The effectiveness of aid in promoting economic development in developing countries


Essay, 2018
10 Pages, Grade: 62.00

Excerpt

Poverty is a very complex and multidimensional phenomenon. The World Bank (2016) defines it generally as the lack of multiple assets and resources necessary for material well-being leading to physical deprivation and social exclusion. According to its statistics 1 in 10 people in the world live for less than $1,90 a day. And, while the situation in Asia improved in absolute terms mainly due to massive progress in China and India, Sub-Saharan Africa still lags behind. In fact, according to Sir Paul Collier (2008) the world’s poorest African countries are nowadays worse off than they had been in 1970s. Reducing poverty is as complex as the poverty itself. In most cases it requires radical institutional changes leading towards freedom to participate in society, enforcement of property rights, provision of public goods as well as of social infrastructure. Ultimately, it is about giving incentives and opportunities to the poorest part of society so that it can participate in the economy (Acemoglu, 2003). In numerous cases where governments were unsuccessful at combating the poverty, international aid has partly filled this vacuum.

Yet, the aid per se has failed to be a remedy for persistent poverty and will never be the latter. According to Acemoglu and Robinson (2014) the belief that large capital inflows in the form of foreign aid can eradicate poverty for good has been a predominant theory of economic development as well as leading ideology of governments and aid agencies over the past six decades. The economists criticise this approach as being short-sighted and overlooking the importance of inclusive domestic institutions needed to generate growth and to lift the societies out of poverty. What is more, numerous scholars argue that foreign aid is and has always been allocated purposively and strategically to serve geopolitical interests of the donors (Collier, 2008; Milner and Tingley, 2010, 2013; Apodaca, 2017). This selection bias has additionally exacerbated the already weak impact of foreign aid on the economic development and poverty eradication. Last but not least, aid fungibility, i.e. the problem of using aid for purposes different than intended as well as tying it as mechanism to deal with it also impact its effectiveness.

Scholars such as Rodrik (2013) and Collier (2008) emphasise the importance of institutions being a fundamental causal factor for a developing country to rise out of poverty. Collier (2008) argues that while the aid might be particularly effective in short-term growth stimulation for post-conflict situations, it will not be effective in generating growth in the long term unless obstacles to it such as poor governance and policy will be dealt with. This thesis is supported by Rodrik (2013) who conditions long-term growth upon accumulation of fundamental capabilities such as human capital and institutions. The latter that focus on securing large elites will be growth oriented while the ones securing narrow elites will choose wealth redistribution (Collier, 2017). What is more, well designed policies will attract private capital that usually is not provided by aid. This capital is crucial for rising up productivity of a developing country (Collier, 2008). This process referred to as structural transformation resulting in rapid industrialisation has almost always been the stimulus of the extraordinarily high economic growth in developing countries (Rodrik, 2013).

Extractive institutions that act in their narrow interests are the problem in many poor and developing countries. These institutions will be likely to use the aid for similarly narrow purposes. There is substantial evidence that a lot of foreign aid has been misused by recipient governments. Those in power tend to loot public money and get it abroad. Nigeria, the 6th largest producer of petroleum, is an example of a country that despite having massive natural and human resources at its disposal has failed to secure the basic economic infrastructure to its citizens. The oil revenues as well as aid have been misused over the past decades by subsequent dictatorship governments for private purposes at the expense of the public. Consequently, Nigeria now possesses a stark dichotomy of wealth and poverty (Frieden et al, 2016). The country that has asked the international community for $ 1.2 billion aid last year, has been plagued by corruption (Boseley, 2016). It is estimated that Nigerians held abroad around $ 100 billion of capital by the end of military rules in 1998 (Collier, 2008). Paradoxically, as a consequence of such practices, poor countries that lack capital, have integrated into global economy through capital flight instead of capital inflows (Collier, 2008).

While the official rhetoric of governments focuses on poverty reduction, human welfare improvement and development as main purposes of giving aid, the academic research has determined that foreign aid has been given predominantly to promote geostrategic interests. Historically, aid was a tool of Western states to contain the spread of communism and to deter growth of the Soviet Union (Apodaca, 2017). The tendency to allocate aid according to the characteristics and interests of the donors rather than of the recipients is a fact. And, consequently foreign aid is and has always been an important element of foreign policy for many countries (Milner and Tingley, 2013). This leads to a situation where aid less tends to be channeled to countries that need it the most. It is instead given to countries where donors have strong political and trade relations, investment interests or colonial ties. Additionally, the agency problem is what also determines the selection bias. As a consequence of this aid tends to bypass the neediest countries with the highest risks (Collier, 2008).

The USA has been the largest aid donor in absolute numbers. In 2011 it spent $31 billion on foreign assistance (Milner and Tingley, 2013). American leaders and policy makers have always viewed foreign assistance as an essential instrument of foreign policy that has been increasingly associated with national security (Tarnoff and Lawson, 2016 cited in Apodaca, 2017). An example of Haiti clearly shows that the aid given to it officially to boost economic development and improve the situation of its citizens has proved elusive. After having received approximately $38 billion in aid since mid-1950s Haiti remains underdeveloped and poor (Buss, 2015). First, the American leaders driven by vested interests have used the aid to support 30 years of brutal regime of the Duvaliers because they provided the USA a counterbalance to the communist Cuban dictatorship in the region. Then, the aid was channeled to a country characterised by weak institutions and corruption (Buss, 2015). Consequently, subsequent Haitian leaders would loot and misuse the aid what translated into instability of and insecurity in its provision as an American stance.

The Haitian example demonstrates that foreign assistance can be a very flexible tool of pursuing the policy that serves mostly the donor interests. It can be provided as a reward for specific behaviour or as an inducement to change it. It can also be suspended as a means of punishing or coercing the recipient. As argued by Tarnoff and Lawson (2016) in Apodaca (2017) it can be an instrument for influencing events, solving certain issues and projecting the US (or any other donor’s) values. Decisions on its allocation are made by political leaders of the donor country and as shown by Milner and Tingley (2010) in their research foreign aid policy is not only driven by geopolitical agenda but also by domestic interests of the donor. They argue that presidents have to construct aid policy in such a way as to get the majority support for it in the United States Congress and that the legislators consider the effects of aid on their districts and vote accordingly. This is also where interests of different groups come into play in the form of lobbying. Hence, foreign aid is and has been highly politicised.

While bilateral aid is criticised for being used predominantly to promote the donor’s objectives and geostrategic interests, it is multilateral aid that is believed to be less politically biased. Advocates of the use of aid as foreign policy tool prefer bilateral aid because it allows the donor to have complete control over it, and because its receipt leaves the recipient obligated to the donor. At the same time, multilateral aid is believed to be cheaper, to disperse accountability as well as to be more politically neutral and needs-driven (Apodaca, 2017). Over time aid has evolved from bilateral donor-recipient based relationships to multilateral ventures involving international organizations such as the World Bank (WB), the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) or the United Nations Development Programme (UNDP). Since the 1990s the multilateral aid has averaged approximately 30 per cent of the total economic aid and yet the USA has historically delivered much less than the above average- 12 per cent- of its aid multilaterally (Milner and Tingley, 2013).

The research conducted by Biscaye et al (2015) for the Bill & Melinda Gates Foundation shows that generally the bilateral aid given directly to recipient governments is used in vast majority of cases for debt relief. This according to the authors indicates that it may be more politically viable for the donors to provide the bilateral aid for the purposes of debt forgiveness versus new cash funding. Furthermore, according to the research bilateral ODA given to the public sector is used predominantly to finance environment, infrastructure as well as water and sanitation projects. And, while the relative allocation to most subsectors of social infrastructure and services is similar for both bilateral and multilateral aid, a much larger percentage of multilateral aid is dedicated to health. These findings appear to support the commonly accepted hypothesis that bilateral aid is less likely to be development-oriented than multilateral aid (Burnside and Dollar, 2000; Ram, 2003; Minoiu and Reddy, 2007; Rajan and Subramanian, 2010 cited in Biscaye et al 2015).

What is more, multilateral aid is believed to be more effective at realising desired development outcomes because multilateral agencies are able to exercise pro-poor conditionality more effectively than bilateral agencies can (Rodrik, 1995 cited in Biscaye et al 2015). And, since multilateral agencies have been historically committed to promoting development outcomes they have a greater incentive to impose pro-development conditions for the recipient countries, such as the preparation of the Poverty Reduction Strategy Papers (PRSPs). On the other hand, however, some evidence exists that multilateral agencies are not impartial either when granting aid. A research of Kaja and Werker (2010) cited in Apodaca (2017) found that members of the executive board of the International Bank for Reconstruction and Development (IBRD) received approximately two times more funding than its non-members. What is more, another research has shown that the IBRD loans were influenced by a recipient government’s temporary seat in the UN Security Council (Dreher et al, 2009; Kuziemko and Werker, 2006 cited in Apodaca, 2017).

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Details

Title
The effectiveness of aid in promoting economic development in developing countries
College
University of Reading
Course
Development Finance
Grade
62.00
Author
Year
2018
Pages
10
Catalog Number
V421545
ISBN (eBook)
9783668689459
ISBN (Book)
9783668689466
File size
410 KB
Language
English
Tags
development economics, development studies, foreign aid, development aid, aid effectiveness, ODA, Nigeria, Haiti
Quote paper
Weronika Krawczyk (Author), 2018, The effectiveness of aid in promoting economic development in developing countries, Munich, GRIN Verlag, https://www.grin.com/document/421545

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