Conditions for Effective Disbursement of Aid

Table of Contents

INTRODUCTION

WHAT IS AID?

Types of Aid

Historical Overview of Aid

Purpose of aid

THE AID DEBATE

INTERNATIONAL CONFERENCES ON AID EFFECTIVENESS

CONDITIONS FOR EFFECTIVE AID DISBURSEMENT

CONCLUSION

REFERENCES

INTRODUCTION

The success of the Marshal Plan in restoring the economically distressed regions of Europe (Denmark and Sweden received $385m and $347m respectively) after the Second World War in 1945 continues to be a beacon that tells us that aid is one of the necessary factors and channels of achieving development.

If aid was successful in Europe why has it not been successful in developing countries? If the problem lies with the political and institutional settings, then why don’t developing countries copy these institutions in their own countries? This basic idea informed the way aid disbursement has been done. Developing countries over the decades could only get access to aid by implementing certain conditions which were believed to be the best roadmap for achieving development. Even with these conditions set and implemented, development and alleviation of poverty still remain a distance dream for these developing countries.

WHAT IS AID?

According to White 1974, foreign aids are “actions taken by people or institutions in one country towards people or institutions in another country which help, or at least intend to help the latter”. The Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) however, defines aids as “flows to developing countries and multilateral institutions from official agencies” and must satisfy two criteria. First, it must be intended for achieving a developmental agenda but excludes military assistance and export credits. Second, it must be very concessional in character and bears a grant element of at least 25% calculated at a rate of discount of 10% (Encyclopaedia of International Development 2005). Other official flows (OOF) as defined by the DAC, include commercial private capital flow and grants from non-governmental organizations (NGOs) and these are not considered as official development aid.

Types of Aid

The DAC has Official Development Assistance (ODA) for least developed; low-income; lower middle-income and upper middle-income countries with per capita GNI between $1,2275 and $1,005 or less and Official Assistance (OA) for developed countries.

The DAC reviews and update these lists every three years and any country that exceeds the high income level for three consecutive years during the review are removed (OECD, 2011). It has another category that comprises of bilateral ODA, multilateral receipts and non-trade related official flows called Official Development Finance (ODF) (OECD 2005).

Another way of differentiating between aid is on the source and channels of aid delivery: Bilateral, multilateral and non-governmental. Bilateral aids are those aids that move directly between donor and recipient governments through national aid agencies like the United Kingdom’s Department for International Development (DFID); multilateral aid represents aid flows from a group of countries or through international bodies like the World Bank, the various organisations under the United Nations and regional development banks like the African Development Bank. About one-third of the total ODA were received by over 200 multilateral agencies in 2010 (OECD 2010). Non-governmental organizations such as CARE and Oxfam are also channels for aid delivery and get access to monies through private giving or internal generation of funds. Even though monies from these groups do not qualify as ODA, some of their activities are usually sponsored by official agencies that use them as implementers of their projects (Encyclopaedia of International Development 2005).

A further differentiation of aid can be based on the length of time or period - short or long term aids. Short term aids are usually in the form of emergency or humanitarian aids. These rapid assistance are given to people in immediate distress in some form of vital services in funds or in-kind. On the other hand, long term aids are given to support social and economic improvement over a longer period of time and usually aimed at alleviating poverty in developing countries.

Historical Overview of Aid

Williams (2013) has traced the earliest form of aid from the 19th and 20th centuries where European powers provided financial assistance to their colonies for infrastructure development to increase their economic output. One such example is the construction of the hydro-electric Kariba Dam on the borders of Zambia and Zimbabwe in the mid 1950s under British colonial rule (Moyo 2009).

The structure and scope of aid today can be traced to two major international events after World War II - the establishment of the Bretton Woods Institutions in the 1940s aimed at supplying developing countries with the financial capital they lacked to spur development and the US-sponsored Marshall Plan in the 1950s to help to bolster the destroyed economies of Europe which provided a rescue package of $20 billion to the region (Moyo 2009).

The United States and Soviet Union used aid during the Cold War (1960s-1980s) as a diplomatic instrument to foster political support and coalition. During this period Africa received aid from 21% to 35% of the total global aid (World Bank 2007). However, the economic recession in the developed countries resulted in the decline of aid from donors and developing countries increasingly resorted to borrowing. This exacerbated the debt crisis of developing countries and increased the level of poverty. By 1999, aid to developing countries especially Africa, began to increase steadily (OECD 2013). In 2000, the continuous failure of aid to help to alleviate poverty in developing countries led to the creation of an international action plan to increase aid to 0.7% of GNI of developed countries by 2015 in eight key areas of poverty reduction - the Millennium Development Goals (A brief history of Aid).

Purpose of aid

i. To help construct basic infrastructure and assist national budgets
ii. To provide essential services during emergencies
iii. To create political ties
iv. To expand the market of donors
v. To influence local political processes in recipient country (Bora 2013)
vi. To fund the rebuilding of post-conflict countries

THE AID DEBATE

In the 1960s, the delivery and evaluation of aids’ impact was based on the macroeconomic two-gap model, which stated that domestic savings in developing countries were less than the needed amount necessary for investment to attain economic growth. Additionally, the foreign trade earnings of these countries were less than the amount needed for accessing their required imports. Hence, aid will fill in these financing gaps and eventually enable developing countries to attain a self-sustaining growth through an increase in investment (Chemery amp; Strout cited in Ranis 2012). However, this model has been criticized on the basis that, there is no theoretical or pragmatic confirmation that filling a financing gap will increase savings and ensure growth. And as such, disbursement of aid is not necessary for the attainment of growth in developing countries.

Nevertheless, the Jeffrey Sachs’ school of thought believes that the level of aid disbursement in developing countries has not been adequate to impact positively on development and there is the need to increase it. To him, aid is important and can make an important impact on development if the entire amount of disbursed aid is increased to 0.7% of the advanced countries’ GDP (Sachs cited in Maugham 2011). If these monies are distributed through practical interventional packages as enshrined in the MDGs, developing countries can exit from poverty within 15 years. An instance of a successful expenditure of aid is the eradication of diseases like smallpox and polio by giving immunization directly to the people who required it. Also, he believes that once these countries have a footing on the development ladder, they can enter into the international market economy without further assistance.

An opposing school of thought is the one led by Easterly, who believes that the problem of aid ineffectiveness does not lie in the amount or level of aid distributed but in the process of disbursement itself - the lack of donors’ familiarity on the actual situation in recipient countries when disbursing aid. According to him, planners in foreign aid typically use a top-down intervention process without taking into consideration and addressing the issues on the ground. He adds that development should be delegated to those he calls “searchers”. These “searchers” will work on the ground and search for solutions that will work and apply them effectively, unlike the big planners in donor countries, these ground workers – searchers will be open to advice, responsible for their actions, adaptable and will have smaller mistakes to correct in case of inaccuracy (Easterly cited in Maugham 2011).

Furthermore, Rajan amp; Subramanian 2007 stated that in order to avert corrupt governments and to make aid disbursement effective, donors are beginning to support developmental projects rather than government budgets. However, these project-aids free government resources and obligations to pursue projects that can be unproductive or inappropriate.

Additionally this school of thought states that, the disbursement of aid goes beyond the philanthropic actions of supporting the poor. Rather, aid is distributed as a strategic overseas policy instrument and reflects the donor’s political or economic interest. Strategic donors thus generally do not allocate aid based on the development it could create but on the political collaboration it could increase. And thus, aids can be used by recipient government to support or finance unproductive ventures because they are less answerable to donors. Others have argued that even though the purpose of aid delivery might be strategic, it can still be used for providing vital services and effectively help to alleviate poverty in recipient countries. A research by Subramanian 2009 revealed that for every additional aid of one per cent of the recipient country’s GDP, its exportable capacity will grow at a slower pace of 0.5% per year. Hence, aid has a negative effect on economic growth of the receiving country.

For a third school of thought, the ability of aid disbursement in achieving development depends on a number of conditions like, better policy setting and good governance. The World Bank report (Doller amp; Collier 1999) estimated that if aid is geared towards poor countries with good policies, more than double of the number of poor people could be lifted out of poverty for a corresponding total level of aid. Alternatively, Mosley et al 1995 have argued that the World Bank’s country officials are under extreme pressure to meet country payment targets and delivery that despite how despondent the government’s development implementation performance, they still get access to aid. Thus, the policy environment of a country does not often decide its access to aid.

Evidence, however, shows that projects in poor policy settings often fail (Easterly cited in Ranis, 2012). For instance, constructing rural roads in a country where there is no procedure or policy to ensure its maintenance. Accordingly, many scholars believe that aid can be effective depending on the policy setting of the recieving country. The research findings of a transverse economic test by Guillaumont amp; Chauvet(1999) to examine the effect of aid on economic development rate on two periods of 12 years revealed that aid disbursed in good economic policy setting are more effective.

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