Published in The Financial Express, Anniversary Issue 2013: 1st Instalment on Thursday, 19 December 2013.
South-South cooperation and changing BD aid scenario
Fahmida Khatun
The role of overseas development assistance (ODA) in achieving the Millennium Development Goals (MDGs) which targets health and education is quite pronounced in low income countries such as Bangladesh. Although Bangladesh has made major progress in terms of a high and steady economic growth of around 6 per cent during the past decade, the country continues to be home to a large number of poor people. The Household Income and Expenditure Survey (HIES) of Bangladesh reveals that 31.5 per cent of its population live below the poverty line and cannot afford the nutritional requirement of 2122 calories per day in 2010 (BBS 2010).
The volume of ODA to Bangladesh has increased both in terms of commitments and disbursements (Figure 1), though as a share of GDP it decreased from 5.8 per cent in 1981 to 1.6 per cent in 2011 (GoB 2011). Despite this gradual decline, at present about 50 per cent of Bangladesh’s ADP budget is supported by ODA. The per capita ODA has also declined from US$13.8 in 2008 to US$9.3 in 2011 (OECD 2012).
The nature and composition of ODA to Bangladesh have changed over time. Loans constituted 49 per cent of all foreign aid in the first decade after independence (1971-1980), but this share increased to 68 per cent in the period 2000-10. In terms of types of aid, project aid and budget support received highest allocation during this latter period. It may be mentioned here that in government records, ODA is categorised as food aid, commodity aid or project aid. Food aid covers payment for food and costs associated with food supply such as transport, storage and distribution. Commodity aid represents funding for consumer items, intermediate inputs and industrial raw materials. Project aid is the financial assistance for projects and programmes, generally listed in the annual development programme. During 1971-80, commodity and food aid constituted 42 per cent and 32 per cent respectively of the total aid to Bangladesh. But as the country developed, during 2001-12 they accounted for only 4 per cent and 2 per cent respectively of total aid. Conversely, the share of project aid grew from 26 per cent during 1971-80 to 94 per cent during 2000-10 (Figure 2). These shifts demonstrate Bangladesh’s reduced dependence on food aid and its greater capacity to implement development projects and repay project loans.
Major sources of ODA to Bangladesh include the World Bank, the ADB and Japan which collectively constituted about 52 per cent of the total external assistance to the country between 1972 and 2010. Among these donors, the World Bank alone provided 23 per cent of total aid to Bangladesh in 2011. Assistance from the World Bank and ADB has been primarily in the form of loans. In the recent period (2006-11), among the top 10 bilateral donors to Bangladesh, Japan provided more than 80 per cent of its support as grant while the rest gave their whole support as grants.
The global landscape of external resources has, however, changed over the years. The importance of ODA relative to other types of finance such as tax revenues, foreign direct investment and workers’ remittances has declined. In view of increasing demand for international finance for development and continuous growth of emerging economies such as India, China and Brazil compared to developed countries there has been a new focus on South-South Cooperation. India and China are the major economic partners of Bangladesh in Asia. However, Bangladesh has a significant trade deficit with both the countries. Together they accounted for about 35 per cent of Bangladesh’s import payments and only about 3.6 per cent of its export receipts in 2011 (http://www.bangladeshbank.org/econdata/import/imp_pay_country_commodity.php).
“In an attempt to improve trade relations with Bangladesh both India and China have offered duty-free market access for a number of Bangladeshi products. India provided Bangladesh and other least developed countries (LDCs) duty-free access for all items outside of a negative list by reducing tariff rates to zero in July 2008. In late 2011, India reduced its sensitive list for LDCs under South Asian Free Trade Area (SAFTA) from 480 items to 25 items and granted zero basic customs duty access on all the items (http://www.saarc-sec.org/areaofcooperation/detail.php?activity_id=35). Since 1972, ODA disbursements from India and China have been inconsistent. Their share of total ODA has been fluctuating, ranging from less than 1 to 4 per cent in recent years. Compared to India, China has increased foreign aid disbursements to Bangladesh, albeit erratically (Figure 3). India provided development aid in the first two decades after independence. However, since the early 1990s the role of India’s development assistance to Bangladesh was minimal. This can partly be linked to the political relationship between Bangladesh and India which was not smooth during the larger part of the period after the independence of Bangladesh. Development assistance by India and China has been mostly in the form of project loans and lines of credit (LOC) (http://www.erd.gov.bd/images/FlowBook/1011/Tbl-3.0.pdf).
In 2010, India extended an LOC worth US$1 billion to Bangladesh primarily for infrastructure, communication and transportation, including supply of locomotives and passenger coaches, procurement of buses, and dredging projects. At the time, this was the largest commitment India had made to any country. Terms of the LOC had included an interest rate set at 1.75 per cent and a requirement that 85 per cent of the projects’ goods and services be imported from India. The government of Bangladesh objected to these burdensome conditions, having struggled for months to implement projects financed by the LOC (http://www.thehindu.com/news/international/bangladesh-to-abandon-8-projects-under-indian-credit/article2807892.ece). In May 2012, India finally agreed to ease the conditionalities. The interest rate for 81 per cent of the LOC has been reduced to 1 per cent (with the rest to be converted to grants) and the quota for procurement has been trimmed to between 65 and 75 per cent.
China has also taken steps to address concerns of trade imbalance and is working to reduce tariffs imposed on jute and textiles, two of Bangladesh’s major exports. Since 2010 China has granted duty-free access of 4,721 Bangladeshi products to its markets, provided that local value additions are at least 40 per cent. China’s notable contributions to Bangladesh are the six ‘friendship’ bridges, a massive conference centre and a fertiliser factory in Chittagong through concessional lending. China is also seeking to mitigate Bangladesh’s energy deficit by developing the country’s natural gas resources. Bangladesh and China are also planning to construct a Bangladesh-Myanmar-China road link through Kunming to enhance economic cooperation.
Globally, South-South cooperation has grown significantly in the last decade, but often not as grant ODA, rather in the forms of private investment, knowledge sharing or concessions on market access. As opposed to traditional donors, South-South cooperation often puts more emphasis on infrastructure and productive sectors rather than on poverty alleviation or fulfilling social needs. This is also the case in Bangladesh where South-South donors focus on physical infrastructure and hardware as part of building economic cooperation. Nevertheless, it is felt by many in Bangladesh that India can play a far more active role in fostering regional cooperation. Bangladesh expects grants rather than supply credits since the latter are costly to Bangladesh.
Observers view that India and China do not offer very many concessional loans and software assistance because they have not yet taken advantage of the diplomatic leverage that aid has to offer. It is also surmised by many that Southern donors may be resisting Western models for development cooperation, in spite of the pressures from Northern donors, and prefer to experiment with their own strategies such as the so-called “Beijing Consensus”. However, the Fourth High Level Forum on Aid Effectiveness, held in Busan in December 2011, has proven that there is an aggressive drive to bring China and India into the folds of global development partnership, where these emerging donors will follow principles of the Organisation for Economic Co-operation and Development on aid effectiveness (http://www.guardian.co.uk/global-development/2011/dec/01/china-india-aid-partnership).
In terms of support to trade from these countries Bangladesh is yet to receive anything substantive. Many feel that fair access to large markets in India and China through negotiations and agreements is the best bet with these countries. Bangladesh has benefited little from regional trade agreements such as SAFTA, Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the Asia-Pacific Trade Agreement (APTA) which are perceived to be largely symbolic. As is known, under the SAFTA accord, Bangladesh receives preferential tariff treatment from India, Sri Lanka and Pakistan for items outside of their respective sensitive lists, many of which have significantly reduced in size over time. Under APTA, China and South Korea have eliminated customs duties for 83 and 139 goods, respectively. However, due to several non-tariff barriers (NTBs), the private sector cannot take advantage of these agreements. NTBs that are faced by Bangladeshi exporters to Indian and Chinese markets include: (a) market access difficulties faced on account of requirements relating to Sanitary and Phytosanitary measures, Technical Barriers to Trade, certification, labelling, registration, laboratory testing and standardisation in place in partner countries; (b) difficulties faced by Bangladeshi exporters due to infrastructural constraints that impede cross-border movement of goods from the exporting countries (lack of infrastructure, low handling capacity, lack of warehouse facilities, etc.); (c) imposition of para-tariffs, surcharges, value added tax, sales tax, and other duties beyond most favoured nation (MFN) tariffs; (e) requirements of licences and permits from importing countries; (f) anti-dumping and countervailing measures; (g) interpretation of rules of origin; (h) lack of availability of adequate letter of credit facilities and necessary financial intermediation; and (i) visa difficulties for Bangladeshi exporters.
In view of the above it is evident that South-South cooperation is yet to play any significant role in Bangladesh. Distrust among neighbours and political tensions are hindering progress in South-South cooperation. At present there is no optimism about increases in aid flows to Bangladesh from its neighbours in light of recent experience. Therefore, South-South cooperation cannot be seen as a substitute for traditional ODA in case of Bangladesh. This however, does not undermine the need for continuous efforts towards improving South-South cooperation. It can be a win-win situation for all in terms of improving trade, investment and finance if the region can be integrated through higher economic cooperation. Political will is of course the pre-condition for fulfilling such aspiration.
Dr Fahmida Khatun is the Research Director at the Centre for Policy Dialogue (CPD). e-mail: fahmida@cpd.org.bd