Comment: Changing role of international donors

The next Sri Lanka Development Forum will be held on January 29-30 in Galle where international donors from 50 countries will meet and discuss over two days on the quantum of aid Sri Lanka should receive.

All preparations are under way to host it in the once tsunami ravaged Galle. This will be a good opportunity to showcase the construction work done by the government to the international community. The government has completed 90% of the tsunami reconstruction work while some NGOs are marking time.

According to political analysts there is no grave situation in Sri Lanka for donors to suspend financial assistance or enforce sanctions. This myth has been created by groups that support the LTTE including some NGOs and the media. However, the LTTE is attempting to do the maximum damage to the image of the country to block financial assistance from the donors.

When the People's Alliance was in power, after the Paris aid forum, the then Finance Minister Prof. G. L. Peiris and then Minister S. B. Dissanayake started this political game saying that the donors offered billions of Dollars as they had confidence in the government.

Thereafter every donor meeting wound up with politicians boasting of their success on getting billions of dollars.

Every year the Finance Ministers broke records because donors generally increased their assistance on high interest credit. In 2002 the UNF government attempted to show that they were the masters of getting foreign aid. It was true and after agreeing to very controversial economic reform which people opposed continuously it got record amounts of foreign aid.

Unfortunately those reforms and decisions they agreed upon with donors cut short the UNF government's life span in the government up to two years. As a result of the unfortunate tsunami disaster, Finance Minister Sarath Amunugama broke all records and got the highest donor assistance in 2005, most of them grants.

Though the aid received gets wide publicity, the conditionality and interest rates do not get similar publicity because they are unpopular and politically negative.

However, with all negatives and criticisms foreign aid has played a crucial role in the country, especially in government investment on mega infrastructure projects. Over time the nature of foreign aid, mainly the assistance from donor agencies has changed.

Generally the amount of grants has reduced. Conditionality and tough economic conditions tied with international financial aid relaxed as in the present global economy countries are willing to chose those reforms to survive or face global competition.

The fall of the Soviet Union and Berlin Wall broke many walls across countries and now countries do not consider some of the conditions of the IMF and the World Bank as negative conditions but essential requirements to compete in world trade. For instance, the IMF or World Bank does not enforce conditions on China or Vietnam. Instead those countries negotiate with the WTO on conditions to enter the WTO or get access to their markets.

During the last decade rapid global political-economic development changed every entity. Our main donors, the international financial institutions too faced severe criticism. Their policies were unsuccessful in many parts of the world which finally made them change their strategies.

After the Shanghai conference in 2004 the WB declared these new strategies and now they prefer a more participatory approach in development financing where policies are formulated by the individual countries.

On the other hand foreign aid has been replaced by FDIs and today governments are more concerned about FDIs than foreign aid.

One argument against foreign aid is that donor countries give this money to poor countries to sell their products and services and get them back through supply of technology and consultancy.

However, FDIs create employment, provide technology and knowledge and is more effective in the development of poor countries. Today mega infrastructure projects such as highways and ports are undertaken by the private sector with FDIs.

The IMF's departure should be viewed in this world political economic context. The IMF has done more in the structural changes of the economy. Some policies that were once highly criticised when they were introduced are now considered as good. The introduction of the floating exchange rate is one such policy.

However, the IMF in Colombo failed to implement some of the reforms it continuously insisted upon, because public opinion was more strong and the parties, in power, would face serious repercussions if it went against the people's power.

Privatisation of strategic public enterprises and opening of the capital account are among them. Under today's composition of the ruling party these policies cannot be implemented or the government is not ready to follow the IMF dictates.

Instead of the IMF's instructions in the present global economy many institutions carry out the same policies in a more democratic manner. In a report published last week Asia was ranked as the world's freest economies in 2007, with Hong Kong ranked first and Singapore second.

Reports such as this promote economic and structural reforms. This is exactly what the IMF attempted to achieve. The outcome of the donor forum will depend on those broader development conditions and policy changes and not on petty reasons.