The debate over foreign aid has been raging for quite a while now. Some critics have argued that aid does precious little to the poor countries it reaches. Others arguing against this pessimism have stated that aid brings in investment, which then fosters growth. However what is indeed a matter of concern is that most countries do not have the capability of absorbing aid.
This is often a function of poor administrative processes, but could also arise out of poor governance structures that allow the siphoning away of funds due to the lack of accountability in these countries. There are a number of instances that are cited by skeptics to argue against foreign aid as it encourages corruption and leakage.
De Soto (1989) gives some extremely clear examples of how corruption in developing countries has left the poor miserable and vulnerable. Boone(1994) shows how aid gives rise to varying outcomes in various countries.
Weisskopf (1972) had pointed out how domestic savings and therefore domestic investment gets affected by various kinds of foreign aid and foreign investment. This kind of intervention is not always in the best interest of the developing country.
The issues are several. Donor countries often give aid for specific purposes. However, what might happen at the recipient’s end is that the aid gets diverted. For example, aid for expenditure of health might get diverted to spending on education.
This often depends on what constituencies are more powerful in the country receiving aid. The same is true at the donor end, where more powerful lobbies ensure that it is the sector that gets the benefit of aid.
Pharmaceutical sectors in developed countries have very often been blamed for diverting most aid into the health sector while the problems afflicting poor nations might be more acute in terms of starvation and malnutrition.
Another reason for disgruntlement against foreign aid is that it tends to distort the domestic development agenda and takes it away towards issues that might not be priority areas. Pfaff (2004) demonstrates how the environment debate in the developed world got transferred to the developing countries riding on massive amounts of aid.
In the entire environmental revolution that came about in the seventies and the eighties, the industrialized and developed world ties most of its concern over the environment with aid packages. Additionally, what happens is that aid comes in for sectors, which are highly underdeveloped, and therefore the resources required to handle this aid might not be locally available.
These resources are usually both human and material resources. With the non-availability of trained personnel in host countries, the modalities of aid therefore ensure that expatriates are then responsible for the distribution and utilization of such aid. Foreign experts are, to say the least, expensive.
What adds to the problem is the bias this builds into the entire process. There is already enough suspicion that exists against foreigners. In addition, there is the entire issue of the lack of familiarity with local issues and local priorities.
This gives rise to a disgruntlement with the management of aid and with locals feeling left out and the managers feeling uncomfortable; the efficacy of such aid reduces significantly.
The foreigner manager has different sets of priorities and an alien understanding of conditions under which the local population understands the need for assistance and this duality of purpose could lead to tension and misunderstanding.
How Aid helps bad governments survive
By far the most stringent criticism of foreign aid has been by way of the evidence that poorly governments in developing countries have managed to survive because of the aid they are able to attract.
These governments have used the aid to push policies in their countries that have been detrimental to the development of markets due to the poor economic and industrial policy environment that has been put in place. Aid has lead to complacency as some constituencies receive enough sops and therefore do not exert pressure on their governments.
Aid gives rise to protectionist measures and the competitive environment that must exist and evolve in developing economies just does not come through.
Therefore poor governance continues to thrive and the dependence on foreign aid becomes perpetual. Krueger (1974) shows how this situation helps rent seekers in developing societies thrive on the poor state of political processes, especially in times of economic distress.
What has also been observed that aid that comes tied to certain conditions, forces structural adjustment programs on countries that are unable to protest.
However unwillingly, these countries must undergo painful reforms to satisfy the conditions laid by donors. This has often resulted in large reductions in public investments and in subsidies to the targeted poor. The famous examples where such pressure has caused domestic damage are in the structural adjustments that were forced upon Argentina, Brazil and Mexico.
With pressure on them to reduce fiscal deficits, these countries went in for stringent reform measures leading to high inflation and acute stagnation. Locke (2001) shows the extent to which governments can pressurize other nations to manage policies to restructure economies in a particular fashion.
However it must be pointed out that this debate is not one sided. There are countries like Zambia that have been at the receiving end. With aid increasing annually over the seventies and the eighties, the economic situation in Zambia went form bad to worse. On the other hand is Ghana in the same region.
Here aid helped foster a friendly environment for the domestic policy to correct itself and help the local economy grow. In Zambia, increased aid coincided with poor policy, while in Ghana as aid levels went up, there were marked improvements seen in the fiscal and monetary sectors as also in the external sector with trade policy improving considerably.
Levinsohn and McMillan (2005) argue that aid to Ethiopia actually was pro poor and enabled the country move towards food sufficiency and food security by ensuring that the poor were given access to food supplies. The authors show how households, especially the very poor, benefited when aid went into the provision of wheat in Ethiopia. The paper further argues that the very poor actually benefited the most in this process.