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Mutual trust: an alternative to mutual obligation in overseas aid

Minh Nguyen*

April 2006

Published as the Uniya-JRS Occasional Paper, no.10, April 2006. A longer version of this paper with footnotes is published as a part of a joint-research with Jesuit Social Services on mutual obligation.


The occasion of the United Nations World Summit in September 2005 presented Prime Minister John Howard with the opportunity to announce Australia’s long-awaited goal of increasing its overseas aid. The Australian government will now aim to double its development aid allocation from the 2004/5 level of about $2.1 billion (even though the aid budget had risen to $2.4 billion by the time of the announcement) to
$4 billion by 2010.

However, the doubling of Australia’s aid allocation will come with new strings attached. Australia’s overseas aid agency, AusAID, is currently preparing a White Paper on the direction of its aid program. The 2005 report of the White Paper Core Group (‘the Group’) commissioned to assist AusAID with this task is a glowing endorsement of the government’s insistence that economic growth is central to poverty alleviation and that Australian aid can be used more effectively to levy reform in recipient countries to induce economic growth. Although the practice of putting conditions on aid is not new, the report promises that such practices will be more stringent in future.

The government has not yet placed an ideological label on its emerging aid policy. But if the Group’s recommendations are signs of things to come, then Australia’s development aid program is about to move towards a more formal acceptance of the ‘mutual obligation’ concept used to justify recent welfare reforms. This paper argues that the seductive nature of this principle is understandable but flawed. One of the downsides to lavishing more attention on the policy weaknesses of poor states through the idea of mutual obligation is that equally critical questions about Australia’s own policies and performance in this area are often ignored.

The influence of mutual obligation

In his announcement of Australia’s plans to increase overseas aid, Howard said that there is a ‘reciprocal responsibility’ on recipient governments to tackle corruption, strengthen governance and promote institutional reform. Howard also said that the aid program would be subject to annual reviews ‘taking into account the effectiveness of the … additional resources’, implying that funding will not be guaranteed. Even though AusAID had been working on the White Paper since early 2005, Howard’s September announcements in effect ‘became the new terms of reference for the Core Group’.

Released in December 2005, the Group’s report recommended that future aid payments and allocations be regularly reviewed and made conditional on a recipient country’s performance against certain targets. The report suggested that improvements in ‘performance’ could be measured by ‘the composite policy and institutional indicators developed by the World Bank and ADB [Asian Development Bank]’. Aid funds could also be used to reward ‘countries that show reductions in corruption (as measured by corruption surveys) or improvements in business regulation (as measured by indicators such as the number of days it takes to register a business).’

Some of the Group’s recommendations will resonate with present government practices of using financial means to lever behavioural change in Australia’s poor. In the domestic context, its attempt to impose conditions and performance targets on the long-term unemployed and other income support recipients – under the principle of ‘mutual obligation’ – has seen radical changes in welfare and indigenous policies. In considering the report’s recommendations, the government will find comfort in seeing that its policy mantra can be extended to foreign aid: ‘For major [aid recipient] partners, making operational the idea of “mutual obligation” … would make explicit the responsibilities of both parties’, the report said.

In Australia, ‘mutual obligation’ is the name government has given to policies that stress the importance of obliging people to do something in return for income support. It is part of the government’s carrot-and-stick approach to getting the long-term unemployed back into the workforce. A clear characteristic of the mutual obligation concept as it is applied in Australia is the focus on individual responsibility rather than structural factors like labour market barriers and anti-inflationary policies that favour joblessness. It is justified by perceived notions of ‘welfare dependency’ and the ‘entrenched entitlement mentality’ of the long-term unemployed, as summarised by Tony Abbott’s rhetorical question: ‘Why do some people not work? Because they don’t have to.’

The simplicity of the dependency idea as applied to households also provides an easy answer to the entrenched problem of global poverty. It has long been proposed that poor countries receiving aid are subjected to a similar ‘trap’. As Susan Windybank and Mike Manning from the Centre for Independent Studies (CIS) declared, ‘Like welfare dependency in developed countries, aid dependency in developing countries entrenches a “handout” mentality.’ Pioneer neoclassical economists like Peter Bauer and Milton Friedman have argued that aid and the expectation of aid, particularly government-to-government assistance, are disincentives for self-reliance. Overseas aid, it is argued, has enlarged recipient government bureaucracies at the expense of the private sector, encouraged bad policies and enriched the elite of recipient countries.

“The simplicity of the dependency idea as applied to households also provides an easy answer to the entrenched problem of global poverty”

This is the view of Helen Hughes of the CIS, who advocates ‘link[ing] Australian aid to conditionality under the principle of mutual obligation’ as a policy medicine for aid dependency. ‘Aid should only be spent on mutually agreed development projects and programmes designed and monitored by teams nominated by the sovereign recipients and donors’, she argued. Importantly, ‘Aid would continue to be disbursed progressively on the documentation of clearly specified benchmarks … [and] there would have to be a willingness on Australia’s part to bear the political heat of halting disbursements if benchmarks were not met’.

However, the analogy between welfare and development aid, in so far as it implies a ‘trap’ in which recipient countries remain perpetually reliant on aid, has been thoroughly critiqued by economist Paul Collier, formerly of the World Bank. Collier argued that the theory is based on flawed assumptions, in part because the scale of aid to developing countries is small in relation to national incomes, whereas welfare payments usually make up the bulk of total income of welfare-recipient households thus creating powerful disincentives. In any event, he argued that national economies do not respond to incentives and disincentives the same way it is believed some households do.

Collier found that aid to poor states would create incentives for the recipient government to reduce politically unpopular taxation or increase politically popular public expenditure. This in effect means that the benefits of aid would indirectly accrue to households through better public services or reduced taxation. Rather than being the incentive problem, aid is actually the solution: ‘The marginal costs of taxation are often quite high in developing countries because they have few efficient tax handles … reduced tax effort can free households and firms from [these] powerful disincentive effects’.

The evidence suggests that the idea of ‘dependency’ on aid cannot be assumed. Yet rich countries continue to find it convenient to shower attention on the behaviour of poor countries. In a globalising world, the policies and practices of rich countries like Australia matter as much as practices of poor countries. As Yilmaz Akyüz argues, ‘In a closely integrated world economy, no country should be expected to be able to put its house in order independently of what is happening elsewhere.’ The concept of mutual obligation, with its focus on recipient behavioural change and its aversion to extraneous or structural factors, can only entrench, rather than correct, this imbalance.

Conditionality: solution or problem?

The hallmark of mutual obligation is the use of formal agreements and conditions to influence the behaviours of the poor. The application of this idea to development assistance as put forward by Helen Hughes was cautiously endorsed by the Group in its report. However, the idea of conditionality with ‘funds disbursed subject to evidence of targets met and audited expenditure is not an innovative concept’, as Neva Wendt points out. Conditions are already a crucial part of most overseas aid and loan programs. While few would oppose donor or lender conditions to ensure that funds are well spent, current practices have gone beyond what is necessary for basic fiduciary accountability. Conditions are now so intrusive that they can cover recipients’ trade and investment policies and even the structure of government.

According to Oliver Morrissey, conditionality relates mainly to the use of financing by donors to leverage policy reforms in recipient countries. At least in principle, failure to meet aid conditions typically means that funding is not released. Conditionality in this meaning was used extensively through ‘structural adjustment programs’ by international financial institutions such as the International Monetary Fund (IMF) during the 1980-90s. Sometimes referred to as ‘traditional conditionality’, donor countries like Australia often link their own bilateral aid funding to it.

There is now overwhelming evidence of the failure of conditionality, including findings from unlikely sources such as the conservative US Congress’s Meltzer Commission in 2000. Tony Killick, noting empirical evidence of the ineffectiveness of structural adjustment programs, points out that one of the chief failures of conditionality is that it conflicts with local ‘ownership’ of reform processes, thereby undermining their credibility and effectiveness. Others have criticised its intrusiveness in the domestic affairs of recipient countries and its disregard for the adverse social impacts on the poor.

With the failure of traditional conditionality in the 1980-90s, the current rhetoric is now about ‘ex post’ conditionality based on performance, in order to foster local ‘ownership’ of the development process, rather than ‘ex ante’ conditionality based on promises of reform: ‘International experience with conditionality suggests that behaviour should be given more weight than promises … It may, therefore, be more feasible to reward good performance, rather than punish bad’, the Group advises. While the acknowledgement of problems associated with past practices is a welcome change, it is a mistake to think that ‘ex post’ conditionality will be any different.

Local ownership, widely acknowledged as one of the solutions to aid ineffectiveness, does not mean forcing recipients to do things voluntarily, as is implicit in current thinking. Real ownership is about taking into account the concerns and needs of developing countries and allowing them to take the ‘driver’s seat’ of development in a genuine spirit of partnership, trust and mutual accountability between recipients and donors – even if the recipient’s development paths are contrary to Australia’s sense of economic correctness. Conditionality that is intended to accelerate externally designed policy reforms in recipient states – as opposed to local solutions to local problems – will be little different from past practices.

“Conditionality that is intended to accelerate externally designed policy reforms in recipient states will be little different from past practices”

The reality of aid

It is no secret that the Australian aid program, which falls under the portfolio of the Department of Foreign Affairs and Trade, has since its foundation served a mixture of humanitarian and self-serving strategic and commercial objectives. While corruption and inefficiencies in recipient countries are significant barriers to development, Australia has also contributed to aid ineffectiveness by allowing strategic and commercial motives to taint its development assistance programs. The failure of a clear poverty-reduction motive may have contributed to aid’s mixed record in reducing poverty.

According to Daniel Oakman, aid has always been political, with a history stretching back to the Colombo Plan, Australia’s first bilateral aid program which started in the 1950s. It funded a plethora of development projects in Asia, technical training and scholarships to Asian students. Oakman, argues that although altruism was the publicly stated objective of the Colombo Plan, it operated as ‘unspoken propaganda’ to express and promote Australia’s political and economic interests in the Asian region in the context of the Cold War. Due to mixed motives, the program became riddled with inefficiencies. ‘There were a lot of short-term programs that [Australia] could put labels on which would have an immediate publicity impact’, Oakman said. ‘Money was thrown at programs and once the immediate publicity value had been achieved a lot of those programs tended to languish and become corrupt.’

However, instead of reforming Australia’s competing aid objectives, they were entrenched in policy following the Jackson Report on Australia’s aid in 1984, which reaffirmed that ‘the overall aims of foreign aid are to achieve humanitarian, strategic and commercial goals … Australian aid policy has, therefore, not one but several mandates’. As late as 1997, AusAID’s Corporate Plan was still articulating this triple mandate. It was only following recommendations from another major review of development aid in 1997, which cautioned against mixed objectives, that the government announced a change in direction. The overall aim of Australian aid is now ‘to advance Australia’s national interest by assisting developing countries to reduce poverty and achieve sustainable development’.

Yet despite the Group’s best efforts to defend Australia’s revamped aid mandate as a failure of communication rather than substance, the reality is that the line between ‘national interest’ and ‘poverty reduction’ can be quite elastic. For instance, development assistance given on condition that the recipient purchases goods and services from Australian companies (‘tied aid’) is still a reality even though it is generally accepted by most observers, including the World Bank and other financial institutions, that tied aid reduces the value of aid by 25 per cent or more. The precise extent of Australia’s tied aid industry is unknown because of the lack of reporting procedures in the Australian aid program. However, AusAID official Dereck Rooken-Smith was forced to admit at a Senate Estimates hearing in February 2006 that, of the estimated 2000 current aid contracts worth $3.4 billion dollars, ‘the vast majority’ or ‘90 per cent plus’ of them go to Australian contractors.

Australian aid has also come under criticism for muddying poverty reduction assistance and security issues. The OECD’s Development Co-operation Directorate (DAC) Peer Review of Australia noted disapprovingly that Australia included as part of its aid components counter-terrorism measures and strategies to counter illegal migration. Australia’s ‘aid’ has in recent years included bilateral counter-terrorism programs with terrorism-prone countries like Indonesia and the Philippines, a $7.5 million ‘Peace and Security Fund’ to counter transnational crime and terrorism, and post-conflict assistance in the Pacific. Similarly, since 2001 over $50 million of the aid budget has been offered to the near-bankrupt Pacific state of Nauru in exchange for parking Australia’s unwanted asylum seekers.

Security and defence measures, inevitable as they may be in the post-11 September hysteria, are nonetheless masquerading as altruistic development assistance. It is one element of what ActionAid International calls ‘phantom aid’ – ‘aid that never materialises for poor countries, but is instead diverted for other purposes within the aid system.’

“The line between ‘national interest’ and ‘poverty reduction’ can be quite elastic”

Towards trust and mutual accountability

Australia’s current review of its aid program and the government’s announcement to double its development assistance level are both potentially positive steps toward a fairer arrangement for developing countries. However, as the government considers recommendations of the Group in light of its new commitment, it should resist the temptation to import ‘mutual obligation’ to its development assistance program. The evidence suggests that such an arrangement in development aid will not necessarily bring about similar outcomes to welfare reforms in donor countries. On the contrary, two decades of experience shows that development aid is ineffective when recipients do not have control of the development process and when donors neglect the impact of their own policies on poor countries.

The excessive demands for accountability and reform in developing countries through the use of conditionality are contrasted with the almost complete lack of accountability and slow pace of reform on the part of Australia. With its attention directed mostly at the policy weaknesses of recipients, a mutual obligation regime in development aid will only reinforce the impression that Australia’s policies do not matter. But they do. It is a serious ethical question when Australia asks for change in others while neglecting its own contributions to aid ineffectiveness. Such is the policy weaknesses that allow aid money to ‘boomerang’ back to Australia’s shores through payments to Australian companies and their ‘consultants’ often for overpriced and inappropriate goods and services that have few benefits.

“An aid system based on mutual trust and a fairer balance of the legitimate interests of Australia and its aid recipients would lead to a more stable and secure region”

However, should the government insist on applying mutual obligation to development aid, it must at least ensure that the obligation is mutual. This means increasing untied aid and opening the development procurement process to non-Australian companies. It means using the aid budget for genuinely humanitarian and poverty reduction programs and not diverting it for security and defence purposes. It implies winding back the practice of policy conditionality other than as required for basic fiduciary accountability. It means developing a system based on mutual trust and a fairer balance of the legitimate interests of Australia and its aid recipients. Such a model – placing greater emphasis, responsibility and accountability on the donor to also deliver in terms of global poverty reduction – will ensure that Australia’s development aid in future will be delivered in ways that are intended to eradicate poverty in the region and, in the long term, lead to a more stable and secure region.

Selected references

ActionAid International, ‘Real Aid: an Agenda for Making Aid Work’, June 2005, www.actionaid.org.uk

Collier, Paul, ‘Aid dependency: a critique’, Journal of African Economies, 8(4), 1999
DAC, Peer Review of Australia 2004, OCED, 4 January 2005,

Duncan, Ron, et al, Core Group Recommendations Report for a White Paper on Australia’s Aid Program, AusAID, Canberra, December 2005, www.ausaid.gov.au

Hughes, Helen, ‘Aid has failed the Pacific’, Issue Analysis 33, Centre for Independent Studies, 7 May 2003, www.cis.org.au

Picciotto, Robert, ‘The Missing Dimension of Development: Impact of Rich Countries’ Policies on the Poor’, 2003

Rich, Roland, ‘Applying Conditionality to Development Assistance’, Agenda, 11(4), 2004
World Bank, Assessing aid: What Works, What Doesn’t and Why, November 1998, www.worldbank.org


Note: Visit the research section for a longer version of this paper with footnotes.

* Minh Nguyen is Uniya's Research Officer. Thanks to Uniya staff and volunteers for their comments. Special thanks to Tim O’Connor from AidWatch and Nadia Rosenman from CLRI(NSW) for their kind assistance.

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