India’s Approach to Development Cooperation

Sachin Chaturvedi, Anthea Mulakala

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780367874179
• eBook ISBN: 9781317365532
• Edition: 1
• Topic: Economics
• Subtopic: Ethnic Studies
• Index: Economics

India is emerging as a key player in the development cooperation arena, not only because of the increasing volume and reach of its south-south cooperation but more so because of its leadership and advocacy for the development of a distinctly southern development discourse and knowledge generation.

This book traces and analyses the evolution of Indian development cooperation. It highlights its significance both to global development and as an effective tool of Indian foreign policy. Focussing on how India has played an important role in supporting development efforts of partner countries in South Asia and beyond through its various initiatives in the realm of development cooperation, the book tracks the evolution, genesis, and the challenges India faces in the current international context. The contributions provide a rich mix of academic and government, policy and practice, Indian and external perspectives. Theory is complemented with empirical research, and case studies on countries and sectors as well as comparisons with other aid providing countries are presented.

The book is of interest to researchers and policy makers in the field of development cooperation, the role of emerging powers from the South, international development, foreign policy and global political economy.

1
Shaping Indian development cooperation

India’s mission approach in a theoretical framework

Saroj Kumar Mohanty

Introduction

India has a long history of supporting fellow developing countries through different forms of assistance; these efforts have occupied the centre stage of India’s public policy since the pre-independence days. Over the years, the nature and content of Indian development assistance have undergone radical transformation, reflecting changing global situations and India’s own varied experience as both an assistance recipient and provider. This has encouraged the development of a distinctively Indian cooperation strategy and a set of current concerns on improving aid efficacy.

India has a notable legacy of supporting those who have fought against colonial powers. It has championed the cause of anticolonialism across the globe and worked to unite like-minded countries in remaining nonaligned, independent of the super-powers. During the decolonisation period, India’s mission aimed to empower and industrialise the newly independent countries, responding to their demands in diverse sectors, including trade, investment, technology, and capacity building, among others. Such a philosophy, informed by recipient experience and focused on the needs of friendly countries in the developing world, has largely shaped the economic foundation of Indian foreign policy. India’s engagement with these countries has ranged across diverse sectors, even though support has remained limited and commensurate with the ability to deliver. However, in the absence of an established conceptual framework to guide long-term policies and actions – one evolved through academic research with firm theoretical foundations – India arguably has achieved limited success in crafting an effective, result-oriented development cooperation approach.

The present chapter has a two-fold objective: (1) to outline a suitable development cooperation approach that conforms to India’s long-standing norms of foreign policy and (2) to situate this Indian strategy within a formal framework of South-South cooperation (SSC). The chapter begins with an overview of the economic theories most often applied to development assistance and argues that a strategy with theoretical underpinnings would presumably make India’s cooperation initiatives more efficient, effective, and predictable. The succeeding section discusses the influence of development theories on development assistance approaches; it focuses on the theoretical foundations of the structuralist approach and their impact on cooperation. The third section will address salient features of India’s development financing strategy, sometimes referred to as the ‘mission approach’; this section also elaborates the ‘development compact’ underpinning this strategy. The conclusion will summarise our key findings and highlight the distinctive features of the Indian model.

Economics theory and development assistance: the Indian dilemma

The experiences of development assistance providers suggest that no individual country should require an independent and exclusive theory for aid and financial assistance. Yet conventional approaches generally reflect dominant perspectives on international development and their roots in macroeconomic theory. The world economy has witnessed two competing theories in the post-war period: monetarist and structuralist approaches to economic development and, by extension, development cooperation (Yanagihara 2006; Lim 2011; Mohanty 2015a). The Organisation for Economic Co-operation and Development Development Assistance Committee (OECD-DAC) approach rests on monetarist principles, supported by the Bretton Woods Institution (BWI)¹ and critically referred to as the Washington consensus (Mohanty 2011). The DAC approach has pursued the BWI policies in making aid disbursement decisions, focusing on macroeconomic targets, conditionality, budgetary support, and so forth.

India has vigorously pursued a sturdy development approach over the last decade, allying itself effectively with development assistance programmes in Southern countries. Yet Indian policy reflects a lack of comfort with the prevalent DAC narrative. India has consistently sought a prudent, well-defined development cooperation strategy, one consonant with the long-pursued strategy of promoting partnership, solidarity, and mutual respect in international relations – but rarely identified with the theories underpinning DAC aid. Although this approach thus reflects Indian foreign policy principles, it has not to date assumed the status of an alternative economic strategy and rarely undergoes scrutiny from that perspective.

Nonetheless, the emergence of Southern development assistance providers, along with their changing perceptions about economic assistance, has generated new debate on diverse, multifaceted approaches to development cooperation. Most of these Southern providers began their journey under the banner of SSC. The aid policies of emerging donors have become attractive for Southern recipients and contribute significantly to their growth efforts (Chaturvedi 2012; Chaturvedi, Fues and Sidiropoulos 2012). For a long time, India has searched for a credible development cooperation approach that would better utilise taxpayer resources with a greater degree of aid effectiveness, but without deviating from the main framework of SSC. The OECD-DAC has often criticised emerging-country approaches to development assistance for their lack of a sound theoretical basis and robust implementation policies; but India has yet to evolve an alternative model to justify, shape, and assess its practices. This chapter will give an overview of what such a model might look like. We will argue that emerging-country development assistance programmes share features that align them with the structuralist approach to growth. We will then evaluate how, by adapting to this tradition, India may improve the efficacy of its own strategy.

Divergent approaches to development cooperation

The monetarist and structuralist schools in economics

Conventional wisdom holds that the macroeconomic conditions determine the economic growth of nations (Mohanty 1996). Regarding linkages between economic growth and macroeconomic stability, monetarist and structuralist schools differ widely in their underlying principles and policies.²

Their fundamental disagreement centres on macroeconomic stability. According to the monetarists, macroeconomic stability is necessary to have growth, but structuralists consider that growth is possible with a certain level of macroeconomic instability. Macroeconomic stability refers to several variables, representing various facets of the macroeconomic situation. The barometer of macroeconomic stability has been inflation. Therefore, monetarists believe that inflation poses the main obstacle to economic growth because it reduces real income and thus aggregate demand in the economy. Structuralists believe inflation naturally accompanies growth and stems from structural inelasticity in economic systems (Valenzuela Silva 2008: 68–69). For example, the monetary approach to balance of payments (BOP) suggests that excess money supply causes disequilibrium in exchange rates and BOPs. In short, macroeconomic disequilibrium is a monetary phenomenon, manifested in rising prices, and can only be addressed effectively with monetary policies (that is, controlling inflation by influencing money supply in the economy through the adjustment of interest and exchange rates) (Mohanty 1996).

On the other hand, the structuralist approach defines macroeconomic disequilibrium in terms of supply constraints and underemployment (two forms of inelasticity). Hence, policy corrections focus on easing supply bottlenecks and creating demand, thus preserving macroeconomic stability and promoting economic growth. Structuralists argue that the convergence between aggregate demand and aggregate supply achieved through monetary policy interventions may not lead to price stabilisation if underlying sectoral imbalances persist (Bilquee 1988; Lim 2006; Valenzuela Silva 2008).

On the question of macroeconomic conditions conducive for economic growth, the schools once again differ. Whereas the monetarists argue that growth requires economically stable conditions, structuralists emphasise that it can occur even in situations of macroeconomic instability; many developing countries operate in a situation resembling ‘underemployment equilibrium’³ (Mohanty 1996), although inflation and other macroeconomic imbalances are bound to persist. Therefore, growth with instability could prove a reality for developing countries. Unsolicited intervention in arresting moderate levels of inflation could have a negative impact on growth prospects. Structuralists oppose policies such as conditionality, budgetary interventions, macroeconomic targeting, and so forth because these policies impede growth but cannot influence moderate levels of inflation (Chenery 1975; Mohanty 1996).

Many orthodox stabilisation programmes (embodying monetarist principles) have been implemented in developing countries, including Chile (1956–1958 and 1973–1978), Argentina (1959–1962 and 1976–1978), Brazil (1964–1973 and 1982–1983), Bolivia (1956 and 1985), Peru (1959 and 1975–1978), and Venezuela (1988), among others. In most cases, the programmes have failed to deliver either stability or growth (see e.g. Mann and Pastor 1989). Moreover, there is little theoretical justification for conditionality/stabilisation policies in crisis-ridden economies – which may be aid recipients at the same time (Kay 1990; Boianovsky 2012). Therefore, many critics do not see monetarist development cooperation approaches as likely to ensure speedy economic recovery (Meller 1994; Oxfam 2006; Boianovsky 2012; Mohanty 2015b).

On the other hand, the structuralist framework has evolved its own heterodox⁴ stabilisation policies, implemented in several Latin American countries, including Argentina (Austral Plan), Brazil (Cruzado Plan), Peru (Inti Plan), and so on.⁵ These policies have had mixed results in achieving macroeconomic targets (Ambler and Cardia 1992). However, some programme countries report encouraging outcomes from blending orthodox and heterodox stabilisation policies – notably Israel and Mexico. Upon completion, the programmes in these countries reached several of their goals, particularly in three areas: achieving macroeconomic targets, demonstrating their governments’ intention of taking ownership of the programmes, and protecting the social sector to mitigate the adverse impact of SAPs.

Have development theories influenced cooperation approaches?

After reviewing seventy-five years of debate between monetarists and structural-ists, we can see that the monetarist approach to BOP has deeply influenced DAC policies. Meanwhile, policies consistent with structuralist principles appear to have shaped development cooperation in emerging countries, although this link has yet to receive a coherent analysis. The DAC approach to development cooperation rests on the 2005 Paris Declaration, which draws its theoretical support from the Washington consensus (Williamson 1990). The lending principles of the IMF and the World Bank mostly reflect the overarching approach of the monetarists. A certain degree of policy coherence therefore exists between the BWIs and the DAC approach towards development assistance.

The DAC seeks to make aid programmes effective through policies of conditionality, budgetary support, macrotargeting, and other monetarist principles. This approach has often drawn criticism because of the complex nature of its financial procedures and the risks involved in adhering to conditionality (Oxfam 2006). Moreover, several developing countries have failed in the past to comply with stringent conditionality because of domestic compulsions, despite sincere efforts. Severe natural disasters and other unforeseen situations have often prevented national governments from maintaining previously agreed macroeconomic targets, leading to programme failures – at an enormous cost to the programme countries. One might cite, for example, the emergency that arose when Bangladesh could not maintain its quarterly credit-flow limit because certain donors failed to abide by their commitments; the country faced acute problems in the 1980s following the withdrawal of IMF support in the midst of the structural adjustment programme (Matin 1986; Rahman 1992).

By contrast, emerging countries argue that their small-scale development cooperation efforts could support recipients in specific sectors, linking projects directly with people who may benefit from them. Although small in size, such projects operate in social and production sectors such as health, infrastructure, services, pharmaceuticals, agriculture, and manufacturing, among others, without linking the aid programme to the recipient countries’ macroeconomic performances. The funding principles of emerging countries assert that improved supply conditions in needy sectors may support the potential for sustained growth. Such assertions, however, have not to date invoked the support of any theoretical principles. Therefore, traditional donors often criticise such project-based development cooperation on the grounds of its (often) partisan approach, nontransparency, and as suggested earlier, lack of sound theoretical basis (Smith, Fordelone and Zimmermann 2010; EIAS 2013).

Many emerging countries note that although the scale of cooperation resources they can offer lags behind that of more developed countries, the demand for such resources has surged.⁶ This may reflect the fact that emerging countries often engage in sectors where ‘traditional donors’ have minimal or no presence. The growing dependence on cooperation from emerging countries may also indicate efficient delivery systems (Chaturvedi, Kumar and Mendiratta 2013). Such projects may prove highly effective precisely because their financing does not depend on the recipient’s overall macroeconomic performance or on conditionality.

This has simplified the disbursement procedures for partner-country resources because they do not require the complex procedures of macrotargeting. Despite their lack of cl...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of boxes
• Notes on contributors
• Foreword
• Acknowledgements
• List of abbreviations
• Introduction
• 1 Shaping Indian development cooperation: India’s mission approach in a theoretical framework
• 2 The role of aid in India’s economic development cooperation: finance, capacity building, and policy advice
• 3 India’s development cooperation through capacity building
• 4 Towards health diplomacy: emerging trends in India’s South-South health cooperation
• 5 India’s credit lines: instrument of economic diplomacy
• 6 Civil society organisations and Indian development assistance: emerging roles for commentators, collaborators, and critics
• 7 Prosper thy neighbour: India’s cooperation with Nepal
• 8 The India–Afghanistan development partnership
• 9 India’s evolving blueprint for cooperation with Africa
• 10 Chinese perspectives on India’s development cooperation
• 11 Australian and Indian development cooperation: some similarities, more contrasts
• 12 Conclusion
• Index