There are two, large conflicting opinions on the effectiveness of aid. Many of the aid agencies and some economists claim that aid that is focused and purposeful can be a strategy to lift people out of poverty. Other economists claim that development aid throughout African has been wasted over the past 50 years, and has only served to fuel corruption and a culture of dependency.
What is aid…
Foreign aid consists of financial flows from the developed world to less developed countries. It can be bilateral (between two countries) or multilateral (between multiple countries, through aid agencies) Some of these flows are soft loans, which receive more favorable interest rates and terms; others are grants which don’t need to be repaid. They can be further classified as tied aid when the money flow needs to be spent purchasing goods from the donor nation.
What are the motives for providing aid?
Nations can offer aid for a variety of reasons. Many developed countries grouped together at the Earth Summit in the 1992 and pledged to donate 0.7% of thier nations total Gross National Income (GNI) as foreign aid. The graph below shows how successful northern Europe has been in reaching these targets and how far the rest of the world still has to go.
- Political and Strategic Motives: Historical links have provided the key motive for bilateral aid between many countries. Some of the colonial links between France and parts of Africa have informed thier aid strategies. In parts of Asia the spread of communism promoted USA to support countries as the USSR supported the pro-communist regimes.
- Economic Motives: Aid is used by many developed countries to support the development of closer economic ties. China’s investment into the Democratic Republic of Congo is a good example of this as explained in this article Africa, Business and Development – Times.
- Humanitarian Aid: In the days after any natural disaster such as the Haiti Earthquake or Japanese Tsunami, countries have pledged grants to support the redevelopment of countries. Developed nations have also supported the drive towards the Millennium Development Goals to alleviation of poverty in parts of Africa by granting vast sums of money in an altruistic fashion.
How is aid helping?
For many countries, aid is the key tool to breaking the poverty cycle. Increased foreign grants can be used for loans, therefore breaking the savings/investment constraint that low income societies face. Small loans allow families to invest in capital, fertilizer or education. In many countries aid makes up a large percentage of social spending, such as in Tanzania up to third of total social spending comes from aid. Local government do not have the tax revenues to replace aid and therefore need it to supply basic services such as education and healthcare. The two videos below help explain how targeted aid can be effective tool in the development of countries.
What are the problems with foreign aid?
There are numerous critics of foreign development aid, who claim that trade is a more sustainable path to prosperity. The following video is perhaps the best intellectual critique of the issue. The main argument against aid are as follows.
- Aid is a breeding ground for corruption: There are numerous cases of governments using funds for personal gain or to fund armies. The government of Haiti was once considered the most corrupt in the world and after the earthquake in 2009 lead many government to be skeptical about the effectiveness of their donations given the politician historical record.
- Aid substitutes for rather than complements domestic government revenues: Many governments need to develop the tax system so that they can collect sufficient revenue to provide essential services. Too often aid is used in the place of tax revenue which is a short term solution and breeds a culture of dependency.
- Aid does not reach those in need: Sometimes aid is tied to projects that do little to support development. Cases of countries developing miles of fiber-optic broadband internet connections when people starve is a prime example. Sometime corruption by local official prevents all of the money reaching those in need.
- What factors does Paul Collier point to that contribute to the “poverty traps” many African nations find themselves in? [3:07]
- What have the two main goals of foreign aid policy been over the last 50 years, according to Dambisa Moyo? [4:45]
- What are the “four horsemen of the African apocalypse?” How does Moyo think these four obstacles to development can best be overcome? [5:14]
- What is Paul Collier’s opinion of the role of free trade in promoting human and economic development in Africa? What does he think about Africa’s traditional dependence on primary products and commodities? [7:45]
- Before economic growth and development can occur, security must be achieved. Why is security, according to Collier, the number one obstacle to achieving meaningful development in Africa? [8:30]
- In a dissenting view, Dr. Jeffery Sachs argues for more aid to Africa. What types of aid does Sachs believe is absolutely crucial for Africa to continue to receive? [10:39]
This is an excellent post by Jason Welker, that goes into the evaluation of aid and trade in more depth. The Bottom Billion: Aid and strategies for achieving economic development It also contains the second part of the above video.
The economic concepts and definitions in this post are borrowed from the detailed textbook – Economics for the IB Diploma by Ellie Tragakes