Can a Country be a Donor and a Recipient of Aid? Ravi Kanbur ECINEQ, July 23, 2013 IIPF, August 23, 2013

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1 Can a Country be a Donor and a Recipient of Aid? Ravi Kanbur ECINEQ, July 23, 2013 IIPF, August 23, 2013

2 Outline Introduction: The Politics of Aid to Middle Income Countries Moral Salience of the National State: Rawls versus Global Rawlsians Global Poverty Minimization Some Operational Considerations: The Case of IDA Summary and Conclusion

3 Political Optics (1) The MIC threshold is GNI of $1,035 per capita. The threshold for losing World Bank concessional funding (IDA) eligibility is $1,175. Many countries have recently crossed, or are about to cross, these two thresholds. India is a leading example. A few years ago, India crossed the MIC threshold. Soon after, it crossed the IDA threshold. Its GNI per capita is now over $1,500. The MIC threshold and the IDA threshold are key indicators in the international aid architecture. Graduation from IDA. Big debates on whether aid should continue beyond these thresholds. The debates are particularly lively on aid to India.

4 Political Optics (2) Northern taxpayer perspectives: India is now a MIC, It is a nuclear power, It has a space program, Its business leaders are buying up northern factories. And, India has its own aid program! ($5b aid program to Africa). Why can t they help their own poor?

5 Political Optics (3) Perspectives of Indian Policy Making Elite: Receiving aid is not in keeping with MIC status, G20 status, demand for permanent seat on UN security council etc. In fact, India should give more aid to other developing countries. India is a MIC, but it has 400 million poor people. If resources are available from the outside to address this, we should access them. Pragmatic faction: if there is money on the table, why not access it if it can done at not too much cost to geopolitical ambitions. (This argument has more weight in financially difficult times)

6 Political Optics (4) Ultimate resolution of all this will of course be in the political domain, and political optics will be crucial. But in this talk I look at the issue from an analytical perspective and ask three questions. How is the moral responsibility to help a poor person mediated by the nature of the nation state in which that person lives? Given equal moral responsibility to help the poor in the world no matter where they are, is it a rational outcome for a country to be a recipient AND a donor of aid? How, operationally, should the World Bank concessional assistance window, IDA, handle the forthcoming graduations of MICs from its ranks?

7 Rawls versus Global Rawlsians (1) Back to political debates and the argument that if a country satisfies certain criteria (income above MIC threshold, high military expenditures etc), aid should cease or be curtailed. TWO very different types of reasoning for this conclusion: Global responsibility to help the poor in the country still holds, but indicators say that aid will no longer be helpful in achieving this objective. When national indicators satisfy certain criteria, global responsibility to help the poor ENDS.

8 Rawls versus Global Rawlsians (2) The second line of reasoning relates to a lively debate in political philosophy. An extreme position of one side in this debate is that there is NO moral responsibility, no obligation from justice based arguments, of those in one nation state to help the poor in another nation state. Let us now consider this debate.

9 Rawls versus Global Rawlsians (3) A powerful line of argument in political philosophy has been the application of Rawls Theory of Justice to the Global arena. First, recall the (simplified) Rawlsian maximin argument. Alternative proposals for just constitutions are put forward, and the choice that a society of individuals would make behind a veil of ignorance is argued to have a special claim on our moral intuitions. Further, it is argued that such individuals would choose the arrangement that would focus on the wellbeing of the worst off individual. There but for the grace of God.. Thence the Rawlsian maximin.

10 Rawls versus Global Rawlsians(4) Applying the same argument to the global stage world citizens behind a global veil of ignorance etc many argued that we would thus focus on the least well off in the world, no matter where they lived (eg Pogge, Beitz, Singer). This is Global Rawlsianism. There are of course many issues with the Rawlsian maximin (eg Arrow s point on degree of risk aversion). But the criticism of Global Rawlsian maximin focused not so much on the maximin as on the global.

11 Rawls versus Global Rawlsians(5) And the major critic of Global Rawlsianism was Rawls himself! (A series of arguments culminating in The Law of Peoples). The essence of the criticism is that contractarian theories of justice like Rawls s Theory of Justice, which evolve from Hobbesian arguments in Leviathan, need a prior institutional frame in which the sovereign and subjects are defined and identified. Such a frame exists, however imperfectly, for the nation state. It does not exist at the global level.

12 Rawls versus Global Rawlsians (6) the liberal requirements of justice include a strong component of equality among citizens, but that..applies to the basic structure of a unified nation-state. It does not apply to the personal (nonpolitical) choices of individuals living in such a society, nor does it apply to the relations between one society and another, or between the members of different societies. Egalitarian justice is a requirement on the internal political, economic, and social structure of nation-states and cannot be extrapolated to different contexts. (Nagel, 2005)

13 Rawls versus Global Rawlsians(7) This is the political conception. Alternative conception, cosmopolitanism, flows from the basis of equal concern and duty that is owed to all human beings (Pogge, Beitz, Singer). it would be morally inconsistent not to wish, for the world as a whole, a common system of institutions that could attempt to realize the same standards of fairness or equal opportunity that one wants for one s own society. The accident of being born in a poor rather than a rich country is as arbitrary a determinant of one s fate as the accident of being born into a poor rather than a rich family in the same country. (Nagel).

14 Rawls versus Global Rawlsians (8) There are many, many, elements to the nuanced nature of the debate between Rawls and Global Rawlsians. For example: The interconnections between sovereignty and justice. Justice is an associative obligation. (Dworkin: Equal concern is the special and indispensable virtue of sovereigns ) Rawls s critique of monism : ( the correct regulative principle for a thing depends on the nature of that thing. ) Nations behind a veil of ignorance. etc

15 Rawls versus Global Rawlsians (9) Note that Rawls s reluctance, in fact resistance, to Global Rawlsianism has echoes in the raw political sentiments in the north: If they are rich enough to have a space program, if they are rich enough to buy up our factories, if they are rich enough to themselves give aid, why should we give money to help their poor?

16 Rawls versus Global Rawlsians (10) I am myself more drawn to the cosmopolitan position, and have argued along these lines in global political debates. BUT, three points do give me some pause. Supporters of cosmopolitanism are by and large the cosmopolitan elite. Ordinary people are more likely to feel a connection to the political conception. Globally, cosmopolitanism would not care about where poverty was reduced. But some moral intuition suggests that we might care about this. Eg Global MDG and Africa MDG. Even within a country, federalism requires special attention to identity of constituent parts separately, which would go against National Cosmopolitanism within the country. Example of Johore and Kedah in Malaysia.

17 Global Poverty Minimization (1) Let us take a cosmopolitan perspective, and specifically consider the objective of global minimization of poverty, no matter where it occurs. Can it be that in such a situation it can make sense to have a country being both a donor and a recipient of aid?

18 Global Poverty Minimization (2) Consider a model with three countries high income (HIC), middle income (MIC) and low income (LIC). Each of these can, if it so wishes, dispense aid to other countries. The optimal amount and direction of aid from a country will depend on (i) its objectives, (ii) its instruments and their efficacy and (iii) the level and direction of aid from other countries. We can then solve for a Nash equilibrium of aid patterns, and for a socially optimal pattern of aid as well.

19 Global Poverty Minimization (3) I invite further development of and research on this structure, which offers interesting analytical possibilities. Suppose all countries had the same instruments and the same objective, say Global Rawlsian Maximin. Then if the world s poorest were in the LIC there would be no country which was both a donor and recipient of aid.

20 Global Poverty Minimization (4) But, of course, this result would not necessarily hold if (i) the world s poorest lived in MICs as well as LICs; (ii) if objective functions differed; or (iii) if instruments available differed across countries. On (iii), The Economist recently noted: like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for).

21 Global Poverty Minimization (5) Thus, analytically, it is indeed not irrational or incoherent for a country to be a donor and a recipient of aid. However, I recognize that the donor and recipient argument is a killer argument in the political domain. It is particularly so with northern publics for bilateral aid. It may be less so for multilateral aid, and I now turn to operational dimensions of continuing such aid to MICs.

22 The Case of IDA (1) IDA dispenses around $45b in every three year cycle. The current operational cutoff for IDA eligibility is per capita gross national income of $1,175. Other considerations such as capital market access, but I will focus on GNI per capita. Inflows: The borrower will continue to access IDA resources on regular terms until the GNI per capita continuously exceeds the cutoff for three years. The accelerated repayment clause is also triggered when the operational cutoff is breached three years in a row.

23 The Case of IDA (2) Some IDA Graduates: Chile (1961) Korea (1973) Thailand (1979) China (1999) Indonesia (2008) Montenegro (2008) Some reverse graduates Cote d Ivoire (1973, 1992) Honduras (1980, 1991) Congo (1982, 1994) Zimbabwe (1983, 1992)

24 The Case of IDA (3) Graduation Simulations by Moss and Leo based on WEO growth projections. Who graduates?

25 The Case of IDA (4) IDA 16/17 Angola, Armenia, Bhutan, Bolivia, Bos&Herz, Congo, Djibouti, Georgia, Guyana, Honduras, Moldova, Mongolia, Sri Lanka, Sudan, Uzbekistan / Cameroon, India, Nigeria, Vietnam, Yemen, Zambia IDA 18/19 Cote d Ivoire, Kenya, Kyrgyz Rep, Laos, Mauritania, PNG / Cambodia, Ghana, Lesotho, Nicaragua, Pakistan, Senegal, Tajikistan IDA 20/21 Bangladesh, Benin

26 The Case of IDA (5) So, who s left? 31 countries with 40% of current allocation with one third of the current population largely African many currently fragile and poor performing IDA will be disengaged from the bulk of the world s poor (three quarters of the world s poor now live in MICs). Remaining countries will get a bonanza absorptive capacity problems (their allocation would double).

27 The Case of IDA (6) What is the answer? If IDA is to remain engaged with the vast bulk of the world s poor, its rules need to change. A possible broad framework is to have three windows (along the lines of the proposal of recent CGD taskforce): The standard window, for countries below the income cutoff. A second window for countries below twice (or three times?) the cutoff, for projects focused on poor regions or sharply poverty focused sectors. (A third window, for interventions with Global Public Goods dimensions.)

28 The Case of IDA (7) Of course, there are a whole series of operational problems, eg What about countries that have already graduated? How exactly to define poor regions or poverty focused sectors for second window? How much to be allocated to second window? How exactly will performance criteria differ in the second window from the first window? But these operational questions only become relevant when the higher level decision has been taken to continue concessional assistance to MICs.

29 The Case of IDA (8) India and IDA Donor concerns about political optics, against manifest needs in India and need of donors to stay engaged with India and huge take up of IDA by India. Changes in Indian position over the last five years for graduation at first and then looking to stay in. Final outcome still being negotiated, but India will stay on for at least three more years, on harder terms.

30 Summary and Conclusion (1) Aid to MICs is a live political issue. The politics, in donor and recipient countries, seems to be geared towards ending this aid. But what about the analytics? The philosophical doctrine of cosmopolitanism can underpin aid to the poor in a non-poor country. Further, the special case of Global Poverty Minimization can indeed rationalize the seemingly incongruous notion of the same country giving and receiving aid. If we accept this doctrine then a major operational issue is whether, and how, to modify the graduation rules of IDA and other concessional aid funds. There are some specific proposals on the table for debate.

31 Summary and Conclusion (2) But the Rawls of The Law of Peoples stands against globalizing the Ralwsian arguments of A Theory of Justice. In the extreme form of this resistance, the Rawlsian argument is held to operate only within each nation state. This philosophical argument has an echo on northern streets, where the argument that they should now look after their own poor has sway. In this political optic, a recipient country having its own aid program provides a killer argument to shut down aid to such countries, despite the fact that analytically this is seemingly absurd outcome can be quite consistent with global poverty minimization. Added to this is the self image of the elite in MICs, which finds it demeaning to accept aid despite poverty in their countries.

32 Summary and Conclusion (3) Some of these political arguments may be less sharp for multilateral aid than for bilateral aid, but I fear that, despite the strong analytical arguments to the contrary, we will indeed see a drastic reduction in aid to Middle Income Countries. So, can a country be a donor and recipient of aid? Answer analytically it can, but politically it may not be allowed to.

33 Thank You!

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