Fiscal Policies of Aid and Investment: An application of advocacy coalition framework

Transcription

1 University: American University of Beirut Major: MA in Public Administration Abstract: The advocacy coalition framework is taken as basic theoretical ground for the explanation of the aid policy and investment policy. This framework gives the necessary attention to the countries stable parameters and to the external events. These are taken as independent variables; the dependent variables are the policies of aid and investment. But most importantly, this framework takes into consideration the long run coalition formations in the political system. By analyzing first aid, then investment, and finally both policies combined we try to know who the players are in each policy s case, governments, interest groups, etc. A relatively less studied question is the choice between the aid policy and the investment policy in pursuit of economic development, if such a choice can exist. Theme: Fiscal Policies of Aid and Investment: An application of advocacy coalition framework Fiscal Policies of Aid and Investment: An application of advocacy coalition framework by Vahakn Keshishian

2 Outline I. Introduction II. III. IV. Policies of Aid Policies of Investment Investment and aid V. Conclusions ii

3 Introduction From the pool of development policies, the financial and the monetary policies are the ones that are most at stake in the recent years. The late 2000 s global financial crisis, the mounting public debts, cross-national unprecedented trade and many other events and processes contribute to the importance of the fiscal and monetary policies. They are increasingly being considered as alternatives to many government regulations in other policy areas; specifically in the domain of foreign policy, fiscal measures are becoming a new tool for the governments to pursue intervention or defense, thanks to global financial arrangements, institutional and conventional. This study regards the choice of countries to economically develop as a fiscal policy. However, to separate this policy from given country s foreign policy is almost impossible, because those countries that have development policies are the ones that are in need of external assistance; to deal with the external assistance requires activity in the foreign policy domain as well as in the fiscal and monetary domains. As choices of development policy, foreign aid (hereafter aid ) and foreign direct investment (hereafter investment ) are taken as the most important. Aid and investment are not mutually exclusive, and are usually combined, but the fiscal policies of each differ, and should be taken into distinct consideration. The advocacy coalition framework (Sabatier & Weible, 2007) is taken as basic theoretical ground for the explanation of the aid policy and investment policy. This framework, which is developed basically by Paul Sabatier, gives the necessary attention to the countries stable parameters, geographic location, natural 1

4 resources, cultural values, constitutional arrangements, etc., and to the external events, wars, disasters, global economic phenomena, etc. These are taken as independent variables. the dependent variables are the policies of aid and investment. But most importantly, this framework takes into consideration the long run coalition formations in the political system. By analyzing first aid, then investment, and finally both policies combined we try to know who the players are in each policy s case. Do the policies of aid and investment serve the intention for development? If not, why are these policies adapted? Are they mere fiscal policies or they are overstepping the foreign policy domain? These are some of the questions that the current study tries to answer by using the advocacy coalition framework, but the ultimate dilemma resides in the relatively less studied question of the choice between the aid policy and the investment policy in pursuit of economic development, if such a choice can exist. Relatively Stable Parameters Long term coalitions Policy Subsystem Coalition A Coalition B Governmental Authorities External Events Policy Output Figure 1: the original diagram of advocacy coalition framework as developed by Sabatier & Weible 2

5 Policies of Aid In his classical work on aid, Morgenthau defines it as the transfer of goods and services from one nation to another (1962, p. 301). In the same study he identifies six types of aid, and classifies them in political and non-political columns. Morgenthau being one of the founding fathers of the realist theory in the international relations, says that only humanitarian aid is not political, the other types, which include military aid, prestige aid, etc., are all politically intentioned from the donor s point of view; however, he distinguishes economic development aid as of special importance, because its misleading nature: political or not; he argues that it should be classified under the political column by all means. Morgenthau s study is directed towards giving foreign aid policy recommendations for the United States; he derives conclusions about how to establish loyalties abroad through foreign aid. The intention of such a study in itself is an a priori provision; it leads us to conclude that foreign aid is perceived as foreign policy tool by the donor countries, but the recipient countries view it as development assistance. For that assistance they adapt new fiscal policies that are required by the donors. The International Monetary Fund (IMF) asks the governments, as precondition for any kind of aid, first to build legal and regulatory framework for fiscal policy, second, to establish a central authority and mechanism for foreign assistance, and finally, to implement policy changes and administrative arrangements to leverage scarce human resources (Gupta, et al., 2005). The Washington Consensus, on the other hand, that the IMF takes it as its donations and lending guideline, has a list of measures that leads to liberalization and decentralization (Rao, 2003, p. 79). We are bound to ask, if the developing countries change their fiscal policies to receive aid, and aid is political in its nature, can we say that these developing countries are changing their policies for political 3

6 reasons, not economical development? Further exploration is required to answer this question. A recent study shows that aid is in the foreign policy portfolio of the donor country, it is either to change a behavior towards a desired direction, or to protect the status quo of certain behavior (Palmer, Wohlander, & Morgan, 2002). Baldwin takes the discussion a step further, by saying that the aid consequences are political, not the aid itself (1969, p. 427). This will modify our hypothesis that countries change their policies for political reasons; we conclude that countries change their policies to receive aid, but as a consequence they suffer intervention. We see that receiving aid has a price, which is logically sound, otherwise why donate? To argue that countries are obliged to receive aid and the normal price they pay is the intervention is a realistic point of view, but in the world of policies, and within the advocacy coalition framework it is rather a naïve argument. We should not neglect the fact that inside the policy subsystem there will be groupings that will favor aid and intervention; these subsystems will channel their policy towards implementation. Not all intervention is resisted, sub governmental actors may desire intervention to tackle the government, the government may desire intervention to gain leverage, and so on. (Baldwin, 1969, p. 433). Some theorists argue that aid results in government expansion, particularly one study is of important relevance, it argues that foreign aid systematically generates incentives for the expansion of government (Remmer, 2004, p. 78); the study was done based upon data for over 100 middle- and lower-income nations, during the period. On the other hand, Horowitz & Heo argue that To explain economic foreign policies [ ] the scope should include the dispersed and unorganized interest groups, alongside the highly concentrated industries and corporations (2001, p. 4). To further support the idea of the groupings we 4

7 turn to Schelling, who explains that intervention in a country is giving support to a part of the country, vis-à-vis another part (1955, p. 623). According to the advocacy coalition framework, the policies are the result of the strategies of the coalitions to effect their governments in competition with other coalitions. Does this mean that any kind of intervention is good for the state? Can we ever ask good for the state as an aggregate moral reality? Our discussion shows that although in theory intervention in countries affairs, and altering fiscal policies are considered to be wrong, but the choice of such policy by the developing countries governments is justified. To consider some cases, we take Benin and Niger; both of them are sub-saharan developing countries, under IMF funding. In the case of Benin, which chose to totally abide by the aid regulations, the fiscal policy brought changes in the political system as well. Niger was more selective in the policy changes, consequently and after a short while the gap between the aid amounts was evident; Niger fell in political turmoil and coups followed each other (Gazibo, 2005). It was a policy choice for both Benin and Niger; it is probable that in Benin, some group was more western oriented in its values and interests, but in Niger, such a group was either absent or weak. We do not go in details to investigate the actors that push for the policies of aid; it is out of the scope of the current study, their existence as unanimous pressure/interest groups serves our purpose of explaining the choice of the government of a policy that is regarded as self-harming, which is the policy of aid that brings intervention. 5

8 Policies of Investment We now turn to investigate the investment policies as economic development choice for the government. Holland & Owens explain that the importance of the investments lie in the attraction of capital, transfer of technologies; transfer of management techniques and in facilitating privatization (1997, pp ). Investment differs from aid basically that it deals with private rather than governmental or intergovernmental entities. This should not imply that these entities are immune from public regulation; moreover, they are directly affected by the recommendations or oppositions of the latter. First we should investigate why companies choose to invest in this country or that. An in-depth theory of relations between government policies and investment flows identifies government restrictions, transfer pricing, labor relations and intellectual property laws as independent variables to control the level of market imperfections. The increase and decrease in market imperfections, in their turn are independent variables to affect the investment flows (Brewer, 1993). Almost similarly, an older study chose tax concessions and tariff concessions as independent variables, and particularly American corporation s investment choices as dependent variables (Loree & Guisinger, 1995). Others argue that investment is the product of favorable conditions, but not as simple competition game between the recipient countries; the non-market factors should also be taken into consideration, like the credibility of the financial institutions and the ability to deliver contracts (Rao, 2003, p. 21). However, we should not forget that IMF recommendations are studied thoroughly by the investors; as a consequence, the countries thrive to have recommendations or high rankings in the IMF lists. The IMF has clear guidelines on who will be granted the right of good recommendation. Most of these guidelines are about fiscal 6

9 and monetary policies that the governments should adapt. In many cases, the IMF even builds the financial institutions of the given country from scratch. A recent study of IMF shows how the different departments of the ministries of finances should be shaped (Gupta, et al., 2005). More importantly, the IMF has developed a framework to guide the countries in their different market development stages, and it clearly states what fiscal or monetary policy should be implemented in each of the four steps. To mention them in short, these are stage zero: financial reforms, stage one: implementation of rules based instruments, stage two: fostering interbank development, and stage three: implementation of money market operations (Laurens, 2005). We see that the IMF is a major player in causing policy change in the developing countries; those who are not implementing these steps, are ranked low in the recommendation lists, thus expected to not be considered by the investors. Logically we should hypothesize that those countries that want to develop economically should abide by the IMF regulations, or generally create a heaven of investment for the companies, who will bring their resources and expertise, thus alleviate the economic condition of the developing country. However, as in the case of the aid recipient countries, investment is not received as it is generally perceived. In the following paragraphs we discuss the alternative views on investment, and try to connect it to the advocacy coalition framework. If governments choose to economically develop, and choose investment as optimal fiscal policy for that purpose, what can they do? They apply for IMF to come and study their fiscal system, give provisions, cause a change in policies, and then recommend it for the investors. But do the capital flows directly to this country after the recommendation? Jensen, in a study of how IMF effects the investment, says that the IMF recommendations per se do not affect the decision of the investors. If other factors accompany the recommendations, 7

10 only then they can be effective. Otherwise, IMF s involvement in a country s fiscal policies has a deterrent effect on the investors; the country s image will be affiliated with financial difficulties, that the IMF will intervene to solve it (2004, pp ). We see that IMF s image as helper of last resort harms the country; Jensen finds that countries affiliated with IMF receive 25% less investment (p. 195). Policies that are directed to attract foreign investment, can be harmful to the domestic markets, because the foreign investors, already more skilled, experienced and with bigger capitals, will win the competition vis-à-vis the domestic investors (Holland & Owens, 1997, p. 277). Many other arguments against the investment policy can be counted; many studies are conducted to find the relationship between growth and investment; the two important examples are those of Balasubramanyam, Salisu & Sapsford s (Foreign direct investment and growth in EP and IS countries, 1996) and Borensztein, De Gregorio & Lee s (How does foreign direct investment affect economic growth?, 1998). None of these will be enough to rule out investment as a tool for development, but for the purpose of this study they are important in regard that they show how governments choose policies that may harm their systems. The factors that should accompany the IMF recommendation have been already discussed above. We argue that all the factors that a country has are located in the stable parameters column of the advocacy coalition framework; on the other hand, the IMF recommendations are inside the external events column. Then the choice of investment as fiscal policy is a result of both stable and external parameters; the long term coalitions formed inside the political system of the given country advocate the investment policy that, as we saw, will not always be helpful for the development goal, but will still serve the interest of a certain grouping, and the latter will push for the investment policy in the policy subsystem. 8

11 Aid and Investment Policies Combined Each of aid and investment had certain effects on the economic development; they had distinct political environment, and reached the policy-subsystem differently. However, they may have dissimilar effects when combined, in other words, if aid and investment are choices, and according to the advocacy coalition framework have their own long-term coalitions that will push for their interests, will these coalitions behave the same or different if brought face-to-face? This question may sound very hypothetic, but almost in all cases, the developing countries have policies for both aid and investment, this means they have coalitions that have interest in both of them. Do they oppose each other? Or they go hand in hand to oppose the other fiscal and monetary policies. In the Advocacy Coalition approach, Sabatier and Weible divide the policy subsystem into suppositional coalition A and coalition B to give an image of policy struggle; in this view, do aid and investment coalitions have such a divide? These questions gain significance when we consider the fact that almost the same fiscal policy requirements are asked the countries to implement in both cases: liberalized markets, money market operations, high tax incentives, etc. To find the relation of aid and investment we should look to the fact that [t]he growing importance of foreign direct investment flows has gone hand in hand with the expansion of conditionality-based aid and lending programs, increased donor coordination, and enhanced pressure for marketoriented policy reforms. Beginning in the 1980s, aid donors and official creditors began to make loans and grants more conditional by coordinating their lending with the IMF and World Bank. This shift coincided with efforts to promote [ ] privatization, trade and financial liberalization, fiscal discipline, deregulation, and related policy reforms that was designed to reduce the role of the state in the economy. (Remmer, 2004, p. 78). In assertion 9

12 to this, Loree and Guisinger say that foreign direct investment has been simulated by the liberalizing policies of the host countries (1995, p. 285). Whether they are the same groupings that advocate aid and investment is another question, and requires further study, but the fact that they ask the government the same fiscal policies is a reality. We do not take into consideration the difference of interest in aid and investment policies, but our arguments led us to conclude that one major coalition in the policy subgroup pushes for liberalization, for that they may have interests with outside partners or interests in the domestic political liberalized atmosphere, as opposed to those groupings who find government centralization or reliance on alternative fiscal policies in their interest. We refer to Papanek to be sure that other than investment and aid, there are other factors that affect the economic development; these are for example, exports, education level and size of manufacturing sector (Papanek, 1973). Even if the fiscal policies of the countries to attract investment have a positive effect on the growth rate, they may have negative effects on comparative basis, because they may trigger the regional competitors, creating a prisoner s dilemma situation, where all countries adapt liberalizing policies and incentives, but no one benefiting from these sacrifices comparatively; isn t this the strategy of IMF? to push all the countries for liberalization at the end (Loree & Guisinger, 1995). Bornschier, Chase-Dunn, and Rubinson go a step further, and say that aid and investment together have a decreasing effect on the economic growth (Cross-National Evidence of the Effects of Foreign Investment and Aid on Economic Growth and Inequality, 1978). By this, we have established our hypothesis on firm grounds: Economic development is not based on aid and investment, the countries that choose these as their fiscal policies are doing so because of a coalition of interests in their respective policy subsystems that demand 10

13 so, and are strong enough to achieve to the levels of policy adaptation and implementation. Add to this the foreign policies of the donor countries who thrive to achieve influence in the developing countries, and the interests of the transnational companies who seek new markets, after all Trade policy is foreign policy (Kudrle & Bobrow, 1982). Now we can argue that the coalitions that push for liberalization contain elements from the inside and outside the system; however the advocacy coalition approach falls short in including foreign influence on the policy making process. Relatively Stable Parameters Geographical location Cultural values Constitutional rules External Events War and peace Natural disasters IMF involvement Long term coalitions Coalitions of aid and investment advocates aid & investment Policy Subsystem Coalition B Governmental Authorities Policy Output Fiscal policy of aid and policy that leads to liberalization Figure 2: the modified diagram of advocacy coalition framework as developed in the current study 11

14 Conclusion To sum up our findings, we stress on our argument that countries adapt fiscal policies of economic development not for mere developmental purposes, but also because of political intentions, secret or evident these have certain consequences on the sovereignty of the state, but basically serves the interest of coalitions that have interest in these policies or the general liberalization mood of the economy. We also found out that to consider these policies as harming the state is a simplistic argument, because utilization of the coalition advocacy framework helped us to conclude that policies are the result of a dynamics that takes place in the general political arena and the policy subsystem, as a result, adaptation of such policies can be explained by the governments obligation towards the groupings. Isn t the government already composed of these groupings? Another major finding was that the IMF involvement and the political and economic events that take place that may oblige the countries to have aid and investment fiscal policies are only in the external events column and cannot have the enduring effect on the policies, rather the stable parameters and the long term coalitions are the ones that will have the most effect. Thus, the coalitions of aid and investment are the ones that together stronger are pushing for the liberalized market economy changes. Our study reached to the conclusion that economic development is not based on aid and investment, these later policies are only choices, from among the pool of the policies. We stress on the fact that much deeper studies are needed to further analyze the relation between the aid and investment policies and the economic development goals of the countries. Another major deficiency of the current study was that it lacked enough specific 12

15 case studies to empirically test the proposed hypothesis. Moreover, only IMF was taken as multinational monetary agency; many other agencies operate in the domain, for example the World Bank, the Organization for Economic and Cooperation Development, the United Nations, etc. These may have different impacts on the governments, donor and receiver, and the investors. Concerning the coalition advocacy framework, we tried as much to abide by the guidelines that it imposes, but we were obliged to omit the the short term constraints and resources of the actors for simplicity purposes. But the framework in its turn was developed in the current study by the addition of the foreign involvement factor in its policy analysis parameters. 13

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