What Is Foreign Aid

Published Date: 02 Nov 2017

Supporters disagree and give a counter argument that foreign aid is still playing a major role. Jeffrey Sachs, Joseph Stieglitz, Nicholas Stern and others have argued that although aid has sometimes failed, it has supported poverty reduction and growth in some countries and prevented bad performance in others. They believe that many of the problems of aid have more to do with donors than recipients, and point to a range of successful countries that have received sufficiant aid such as Botswana, Indonesia, Korea, and, more recently, Tanzania and Mozambique, along with successful initiatives such as the Green Revolution, the campaign against river blindness, and the introduction of oral rehydration therapy.

This paper explores trends in aid, the motivations for aid, its impacts, and suggestions how to reform it. It starts by examining aid magnitudes and who gives and receives aid. It explains the multiple motivations and objectives of aid, some of which are not in conformity with each other. It then explores the empirical evidence on the relationship between aid and growth, which is divided between research that finds no relationship and research that finds a positive relationship (at least under certain circumstances). It examines some of the key challenges in making aid effective, including the principal-agent problem and the other related issue of conditionality, and also some conclusions are drawn by examining the main proposal.

The term 'Foreign Aid' is broad one. It refers to any money or resources that are transferred from one country to another without any expecting for full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% more. Commercial or non-concessional loans are not included, private foreign direct investment such as inner investment by multilateral corporations nor does it include preferential tariff reductions offered by MDCs to LDCs that enable them easy access of their exports into the markets of the MDCs.

Foreign aid includes:

1. Public or Official Development Assistance Individual government assistance, known as bilateral aid multilateral donor agencies such as the IMF and World Bank providing multilateral aid

2. Private Development Assistance and Private non-governmental organizations (NGOs) such as CARE etc

What is Foreign Aid?

The standard definition of foreign aid comes from the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), which defines foreign aid (or the equivalent term, foreign assistance) as financial flows, technical assistance, and commodities that are made to accelerate economic development and welfare as main objective (thus excluding aid for military or other non-development purposes).Grants and subsidized loans are referred to as concessional financing, whereas loans that carry market or near-market terms (and therefore are not foreign aid) are non-concessional financing. According to the DAC, a loan counts as aid if it has a "grant element" of 25 percent or more, earning that the current value of the loan must be at least 25 percent below the current value of as compare to loan at market interest rates (usually assumed by the DAC – rather arbitrarily -- to be 10 percent with no grace period). Thus, the grant element is zero for a loan carrying a 10 percent interest rate, 100 percent for an outright grant, and something in-between for other loans.

The aid flow is classified into three categories by DAC.

Official development assistance (ODA) is the largest aid programme, consisting of aid provided by donor governments to low- and middle- income countries. Official assistance (OA) is aid provided by governments to comparatively richer countries with per capita incomes higher than nearly $9, 0005 (e.g., Bahamas, Cyprus, Israel and Singapore) and to countries that were formerly part of the Soviet Union or its satellites. Private voluntary assistance includes grants from non-government organizations, religious groups, charities, foundations, and private companies.

Although official development assistance has grown in absolute terms, it has declined sharply as a percentage of donor countries' GDP in recent years. Despite the commitment to ODA of 0.7% of national income made by the rich countries at the United Nations in 1970, only the Scandinavian countries, the Netherlands and Luxemburg had been able to meet this target by 2003. The USA was bottom of the table of OECD counties, with 0.15%.

In international relations, aid (also known as international aid, overseas aid, or foreign aid) is from the perspective of governments a voluntary transfer of resources from one country to another, given at least partly with the objective of giving benefits to the recipient country.

It may have other functions as well, it may be given as a indication of diplomatic approval, or to strengthen a military ally, to reward a government for behavior desired by the donor, to extend the donor's cultural influence, to give infrastructure needed by the donor for resource extraction from the recipient country, or to get other kinds of commercial access. Humanitarianism and altruism are, nevertheless, important motivations for the giving of aid.

When discussing foreign aid, most people have in mind ODA. Global ODA increased steadily from the 1960s until it reached a peak of $68 billion in 1992, right after the end of the Cold War, and then declined sightly to just under $55 billion in 1997. Aid flows started to rebound in the late 1990s following calls for greater debt relief and increased aid to new democracies, and accelerated after the attacks of September 11, 2001, reaching $92 billion in 2004 (all of these figures would be slightly higher if they included OA). In real terms, total ODA in 2002 was about the same as in 1992, and by 2004 was about 12 percent higher. Measured as a share of donor income ODA fell during the 1990s, and has rebounded only slightly. Donors have pledged to continue to increase aid, as most recently in July 2005 when the heads of state of the Group of 8 industrialized countries promised to double aid to sub Saharan Africa by 2010 and triple it by 2015, but due to budget tensions in donor countries may undermine these pledges.

Statistics

http://upload.wikimedia.org/wikipedia/commons/c/cb/Aid_recipients._%24_per_capita%2C_2007.PNG

Aid received, per capita, in 2007, in $ of Official Development Assistance per person. Note that grey countries can either be non-recipients or ones for which data is unavailable. The data were converted into dollars using exchange rates, hence may not accurately reflect the purchasing power of the foreign aid received.

Who’s eligible to give aid?

Aid may be given by groups, private organizations, or governments. Standards delimiting exactly the kinds of transfers that count as aid vary. For example, aid figures may or may not include transfers for military equipment: to cite one instance, the United States included military assistance in its aid figure until 1957 but does not provide concessional credit anymore to developing countries (i.e. not, as in the past, just those in areas of potential conflict with Moscow) to promote their long-term growth In 1957 the administration (with congressional support) separated economic from military assistance and created a Development Loan. The most widely measure of aid, "Official Development Assistance" (ODA) is such a figure. It is compiled by the Development Assistance Committee of the Organization for Economic Co-operation and Development. The ODA’s provided figures related to aid are considers reliable by UN and IMF etc. The DAC consists of 22 of the richest Western industrialized countries plus the EU; it is a forum in which they coordinate their aid policies.

How Aid is Measured?

Aid is typically measured in one of three ways: total dollars, as a share of GDP, or per capita. Each measure reveals different things. Total dollar amounts clearly are important, but they do not tell the entire story. Aid measured as a share of GDP shows its size relative to the entire economy, and is may be the most common measure. But it can be misleading since a high ratio can be indicative of low GDP or a large amount of aid. The amount of aid required to immunize 1 million children can look like a large share of GDP in a poor country and a small share of GDP in a richer country, when the amount per child might be otherwise be the same. On a per capita basis, the aid flows to some of the largest recipients are very small. Bangladesh received $1.4 billion in aid in 2004, but this was equivalent to just 2 percent of its GDP or about $10 per Bangladeshi. By contrast, Nicaragua was given a slightly smaller amount, $1.2 billion in 2004, but for its 5.5 million people this was equivalent to about $225 dollars per person. For small countries, a little bit goes a long way.

Types of Foreign Aid

Humanitarian Aid

Development Aid

Food Aid

Military Aid

Technical assistance

Grants and Commodity Import Programs

Development Loans

Humanitarian aid Humanitarian aid or emergency aid is rapid assistance given to people in immediate distress by individuals, organizations, or governments to relieve the suffering, during and after man-made emergencies (like wars) and other natural disasters. It is different from developmental aid because it is related to eliminate suffering on the other hand developmental aid is related to eradicate the root causes of poverty.

The provision of humanitarian aid or humanitarian response comprise of the provision of vital services (such as food aid to prevent starvation) by aid agencies, and the provision of funding or in-kind services (like logistics or transport), usually through aid agencies or the government of the affected country. Humanitarian aid is distinguished from humanitarian intervention, in which armed forces protecting civilians from violent oppression or genocide by state-supported actors.

The Geneva Conventions give a mandate to the International Committee of the Red Cross and other impartial humanitarian organizations to give assistance and protection of civilians during times of war.

The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) is mandated to coordinate the international humanitarian response to a natural disaster or complex emergency acting according to United Nations General Assembly Resolution 46/182.

The Sphere Project handbook, Humanitarian Charter and Minimum Standards in Disaster Response, which was produced by a coalition of leading non-governmental humanitarian agencies, lists the following principles of humanitarian action:

1. The right to live with dignity.

2. The distinction between the combatant and non-combatants.

3. The principle of non-refoulemet

Development Aid

Development aid is aid given by developed countries to support development which can be economic development or social development in developing countries. It is different from humanitarian aid as being aimed at removing poverty in the long term, rather than alleviating suffering in the short term.

Official Development Assistance (ODA) is a commonly used measure of developmental aid. Development aid is provided by governments through individual countries' international aid agencies and through multilateral institutions such as the World Bank, and by individuals through development charities such as Action Aid, Caritas or Oxfam.

The offer to give development aid can be understood with the cold war context. The speech in which Harry Truman announced the foundation of NATO is the major document of developing aid: In addition, we will provide military advice and equipment to free nations which will cooperate with us in the maintenance of peace and security. Fourth, we must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas.

Food Aid

Food deprivation leads to malnutrition and ultimately starvation. This is often linked with famine, which involves the absence of food in entire communities. This can have a devastating and widespread effect on human health and also on mortality. Starvation is a significant international problem. Nearly 815 million people are undernourished, and over 16,000 children die per day from hunger-related causes Food deprivation is regarded as a deficit need in Maslow's hierarchy of needs and is measured using famine scales.

Food aid can give benefit to people who are suffering from shortage of food. It can be used to improve peoples' lives in the short term, so that a society may increase its standard of living to the point that food aid is no longer required. On the other hand, badly managed food aid can create problems by disrupting local markets, depressing crop prices, and discouraging food production.

Sometimes food aid’s provisions and threats to withdraw aid ,can b used as a political tool to influence the internal policies, strategy known as food politics. Therefore the world food programme is started, an effort for the coordinated distribution of food to the neediest countries.

Military Aid

It is the traditionalist technique for making alliances. The donors supplied money and material, while the recipients provided most of the manpower and support. During Cold War, United States and Soviet Union have spent more money on military aid than on their foreign economic program- and the objective has been the traditional one of strengthening the capabilities of their allies to safeguard their own interests. Military aid is used to create local power balances or preponderance, thus reducing the likelihood that the donor will have to station troops abroad or intervene militarily to protect its personal interests. Most forms of military aid have the advantages of build-in-controls.The recipients dependent upon the donors for creating a modern military force and they cannot operate the force effectively without the effective support from the donor, replacement parts, and maintenance. Thus, the controls provide a partial guarantee that the recipient will use its military forces according to the interest of the donors-unless the recipient can obtain ammunition, spare parts, and training from alternative sources.

Technical Assistance

Technical assistance is designed to share the knowledge and skills instead of goods or funds. Personal with special skills from industrialized countries go abroad to advice on a wide variety of projects. Malaria controls, agriculture techniques, public administration, development of fisheries, teaching programs land reclamation, road construction, and development of medical and other facilities.

Grants and Commodity Import Programs

Grants or gifts for which no economic repayment was expected are the most preferred method. But this type of aid always create problems for the donor and recipient, as the Governments of the major power have replaced grants with long term loans.

Development Loans

Foreign aid in the form of loans is not, strictly speaking, aid because the recipient returns the interests and amount after a short period of time. Only to the extent that bilateral and multilateral loans are made to recipients with 8 very poor credit ratings, or at interest rates lower than the prevailing in international financial markets.

Bilateral loans are often "tied", that is recipients are required to use loan funds either to buy products from the donor or to spend the given amount in a particular area. Often these are at costs above market rates, or the goods are of inferior quality. Tied loans are, in fact, primarily a subsidy by the donor’s government to its own business and shipping interests, despite these negative features of loans, they can be and have been used to wield political influence over recipients.

Why Donors Give Aid?

Donors have a number of motivations for providing aid, only some of which are directly related to economic development. There is little question that foreign policy and political relationships are the most important determinants of aid flows. During the Cold War aid was used by both US and USSR mostly for their political objectives instead of helping the developing countries. The two largest recipients of U.S. foreign aid (including both OA and ODA) from 1980 until very recently were Israel and Egypt, as the U.S. provided financial support to back the 1979 Camp David peace agreement. In early 2002 Iraq became the largest aid recipient in the world, and its reconstruction is likely to become among the largest single foreign aid program ever recorded. Taiwan and China have used aid (among other policy tools) to gain support and recognition for their governments from countries around the world. Mostly aid is provided to the former colonies to retain the political influence in those areas (Alesina and Dollar, 2000).

Many people see the main rationale for aid as dealing with poverty, and although this is less important than political considerations in donor allocation decisions, it still plays an important role. Donors generally provide their most concessional aid to the poorest countries, and some aid programs are designed only with this objective. For example, the World Bank's concessional financing arm – the International Development Association (IDA) -- has an income ceiling ($965 per capita in 2004). Once countries reach that ceiling, in most cases they "graduate" from IDA to non-concessional IBRD loans. Other programs have less formal graduation rules, but still tend to provide less aid as incomes grow.

Bilateral aid is often designed at least partially to help support the economic interests of certain firms or sectors in the donor country. Multilateral aid doesn’t put such pressures, although by no means immune. Many donors "tie" portions of their aid which require certain goods and services be purchased from firms in the donor’s home country, or that it must be used in specific to support the donor’s interests (such as universities or business consulting firms). Automobiles, airline tickets, and consulting services financed by U.S. foreign aid in most of the cases must be purchased from U.S. firms. More political aid can be given through tied aid to the donor, but it can also make it more costly and less effective. If funds must be spent in the donor country, it reduces competition for services so that donors do not always use the least cost provider.

For example, the U.S. requires that food aid be purchased in the U.S. and shipped in U.S. carriers to recipient countries, which can be far more expensive and take much time than if food was purchased from any neighboring country. The means that recipients received much less value for each dollar of aid allocated to it than they otherwise could. One study found that tying aid increases 15- 20 percent to its cost, thus significantly reducing its impact on recipient countries.

Aid Growth and Development

Most foreign aid is designed to meet one or more of four broad economic and development objectives: (1) to accelerate economic growth through building infrastructure, supporting productive sectors including industry or agriculture, also bringing new ideas and technologies,

(2) To promote education, health, environmental, or political systems,

(3)To support proper consumption of food and other commodities, especially during relief operations or humanitarian crises, or

(4) to help stabilize an economy following economic shocks.

Despite these broader objectives for aid, economic growth has always been considered as the main criteria to judge aid’s effectiveness, with more aid expected to lead to faster growth. But at a very broad level, there seem to be no simple relationship between aid and growth; Some countries that have received large amount thus have positive effect on their economic growth on the other hand some countries with the same amount have not shown much economic growth. At the same time, some countries that have received very little aid have done very well, while others have not.

What does the absence of a simple relationship mean? For some researchers aid has helped a lot in the economic growth on the other hand another group of researcher concluded that relationship between aid and the economic growth have not been positive or the way it should be they also give arguments to support their statements. SUPPORTER’S OF AID They argue that though objections on aid are partially right yet are overstated they includes,

1.Jffrey sachs 2.Josheph stiglitz

3.Nicholas starn

They give the following arguments to support the forein aid

Though aid sometimes failed yet has been a great support

Poverty reduction has been made possible with the foreign aid programmes

Foreign aid has been the major cause of development in some countries and they give examples of Bostawana,Indonesia etc

Aid programmes have made possible the development in the health , education and teaching sectors

Aid has helped in preventing the worst performances in other fields

Aid will be more helpful with the help of improved system of sanctioning aid

Weakness in the aid have more to do with donors than recipients.

EXAMPLES

Hey quote following examples to support their arguments

Countries that have shown the economic development

Botswana

Indonesia

Korea

More recently Tanzania

Mozenbique

They also mention different development programmes to support their views

Green Revolution

Compaign against river blindedness

Introduction of oral rehydration therapy

Some believes that aid works well under certain circumstancesand fail under others

CRITICS VIEWS

Controversies about foreign aid effectiveness go back decades. These are some important critics of foreign aid

Milton Friedman

Peter Bauer

William Easterly

They have leveled a stinging critiques namel

Aid programmes discourages self reliance and promote dependence on the richer countries

They promote just structural adjustment policies

They cite widespread poverty in Africa and South Asia despite of three decade of aid

Countries provided with industrial aid yet have disastrous record

The aid had helped to perpetuate bad governments by providing them with enough money to start attractive policies

Enlarge the government bureaucracies

Most of the aid has been wasted on limousines or presidential palaces.

It encouraged the corruption or

Just been wasted

Examples

They quote the following arguments

Democrate republic of Marcos regime

Haiti(Duralier regime)

Papua New Guinea etc

Yet the debate continues on over all general trends and the conditions under which aid works or does not work and what steps must or can be taken to make aid more effective.

Empirical evidence is mixed different studies reaching different conclusions depending upon the time frame countries involved and assumptions underlying the research.

Though not in every country but with diminishing returns as the aid increases there are following three important channels through which aid might spur growth.

Aid has a positive relationship with growth on average across countries

• First, the classic view is that aid augments saving, finances investment, and adds to the capital stock. According to this view, poor countries are not able to generate enough amounts of saving to finance the investment needed to initiate growth, or at best only enough for very slow growth. In the strongest version of this view, the poorest countries may remain poor in which their income is too low to generate the saving necessary to initiate the process of needed growth (Sachs, et. al., 2004). A related argument is that aid might help relax a foreign exchange constraint in countries that earn comparatively little foreign exchange, a view that was popularized through the early "two-gap" models of economic growth.

• Second, aid might increase worker productivity so improve its conditions through investments in health or education.

• Third, aid can help increasing production, through technical assistance, or through direct transfer of technologies such as the introduction of new seeds and fertilizers in the Green Revolution.

Several early studies found a positive relationship between aid and growth (e.g., Papenek, 1973; Levy, 1988), but this strand of the literature took an important turn in the mid-1990s when researchers began to search whether aid might support growth with little returns. strangely– given Solow’s response to the Harrod-Domar model in the 1950s – research until the mid-1990s only tested a linear relationship, a specification which persists in some studies today. A large group of studies that allow for weakening returns have found a positive relationship. These studies get much less public attention and interest than those that have found a zero or conditional relationship, but since the mid-1990s the most of the published research on the topic has found a positive relationship either by allowing for diminishing returns, or by testing for conditional relationships, as explored below. These studies do not conclude that aid has always worked in every country, but under certain conditions .

Aid also could have a positive impact on development outcomes other than growth, such as health, education, or the environment. Perhaps the best documented area is health, where aid- supported programs have contributed to the eliminating of small pox, the near-eradication of polio, control of river blindness and other diseases etc.

2 Aid has no affect on growth, and may actually undermine growth.

Peter Bauer was perhaps the most outspoken supporter of this view (e.g., Bauer, 1972), although he never given systematic empirical proof to support his argument. Many later empirical studies did reach the conclusion of no relationship between aid and growth. These researchers have given a number of reasons why aid might not support growth:

• First, aid simply could be wasted, governments corrupt leaders used it for personal luxuries instead on developmenting programmes.

• Second, sometimes bad governments are kept in power due to foreign aid, thus helping to perpetuate poor economic policies and postpone reform.

• Third, sometimes due to less effective absorptive capacity due to few skilled workers, weak infrastructure or constrained delivery systems make it uneffective. (Aid could help redress these weaknesses, but it may not be aimed to do so).

• Fourth, aid flows can negatively effect and reduce the domestic saving as well as private savings (through its impact on interest rates) and government saving (though its impact on government revenue).

• Fifth, aid flows could reduce private sector incentives for investment or to improve productivity. Aid can cause the currency to appreciate, reducing the profitability of the production of all tradable goods (known as the Dutch disease). Food aid, if not managed appropriately, can reduce farm prices and hurt farmer income.

Some of these studies conclude that aid is ineffective because it "leaks" to consumption. This approach is not specially helpful in the aggregate since large portions of aid in fact are made and designed specifically to directly increase consumption and not investment, including food aid,

immunization programs, textbooks purchasing, technical assistance, and the like. Nevertheless, even where aid is aimed at investment, the impact could be partially offset by a reduction in either private saving (through a decline in the rate of return on private investment) or government saving (through a fall in tax revenue).

Private sectors incentives can be undermined due to aid. Aid can increase inflation and cause a real appreciation of the exchange rate, which reduces the profitability of production of all tradable goods, creating "Dutch disease" effects.Aid flows can enlarge the size of the government and related services supporting aid projects, drawing workers and investment away from other productive activities such as agro-processing, garments, or footwear exports.

The empirical studies that have found no relationship between aid and growth have been influential. However, only a few published studies have concluded in the past decade. Most of those that do use restrictive models that impose constraints such as a linear relationship between aid and growth, ruling out by the chances of diminishing returns.

Aid has a conditional relationship with growth,

This view holds that aid encourages growth in some circumstances but not others, and searches for key characteristics linked with the difference This "conditional" strand of the literature has three subcategories, with the effectiveness and utility of aid depending on the characteristics of the recipient country, the practices and procedures of the donors, or the type of activity that the aid supports.

Recipient country characteristics.

Jonathon Isham, Dani Kaufmann, and Lant Pritchett (1995) opened this line of research by finding that World Bank projects had higher rates of returns are positive in countries with the more liberal policies. Craig Burnside and David Dollar (2000), in a very influential study,reach the conclusion that aid stimulated growth in countries with good policies, but not otherwise. Other researchers have proposed different country characteristics that might affect the aid-growth relationship, which includes export price shocks, climatic shocks, the terms of trade, macroeconomic, institutional quality, warfare, trade policies, government’s type, and location in the tropics.10 All of these studies depends on an interaction term between aid and the variable in question, and (not surprisingly) many of the interaction terms are fragile not solid. Easterly, Levine, and Roodman (2004) find that the original Burnside and Dollar results do not hold up to modest robustness checks. Roodman (2004) tests several other "conditional" studies and finds most of them to be comparatively fragile, although the conclusions of Dalgaard and Tarp (2004) are more robust.

Nevertheless, the view that aid works better (or in a stronger version, aid works only) in countries with good policies and institutions has become the ‘conventional wisdom’ among donors, partly based on this research and partly due to development practitioners that believe this to be the case based on their personal experience. The appeal of this approach is that it can explain why aid seems to have supported growth in some "well-behaving" countries but not others. These findings have had a great impact on donors (World Bank, 2000). The concept feeds directly into the World Bank’s Performance Based Allocation (PBA) system for distributing concessional International Development Association (IDA) funds, and was the foundation for the United States’ new Millennium Challenge Account (Radelet, 2003).

Donor practices

Many analysts have argued that donor practices strongly affect aid effectiveness. For example, multilateral aid might be more effective than bilateral aid, and "untied" aid is consider to have higher returns than "tied" aid, as discussed previously. Many observers says that donors that have large bureaucracies, mostly are found not to coordinate with other donors, or have poor monitoring and evaluation systems decrease the effectiveness of their own programs. Two influential and overlapping views argue that aid would be more effective if there were greater "country ownership" or broader "participation" among government and community groups in recipient countries in designing programs and setting priorities. There has been substantial debate about these issues, and in some cases these ideas have begun to change donor practices. But to date there has been very little systematic research connecting specific donor practices to aid effectiveness.

Type of aid

Different kinds of aid might affect growth in different ways. Clemens, Radelet, and Bhavnani 2004) disaggregated aid into types most likely and least likely to influence growth within a few years, if at all. They divided aid into three categories:

(1) emergency and humanitarian aid (likely to be negatively associated with growth, since aids tends to increase mostly at the same time growth falls following an economic shock);

(2) aid that might only affect growth after a long period of time, if at all, and will be difficult to detect the relationship (such as aid for health, education, the environment, and to support democracy); and

(3) aid that is directly aimed at affecting growth (building roads, ports, and electricity generators, or supporting agriculture). It found a strong positive relationship between the third type of aid (about half of all aid) and growth, a result which stood up to a wide kinds of robustness checks. As expected, the relationship with the other types was difficult to detect.

Improving Aid Effectiveness

The debates about the strengths and weaknesses of aid have led to specific ideas for change, some of which donors have begun to put into practice. Four stand out.

Country Selectivity.

One influential idea is that donors should be more selective about the countries to which they provide aid, based on the argument that aid works best in countries with good policies and smooth institutions. In the strongest version, aid should be provided only to countries that meet these criteria. A more moderate view is that more aid should be given to countries with stronger policies and institutions, but some aid should be targeted to countries with weaker policies, especially post-conflict countries. This proposal is concerned more with the conditions of allocating instead of reforms of aid; give it to countries that have already demonstrated a desire to implement key reforms. Some donors have begun to be more "selective," including the World Bank in the allocation of its concessional IDA funds, some European donors in terms of providing budget support, and the U.S. with its new Millennium Challenge Account. But since the aid is allocated by donors giving more importance to their own political objective and other security purposes therefore the conditions are not followed sometimes.

Recipient Participation and Country Ownership. Many analysts argue donor domination has weakened the growth programmes by setting priorities, designing programs and implementing projects, and push for either a more "country led" approach in which recipient governments take a stronger role, or a "participatory" approach in which various groups in recipient countries (government, NGOs, charities, the private sector) play a more active role. Note that country ownership and a broad participatory process is not the same thing: the former implies that recipient countries take the lead in setting priorities and programs; the latter implies that broad participation by the public (and not just the government) is required. In either case, the idea is to eliminate some of the problems in the long chain of principal-agent relationships, and more tightly integrate the ultimate beneficiaries in key aspects of the aid delivery process. The World Bank and IMF (through their "Poverty Reduction Strategy Papers"), the Global Fund to Fight AIDS, Tuberculosis and Malaria and the Millennium Challenge Corporation have all moved towards greater local participation in designing and implementing the programs they finance. This approach is new, so there is no evidence yet on the extent to which (or the circumstances under which) it improves aid effectiveness. There is a clear and inescapable tension between country ownership on the one hand, and donor priorities and conditionality on the other.

Harmonization and Coordination. Managing aid flows from many different donors is a hugebig challenge for recipient countries, since different donors usually insist on using their own unequaled processes for initiating, implementing, and monitoring project. According to the World Bank, developing countries typically work with 30 or more aid agencies across a wide variety of sectors, with each sending an average of five missions a year to oversee their projects. The donors all want to meet with the same top government officials, leaving them with much less time to deal with important matters. These concerns have caused numerous suggestions for donors to more closely coordinate their activities; harmonize their systems; or "pool" their funds (Kanbur and Sandler, 1999). But while there has been some progress, the pace of change amongst the donors seems glacial.

Results based management. The effectiveness’s emphasis has led to the call for improved monitoring and evaluation and results-based management. In this view, aid programs must aim to achieve very specific quantitative targets, and decision on the basis of renewing the aid programme. There are three basic objectives: (1) helping donors allocate funds towards programs that are working and effective; (2) detecting problems at an early stage to help modify and strengthen current programs; and (3) improving the design of future programs. Stronger monitoring and evaluation would help to improve principal-agent relationships so that aid agencies have clearer incentives and taxpayers have better information about the impact of aid on its intended beneficiaries.

Criticism on Foreign Aid

Aid is occasionally is given from motives of pure altruism; for instance it is often given as a means of supporting an ally in international politics. It may also be given with the intention of effecting the political process in the recipient nation. Whether one considers such aid helpful may depend on whether one agrees with the agenda being followed by the donor nation in a particular case. During the conflict between communism and capitalism in the twentieth century, the leaders of those ideologies - the Soviet Union and the United States - each used aid to affect the internal politics of other nations, and to support their weaker allies. Perhaps the most notable example was the Marshall Plan by which the United States, mainly successfully, sought to pull European nations toward capitalism and away from communism.

S.K.B'. Asante lists some specific motives a donor may have for giving aid: defense allies, expansion of market, foreign investment, missionary enterprise, cultural extension. In recent decades, IMF and World Bank are being severely criticized for serving as a main tool to increase the capitalist’s influence in different areas and only secondarily giving importance to the well being of the recipient country.

Besides criticism of motive, aid may be criticized simply on the grounds that it is not effective: i.e., it did not do what it was meant to do or help the people it was created to help. This is essentially an economic criticism of aid. The two types of criticism are not totally separate: critics of the ideology behind a piece of aid are likely to see it as not effective; and indeed, ineffectiveness must imply some drawbacks in the ideology. Statistical studies have produced widely differing assessments of the mutual relation between aid and economic growth, and no firm consensus has emerged to suggest that foreign aid generally does accelerate growth. Some studies find a positive correlation, but others find either no correlation or a negative correlation. In the case of Africa, Asante (1985) gives the following assessment:

Summing up the experience of African countries both at the national and at the regional levels is right to suggest that, on balance, foreign assistance, especially foreign capitalism, has been somewhat malignant to African development. It must be accepted, however, that the pattern of development is complicated and the effect upon it of foreign assistance is still not clearly be decided. But the limited evidence available suggests that the forms, in which foreign resources have been extended to Africa over the past twenty-five years, insofar as they are linked with economic development, are, to a great extent, counterproductive.

The economist William Easterly and others have argued that aid can often badly affect incentives in poor countries in various harmful ways. Aid can also involve inflows of money to poor countries that have some similarities to inflows of money from natural resources that provoke the resource curse

Many individuals and organizations criticize U.S. Aid. Emergency funds from the International Monetary Fund (IMF) and World Bank, for interfering in the sovereignty of the state for promoting free market and liberal ideas. Policy prescriptions from outsiders can do more harm as they might not fit the local environment. The IMF for countries with short term economic problems can be good but for poor countries needed long term monetary assistance cn be harmful. In his book The White Man's Burden, Easterly argued that if the IMF only gave adjustment loans to countries that can repay it, instead of forgiving debts or lending repetitively even if conditions are not fulfilled, it would maintain its credibility.

In addition to the above criticisms, the logistics in which aid delivery occurs can be problematic. An earthquake in 2003 in Bam, Iran left tens of thousands of people in need of disaster zone aid. Aid in such cases eliminate all the differences whether racial cultural or ideological. Items such as religiously prohibited pork, and non-generic forms of medicine that lacked multilingual instructions came flooding in as relief. An implementation of aid can easily be problematic, causing more problems than it solves.

James Shikwati, a Kenyan economist, has argued that foreign aid causes harm to the recipient nations, specifically because aid is distributed by local corrupt leaders, finances the creation of corrupt government such as that led by Dr Fredrick Chiluba in Zambia bureaucracies, and decrease the development of the local economy. In an interview in Germany's Der Spiegel magazine, Shikwati uses the example of food aid delivered to Kenya in the form of a shipment of corn from America. Portions of the corn may be diverted by corrupt politicians to their own tribes, or sold on the black market at prices that undercut local food producers.

Some believe that aid is offset by other economic programs such as agricultural subsidies. Mark Malloch Brown, former head of the United Nations Development Program, said that farm subsidies cost poor countries about US$50 billion a year in lost agricultural exports:

"It is the extraordinary distortion of global trade, where the West spends $360 billion a year on protecting its agriculture with a network of subsidies and tariffs that costs developing countries about US$50 billion in potential lost agricultural exports. Fifty billion dollars is the equivalent of today's level of development assistance."

Some have given argument that the major international aid organizations have formed an aid cartel.In response to aid critics, a movement to reform U.S. foreign aid has started to gain momentum. In the United States, leaders of this movement include the Center for Global Development, Oxfam America, the Brookings Institution, InterAction, and Bread for the World. The various organizations have united to evolved a new Foreign Assistance Act, a national development strategy, and a new cabinet-level department for development.

Conclusion

Aid flows fell in the 1990s after the end of the Cold War and aid was widely attacked for being ineffective in spurring growth and development. However, aid began to grow again in the late 1990s and indications are that it will continue to increase throughout this decade, although probably less rapidly than donors have pledged.

Most empirical research on aid and growth carried out during the last decade has found a positive relationship, opposite to popular perceptions, particularly studies that have allowed for diminishing returns and have controlled for other factors that affect growth. Some studies have found that the aid-growth relationship is conditional on the policy or institutional environment, but many of those results have been weak. Some studies have come to the conclusion that there is no relationship or even a negative one, but while influential these studies are few in number and tend to use restrictive assumptions. Recent research that has try to find the ways how different types of aid might have different effect on growth has suggested one key reason why earlier research has reached mixed conclusions. Nevertheless, there is little doubt that aid has been less effective in increasing development than is often expected. Aid can keep bad governments in power for too long, and can cripple incentives for saving, tax collection, and private sector production. Aid relationships are made much more difficult by a complicated chain of principal-agent problems that weaken information flows, introduce myriad motivations for different actors, and make monitoring and accountability more difficult. Efforts to solve the principal-agent problem through conditionality have not been very successful. The latest wave of reform efforts aims to solve some of the weaknesses of aid and the principal-agent problem through greater donor selectivity in choosing aid recipients, increased recipient participation in setting priorities and designing programs of aid, streamlining aid bureaucracies, increasing donor coordination, and establishing clearer goals for aid and stronger monitoring and assesment of aid-financed activities. These ideas have been very influential in forming aid programs in recent years, but there is no systematic proof at this point as to whether these changes will lead to greater aid effectiveness and improvement.

Contents

Introduction

What is Foreign Aid

Statistics

Who’s eligible to give aid?

How Aid is Measured ?

Types of Foreign Aid

Humanitarian aid

Development Aid

Food Aid

Military Aid

Technical Assistance

Grants and Commodity Import Programs

Development Loans

Why Donors Give Aid?

Aid Growth and Development

Improving Aid Effectiveness

Criticism on Foreign Aid

Conclusion

NADIA RASHEED

ROLL NO 05

M.PHIL(political science)

MINHAJ UNIVERSITY LAHORE