A Call to Reform Economic Development Aid
An Interview with Dr. Saeed Ahmed
Dr. Saeed Ahmed
About a year ago, turmoil erupted around the international aid system, in part because the Trump administration rapidly dismantled USAID and cut funding for international humanitarian aid. All this took place after Dr. Saeed Ahmed wrote his book titled The Shady Economics of International Aid. His writing proved to be prescient.
The book helps us to understand that not all international aid is the same. While strongly supporting humanitarian aid, Dr. Ahmed’s book raises questions about the efficacy of economic development aid. In this context, the book makes a vital contribution for reforming a vital global system in ways that can improve the lives of millions of people.
Dr Ahmed has a PhD in economics from Cambridge University. He's a leading expert in international finance and development, monetary policy, public finance, and tax policy. In recent years, he's worked as the chief economist at Pakistan's monetary policy committee, and at the State Bank of Pakistan. He's also worked as a senior advisor for the International Monetary Fund. The following interview was edited for length and clarity.
Glenn McMahan (editor at Upriver Press): Your work is based on extensive economic data, but it's also deeply rooted in your own personal experience as a child and as an adult in Pakistan. Before we talk about the economics, could you share a little about your upbringing and how that influenced your motivations for writing the book.
Dr. Ahmed: This book is deeply personal to me. It's a reflection of my lived experience. I was born into a low-income family in rural Pakistan. When I was a child, my family went through difficult financial times. I lost my father when I was ten years old. And from that point on, we really had to struggle to make ends meet. So, I have seen poverty up close, both as a child and as a young adult. I still visit my hometown regularly. It's painful to see how little has changed. In many ways, things have become worse, despite billions of rupees spent through government programs. So, when I look at the economic data on poverty and literacy in rural Pakistan, it's not abstract to me. My hometown still has a basic literacy rate of only 43 percent. The conditions of sanitation and access to water, everything seems to be worse. The on-the-ground realities do not align with the many hyperbolic narratives advanced by international development agencies, or donor agencies as we commonly call them. If we look at the economic evidence and actual realities, experience these narratives do not fit. This is also true around the world. The international aid system is so broken that it is affecting hundreds of millions of people trapped in poverty in developing nations. And it's affecting taxpayers and wealthy nations, costing them over $200 billion annually. My book is about helping real people. That is what economics is about: caring for people.
Glenn: You argue that not all international aid is the same. Perhaps you could explain the differences.
Dr. Ahmed: There are many categories of aid. There's military aid, humanitarian aid, refugees’ assistance, and economic development aid. What happens is that politicians and the media often lump everything together. To evaluate the impact of international aid, it's important to recognize the distinction between different categories.
Humanitarian aid is provided in response to emergency situations, such as geopolitical conflicts like the war in Ukraine. It Is also provided as a response to natural disasters, such as floods and earthquakes, or in response to a public health crisis, such like the Covid-19 pandemic.
Economic development aid aims to end poverty and promote long-term sustainable development in the receiving countries. The funding comes, ultimately, from taxpayers in wealthy nations, but it flows through “donor agencies,” such the World Bank, the International Monetary Fund, and the Asian Development Bank, to name a few.
Glenn: You’ve said that the optimistic narratives generated by the donor agencies do not align with the economic data or on-the-ground realities. Can you explain what you mean?
Dr. Ahmed: To be very clear, I do not criticize humanitarian aid in my book. Humanitarian aid mostly delivers tangible benefits to people in need. Many humanitarian aid workers are risking their lives. But when it comes to economic development aid, the story is different.
Glenn: How so?
Dr. Ahmed: If we look at the websites of these donor agencies, nearly all of them display poverty alleviation as their primary objective. Some also focus on broader economic development agendas. To gain the support of taxpayers, the donor agencies present themselves as torch bearers for a better world, as organizations that work to end extreme poverty and tackle inequality, hunger, disease, migration, and so on. However, this narrative does not match the reality. Despite the flow of billions in taxpayer dollars in aid over decades, many developing countries have in fact deteriorated in terms of human development, poverty rates, government effectiveness, tax collection, and access to justice.
Glenn: Can you give me an example?
Dr. Ahmed: Take the example of Africa. The continent has received a significant share of foreign aid over the past five or six decades. And yet it has the highest number of people living in extreme poverty. In 2022, Africa received around $53 billion. In 2023, in Sub-Saharan Africa alone, there were about four hundred million people living in extreme poverty. The poverty rate has actually increased by 45 percent compared to the poverty rates in 1990. Despite the flow of billions of dollars in economic development aid, Africa is today home to three quarters of the world's poor. I provide many other examples in the book.
Glenn: Because of your high-level work for the Pakistan central bank and for the IMF, you dedicate a portion of the book to Pakistan’s situation, which is, you say, a case study of what happens all over the world.
Dr. Ahmed: Yes. The major donor agencies have been involved in nearly all sectors of Pakistan's economy for decades. Since the year 2000, a few agencies have funded three hundred economic development projects across various sectors: agriculture, health, urban management, sanitation, water, finance. The World Bank alone has also financed around 150 programs in this period. Despite this extensive engagement, it is difficult to find positive outcomes. The book offers a detailed analysis of these projects and the poor results.
It's important for me to add that the problem is caused not only by the donor agencies. My book also shows that the countries that receive billions of dollars in international aid also play a role in this broken system. Both groups share responsibility for the deplorable conditions and misgovernance in each country.
Glenn: In the book, you argue over-reliance on international aid weakens the nationals’ ability to develop their own programs and run their economies.
Dr. Ahmed: Yes, I show that too much reliance on external support frequently weakens the state’s institutions. I have seen this in Pakistan. Donors often impose their own objectives and frequently override national authorities. Likewise, the national leaders allow foreign entities, which have no general commitment to the country's development, to take charge. What happens is that the national leaders essentially outsource economic policymaking to, for example, the IMF.
Glenn: What is the outcome?
Dr. Ahmed: It’s often the case the that the donor agencies’ priorities do not align with the nation’s critical needs. Moreover, many recipient nations have accumulated unsustainable debt because of unchecked reliance on foreign aid. The debts can be so onerous that the government has less capacity to provide for the real needs of people. And that weakens the government’s legitimacy in the eyes of citizens. Pakistan is now facing unsustainable debt. Pakistan's interest payments, as a ratio of the governmental revenues, is close to 60 percent. Pakistan's government neither has the capacity nor the financial resources to spend on the people.
Glenn: This appears to have happened recently in Kenya. We saw some civil strife there with protests in the streets. Some were violent. The government faces a high debt. It needs to pay that debt by raising taxes. And, of course, that puts pressure on the local population, which in turn causes a revolt. Is that an example of the type of thing that can happen when countries have unsustainable debt.
Dr. Ahmed: Absolutely. In Pakistan, everyone is criticizing the tax policies, which have been shaped by the IMF. The government has compromised on the basic tax principles of equity. The tax system has become very regressive. The tax burden does not fall proportionally across the sectors. The nation could become like Kenya, where people came out to the street. That happens when the government stops caring for their people. This is why developing countries should reduce their reliance on foreign assistance. Excessive reliance on foreign aid has only exacerbated the debts.
Glenn: You say that governments need to assume responsibility and initiate internal reforms. Or, as you say, put their own houses in order. What are the primary problems at the national level?
Dr. Ahmed: My book discusses those problems in detail. But many problems originate from the robust alliance of influential elites, including politicians, bureaucrats, and businessmen. And this formidable nexus obstructs meaningful efforts to reform the economy. One serious problem that I discuss in my book is, of course, corruption, which runs deep and wide in many developing countries. It proliferates in infrastructure projects, tax offices, and government departments.
For example, the lack of good governance in public institutions in Pakistan has reached a critical point. State enterprises are bleeding millions of rupees annually, which puts strain on public finances. There is a lot of fiscally irresponsible spending. Pakistan needs to urgently stop the wasteful use of public resources.
Glenn: In light of this overreliance on international economic development aid, is your view that donor agencies should simply discontinue the financial aid?
Dr. Ahmed: I have proposed a six-point plan to reform the international aid system. My intention in the book is not to discredit the concept of international aid. In fact, my aim is to identify the problems so we can design solutions.
As I said earlier, the foremost point is that developing countries need to put their houses in order. Without that, all the foreign development aid will not help. The recipient countries should reduce their dependency, and they should increase their self-reliance.
The second factor is that we need to reform the economic development aid system. Donor agencies, like the IMF and World Bank, have their deficiencies. They need to bring about reforms in their governance structure. I have provided suggestions for how to make these agencies more effective. In addition, private sector professionals need to do more to help.
Glenn: One of your ideas for reform is related to debt forgiveness. Could you explain?
Dr. Ahmed: I have made a strong case for blanket forgiveness for those countries which are in severe debt distress. In some African countries, the debt has grown by 183 percent since 2010, and the average debt-to-GDP ratios have increased from 30 to 60 percent in the last ten years. Even before Covid-19, African countries were paying more on interest payments than on health. Pakistan is paying more on interest than it pays on education. The country pays six times more on interest payments than it does on health. Unless you give these countries some breathing space, no other reform is going to work.
Glenn: Let me end by quoting a paragraph from the book’s preface. “The media will report sporadic and temporary events, and politicians will come and go. In this context, my book was designed to help people think and not react. And with the economic conditions of millions of people being at stake, one hopes that people will do more thinking than reacting.” Let’s hope that policymakers, political leaders, and taxpayers will give thoughtful attention to your book and its proposals.
You can find more information about The Shady Economics of International Aid at this link.
