Foreign Aid: The Development
Assistance Debate
• public bilateral and multilateral development assistance and private assistance
provided by nongovernmental organizations.
• Both of these activities are forms of foreign aid
• Economists have defined foreign aid, therefore, as any flow of capital to a
developing country that meets two criteria:
• (1) Its objective should be non-commercial from the point of view of the donor,
and
• (2) it should be characterized by concessional terms; that is, the interest rate and
repayment period for borrowed capital should be softer (less stringent) than
commercial terms.
Todaro and Smith, 2011
• Official development assistance (ODA) Net disbursements of loans or grants
made on concessional terms by official agencies, historically by high-income
member countries of the Organization for Economic Cooperation and
Development (OECD).
• Some development assistance may be motivated by moral and humanitarian
desires to assist the less fortunate (e.g., emergency food relief and medical
programs)
• Donor-country governments also give aid because it is often in their political,
strategic, or economic self-interest to do so.
• some corresponding benefits (political, economic, military, counterterrorism,
antinarcotics, etc.) in return.
Todaro and Smith, 2011
• Political Motivations
• the flow of funds tends to vary with the donor’s political assessment of changing
international situations
• Recent increases in aid to African countries with public health crises including
HIV assistance may be due in part to concerns that disease may spread
internationally or lead to destabilizing state collapse and possible havens for
Terrorists.
• renewed focus on extreme poverty -change in the prioritization of aid?
Todaro and Smith, 2011
• Economic Motivations
• The arguments on behalf of foreign aid as a crucial ingredient for successful
development should not mask the fact that even at the strictly economic level,
definite benefits may accrue to donor countries as a result of their aid programs.
• The tendency toward providing interest-bearing loans instead of outright grants
and toward tying aid to the exports of donor countries
• Tied Aid: Some foreign aid is provided with conditions that require the recipient
country to purchase goods or services from the donor country, benefiting the
donor’s domestic industries and companies. This is often referred to as "tied aid.”
• aid tied to donor-country exports limits the receiving nation’s freedom to shop
around for low-cost and suitable capital and intermediate goods.
Todaro and Smith, 2011
• The reasons why developing nations have usually been eager to accept aid, even in
its most stringent and restrictive forms, have been given much less attention than
the reasons why donors provide aid.
• The major reason is probably economic.
• Developing countries have often tended to accept the propositions that aid is a
crucial and essential ingredient in the development process.
• It supplements scarce domestic resources, it helps transform the economy
structurally, and it contributes to economic growth.
Todaro and Smith, 2011
• Conflicts generally arise, therefore, not out of any disagreement about the role of
aid but over its amount and conditions.
• Naturally, any developing country would like to have more aid in the form of
outright grants or long term low-cost loans with a minimum of strings attached.
• This means not tying aid to donor exports and granting greater latitude to recipient
countries to decide for themselves what is in their best long-run development
interests.
Todaro and Smith, 2011
• many proponents of foreign aid in both developed and developing countries
believe that rich nations have an obligation to support economic and social
development, particularly in the least developed countries.
• They often link this moral obligation with the need for greater freedom of choice
for recipient developing countries in the allocation and use of aid funds.
• In sum, while the least developed countries will need more assistance to escape
from the vicious circle of poverty, fresh approaches are needed to ensure
effectiveness.
Todaro and Smith, 2011
The Role of Nongovernmental Organizations in Aid
• Funding through developed country NGOs for aid activities in developing
countries is high and growing.
• Many NGOs give local control to their developing-country affiliates or other local
groups they support.
• Increasingly, indigenous NGOs such as BRAC in Bangladesh are becoming active
in international assistance.
• NGOs have two important advantages.
• First, most NGOs are able to work much more effectively at the local level with
the people they are trying to assist than massive bilateral and multilateral aid
programs could.
Todaro and Smith, 2011
• Second, by working directly with local people’s organizations, many NGOs are
better able to avoid the suspicion and cynicism on the part of the mostly poor
people that they serve that their help is likely to be short-lived.
• It is estimated that NGOs in developing countries are affecting the lives of some
250 million people;
• the nature and focus of foreign aid may be changing.
Todaro and Smith, 2011
The Effects of Aid
• The question of whether aid helps poor countries grow in a sustained way
• On one side are the economic traditionalists, who argue that aid has indeed
promoted growth and structural transformation in many developing countries.
• On the other side are critics who argue that aid does not promote faster growth and
exacerbates balance of payments deficits as a result of rising debt repayment
obligations (when aid takes the form of loans, even if at reduced interest rates) and
the linking of aid to donor-country exports.
• large infusions of aid to developing countries have been recommended in recent
years as a means of escaping poverty traps and promoting development (Sachs et
al., 2004, Sachs, 2005a, Sachs, 2005b).
Todaro and Smith, 2011
• “In contrast, some have argued that aid has historically been ineffective in
promoting growth (Easterly, 2007a, Easterly, 2007b, Rajan and Subramanian,
2008) and large increases in aid may therefore be undesirable.”
• Rajan and Subrahmanian (2008)- “We find little robust evidence of a positive (or
negative) relationship between aid inflows into a country and its economic
growth.”
• “An intermediate position has been that more aid spurs growth under specific
conditions, such as when countries have good macroeconomic policies (Burnside
& Dollar, 2000).”
• Reddy and Minoiu (2006) argue that aid given by a set of countries—mostly
Scandinavian—is better than that given by others, and they similarly argue that
multilateral aid (Multilateral aid includes assistance from the World Bank, and the
regional development banks) is better than bilateral aid.
References
• Todaro, M. P., & Smith, S. C. (2011). Economic development. Pearson UK. (topics
discussed are from Chapter 14-section 14.4)
• Minoiu, C., & Reddy, S. G. (2010). Development aid and economic growth: A
positive long-run relation. The Quarterly Review of Economics and
Finance, 50(1), 27-39.
• Reddy, Sanjay, and Carmela Minoiu, “Development Aid and Economic Growth: A
Positive Long-Run Relation,” Barnard College mimeograph (2006).
• Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross-
country evidence really show?. The Review of economics and Statistics, 90(4),
643-665.
