Foreign aid refers to the international transfer of capital, goods, or services in the form of grants or loans; sometimes referred to as voluntary transfer either from one government to another (bilateral assistance) or through a multilateral assistance agency like the World Bank for the benefit of the recipient country or its population. Aid can be in the form of economic, military or emergency humanitarian aid, especially during natural disasters.
Foreign aid was conceived as a product of the Post World War II era. Its roots are in the Marshall Plan, under which the United States gave funds to help rebuild Europe after the war. Two decades after World War II, emergence of independent nations from Europe’s colonies was experienced, especially in Asia and Africa. Encouraged by its role in rebuilding Europe, the United States took the lead in trying to help the newly emerging nations by providing capital in the form of foreign aid, especially to countries that had development plans for investing the aid they received. Accordingly, these developing countries lacked certain kinds of skills and expertise such as planners, engineers and constructors which were considered part of the aid. Hence the United States was the initial fore-father of foreign aid.
Currently the number of Foreign Aid givers has increased mainly drawn from the United States, Europe and some countries in Asia such as Japan and China. The aim of all these donors has nevertheless remained the same in terms of security, economic maintenance, political interests and humanitarianism. In 1970, some of the world’s richest countries agreed to give 0.7% of their gross national income as official international development aid on an, annual basis. Besides, it can be argued that most of these countries do not fulfill their promises and if they do, they gain a lot from the developing countries more that what they give in form of aid. This, therefore, brings in a major debate – is foreign aid working for or against the recipients?
Positive side of foreign aid
Foreign aid is useful for a number of reasons in developing countries as it is assumed to facilitate and accelerate the process of development in a number of ways; importantly on economic development. Foreign aid’s main role in stimulating economic growth has been to supplement domestic sources of finance such as saving, thus increasing the amount of investment and capital stock. This is facilitated by an increase in investments both physically and human capital as well. It also increases the capacity to import capital goods and technology. It is also associated with technology transfer that increases technology knowledge and new skills in a country. This can be in the form of funding of training institutions for example the computerization and e-marketing skills, which in turn increases the productivity of capital. For example e-commerce, computerization and recently the fiber optic cable which attracted many foreign investors.
In many developing countries foreign aid is most of the time in terms of humanitarian aid especially during emergencies or natural calamities such as droughts, famines and earthquakes. This was clearly witnessed when Haiti was hit by a bad earthquake that left the country totally destroyed. The Aid enables countries facing such catastrophes to spend limited foreign exchange on other essential imports. It also enables countries to invest the little they have to solve other emergency needs. In line with this, development projects funded thorough foreign aid have been of great benefit to the people, such as construction of roads, hospitals, schools, boreholes, which could have taken many years for a country to achieve especially if the income per capita is below level or the revenue collected from tax is insufficient. If used well the funds directed to developmental projects is a major boost to African struggles to achieving development and improving quality of life.
Structural transformation of many developing countries has been sped up by foreign aid as a result of a demand to do so from the donor countries. This has entailed implementation of certain policy reforms aimed at improving standards, especially in government offices, adopting policies that are more economically friendly, policies that promote efficiency, transparency and accountability. Above all donors emphasis good governance and ensures countries benefiting from the aid meet these standards. Issues on democracy and democratization always draw many potential Foreign Aid givers as it is part of there emphasis, for example the case of Afghanistan. In a number of developing countries withdrawal by the foreign aid givers has been experience in countries that are corrupt and/or not democratic and they fail to adhere to the rules and regulations set by the donor countries or agencies. This can serve as an advantage and a disadvantage. On a positive note countries are somehow forced to put order in all sectors, and if done well, efficiency and progress can be experienced. On a negative note, countries that receive a lot of aid to be democratic end up being controlled by the country that contributed more, for example Liberia, which is totally dominated by the United States.
Negative implications of foreign aid
As much as foreign aid is termed to be beneficial to many developing countries, many times it comes with negative strings attached which many beneficiaries hardly notice until it is too late. A number of the donor countries concentrate so much with the government and other major agencies based in these developing countries that they fail to address the real needs of the people. This means that most aid does not actually go to the poorest, instead massive and grand strategies fail to help the vulnerable and in return the money/ grants finds it’s way to the famous and powerful politicians who instead use it to benefit their interests.
On the other hand, more aid has meant poorer economic performance mainly in Africa and Asia, although it is not directly realized. A country that has been stagnant economically and/ or is doing bad economically is attributed to foreign aid that is looking at the cause and effect between the raise in aid and the decline in development. This in turn, is attributed to the drain of resources from these developing countries by the donors who sometimes come in the form of former colonies. In return to the resources they drain from the developing countries, importation costs for developing countries are exaggerated. Accordingly, the conditionality often associated with foreign aid may adversely affect certain sectors of the economy. For example, economic reform programmes often advocate increased trade liberalization that could in the short run harm domestic producers. Aid amounts are dwarfed by rich country protectionism that denies market access for poor country products, while rich nations use aid as a lever to open poor country markets to their products.
Aid is often wasted on conditions that the recipient must use overpriced goods and services from donor countries, in return the aid given fails to sustain the needs of the developing countries; rather it finds its way to back to the donors in one way or another. For example in the debate of globalization, severe criticism has been leveled at global economic institutions. Most often singled out are the World Bank which leads multilateral work for long – term development and International Monetary Fund which exists to guide and assist national financial systems. Critics maintain that those institutions serve as collectors of debts from the developing countries to the affluent world, and that they force these countries to implement heavy- handed liberal policies that lead to greater poverty.
In terms of governance aid has rarely helped, mostly it has damaged the capacity of countries in the developing world to govern their own affairs. In most recipient countries, aid has propped up autocratic regimes, a state of the winner takes all, incompetent governments and a violent opposition movement, for example the last general election witnessed in Zimbabwe where many westerners funded and supported Tvasangirai rather than Mugabe which resulted in violence between the opposition and the ruling party. The nature of African Governance is too centralized, hence the checks and balances of parliaments and organized citizen movements are rare. Politics and governance therefore is more centered on kinship and ethnic hierarchies. Competition among these hierarchies drives politics and wars. Because aid is also a kind of patronage system, it has tended to fit neatly into African political life. Aid in many African countries therefore determine the direction of politics in terms of policies to be adopted, reforms and even sometimes who is to take up leadership based on who the donors have recommended and/ or endorsed.
Many aid givers dictate the projects they would like to support and encourage needy countries to take them up. This may led to the implementation of projects that are not priority projects, especially if the recipient government has little to say in their choice. This too makes the recipient countries too dependent on the aid givers as everything is literally done by the donors. The talk of constructions of schools, road, hospitals and even political independence is solely addressed by the Aid givers. This creates a state dependency among countries in the south. As a result accountability between developing countries, states and their citizens is almost non-existent. Instead more accountability is seen on receiving states and their donors. Hence the revenue received through taxes is hardly accounted for by the governments which in turn results in corruption and lack of transparency becoming a norm in most governments.
Judging from the number of positive and negative effects of foreign aid based on this paper, the negatives seem to outweigh the positives. Unfortunately for many developing countries foreign aid is seen as a step forward to development but in the real sense development is totally dependent on the countries in the North. This dependency has caused us to worship Foreign Aid. It is at this that one can conclude that Foreign Aid is a necessary Evil to developing countries. The reason we cannot do without foreign aid yet is because it is a very expensive venture for the developing countries. For example in terms of debt payment many developing countries are in huge debt. In the year 2010 a report showed that Kenya has a debt of 969 billion with an approximation of each Kenyan (no matter their age) having a total debt of twenty six thousand. This is unfortunate because many countries that owe such huge amounts of money are still languishing in poverty and underdevelopment. What then do these developing countries have to avoid?
First ownership of development policies need to be demand driven, and this should be well understood by the leaders in the developing countries and not the aid givers. By this, developing countries need to come up with their own projects without being coerced to adapt and implement certain policies that are irrelevant to the needs of the people. As a result Aid will be directed to the most important projects that are expected to boost development.
Secondly, prioritization among developing countries should be essential, putting the interest of the country first rather than personal interest. By this corruption and misuse of the Aid will be minimal. Thirdly, there is need for developing countries to negotiate a long term mutually binding agreement that would integrate domestic and international action on the basis of receiving an investment entitlement from one centralized pot of money channeled through independent local foundations with cross country representation of donor recipients. This will pave way for developing countries to easily channel their views unlike when such institutions are dominated by members of the super power countries. The coercion of developing countries to adapt certain projects and policies will also be minimal.
In conclusion, therefore, as much as developing countries cannot do without foreign aid, they have to find a way to make the Aid work for them by investing rather than misusing the aid and also by coming up with strategies that will assist them use less Aid, that way they can be independent.
By Esther Kanyi Kairu, WAY Staff Alumni.