Aid Paradoxes in Afghanistan

Building and Undermining the State

Nematullah Bizhan

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138047617
• eBook ISBN: 9781351692656
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

The relationship between aid and state building is highly complex and the effects of aid on weak states depend on donors' interests, aid modalities and the recipient's pre-existing institutional and socio-political conditions. This book argues that, in the case of Afghanistan, the country inherited conditions that were not favourable for effective state building. Although some of the problems that emerged in the post-2001 state building process were predictable, the types of interventions that occurred—including an aid architecture which largely bypassed the state, the subordination of state building to the war on terror, and the short horizon policy choices of donors and the Afghan government—reduced the effectiveness of the aid and undermined effective state building.

By examining how foreign aid affected state building in Afghanistan since the US militarily intervened in Afghanistan in late 2001 until the end of President Hamid Karzai's first term in 2009, this book reveals the dynamic and complex relations between the Afghan government and foreign donors in their efforts to rebuild state institutions. The work explores three key areas: how donors supported government reforms to improve the taxation system, how government reorganized the state's fiscal management system, and how aid dependency and aid distribution outside the government budget affected interactions between state and society. Given that external revenue in the form of tribute, subsidies and aid has shaped the characteristics of the state in Afghanistan since the mid-eighteenth century, this book situates state building in a historical context.

This book will be invaluable for practitioners and anyone studying political economy, state building, international development and the politics of foreign aid.

Part I
Conceptual framework

Aid and state building

1
Aid and state building

Introduction

Scholars have different views on the impacts of aid. One group of scholars argues that aid has negative political effects similar to those of oil revenue and that aid reduces government accountability. The second group of scholars argues that aid is different from oil revenue and that its impacts are therefore distinguished from those of oil revenue. This chapter attempts to assess these two schools of thought on aid impacts and explores the causal mechanism that can explain the aid effects. The chapter concludes that the relationship between aid and state building is complex. Aid can thus have positive and negative effects that depend on the aid recipient’s state capacity, aid modality, policy choices and pre-existing socio-political and economic conditions. This chapter provides the conceptual framework for analysis of the effects of different income sources on state building before 9/11 and of foreign aid after 9/11 in Afghanistan in the proceeding chapters.

Accordingly, this chapter reviews the effects of foreign aid on state building in the literature and builds on rentier state theory. The chapter explores whether aid rentier effects are similar to those of oil revenue by comparing the three mechanisms – taxation, spending and group formation – through which rentier effects work. This chapter argues that aid may have rentier effects but that such effects differ from the rentier effects of oil revenue and may have paradoxical implications for state building and democratic accountability based on prevailing conditions. These effects largely depend on donors’ interests, aid modality and the recipient’s pre-existing institutional and socio-political conditions.

Both aid and oil revenue are unearned. They enable states to derive revenue with little political and organizational efforts in relation to their citizens. Oil-rich countries use low tax rates and high spending to relieve pressure for greater public accountability, which works through the mechanisms of taxation, government spending and group formation. Oil-rich governments use fiscal measures such as lowering tax rates or not taxing the population at all; increasing government spending, especially on patronage; and dispensing of largess, preventing the formation of independent social groups, a necessary precondition for democracy.¹ These measures alleviate the pressure for greater accountability.

However, foreign aid, unlike oil revenue, is conditional and less reliable, and the recipient government does not have full control over its use. These characteristics of aid largely distinguish the effects of aid from the rentier effects of oil revenue. Unlike oil-rich states with a weak taxation function and low revenue collection,² the impact of aid on revenue collection is mixed.³ Aid is often conditional on increases in revenue collection, and the recipient government may also have the incentive to strengthen the taxation system because the flow of aid is not permanent.

Because aid is conditional, the recipient does not have full discretion over it and is relatively constrained from spending it on patronage. How much discretion a recipient government has over the use of aid depends on foreign donors’ intentions and the recipient capacity. Foreign donors typically use bypass tactics. They bypass the state by spending a large portion of aid outside the government budget process. Thus, unlike undemocratic oil-based rentier states with little government accountability, government accountability in aid-dependent states is largely to foreign donors, reducing the recipient government’s accountability to its citizens. In addition, this type of aid can create a parallel public sector. Moreover, unlike oil revenue, aid is often used to promote the formation of groups independent of the recipient government – Civil Society Organisations (CSOs) or non-governmental organizations (NGOs). While such groups are independent of the recipient state, they are dependent on foreign donors for funding; hence, these groups tend to be accountable to donors rather than vice versa.

This chapter first explores why state revenue sources are relevant. Second, it discusses the pattern of state building when states are reliant on domestic tax revenue rather than oil revenue or aid. Third, we compare the rentier effects of aid and oil revenue on state building.

Why are state revenue sources relevant?

The history of state revenue production is the history of the evolution of the state…. One major limitation on rule is revenue, the income of the government. The greater the revenue of the state, the more possible it is to extend rule. Revenue enhances the ability of rulers to elaborate the institutions of the state, to bring more people within the domain of those institutions, and to increase the number and variety of the collective goods provided through the state.⁴

Margaret Levi

As the availability of revenue is crucial for a state to function, it is equally important how a state derives its income. Sources of state revenue have implications for the building of state institutions and governance. State building crucially depends on how revenue is collected, including the compromises that rulers make with their citizens to collect (and use) revenue, which institutional capacity the state develops to achieve this task and the extent to which the institutional arrangements reflect the interests of both the rulers and the ruled.⁵ The state-building literature demonstrates that revenue sources may have different implications for the pattern of state building.⁶ Tax and non-tax revenues (oil and foreign aid) thus produce particular political and institutional outcomes.⁷

Since Max Weber (1864–1920) defined the modern state in the early twentieth century, scholars have criticized him for underestimating the role of revenue and taxation in distinguishing the modern state from its predecessors.⁸

Scholars further developed the taxation and state-building framework to examine the effects of oil revenue on state formation in the late twentieth century. The development of a rentier state theory is a notable example, arguing that states depending on rents use low tax rates and higher spending to reduce the pressure for greater accountability.⁹

Tax and non-tax revenues are the two major sources of state revenue. The most common forms of non-tax revenue are foreign aid and oil revenue. Historically, taxation has been a major source of state income. Since the mid-twentieth century, some states have also derived a significant portion of their income from aid or oil revenue. States that derive a significant share of their income from tax, oil revenue (40 per cent or more of the budget) and foreign aid (10 per cent or greater share of GNI) are referred to here as tax states, rentier states and aid-dependent states respectively.¹⁰

Scholars have generally concentrated on the study of taxation effects on state capacity and of the development of representative institutions. As will be discussed in detail later, taxation helped build the capacity of the state and improved state–society interactions by establishing representative institutions in Western Europe; however, little evidence, especially concerning government accountability, exists to support a similar role for taxation in the contemporary world. This evidence is lacking because state building is complex and because the outcomes depend on the interactions of revenue with institutional, political and economic processes.

The ways in which different revenue sources affect political and institutional outcomes have captured an increasing amount of attention in the literature and policy arena. However, despite the existing consensus that different revenue sources produce distinctive outcomes, scholars differ in their views on the types of outcomes. For example, Kevin M. Morrison’s study argues that taxation leads to instability, not representation.¹¹ Taxation, as Mick Moore and Debora Brautigam claim, will not guarantee improved governance in developing countries.¹² The outcome depends on how states negotiate (or fail to negotiate) with societies and how societies are organized, among other factors.

Oil revenue has different implications for state building. The literature demonstrates that oil revenue hinders democratic accountability.¹³ Oil-rich countries use lower tax rates and higher government spending, especially on patronage, to relieve the pressure for greater accountability.¹⁴ State building in oil-rich countries thus produces institutional and political outcomes that differ from the outcomes in tax states.

Two different views of the impacts of aid exist. In the first view, aid can have rentier effects similar to the effects of oil revenue, while the second view claims that the effects of aid differ from those of oil revenue because the processes and institutions surrounding oil revenue and aid themselves have distinctive characteristics.

Scholars such as Morrison, Bueno de Mesquita and Alastair Smith, and Faisal Z. Ahmed argue that aid extends regime stability and thus could undermine democratic transitions similar to the effects of oil revenue.¹⁵ Morrison argues that the effect of aid is similar to that of oil revenue in decreasing the likelihood of regime change.¹⁶ Ahmed concludes that aid and migrant remittances have similar effects, decreasing the likelihood of government turnover in authoritarian regimes.¹⁷ Bueno de Mesquita and Smith argue that aid, similar to oil revenue, decreases the likelihood of leader turnover and weakens the democratizing effects of mass political movements in nondemocratic countries.¹⁸

However, in his paper “Is Aid Oil?” Paul Collier challenges the view that aid and oil revenue have similar impacts. Collier argues that aid conditionality and modality distinguish the impacts of aid from oil revenue. He argues that “aid comes with various donor-imposed mechanisms of scrutiny, which may spill over onto other expenditures, and so substitute for reduced pressure from citizens.”¹⁹ In her paper “Aid is Not Oil,” Sarah Blodgett Bermeo considers a model incorporating changing donor preferences and foreign aid heterogeneity, in which donors provide fungible and infungible aid based on empirical tests for the period 1973–2010, challenges both the negative political effects of aid and the similarity of aid to other resources. She argues that the negative relationship between foreign aid and democratic change is confined to the Cold War period.²⁰ Furthermore, Ceren Altincekic and David H. Bearce argue that aid is infungible, conditional and volatile over time and, thus, that it is poorly suited as a revenue source to pay for appeasement or oppression.²¹

Claims that aid has similar effects as oil revenue underestimate the complexities of aid impacts. First, the view that aid and oil revenue have simi...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Note on transliteration, dates and currency
• Preface
• Glossary
• List of abbreviations
• Introduction
• PART I Conceptual framework: aid and state building
• PART II The history of revenue and state formation in Afghanistan, 1747–2000
• PART III Post-9/11 state building in Afghanistan
• Conclusion: findings and implications
• Bibliography
• Index