The Autocrat’s Emergency Bailout Fund

A new trend is afoot in the world of foreign aid: The Autocrat’s Emergency Bailout Fund. This past summer, Saudi Arabia, Kuwait, and the United Arab Emirates agreed to give $12 billion to Egypt after a military coup unseated a Muslim Brotherhood-led elected government which the Gulf states feared and despised. And now Russia’s president, Vladimir Putin, has topped that reward all by himself with his $15 billion gift to Ukrainian President Viktor Yanukovych, who has been reeling from mass protests after he spurned a proffered partnership with the European Union. In both cases, the autocrats effortlessly outbid Western institutions.

Democracies are not, of course, pure of heart in matters of development assistance. Hans Morgenthau, that bleakest of realists, argued in his 1968 book, A New Foreign Policy for the United States, that development assistance was a perfectly effective instrument with which to bribe allies, though otherwise a waste of money. The billions of dollars in development aid which the United States has given Egypt since the Camp David Accord, like the billions it has given in military assistance, were just that. It was money given to reward a regime, just as is Egypt’s new windfall from the Gulf, though in both cases the donor hopes to help the people as well.

Let us grant, then, that everyone has mixed motives — even Vladimir Putin, who has said with a straight face that he was acting "not for the sake of the Ukrainian leadership but for the sake of the Ukrainian people." Nevertheless, it remains true that most Western aid is explicitly designed to encourage good political and economic governance, while the autocrat’s bailout fund is designed to keep fellow authoritarians in place, and thus has the effect of encouraging bad governance. And because autocracies are better configured than democracies are to play and win this game, that’s a serious threat to the cause of political and economic reform.

"Autocracy promotion" is not itself a new phenomenon. A 2010 study cited the examples of China’s support for the Hun Sen regime in Cambodia and Russia’s support for the increasingly autocratic regime in Kyrgyzstan as evidence that both countries, apart from promoting economic and geopolitical interests, sought to undermine democratic forces and consolidate authoritarian ones. Both like to keep their neighborhoods safe for autocracy.

What has, however, made this often ham-fisted policy far more effective is the redistribution of global wealth which has sent vast amounts of money sloshing through the treasuries and sovereign wealth funds of Russia, China, and the Gulf. Vast amounts of money are sloshing through the treasuries and sovereign wealth funds of Russia, China, and the Gulf. The aid competition now looks decidedly one-sided. The windfall from the Gulf enabled Egypt to decline a $4.8 billion loan from the International Monetary Fund. The grant from Russia, plus a sharp reduction in the price Russia will charge for natural gas, allowed Ukraine to reject a $4 billion package from the International Monetary Fund (IMF).

It’s not just a matter of size, but also efficiency and speed. The wonderful thing about authoritarian states is that when a paramount leader decides to spend the country’s money, the check can be in the mail next day. Western governments, by contrast, dithered for years over how to extend significant assistance to Egypt’s civilian government. Prompt action might have done a world of good for the shaky legitimacy of President Mohamed Morsi.

And then there’s the quid pro quo. The IMF and the European Union wanted Ukraine to clean up the rampant corruption and dysfunction that has plunged the country into economic crisis. The IMF demanded that Egypt increase revenue and reduce fuel subsidies. To have given the money without the accompanying demands would only have encouraged more reckless behavior. But only regimes with very strong popular support can afford to demand such painful sacrifices from their citizens. Morsi seriously considered concluding a deal with the IMF, but then backed off. Had he agreed, he might have been forced from office even earlier than he was. The Gulf states, of course, gave Egypt’s generals the money with no strings attached, as Putin did to the "sister nation" of Ukraine. They were reinforcing behavior, not trying to change it.

The one Western institution with the power to make its demands stick is the European Union, which is prepared to provide tens of billions of dollars in order to prevent weak members like Greece or Spain from leaving the union, and thus has been able to exact painful sacrifices from both. Because of the sums involved, and because of the immense advantages of membership, the European Union is unique in its capacity to shape desirable behavior both among member states and aspirants to membership. Indeed, what has been extraordinary about the drama in Ukraine is that Russia has managed to trump the one Western institution which truly has adhesive power.

You’d like to think that a rational citizen would choose Western aid, even with all the encumbrances, over the autocratic quick fix. That assumes that the bitter medicine offered by the West will ultimately cure what ails weak states. There is actually not much evidence that this is so. In a 2003 paper, the development economist William Easterly compared the top 20 recipients of IMF and World Bank "structural adjustment loans" between 1980 and 1999 to a developing country sample and found that the economic outcomes of the two groups were indistinguishable. Many of the beneficiaries had received over a dozen such loans, and had kept finding artful ways to avoid the onerous conditions. The United States has tried to solve this problem through the Millennium Challenge Corporation, which offers development assistance to states which demonstrate good governance. But the funds amount to less than $2 billion a year, which means they have real leverage only with small states, and no other donor has adopted a similar policy. Easterly, an aid skeptic, argues that development assistance is generally ineffective in shaping desired behaviors.

That’s not to say that Western aid and loans cannot produce better governance and wiser economic policies. You can find evidence that it has done so in fragile democracies like Liberia, or in relatively effective autocracies like Ethiopia. Such assistance only works, however, "if you really, really have an honestly keen recipient," as Charles Kenny of the Center for Global Development puts it. Some states have jumped through hoops to join the European Union, but President Yanukovych and his compliant parliament dragged their feet on the political and economic reforms the union required. Even had Yanukovych agreed to sign the "association agreement" offering free trade with Europe, he probably would have reneged on his reform commitments.

The bottom line, then, is that the autocratic bailout offers short-term relief, while the long-term benefits of conditioned Western assistance are less marked than they appear to be.The autocratic bailout offers short-term relief; the long-term benefits of Western aid are patchy.  We can guess who will win in that marketplace. The only limiting factors for the autocrats are, first, the high cost of bribing feckless sta
tes and, second, the danger of provoking the public. This is not a problem in Egypt, where the current regime enjoys widespread support, but it certainly is in Ukraine, where an aroused citizenry has mocked the nation’s leader as a Russian pawn. And Moscow is, of course, a uniquely terrifying dance partner.

The obvious way for the West to start winning these contests is to imitate the European Union by offering irresistible incentives for good behavior. But that would require a commitment to aid, trade, and investment which Western states and institutions are not about to make. And it still might be a fool’s errand, since bad regimes would take the money and slip the yoke of promised reform. Perhaps patience is the best policy. Given recent reports that Egypt will preserve its subsidy policy as is, and that the IMF views Ukraine as a basket case in the making, both countries’ sugar daddies may conclude that they can’t subsidize ruinous policies forever.