Aid is the annual transfer of billions of dollars from donor governments to developing countries. Donors give aid bilaterally or through multilateral institutions like the Development Assistance Committee (DAC) of the Organisation for Economic Cooperation and Development (OECD). In 2005, total official development assistance (ODA), the DAC
term used for aid, reached its highest level yet at USD $106.8 billion (DAC 2006a, 1).
However, the link between international aid and international development is weak and problematic. In order to strengthen this link, aid should be focused on solving governance issues, including corruption, so it will be more effective and efficient. I'm going to focus on three controversial aspects of aid: the motives and interests behind it, its size and distribution, and its effectiveness and efficiency.
Aid – Motives and interests
The reasons behind giving aid are based on a variety of purposes and motives that include self-interest and guilt. A perceived Western responsibility for a lack of development in many of the poorest countries following decolonisation has been a theme of academic discussion. One particular argument, advanced by Daron Acemoglu, is that the institutions set up during colonisation reflect differences in mortality rates. European powers set up “extractive” states, like that in Belgian-colonised Congo where mortality rates were high, which transferred many resources quickly from the colony to the coloniser. The opposite applied in “Neo-Europes” like Australia, New Zealand, Canada and the United States. The extractive states had, and continue to have, poor institutions because the colonisers were unwilling or unable to set up better institutions from the beginning.
The most altruistic of motives for foreign aid is on moral and humanitarian grounds. The idea behind it is that a person, or government, has an obligation to help those who are poor or who have poor access to resources. Purely moral and humanitarian motives for the provision of aid are rare. More often, donors stress the moral obligation but are also very aware of providing aid in such a way that it will benefit the donor in the long run. Giving aid for political and economic reasons has seldom been the sole motive, but these interests have played a significant role in the distribution of development assistance from a number of large industrial countries, including the USA. During the Cold War, both th U.S. and Russia used aid as a political tool to keep developing countries on their side. In the post-Cold War era, Japan has used aid as a tool for gaining votes from small states, including the Pacific Islands of Tuvalu and Nauru, in the International Whaling Commission.
Motives for aid provision are rarely simple and it is usually given for more than one reason. There can be significant differences between the declared motives and real ones, particularly in bilateral aid, as moral and humanitarian grounds are more difficult for opponents to argue against.
Aid – Size and Distribution
The size of development assistance is calculated against various definitions provided by the members of the DAC. In order for aid to be considered ODA it must:
1. be undertaken by the official sector;
2. have as its main objective the promotion of economic development and welfare;
3. be provided on concessional financial terms.
Of particular note is the fact that ODA is defined by declared goals and not the actual effects, with no emphasis on whether the aid actually contributes to economic development and welfare. In 2005, total ODA rose by 32% representing 0.33% of members’ combined 2005 Gross National Income (GNI). Most of the increase to core development programmes was accounted for by reconstruction efforts in Iraq and Afghanistan.
Aid distribution among regions and countries varies from donor to donor. Former European colonial powers concentrate their aid on former colonies. In 2005, the top ten recipients of gross ODA for France were (in numerical order): Democratic Republic of Congo, French Polynesia, New Caledonia, Senegal, Cameroon, Madagascar, Morocco, Pakistan, Poland and Mayotte. American foreign aid appears to be mostly allocated on the basis of national security interests, with their top ten recipients for 2005 including Israel, Russia, Jordan, Afghanistan and Iraq. Smaller DAC countries generally have a wider distribution, although New Zealand’s ODA is almost entirely focused on the Pacific region. Sub-Saharan Africa received the most aid in 1997-98, but Africa’s share of total official aid at the end of the 1990s remained the same as it was in the mid-1980s.
Analysing distribution by sector and type of aid is difficult because criteria vary from donor to donor. It is clear, however, that allocations from DAC members to the social sectors such as health and education increased from around 20% in the 1970s and 1980s to almost 30% at the end of the 1990s. Within this sector, education receives the largest share although only a relatively small amount of this is targeted at primary education. There has been a decrease in bilateral allocation to economic infrastructure and production, principally in areas such as energy supply and industrial production. As aid is highly fungible, distribution by sector may outline donors’ interests but it does not provide any information on how the resources are allocated by the recipients.
Aid –Effectiveness and Efficiency
For aid to be effective, it must meet its goals. For it to be efficient, it must meet its goals within certain financial limits. Currently, a large amount of aid is both ineffective at reaching goals and inefficient at keeping costs low. While the objectives of aid consist of vague and open-ended commitments, real success is determined by the policies, attitudes and conduct of the recipient states. In 1981, Bauer pointed out that aid continued to governments that had disastrous policies, which in fact ensured poverty continued to exist. Aid, he argued, has led to the politicisation of the third world in that it increases the relative power, resources and patronage of recipient governments. The great paradox is that the longer aid continues, the harder it is to question.
Peter Boone and Jean-Paul Faguet outline further efficiency and effectiveness problems. While industrialised countries gave annual grants equal to 8% of recipient countries’ GNP, absolute poverty continues unabated. Fifty years of aid work and investment has done little to reduce deprivation to anything close to acceptable levels. Long-term aid programs have broadly failed to achieve their objectives and indeed there have not been any persuasive theoretical or empirical evidence to indicate that international aid leads to international development.
At the Financing for Development Conference in March 2002, the USA representative spoke unfavourably about the effectiveness of aid. An NGO representative present reported that “unfortunately, they did not explore the reasons for that ineffectiveness, such as its political capture, funnelling to middle-income rather than low-income countries, distribution to client states and tying to donor country goods, in all of which the US is a leading culprit.” However, recipient countries may be more to blame than donors, as many have misused aid through redirection, predatory official behaviour and corruption.
Aid for Good Governance
If aid is so ineffective and inefficient, then there must be a problem. The difficulty cannot be capital scarcity, which previously justified loans and grants, as evidence shows that investing capital does not lead to growth. The problem is not ignorance or bad information, as the information is now readily available from multilateral institutions. The final possibility for this lack of achievement is bad incentives and problematic institutions, many of which may stem from poor institutional creation during colonisation. Development assistance is given to recipients on the understanding that they will use it to pursue positive net present value (+NPV) projects, however these recipient governments should be working on +NPV projects already. There are strong and continual incentives for recipients not to pursue these projects and the provision of a loan or grant, in a world with low sanctions, does little to reverse these incentives.
There are a number of perverse incentives in aid and development. Firstly, poorer countries get more aid. Countries are encouraged to stay poor in order to get more aid; by improving circumstances they cut off the hand that feeds them. Evidence to date has shown that bad policy also leads to more aid. Lots of aid leads to bad government officials, who either take advantage of aid indirectly or actively work to misuse it in cases of corruption. Governments want to be kept in power so it seems only natural that politicians will ensure that any aid flows to the general population reach government supporters first, indirectly causing more problems. Aid leads to more aid, it obscures the necessity for people in developing countries to develop their own resources and faculties required for sustained material progress.
Government failure can be blamed for the lack of improvement in human development indicators in many countries. Governments lack the political will, rather than financial capital. Aid needs to focus on improving the performance of recipient governments so that there are strong incentives for growth and reform. It is clear that institutions matter. Countries with better institutions, more secure property rights and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income.
Conclusions
Aid motives are unlikely to change. While there may be increasing moral and humanitarian rhetoric, political and economic interests will continue to motivate donors to give aid to specific countries. Motives are very closely tied to the size and distribution of aid, which will continue to receive a significant amount of attention from civil society. In the coming years, it will be interesting to see what impact Japanese aid and Chinese investment will have on the developing Pacific Island states, who get very little attention from the rest of the world.
The reconstruction efforts in Iraq and Afghanistan will have significant impacts on the already tight aid budgets of donors. It seems likely aid to these two countries will increase again between 2005 and 2006. Development assistance has been shown to be ineffective and inefficient, with a very tenuous link between international aid and international development. In an attempt to fix this, institutions like the World Bank are now focusing aid on countries with better governance. However countries with better institutions and policies may not need the aid as much as countries that lack these good policies and institutions. In countries where the incentives to use the aid correctly do not exist, the need does; while in countries where the incentives do exist, the need may be less. This is the link between international aid and international development and the heart of the problem is balancing need and deprivation with aid efficiency.
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