Mirages of External Finance in Social Protection: the Politics of Aid Viewed Through the Monetary Transfer Dilemma

Official development assistance (or aid for short) that is intended for financing social protection is, for the most part, not actually spent on social protection given that social protection expenditures—especially cash transfer programmes—are almost entirely in domestic currency, whereas aid is in foreign currency. This article elaborates a theoretical and conceptual framing of this counterintuitive understanding that has been ignored in the scholarship on the financing and/or politics of social protection in developing countries. The framing is based on what can be called a monetary transfer dilemma facing most developing countries that confront strong external constraints with subordinated (or “soft”) currencies. Combined with illustrations from a research project on the external financing of social protection, it clarifies how external funding that is notionally associated with social protection programmes tends to exacerbate underlying tensions between donors and recipient governments given the balancing act that the latter must perform between addressing foreign currency needs versus compliance with donor expectations. These tensions are synthesised along three themes: the predominance of budget support in so called social protection financing, which relies on conditions rather than direct funding; how this has tended to associate the social protection agenda to the broader policy mandates of international financial institutions, especially the International Monetary Fund, with its focus on fiscal consolidation, austerity, and macroeconomic reforms; and the gulf of understanding between governments and donors regarding the fundamental role of aid in such contexts. Rather than simply accepting that the supply of their hard currency is the primary function of their aid, the insistence of donors to influence domestic policy and spending through the power of their hard currencies potentially paves the road to structural adjustment with good intentions.