Pakistan Institute of Development Economics

Foreign Aid Donors And Consultants: Analyzing Pakistan’s Foreign Aid Inflows And Its Outcomes Featured Image
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Foreign Aid Donors And Consultants: Analyzing Pakistan’s Foreign Aid Inflows And Its Outcomes

Publication Year : 2024


Pakistan has been a regular receiver of foreign aid since its inception. It would not be misplaced to state that Pakistan is addicted to aid! Since its inception, till FY 22-23, the commitments of foreign aid have crossed the $200 billion mark. There is no single, concise estimate of how much of that committed aid has actually been credited and disbursed. Based on the estimates from various sources, brought together and counterchecked due to their various methodologies, we estimate that at least $155 billion has been credited and disbursed/used up for various purposes (development and non-development) in Pakistan. This is besides the aid that was credited but has not been documented due to various reasons.

The important question of whether foreign aid has been helpful to Pakistan or not has remained unanswered as the available literature does not offer a clear answer, often bringing out a mixed bag, which is too general and vague. This research effort analyzes this question in light of criterion set by the influential Millikan-Rostow report on foreign aid, which are as follows-

  • Transfer of resources in a manner that they don’t create future liabilities, especially long-term liabilities
  • are NOT source-tied to creditor country, especially projects and services
  • leads to economic development and growth in a manner that is sustainable and self-sustaining in the long-run
  • raise marginal savings rate in nations receiving aid, which would lead to higher capital formation
  • formation of additional capital should be complemented by a development program that helps enlarge the  economy-wide capacity to absorb additional capital productively

We find that, in aggregate, foreign aid inflows to Pakistan meet none of the above stated criterion. Over time, improvements have been marginal and concentrated in only a few sectors and selected projects. For example, vaccination efforts led by the UN present one example of success of foreign aid (although Pakistan has become ever more dependent upon others for provision of vaccines, and the program is not self-sustainable). But when it comes to the above stated criterion and aggregate economic outcomes, there is little to doubt that all the aid inflows have failed to achieve any of these objectives. Even if one were to bifurcate Official Development Assistance (ODA) by sectoral inflows, it only tends to affirm improvements of marginal nature rather than any substantial improvements that can spillover into positive aggregate economic outcomes. For example, OECDs data on ODA shows that in the last two decades, ‘Health’ and ‘Education’ sector has received a combined inflow of $12 billion (approximately). But despite such heavy infusion of aid, the outcomes in both sectors remain dismal! Pakistan’s human capital quality remains poor, and the disease burden remains substantial. Pakistan’s Human Development Index (HDI) is perhaps the best reflection of this, hardly budging from its position two decades ago. Keeping in with Milton Friedman’s dictum of there being no such thing as free lunch, we demonstrate the various costs of foreign aid to the country. To put it mildly, it costs the country a fortune, but is rarely discussed or analyzed. The most obvious cost is the growth in external liabilities over the decades (the ‘debt burden’), with external debt now touching $125 billion and more. The second cost comes in the form of ‘offensive financial statecraft’, a form of induced demand for credit and  projects that have little utility to creditor country, but ends up saddling it with more debt. Donor induced projects of various types are a norm in Pakistan, indicating the donor influence in policymaking circles.

The heavy dependence of Pakistan’s development programs (PSDP at federal and provincial levels) is another cost of aid, whereby foreign aid component is a substantial portion of total outlays of PSDPs. The non-materialization of the external aid component, which is the usual case, is part of what leads to unnecessary delays and ballooning of project costs. This is amply demonstrated by PIDEs analysis of PSDP over the last decade. Further, the tied nature of aid means that Pakistan has to buy goods and services that in the end proves to be costlier, as found out earlier by Dr. Mahbub ul Haq. Also, creditors are usually successful in generating long-term demand for goods and services within the creditor economies, which more than makes up for the financial aid they provide.

Then there is the loss or non-development of what a domestic ‘thought industry’, leading to real or perceived need for donor technical advice and expertise. This also opens the way for donor influence in the policy circles whereby they are a regular presence, at the cost of domestic research and domestic Think Tanks.

Their advice, over the years, has also led to founding or administrative setups that have delivered little in terms of what they were meant for (like bifurcation of WAPDA, CGA, PMRCL, or the setting up of a huge infrastructure for disaster management etc.), and now being a burden upon the national exchequer in the form of salaries and other perks being paid through taxpayer money.

Both the donors and Pakistan’s civil servants (primarily civil bureaucracy and military) are responsible for the foreign aid bearing little in terms of development over all those decades. Over time, they have developed a healthy relationship that is based upon looking after each others’ interests. Donors, for example, can push loans through the official machinery without due diligence or need-assessment (whether the loan is needed at all?) while the civil  servants can enjoy perks like paid foreign tours, project allowances, project posts, consulting and post-retirement work with donors.

The global Consulting industry has also made its mark in Pakistan, with big consulting firms like McKinsey picking up contracts for various projects and assignment. Despite the increasing scrutiny over its workings, the latest being Mazzucatto and Collington’s work (‘The Big Con’), discussion over its work in Pakistan and its evaluation is rare. Pakistan first hired consultants in 1949, and the trend continues till now, with either the donors or the government handing out contracts to donors. An effort to develop Pakistan’s own home-grown consultancy was initiated in the early 1970s, with the establishment of organizations like PEC and NESPAK. However, the policy did not much  headway as the influence of external donors and lack of policy continuity plus government support led to fizzling out of this initiative. But it left these organizations largely dependent upon public dole without much to show for   especially PEC).

Donors have a substantial network in Pakistan which includes both the public and the private sector, and domestic plus external individuals/groups that are part of the aid apparatus. Donors themselves reveal little about the network and it standard working. For example, there is no information on to whom have contracts been awarded to over time? While donors do claim to cooperate amongst them selves in terms of pursuing development goals within the country (and there is some evidence to back this up), this cooperation is smaller part of their overall work, whereby they pursue their goals/work solely. These goals keep changing with the changing geo-economic and geo-political situation.

The research finds that on aggregate, foreign aid has led to what William Easterly referred to as ‘loss of agency’ and the failure at the domestic level to develop what Dr. Nadeem Ul Haque calls the ‘thought-industry’. Pakistan’s policymaking has a huge donor influence, and seriously lacks in its own thought and skills when it comes to tackling economic issues of critical concern. All in all, there is little evidence to suggest that all the foreign aid inflows over the decades has done anything substantial to put Pakistan on a sustainable path of economic growth, or of improving the macro or micro indicators of the economy.

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