As we celebrate the completion of 75 years of freedom, the time is ripe for choosing a wiser course of action for future economic development.

Historically, foreign aid played an important role in Pakistan’s economic development in the 1960s and 1970s. During this period, the country made a massive investment in physical infrastructure, electric power and irrigation projects with the help of foreign aid. Mega projects such as Tarbela and Mangla dams were constructed during this period.

Foreign aid during these two decades, mixed with domestic private and public investment, enabled Pakistan to undertake crucial public sector projects including the construction of road networks, electric power generation, construction of the Indus Superhighway and the establishment of Pakistan Steel Mills. These and other similar projects were launched during the governments of General Ayub Khan and Zulfiqar Ali Bhutto.

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In the 1960s, yearly net inflows of development assistance and foreign aid into Pakistan ranged between $252 million and $501m and in the 1970s, between $282m and $1.01 billion, according to the World Bank. (The current value of $1.01bn received in 1976 comes to around $5.21bn after adjusting for US inflation during this period).

International assistance is influenced by Pakistan’s position in the region

The separation of then East Pakistan, which became Bangladesh on Dec 16, 1971, however, changed the dynamics of foreign aid inflows towards the South Asian region. Aid inflows to new-born Bangladesh grew in terms of percentage of Gross National Product leaving Pakistan behind, scanning of the World Bank stats reveals.

Besides, even during the 1970s, foreign aid disbursement into Pakistan markedly fell during 1977-78 and 1978-79 to $593.3m and $631.7m, as the US curtailed aid because of Islamabad’s nuclear policy.

But as soon as Pakistan (under Gen Zia’s regime) became a front-line ally of the US in its war with the then Union of Soviet Socialist Republics in Afghanistan, inflows of net development assistance and foreign aid got thicker again. During the 1980s, yearly inflows oscillated between $625m in 1984 and $1.19bn in 1989. The current value of $1.19bn in 1989 is about $2.844bn. This amount is still higher than what Pakistan got in development assistance and foreign aid in 2020 —$2.59bn.

That provides us with a clue about how Pakistan’s positioning in geopolitics plays a part in determining the size of international economic assistance and foreign aid. The shift in the US policy of foreign aid to Pakistan — from aid sanctions between 1985 and 1995 on concerns regarding Islamabad’s nuclear ambitions to the wide opening of the gates of foreign aid after 9/11 — is another, more recent example of how foreign aid into Pakistan remains linked with the geopolitical interests of the donor countries in particular and the Western world at large.

History offers us a few lessons even in the case of net development assistance and foreign aid. The first and foremost lesson is that inflows of such aid and assistance, too, remain tied to our positioning in geopolitics.

The second lesson is that foreign assistance and aid contribute to future economic development only when we employ them in development projects wisely. Both Gen Ayub Khan and Z.A. Bhutto deserve credit for using foreign development assistance with a futuristic outlook of the then Pakistan’s economy.

Even during Gen Musharraf’s era foreign funds received (in addition to the compensation paid to Pakistan for the economic fallout of being a front-line ally of the US in its War on Terror) were spent on capacity building of institutions, for introducing the required improvement in the social sector, particularly in education — and for strengthening district governments. Earlier Benazir’s and Nawaz Sharif’s governments had also channelised foreign aid and assistance into social sectors, particularly in health and education.

The third lesson, which can be drawn easily from the ongoing China-Pakistan Economic Corridor (CPEC) funding, is that partnering for progress with the world’s economic superpowers is fast replacing the concept of development assistance. This is truer in the case of the relationship between emerging economies (with geopolitical aspirations) and developing countries.

Advance economies still provide assistance and aid to developing countries but unlike in the past, their assistance has become more target oriented. They now want to ensure that such assistance is used in the recipient countries for meeting Social Development Goals or for partnering in progress in common areas of interest.

It was easier to build mega projects in the 1960s and 1970s with the help of foreign aid and assistance because those inflows covered a significant portion of the total cost of those projects. But just look at the financing mix of any large CPEC-related project and you will find that commercial Chinese loans and foreign direct investment, or in some cases interest-based Chinese state financing, form the bulk of the financing even where the requirement of counterpart Pakistan’s domestic financing is low. You will not see foreign aid and zero-rated development assistance featured in the financing mix except in very few cases where the projects fall in the areas of knowledge sharing or strengthening of cultural ties.

Published in Dawn, The Business and Finance Weekly, August 15th, 2022