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PIDE: No Progress in Pakistan’s economy despite $200bn foreign aid

On April 25, 2024, the Pakistan Institute of Development Economics underscored in a report that Pakistan has consistently relied on foreign aid since its inception, with commitments exceeding $200 billion.

Despite this significant influx, the report emphasizes that Pakistan’s economy has not experienced substantial improvement.

Titled “Foreign Aid Donors and Consultants Analyzing Pakistan’s Foreign Aid Inflows and Its Outcomes,” the research reveals that approximately $155 billion out of the pledged $200 billion has been disbursed. However, there is scant evidence to suggest that these inflows have effectively steered Pakistan towards sustainable economic growth.

The report suggests a concerning trend of dependency on aid, noting that Pakistan’s foreign aid commitments have surpassed the $200 billion mark until FY22-23. However, there remains a lack of precise estimation regarding the actual disbursement of aid.

Drawing from various sources and methodologies, PIDE estimated that at least $155 billion has been disbursed and utilized for various purposes in Pakistan, inclusive of development and non-development initiatives. Additionally, the report acknowledges the existence of aid credited but not documented due to various factors.

The inquiry into the efficacy of foreign aid in Pakistan remains inconclusive due to the ambiguity present in the available literature. The report highlights the need for a more nuanced and specific analysis, as current discourse often yields generalized and vague conclusions.

This research endeavor evaluates the question in accordance with the criteria outlined in the influential Millikan-Rostow report on foreign aid, which are as follows:

  • Avoid tying aid to the interests of the creditor country, especially concerning projects and services.
  • Ensure the transfer of resources in a manner that does not create future liabilities, particularly long-term ones.
  • Foster economic development and growth in a sustainable and self-sustaining manner over the long term.
  • Enhance the marginal savings rate in recipient nations, thereby promoting higher capital formation.
  • Complement the formation of additional capital with development programs that effectively increase the economy-wide capacity to absorb capital productively.

The study concludes that, collectively, foreign aid inflows to Pakistan fail to meet any of the aforementioned criteria. Over time, any improvements have been minimal and largely concentrated in specific sectors and projects.

For instance, the success of vaccination efforts led by the UN serves as a notable example of foreign aid effectiveness. However, Pakistan’s increasing dependence on external sources for vaccine provision and the program’s lack of self-sustainability indicate broader shortcomings.

Overall, it is evident that the aid inflows have not achieved the objectives outlined by the aforementioned criteria, both in terms of individual projects and their aggregate economic impact.

Even if Official Development Assistance is analyzed by sectoral inflows, it merely confirms marginal improvements rather than significant ones that could positively impact overall economic outcomes.

For instance, OECD data on ODA indicates that over the last two decades, the ‘Health’ and ‘Education’ sectors have collectively received approximately $12 billion in aid. Despite this substantial investment, outcomes in both sectors remain unsatisfactory, with Pakistan’s human capital quality remaining poor and the disease burden remaining significant. This stagnation is evident in Pakistan’s Human Development Index, which has hardly improved over the past two decades.

Aligning with Milton Friedman’s assertion that there is no such thing as a free lunch, we illuminate the various costs associated with foreign aid to the country. These costs are seldom discussed or analyzed despite their significant impact. The most apparent cost is the escalation of external liabilities over the years, resulting in a debt burden exceeding $125 billion.

Another cost arises in the form of ‘offensive financial statecraft,’ wherein induced demand for credit and projects leads to increased debt without commensurate benefits to the creditor country. Donor-induced projects are commonplace in Pakistan, underscoring donor influence in policymaking circles.

Moreover, Pakistan’s heavy reliance on foreign aid in its development programs, such as the Public Sector Development Programs at federal and provincial levels, entails a substantial portion of total outlays. The failure of external aid components to materialize, as is often the case, contributes to unnecessary delays and inflated project costs, as evidenced by PIDE’s analysis of PSDP over the last decade.

Additionally, the tied nature of aid compels Pakistan to purchase goods and services that end up being costlier, as highlighted earlier by Mahbub ul Haq. Creditors often succeed in generating long-term demand for goods and services within their economies, offsetting the financial aid provided.

Furthermore, the lack of development in Pakistan’s domestic ‘thought industry’ leads to a perceived need for donor technical advice and expertise, resulting in a loss of indigenous innovation and expertise.

This scenario fosters donor influence in policy circles, often at the expense of domestic research and think tanks. Over the years, their advice has resulted in the establishment of administrative setups that have failed to deliver their intended outcomes, such as the bifurcation of entities like WAPDA, CGA, PMRCL, and the creation of extensive infrastructure for disaster management. These setups now impose a burden on the national exchequer through taxpayer-funded salaries and perks.

Both donors and Pakistan’s civil servants, primarily the civil bureaucracy and military, share responsibility for the limited development outcomes despite decades of foreign aid. They have developed a symbiotic relationship focused on mutual interests. Donors can push loans through official channels without adequate due diligence, while civil servants enjoy various perks, including paid foreign tours, project allowances, and post-retirement work opportunities with donors.

The global consulting industry, including major firms like McKinsey, has made significant inroads in Pakistan, securing contracts for various projects and assignments. However, discussions about their work and evaluations, despite increasing scrutiny, are rare.

Although Pakistan began hiring consultants in 1949, efforts to develop home-grown consultancy expertise, such as with the establishment of organizations like PEC and NESPAK in the early 1970s, faced challenges due to external donor influence, lack of policy continuity, and insufficient government support.

Donors maintain a substantial network in Pakistan encompassing both the public and private sectors, as well as domestic and external individuals and groups involved in the aid apparatus. However, little information is disclosed about the network and its standard operations, including details about contract awards over time.

While donors claim to cooperate in pursuing development goals within the country, this cooperation constitutes a smaller part of their overall work, with goals shifting according to changing geopolitical and geo-economic circumstances.

On aggregate, foreign aid has contributed to what William Easterly termed the “loss of agency” and the failure to develop a robust domestic “thought industry,” as noted by Nadeem Ul Haque. Pakistan’s policymaking is heavily influenced by donors, resulting in a lack of indigenous thought and skills in addressing critical economic issues.

Overall, there is scant evidence to suggest that decades of foreign aid have significantly propelled Pakistan onto a sustainable path of economic growth or improved macro and microeconomic indicators.

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