What does the Post-Aid Era mean for Development?
The withdrawal of USAID has revealed just how precarious the aid-driven model of development really is. Instead, Ashfaq Zaman argues that Bangladesh’s ‘economic miracle’ shows us that economic transformation comes through trade, not aid. As developing nations grapple with alternative models, they shouldn’t fall into the trap of exporting their raw materials for cheap. Instead, developing nations could learn from nations like Saudi Arabia and exploit the true economic potential of what is buried beneath their feet. If handled correctly, many nations could look forward to the boom years still to come.
The collapse of America’s USAID programme has sent deadly reverberations across the globe. Yet America is not alone. The shift to the right across the European continent, combined with the increased urgency for defence spending, has kicked international development to the bottom of the priority list.
The sudden shock to global aid is already having fatal consequences. Yet as the world heads into an era that favours transactions over ‘aid’, countries in the Global South have the opportunity to chart a new course through various development stages.
However, the AI and electrification boom means that the global appetite for rare earth metals has exploded. For many developing nations, this presents a once-in-an-era opportunity, if handled correctly.
USAID’s withdrawal is a testament to why the aid model was broken to begin with. In many instances, aid from abroad is somewhat a sticking plaster; it can create a dependency that distorts local economies and creates perverse political incentives. We have felt this first-hand in Bangladesh; as a result of the funding crunch, aid provisions for the 1,000,000 Rohingya population have been halved. Yet Bangladesh is not alone at the sharp end of government spending cuts.
This aid withdrawal shows why aid is a rotten foundation upon which to build an economy. A prime example can be found in Malawi. For many years, 30-40% of Malawi’s national budget came from foreign aid. This encouraged Malawi’s government and economy to become dependent on external funds, arguably stunting efforts that could have led to longer-term development. Similarly, as Malawi saw, this can all too easily be withdrawn, as seen in the 2013 ‘Cashgate’ scandal.
Over-reliance on aid can distort politics as much as it can economics. For example, look at Bolivia in the 1990s. In order to qualify for the Heavily Indebted Poor Countries Initiative in 1996, Bolivia followed a path of austerity in order to receive the debt-relief. Yet this austerity led to significant social costs like unemployment, without delivering the growth that was forecasted from the offices of Washington.
The retreat from the traditional aid model may turn out to be a boon for true sovereignty; a necessary ingredient for true development.
Of course, in particular circumstances, aid is essential. When natural disasters strike, countries should go beyond the geopolitical jargon of ‘soft power’ and think in humanitarian terms. Temporary aid is commendable. Aid, when used as a means of exerting power, always comes with a heavy small print.
These days, Western nations are not the only players in the ‘assisted development’ game. China has adopted a different model, albeit with similar objectives.
Under the Belt and Road Initiative, China invests in a variety of infrastructure projects across the globe, often for the cost of cheap debt, and in return for uncontrolled mining rights to raw materials. Beyond the ‘soft power’ advantages, this is how, for example, China has been able to grant itself access to the vast reserves of critical minerals found in the Democratic of Congo.
This should be instructive. Many correctly assume that China may fill the vacuum of influence left behind by USAID’s departure. Yet we shouldn't hold our breath, considering China’s recent Belt and Road slowdown, triggered by a wider economic downturn.
To chart a course of real, long-term development, nations should opt for a strategy of trade over aid. In recent years, the opportunities to do this have become plenty.
As illustrated, the race is on for the rare earth metals required for AI, renewable energy and electrification. China was early to this party, hence why today they refine 85 to 90% of the world’s rare earths.
However, there are plenty of rare earth metals still in the ground. Countries like Burundi, Madagascar, Tanzania, Tanzania, Myanmar and Afghanistan are reported to have trillions worth of untapped critical minerals.
With the newfound global urgency for these minerals, there is an opportunity for real long-term wealth generation. For a lesson on how to capitalise on newfound raw materials with minimal start-up capital, one may look to Saudi Arabia. Upon discovery of oil, Saudi Arabia attracted foreign investment into their oil reserves. However, gradually they nationalized their oil assets under the company Aramco. This is a lesson; for long-term development, developing nations should resist the temptation to grant uncontrolled mining operations. Instead, they should implement policy that increases government equity in mining ventures, while still benefiting from foreign expertise.
Equally, any investment capital available should be invested into rare earth processing capacity. Instead of exporting raw critical minerals and rare earth metals at low costs, developing nations should place investment into their own refining capacity as a top priority. Not only would this increase revenue and create jobs, it would reduce reliance on foreign refining. On top of this, a sovereign wealth fund created from critical mineral extraction could then be used to invest into longer term development projects.
Of course, this strategy only works for nations endowed with rare earth minerals. My home nation of Bangladesh is often considered a development success story. Famously described by Henry Kissinger as a ‘basket case nation’, Bangladesh was able to become one of the fastest growing economies in the global south. This success story holds some clues to pathways to development without reliance on raw material reserves (or foreign temperaments).
First, we focused on textiles and garments, and leveraged low labor costs to attract foreign investment. This was thanks in part to the EU’s generalised Scheme of Preferences, which gave Bangladesh a duty-free and quota-free access to the EU market, providing an example of the strength of the trade over the aid model.
The growing garment sector was the bedrock of the wider Bangladeshi transformation. Bangladesh also embraced export-led growth, establishing special economic zones (SEZs) and free trade policies to attract businesses. This was a prime example of how the private and public sector can work symbiotically in development.
To future-proof our economy, we then diversified into IT, freelancing, and digital services. This is crucial for those developing nations looking to expand beyond raw materials. Lastly, strong government-business collaboration helped implement effective policies, ensuring sustainable growth.
Bangladesh provides another example of what organic, self-dependent growth could look like. Of course, no two nations’ development stories are the same. Yet themes emerge; whether that's through the smart commercialisation of raw materials, or focussed investment in targeted sectors.
While Bangladesh can provide a positive model of development, it also serves as a warning. Bangladesh’s recent revolution has undoubtedly hindered the wider development programme. The revolution started with localised student protests about government job quotas. This metastasised into a wider spread, national rejection of the slow creep of corruption.
The previous ruling ‘Awami League’ had explicitly followed a policy of ‘development over democracy.’ There are lessons to be learnt. Development only works if it takes the wishes of the majority into account. Bangladesh’s revolution tells us what happens if we don’t.
This might beg the question; how was China able to develop so effectively without democracy? It is true that since the late 1970s, China has been able to lift millions out of poverty through a mixture of state-governed capitalism and heavy integration into the global market.
The benefits are seductive; five-year plans can be executed without the wild oscillations that are common in democracies. Long-term infrastructure projects can be executed in a fraction of the time; cities and highways can be built in months, not years.
Yet remaining deaf to wishes and corrections of public opinion can be fatal. One must only look at the failed centralized autocratic projects found in Cuba, Zimbabwe, Turkmenistan or North Korea to understand why ignoring the state may not always know best.
Developing countries must ask themselves why they want to develop; political inclusion and individual freedoms are fundamental to many. One need only look at the Arab Spring to understand these fundamental human impulses. I would therefore, argue that reliable, stable, long-term development is driven by people; it doesn’t drag them.
As the world takes a step back from the broken aid model, many countries will be forced to develop in their own way and on their own terms. In a world of shifting appetites and industries, many developing nations may well have their ‘boom’ years ahead of them.
Ashfaq Zaman is an international affairs expert, advisor to Bangladesh’s a2i programme, and founder of the Dhaka Forum.
Photo by Nicolas Postiglioni
