“ Foreign aid consists of all resources – physical goods, skills and technical know-how, financial grants (gifts), or loans (at concessional rates) transferred by donors to recipients” (Riddell 2007, 17). It can be in three different forms: bilateral, which is from one country to another, multilateral, which is from institutions like World Bank and IMF to other countries or institutions, and NGOs based foreign aid (Riddell 2007). The idea officially started from post World War Two even though many countries are found before that too helping the other countries in various forms of aid (Hjertholm and White 1998). The objective behind foreign aid is not always only to uplift the economy of the recipient country, but sometimes it is also meant to benefit the donor country (Ehrenfeld 2004). Thus through various means and with various objectives foreign aid reaches several developing countries especially in Africa. Approximately 25% of today’s aid is through multilateral sources while rest of the 75% goes through bilateral means (Boone 1996).
However, there is a strong debate among various circles whether the foreign aid is at all advantageous for the recipient developing country. The arguments, for and against, are plenty. Therefore, in this paper, it is analyzed whether foreign aid helps the developing countries. It is noticed that foreign aid is seen as an effective tool for reducing poverty and increasing economic growth. It may also strengthen the strategic relations between two countries. However, as disadvantages, its effectiveness as poverty eliminating tool and economic growth provider is questioned especially in reference to Africa. Moreover, the aid which targets donors’ objectives more than recipients’ benefits often turn out to be negative for the recipient country. Similarly, bad governance and corruption does not let aid do any good to the country.
The advantages of Aid started to appear in early 1950s and 60s studies (Kabete 2008). However, later the views of the scholars started to change. Still, there were quite well-thought theories and empirical studies that supported the idea of foreign aid. Importantly, one must notice that the primary purpose of foreign aid was seen in economic growth and poverty elimination. But later it also turned to achieving donors’ personal motives and strategic objectives (Ehrenfeld 2004). Therefore based on all that following are the arguments, theories and empirical evidence supporting the foreign aid is a developmental tool for the developing countries.
The post World War Two foreign aid went to Africa and Europe. Europe was primarily devastated because of the war (Hjertholm and White 1998). Importantly, this aid brought significant results as Europe rose back up and almost every European country became economically developed and stable. Therefore, the literature and empirical studies from 1950s and 1960s, which are based on evidence from late 1940s and early 1950s, are mostly found supportive of foreign aid (Hjertholm and White 2003). Kabete (2008) argues that the literature from the 1950s and 60s held the view that the developing countries lack capital. Once the capital is provided to them, their problems could easily be resolved. An elaboration of this argument could be found in Chenery and Strout (1966) who argue in favor of foreign aid. Their argument is that developing countries major problem is that they lack resources to fully manage their expenses and reduce down the difference between exports and imports. Thus, foreign aid is a major instrument for covering up for the saving (surplus income) and trading (exports-imports) gaps. They further argue that it gives these countries with an opportunity for investments, which directly increases their revenues and hence, growth.
Therefore, a major argument in support of foreign aid usually argues that it helps balance the income with expenditures of a country in its budget. Fayissa and El-Kaissy (1999) argue that the fundamental purpose of aid is to provide what a country lacks. In the holistic sense, a country usually lacks the capital or financial resources to produce surplus or even equalize its revenues against expenditures. This is the purpose that foreign aid serves; it eliminates the difference between revenue and expenditures. Fayissa and El-Kaissy (1999) give the example of India and Bangladesh where foreign aid when covered for the expenditures became a resourceful tool for growth and development of the countries.
Moreover, it is usually not about the aid, but the area where it is being allocated and how is it being used that decides whether aid becomes an asset or a liability. If aid is given for any vague, unknown or unclear purposes, there are more chances of it being exploited badly. However, targeted and monitored aid can be helpful as it achieves particular purposes. Kabete (2008) support the idea of targeted aid and gives an example that if a foreign aid is in the form of giving technical know-how to another country, it can very easily produce the desired results. However, first, it needs to be established that the know-how being given is needed and would be helpful in uplifting of the society. Therefore, while providing or covering up the skills lack, the foreign aid seems very effective and helpful.
Similarly, another benefit or advantage of foreign aid is a useful helping tool in emergency situations. War and natural disaster affected countries’ often lack complete financial and technical resources for taking its people out of the crisis. Therefore, in such a scenario, foreign aid becomes very helpful. Kabete (2008) has argued in favor of foreign aid saying that in the short run, in case of emergency needs, it brings many positive assistance and outcomes. Cohen and Werker (2008) further argue that natural disasters usually occur because of events that are beyond the control of human beings as yet. However, they can be predicted and their damage can be brought to minimum. But for that, countries need to put in resources and do long term preparations. Developed countries are found to do this successfully, however, underdeveloped countries are not. Usually the problem for developing countries is the lack of resources (Cohen and Werker 2008). Therefore, an aid sent for dealing with the crisis in short as well in long term can be an effective strategy to counter the adverse effects of natural disasters.
Moreover, Foreign aid is also considered a useful tool in promoting a cause. For instance in promoting capitalism, liberalism, democracy and other dominating values and rights, foreign aid is argued to be functional. Also, it is not only to help the beneficiary country, foreign aid is mostly used by the donor country to promote its own causes and influence other countries. Nixon is found to have said that the purpose of foreign aid is to help USA, not any other country (Leonard 2014). During the cold war, America and Soviet Union used to provide aid to other countries to influence their economic decisions according the respective ideologies. America wanted to draw countries to capitalist block while Soviets wanted them in communism (Meernik et al. 1998). Similarly, in the post cold war era, in 1990s, notion of democratization has gained popularity as an objective of foreign aid. Meernik et al. (1998) notices that Clinton had put democratization and human rights agenda as third major pillar on which his foreign policy stands. In this regard, ‘ Support for Eastern European Democracy Act 1989’ and ‘ Africa Conflict Resolution Act of 1994’ carry great value (Meernik et al. 1998).
Furthermore, foreign aid is also useful for donor countries in strengthening ties with the recipient country in such a way that they can be influenced. Thus, more than the recipients’ interests, in such cases, the aid reflects the donors’ economic and strategic interests. For instance, Ram (2003) gives examples of Japan, Britian and America’s aid as follows: Japan gives aid to only some Asian countries. Similarly, Britian is more interested in countries that it had colonized in the past while America also aids when there is a strategic motive (Ram 2003). The advantages that donors try to gain are not always mono-directional. They may also help the recipient country. For example, the aid might aim towards capacity building or defense building because the donor country might need a stable country for increasing its economic ties with them and gaining long term economic benefits out of it (Ehrenfeld 2004).
In this regard, one of the ways opted for could be tied aid in which a significant portion of the aid is required to be spent on the promotion and growth of the goods imported from the donor country or on which the donor country has some sort of control (Gillies 1987). For instance the idea could be that the aid would increase job opportunities but for that the sales of a particular company’s products would have to be increased so a significant portion of the aid would be spent on increasing that company’s sales. Interestingly, 30% of total foreign aid is usually tied (Boone 1996).
Thus, basically the arguments that favor the idea of foreign aid give the example of Europe rising back up after World War Two and argue that it covers for the lack of capital and helps countries grow effectively and efficiently while also promoting the cause of donor country in the recipient.
Just like the arguments in favor of different projects and departments of aid, arguments against foreign aid are also excessively available. In other words, no foreign aid brings only positive outcomes. On many occasions and in many ways, it fails to help and even negatively harm the recipient as well as donor country.
Pack and Pack (1993) argue that foreign aid has not helped significantly in reduction of poverty or economic growth in the developing countries especially in Africa. Mosley (1987) disagrees with Chenery and Strout (1966) arguing that there is very little correlation found between the amount of aid that flows to developing countries and their growth rates. Similarly, Gong and Zou (2001) also showed that there is no surety that foreign can bring positive economic changes in the recipient country. Another argument, in this regard, comes from Degnbol-Martinussen et al. (2003). They argue that foreign aid shifts the focus of leaders of a country. Rulers rather than worrying about and working for poverty elimination and economic growth start spending resources on military and luxuries and leave development and poverty matters to foreign aid.
Similarly, in case of tied aid, it becomes a liability in fulfilling the projects. First of all, a project ought not to begin as long as the country cannot fulfill its requirements (Riddell 2007). Foreign aid coming to provide assistance resources, according to Riddell (2007), actually puts the host country under pressure because they lack the resources, skills and other know-how required for completing the projects. Thus, in such matters, foreign aid does not only fail to help but also becomes a burden. Similarly, when tied aid provides help significantly to international firms, it basically destroys the local economy and domestic industry. Local companies cannot compete with such heavily funded companies and hence, their business go down and negatively impact the economy of the country (Gillies 1994).
The rising international companies create a monopoly and charge higher prices (“ Strenthening Aid Effectiveness” 2001). Thus, on one end, people start losing their jobs because local businesses are going down and on the other end, prices for various products start going up. Government is then forced to publish more money, which then gives rise to inflation. Kabete (2008) further argue that foreign aid can often a times increase inflation in the host country. The reason for that is foreign aid might appreciate the real exchange rate and this would then result in inflation.
Similarly, those who consider debts a good foreign aid tool, which not only keeps the donor country satisfied, but helps the recipient country as well, ought to understand that increasing debt and continuous inability to pay them back rather harms the country. Kabete (2008) argue that currently one of the major obstacles in the path of developing countries, especially Least Developed Countries (LDCs) seem to be the debt provided as foreign aid to them in the last few decades.
This also leads to the argument that foreign aid does not achieve anything because of the corruption in the developing countries. Similarly, foreign aid is also statistically found to increase dependency of the countries on aid and wasteful and luxurious spending of its rulers (“ Strengthening Aid Effectiveness” 2001). For example, Mobutu’s (Zaire) meeting with Regan in 1980s is an evidence of that. He came to the President to negotiate easier and payable debt terms. However, soon he had his daughter’s marriage at Ivory Coast for which he leased Concorde (Leonard 2014). Rulers spend the money on themselves more, i. e., do corruption and the purpose or objective of the aid could never be achieved.
Furthermore, the aid that is given with the primary objective of donor’s welfare might end up having pernicious effects on the recipient country. It is argued by Ehrenfeld (2004) that sometimes the aid that comes to achieve the objectives of donors not only leaves negative impact on the poverty and economic growth of the country, but even makes it vulnerable to such an extent that the existence of the recipient country existence becomes doubtful. For example, Blake and Robert (1976) give the example of Vietnam where Soviets and America’s aid to keep them in their respective blocks increased so much that these countries started directly interfering in Vietnam’s matters. It kindled the fires of a proxy war between the two super powers in Vietnam. And in the end, it was all devastation because of the American invasion and till now it is hard for the country to stand back up.
Similarly, not only the bilateral aid, but the multilateral aid has also been bad for many countries. This is because the institutions like World Bank and IMF are largely dominated by Europe and especially America. It has been revealed that the amount of money that goes in developing countries through these institutions is far less than the amount of money that goes to America and other drivers of these institutions from the developing countries. Raffer and Singer (1996) note that America gets $9 in return to every single dollar that goes to developing countries through World Bank and other multilateral institutions.
Therefore, as disadvantages to the foreign aid, it at minimum does no good and at maximum destroys and bankrupts the whole country.
The point of this section is to establish that no form of aid carries good or harm only. In fact, with every aid, there comes some benefits for the recipient as well as the donor country and some risks or clear harms for both too. It always has to be a cost benefit analysis which may decide whether a country ought to take the aid. To understand better, see the following figure:
Figure 1 (White 1998, 88)
In figure (1) for every type of aid, the possible motive or objective is given and its effects, theoretical as well as empirical, are given. The possible positive as well as negative impacts both are given in the table. This is a general table, not specific to any particular country. Therefore, while taking aid, every country needs to look at both positives as well as negatives and then finalize if the benefits are greater than the costs for taking aid.
For instance, the costs of getting technical or skills increasing aid is very less, but benefits are huge. However, debt based aid and tied aid often carries more costs than benefits. But, the budget relaxing funds often bring inflation to the country. However, if the balanced budget has proper policies and strategies for economic growth, the inflation could be brought down in a few years using simple macroeconomic strategies.
But for that one needs sincere leadership, good governance and corruption free execution of policies. This is something that many developing countries lack. Thus, the argument comes down to that it is not the aid itself which is advantageous or disadvantageous, it is rather the recipient countries sincerity and motives that make the aid bring benefits or harms to the country. Therefore, it would be a narrowed approach to reject aid based on the studies that show no improvement on poverty, economy and democratization agendas. Rather donors should convince and influence the recipient countries to improve governance and make their countries corruption free.
It has been analyzed that foreign aid has advantages as well as disadvantages for the developing countries. In case of European economies, one notices that aid has significantly helped their economy stand back up after second world war. The reason is that Europe had the structure and policies and leadership sincerity. All they needed was capital or resources to build on. This is what aid meant for them.
However, in case of Africa, one does not see any significant progress in last five decades despite trillions of dollars of aid. The primary reason is that on one hand, these countries often lack even basic resources to build on and on the other, they also lack sincere leadership and good governance for using the aid in the best interest of their country and people.
However, it is not always dependent on the recipient; sometimes even the donors’ strategic interests and objectives harm the development of the developing countries. The aid often intentionally or unintentionally makes developing countries dependent on developed countries in the long run and this gives an opportunity to the developed countries to exploit their counter parts as much as possible.
Nonetheless, one may argue that more than the foreign in itself, it is the other factors that matter the most in uplifting of a society or country. Foreign aid in itself may not do any good or bad, but the governance, corruption levels and objectives, strategies and much more join up to form a complex structure of aid usage, which decides whether it benefits or costs more.
Boone, P. (1996). Politics and the effectiveness of foreign aid. European economic review, 40(2), 289-329.
Blake, D. H., & Robert, S. (1976). The politics of global economic relations. The International Executive, 18(2), 22-24.
Chenery B. H and A. M. Strout. (1966). ‘ Foreign Assistance and Economic Development’, The American Economic Review, 56 (4): 679-733.
Cohen, C., & Werker, E. D. (2008). The political economy of “ natural” disasters. Journal of Conflict Resolution.
Degnbol-Martinussen, J. and P. Engberg-Pedersen (2003) Aid: Understanding International Development Cooperation. London; New York; Copenhagen: Zed Books; Danish Association for International cooperation.
Ehrenfeld, D. (2004, February 1). Foreign Aid Effectiveness, Political Rights and Bilateral Distribution. Retrieved November 27, 2014, from http://sites. tufts. edu/jha/archives/75
Fayissa, B., & Mohammed, I. El-Kaissy. (1999). “. Foreign Aid and the Economic Growth of Developing Countries: Further Evidence” in Studies in Comparative International Development. Washington: Transaction Periodicals Consortium, Fall.
Gillies, D. W. (1987). Commerce over conscience. Aid-trade links in canada’s foreign aid programme. McGill University, Montreal.
Gillies, D. (1994). Export promotion and Canadian development assistance. Canadian International Development Assistance: An Appraisal.
Gong, L., & Zou, H. F. (2001). Foreign aid reduces labor supply and capital accumulation. Review of Development Economics, 5(1), 105-118.
Hjertholm, P., & White, H. (1998). Survey of Foreign Aid: History, Trends and Allocation. (A discussion paper presented to the Development Economics Research Group in Copenhagen, October 9th and 10th, 1998).
Hjertholm, P., & White, H. (2003). Foreign aid in historical perspective. Foreign aid and development: Lessons learnt and directions for the future, 59.
Kabete, Conchesta Nestory. (2008). FOREIGN AID AND ECONOMIC GROWTH: THE CASE OF TANZANIA.
Meernik, J., Krueger, E. L., & Poe, S. C. (1998). Testing models of US foreign policy: Foreign aid during and after the Cold War. The journal of Politics, 60(01), 63-85.
Mosley P. (1987) Overseas Aid: Its Defense and Reform. Great Britain: Wheatsheaf Books Ltd.
Pack, H. and J. R. Pack. (1993). ‘Foreign Aid and the Question of Fungibility’, Review of Economics and Statistics 75(2): 258-265.
Ram, R. (2003). Roles of bilateral and multilateral aid in economic growth of developing countries. Kyklos, 56(1), 95-110.
Raffer, K., & Singer, H. W. (1996). The foreign aid business: economic assistance and development co-operation. Cheltenham: Edward Elgar.
Riddell, R. C.. (2007). Does Foreign Aid Really Work? New York: Oxford University Press.
Strengthening Aid Effectiveness: New Approaches to Canada’s International Assistance Program. (2001, June 1). Retrieved November 27, 2014, from http://www. acdi-cida. gc. ca/cida_ind. nsf/8949395286e4d3a58525641300568be1/5a14c5f9eb149e7685256aa10056afee/$FILE/sae. rtf
White, H. (1998). Aid and Macroeconomic Performance: Theory, Empirical Evidence, and Four Country Cases (ed.) London; New York: Macmillan Press; St. Martin’s Press in association with Institute of Social Studies.