How BRIC economies differ in their development financing philosophy?

A nice paper from Nkunde Mwase and Yongzheng Yang of IMF. I had just pointed to a paper on how Indian economy spillover to South Asia. This one is more about India’s development financing (along with three BRIC economies) to low-income regions mainly its neighbours in South Asia.

The authors say BRIC economies differ from OECD economies’ Development Assistance Committee framework in 3 ways:

  • BRIC engagement, with the exception of Russia, is founded on a model of mutual benefits. Most of the financing has been concentrated in the infrastructure sector to support productive activities. Russia, similar to traditional donors, has recently focused on social spending, seeing poverty reduction as the main objective of their ODA.
  • Some BRICs, particularly China, tend to provide noncash financing for projects without attachment of policy conditionality. They view this as part of the principle of noninterference of internal affairs and as a means of circumventing corruption. In contrast, traditional donors view policy conditionality on institution building and governance as central to ensuring efficient use of aid.
  • Concepts of debt sustainability differ, with BRICs tending to focus on micro sustainability of individual projects while traditional donors pay greater attention to long-run debt sustainability by taking into account macroeconomic linkages

The paper is really interesting. For instance, BRIC economies do not impose conditions while lending. China prefers tied aid. Why?

Conditionality, they argue, would undermine the principle of respecting “national sovereignty” and promoting “solidarity”.9 China, in particular, emphasizes the respect of the national sovereignty (broadly defined to include national economic policies) of the recipient country. Partly reflecting China’s own recent development history and its policy of noninterference, it believes that the long-term development of a country is ultimately the responsibility of the recipient and not the development partners’ (Schiere, 2010).

While traditional donors attempt to improve governance by attaching policy conditions to aid, China argues that “tied aid” (i.e., financing that is tied to purchases from the source country) helps circumvent this, lowering the risk of financial mismanagement and misappropriation of funds (see later discussion). Accordingly, China often extends credit lines in a special account where funds are  channeled directly to firms (often of Chinese origin) contracted for projects, rather than to entities of the recipient country.

Though this has not really helped:

While conditionality has often been criticized as intrusive and weakening country ownership of reforms, tied aid has reportedly not been able to address concerns about transparency and corruption (e.g., over-invoicing), especially given the general lack of comprehensive, meaningful, and timely statistics (see later discussions).This is consistent with findings that there is no significant positive relationship between aid allocations and institutions.

Then things like India wanted to set up a central agency within Ministry of External Affairs to coordinate its aid function. But this has not kicked off:

The Indian government announced, in 2007, that it would set up a lead agency to coordinate development cooperation—the India International Development Cooperation (IIDC). From an organizational perspective, the Ministry of External Affairs (MEA) no longer has a monopoly on all instruments of aid policy whilst the influence of the Ministry of Commerce in aid allocation has grown (Chaturvedi, 2008). Various ministries and institutions would be also represented in the IIDC, including the Ministry of External Affairs (MEA)

Then how India differs from other BRIC economies in some key issues is also discussed.

Nice read..

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