Impact of foreign aid on development
Fowzia Gulshana Rashid Lopa | Sunday, 31 August 2008
THE concept of foreign aid was floated in the 1950s as part of post World War II economic development theory, to fill 'domestic saving gaps'. It involved a massive transfer of capital and technical assistance from the developed to the less developed countries (LDCs). It was argued that foreign aid would contribute to high national investment, economic growth and development in the recipient countries. Foreign aid has been playing a major economic role, since then, especially in the LDCs, with scarce domestic resources.
It is open to question how far the LDCs could achieve self-sustaining economic growth with foreign aid. Could foreign aid reduce poverty, inequality and unemployment? Champions of foreign aid think it helps the transmission of new ideas through transfer of technology, provides technical assistance to uplift a country's skill, production and services. It helps traditionalism to be upgraded and they think it helps modernization and adaptation.
But critics say concessional resources from aid donors delay self-reliance of the recipient countries, thwart domestic saving, prop up authoritarian and repressive regimes, and distorts domestic development. They also think foreign fosters dependence syndrome, which proves difficult to break. Such criticism led to evaluation of the impact of foreign aid. It raised questions whether or not aid works. The Development Advisory Committee (DAC) of the Organisation for Economic Cooperation & Development (OECD) states that aid has helped build key development-promoting institutions like agricultural universities as well as technical and enterprise management training institutes in many countries. A number of econometric studies estimated that about 23 per cent of foreign-capital inflows offset the declines in domestic savings.
According to a Development Advisory Committee report, about 33 per cent of aided projects were highly successful, 33 per cent were "satisfactory," and 33 per cent were adjudged "disappointing." About 10 per cent of the projects were adjudged as "a total loss". The Asian Development Bank and the Inter-American Development Banks (IADB) concluded that 60 per cent of the loans they provided fully met the objectives, 30 per cent partially did so, and less than 10 per cent achieved marginal success. However, this indicates that foreign aid works partially without fully achieving the development objectives. Foreign aid creates constraints which make sustained long-term development difficult. So, what are the problems behind this partial performance which limits the benefit of aid?
Problems associated with foreign aid occur partially because of failures on the part of aid recipients and also because the donor countries value strategic considerations more than the development concerns. Donor countries impose conditionalities that do not seem to work because the steady flow of aid is meant to provide income sources to many interest groups in the donor countries. A dominant concern remains their income, and not necessarily the well-being of the aid recipients. Poor countries need aid that is delivered in a predictable fashion, without too many strings attached to minimise transaction costs and maximise the value for money. All too often, they get aid that is unpredictable, uncoordinated and tied to purchases from the donor countries.
In case of debt relief, procedures for resolving difficulties with international debts are plagued by a lack of effective coordination mechanism. The ability of countries to support exports and output is severely weakened in the absence of provisions for sustaining trade credit during the debt resolution process. However, not all of the problems in aid can be traced to the donor side of the equation. Many developing countries have poverty reduction in the heart of their public policy. Too often, however, a failure to translate commitments into effective action undermines aid effectiveness. Weak governance, corruption and a failure to adopt policies that sustain economic growth reduce the development returns out of aid investments.
What is the impact of foreign financial assistance on developing countries' economic development? They are facing increasing debt burden. They cannot invest in the needed sectors. On the other hand, increasing underdevelopment due to governance problems develops dependence on assistance from the developed countries.
Globalisation of international financial system has added an extra dimension. There are several arguments. At first, development strategies have generally involved a significant government intervention and fairly gradual liberalisation of trade restrictions. Second, the developing countries are following different approaches to open their economics.
Third, developing counties succeeded in achieving growth by shaping their strategies in consultation with the private sector. The challenge involves pursuing a very large agenda. Many countries lack conditions for sustainable growth and poverty reduction. They cannot avoid financial crises.
However, some countries have achieved success in generating growth, with major setbacks along the way. These success stories provide grounds for optimism. Nevertheless, the future growth of individual countries depends on the international financial environment and on the efforts of the international community to pursue an appropriate agenda for strengthening the international system. Aid has to be delivered on a predictable, low transaction cost, value for money basis. Developing countries have primary responsibility for creating the conditions under which aid can yield optimal results.
The writer is doing her Masters in Development Studies at the East West University
It is open to question how far the LDCs could achieve self-sustaining economic growth with foreign aid. Could foreign aid reduce poverty, inequality and unemployment? Champions of foreign aid think it helps the transmission of new ideas through transfer of technology, provides technical assistance to uplift a country's skill, production and services. It helps traditionalism to be upgraded and they think it helps modernization and adaptation.
But critics say concessional resources from aid donors delay self-reliance of the recipient countries, thwart domestic saving, prop up authoritarian and repressive regimes, and distorts domestic development. They also think foreign fosters dependence syndrome, which proves difficult to break. Such criticism led to evaluation of the impact of foreign aid. It raised questions whether or not aid works. The Development Advisory Committee (DAC) of the Organisation for Economic Cooperation & Development (OECD) states that aid has helped build key development-promoting institutions like agricultural universities as well as technical and enterprise management training institutes in many countries. A number of econometric studies estimated that about 23 per cent of foreign-capital inflows offset the declines in domestic savings.
According to a Development Advisory Committee report, about 33 per cent of aided projects were highly successful, 33 per cent were "satisfactory," and 33 per cent were adjudged "disappointing." About 10 per cent of the projects were adjudged as "a total loss". The Asian Development Bank and the Inter-American Development Banks (IADB) concluded that 60 per cent of the loans they provided fully met the objectives, 30 per cent partially did so, and less than 10 per cent achieved marginal success. However, this indicates that foreign aid works partially without fully achieving the development objectives. Foreign aid creates constraints which make sustained long-term development difficult. So, what are the problems behind this partial performance which limits the benefit of aid?
Problems associated with foreign aid occur partially because of failures on the part of aid recipients and also because the donor countries value strategic considerations more than the development concerns. Donor countries impose conditionalities that do not seem to work because the steady flow of aid is meant to provide income sources to many interest groups in the donor countries. A dominant concern remains their income, and not necessarily the well-being of the aid recipients. Poor countries need aid that is delivered in a predictable fashion, without too many strings attached to minimise transaction costs and maximise the value for money. All too often, they get aid that is unpredictable, uncoordinated and tied to purchases from the donor countries.
In case of debt relief, procedures for resolving difficulties with international debts are plagued by a lack of effective coordination mechanism. The ability of countries to support exports and output is severely weakened in the absence of provisions for sustaining trade credit during the debt resolution process. However, not all of the problems in aid can be traced to the donor side of the equation. Many developing countries have poverty reduction in the heart of their public policy. Too often, however, a failure to translate commitments into effective action undermines aid effectiveness. Weak governance, corruption and a failure to adopt policies that sustain economic growth reduce the development returns out of aid investments.
What is the impact of foreign financial assistance on developing countries' economic development? They are facing increasing debt burden. They cannot invest in the needed sectors. On the other hand, increasing underdevelopment due to governance problems develops dependence on assistance from the developed countries.
Globalisation of international financial system has added an extra dimension. There are several arguments. At first, development strategies have generally involved a significant government intervention and fairly gradual liberalisation of trade restrictions. Second, the developing countries are following different approaches to open their economics.
Third, developing counties succeeded in achieving growth by shaping their strategies in consultation with the private sector. The challenge involves pursuing a very large agenda. Many countries lack conditions for sustainable growth and poverty reduction. They cannot avoid financial crises.
However, some countries have achieved success in generating growth, with major setbacks along the way. These success stories provide grounds for optimism. Nevertheless, the future growth of individual countries depends on the international financial environment and on the efforts of the international community to pursue an appropriate agenda for strengthening the international system. Aid has to be delivered on a predictable, low transaction cost, value for money basis. Developing countries have primary responsibility for creating the conditions under which aid can yield optimal results.
The writer is doing her Masters in Development Studies at the East West University