan formally recognized the newly independent nation in early 1972,
starting from dispatching three volunteers in 1973. Japan committed its first ODA loan and established
the JICA office in Dhaka in 1974. Since then it has been cooperating with the people and the
Government of Bangladesh (GOB) in almost every important socio-economic sector throughout the
country. With understanding and support of the people of Bangladesh, JICA has expanded activities
dramatically and Bangladesh became the third largest partner country of Japan’s ODA.

Development Aid and Diplomacy Debate

There is a huge debate on development aid and diplomacy. There is no formal evaluation of the
development aid effectiveness neither by the government nor by the private sector. Still some debates
on this issue can be discussed as follows:

(i) The donors have a disproportionate influence on policies: While the significance of aid in relation
to the macro economy of the country has been on the decline, the influence of donors in shaping and
setting the policy agenda seems be on the increase. This disconnect between financial contribution
and policy influence leads to a policy agenda at odds with the requirements of the macro economy
and does not necessarily bode well for it.

(ii) Conditionality’s limiting the policy autonomy of the government: Multilateral aid is not always
based on pure economic considerations. It is usually associated with a wider variety of conditionality’s
that restrict policy autonomy of the government.

(iii) There is an apparent disjunction between the benefits and costs of adjustment loans that act as
a disincentive to implement reforms: When the government contracts a policy loan, its resources are
augmented but reforms relate to the sectors; and as the sectors do not receive the money, they do
not have much incentive to implement the reforms.

(iv) The reforms should be home-grown and vetted by parliament: Currently most reforms are
imported and introduced as part of the aid package, which explains their lack of ownership. The
government should form committees in ministries or independent commissions to formulate reforms
that could later be discussed and vetted by parliament.

(v) Donors have had little impact on poverty reduction of the country: The donors have done little in
relation to poverty alleviation. Except for Food-for-Works, all successful programs that have a direct
bearing on poverty reduction were home grown. Often the only help the donors provided was limited
to not radically trimming down social expenditures under adjustment programs.

(vi) There should be more aid to higher education: Bangladesh, which is poised to move to the next
higher stage of economic development, requires foreign assistance in higher education for skill-
formation and technological innovation. However this is one area where donors’ priority and
assistance is conspicuously lacking.

(vii) Reforms are not owned because they are imposed: Bangladesh, like many other developing
economies at a similar stage of economic development, requires foreign aid for budgetary support, as
well as for economic development. As a result when donors propose any aid with conditionalities, it
reluctantly accepts many of the conditionalities, which are not to its liking. This explains the lack of
ownership of many reforms, as well as their unenthusiastic implementation.

(viii) The PRSP is a poor substitute for planning: It is an inadequate substitute for the overall planning
of the economy, embodied in traditional five-year or long-term planning documents. The PRSP
remains no more than a wish list.
(ix) Donor policies are inappropriate: While some policies advocated by donors are good, they are
often formulated in the abstract, without considering the complex political-economic realities of the
country. As a consequence it is difficult to implement these policies in the face of general
unacceptability by society.

(x) The Washington-consensus has yielded few benefits for Bangladesh: Donors have usually taken
a cookie-cutter approach to policy by promoting the Washington-consensus. They have often
advocated policy prescriptions that implied undiluted privatization rather than development of the
private sector, sudden liberalization rather than gradual adjustment, and deregulation rather than
regulatory redesign. These policies have contributed little to economic growth, poverty alleviation, or
promoting equity.

In short the debate suggests that aid had been less than effective and had little direct impact on
poverty reduction; that it led to a plethora of inappropriate policies imposed exogenously by donors;
that donors had exerted a disproportionate influence on policies that were neither owned by the
country nor went through the usual democratic vetting mechanism; and above all, that the PRSP
exercise, which was artificially imposed by donors, had few indigenous roots and had helped
undermine the traditional planning mechanism.

Conclusion

Foreign aid has had a mixed performance in Bangladesh. Although to a large extent the influx of
foreign resources into Bangladesh’s economy is practically necessary for overall development of the
country, development aid has been ineffective in achieving its prime objective of socio-economic
development of Bangladesh. This crisis of aid effectiveness is mainly the result of an imbalance in the
relative proportions of altruism and self-interest on the part of donors in providing aid to the country.
Aid ineffectiveness in Bangladesh is not surprising at all because the prime objective of foreign aid is
surpassed by other objectives guided by mere self-interests such as geo-political and commercial
interests that are primarily designed to advance the national interests of developed countries as part
of their foreign policy instruments. Whatever the development has been, by this time, achieved by
the country is merely the outcome of its domestic efforts as in many other developing countries. These
domestic efforts have been, no doubt, fueled by the foreign aid but this contribution of foreign aid to
the socio-economic development of the country is much less than was expected. As a result,
Bangladesh is appropriately trying to find home-grown development remedies to its home-grown
development problems.

To conclude, the time has come for Bangladesh to learn to manage its economy without being
dependent on ineffective foreign aid in order to achieve its intended development objectives. While
the sizeable amount of about $50 billion of foreign aid has been received since its independence, this
aid could not significantly contribute to the country’s intended development, rather the country’s
people had to bear the cost of a foreign aid burden where benefits accrued to others. This
ineffectiveness of foreign aid can perhaps also be generalized to most other developing countries of
the world. Therefore, foreign aid has failed to be effective in the socio-economic development of
developing countries in general, and of Bangladesh in particular.