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A Primer on Foreign Aid

There is a controversy about the effectiveness of foreign aid. While some experts believe that it
enlarged government bureaucracies and enriched ruling classes without any benefit for the
country, others think that it actually has been effective in reducing poverty and inequality and in
preventing a worsening of a country economy.
What is Foreign Aid
It is money that one country decides to give to another, which can take the form of grants or
subsidized loans.
According to the Development Assistance Committee (DAC) aid flows can be divided into:
● ​Official development assistance (ODA) it is guaranteed by donor governments to low-
and middle-income countries.
● Official assistance (OA) transfer to countries on the WB list of ‘high income countries’
(with per capita income above $ 9.200 in 2001) for three years or more, and to countries
of the previous Soviet Union.
● Private voluntary assistance is represented by donations from NGOs, religious
organizations, charities, and the private sector.
Who Gives Aid, and Who Receives It?
Generally aid is provided on a multilateral basis, which means that many different donors are
involved in the process. The main ​donating institutions​ are:
● the World Bank
● the IMF
● the African, Asian, and Inter-American Development Banks
● United Nations
The ​recipients​ are:
● low-income countries - the major flow of capital is constituted by foreign aid
● middle-income countries - the private capital has the biggest share.
Why do Donors Give Aid?
Although donors mainly donate to support poor countries in the fight against poverty, there are
also ​political and economic ​reasons behind it, for instance:
● To donate to smaller countries in order to influence as many countries as possible.
● To promote the donor country export by requiring recipient nations to spend the received
aid on good and services from the donor nation (​tied aid​​).
AID, GROWTH, AND DEVELOPMENT
Aid might spur economic growth in countries through specific ​channels​:
● Investments to increase savings
● Investments in health and education (it sustains ​development through the eradication of
endemic diseases)
● Transfer of technology
Reasons why aid ​does not support growth​:
● corruption (aid is wasted or stolen for example for limousines or presidential palaces)
● Poor economic policies and bad governments (for instance to finance civil conflicts)
 ● Lack of skilled workers, weak infrastructures
● Decline of domestic savings
● The Dutch disease
Aid can stimulate growth under ​specific circumstances ​but not others:
● Good economic policies and strong institutions (this approach is based on the World
Bank criteria for resources allocation- PBA. It has a strong influence on donors)
● Multilateral agreements (with better coordination between members and a broader
participation among governments and community groups in setting priorities and
designing programs)
● Untied aid (aimed at affecting growth through the construction of infrastructures,
electricity generators, and the support of agriculture)-This is considered the most
effective type of aid
DONOR RELATIONSHIPS WITH RECIPIENT COUNTRIES
The Principal-Agent Problem
The bigger challenge for aid is the international dimension and the ​physical separation between
donors and recipients. In other words, aid agencies and poor people do not relate to each other
because of a complex chain of principal-agent relationships, where taxpayers delegate to
principals, who also delegate to others. Although donors are willing to have funds spent in the
right way, many times the beneficiary is not able to transmit his point of view to the taxpayer. As
a consequence, objectives, incentives, and information are not aligned between the two groups so
that program design, evaluation, implementation and fund allocation are being affected.
Conditionality
This is the most controversial aspect of the aid resulting from the principal-agent problem, and is
often associated with the IMF and WB conditions. Donors believe that, in order to grow and
develop in a sustainable way, fundamental changes in governments policies are required to avoid
inflation, waste of public spending and extensive corruption.
There are ​three key problems​ related to conditionality:
● Unclearness if the nationalist or the liberal approach is the most appropriate to sustain
economic growth and development
● Critiques to the WB and IMF for not imposing enough conditions on health, education
and environment protection
● Disbursement of funds, although the recipient governments did not meet the conditions
imposed by donors
To ensure that conditions are met, aid agencies are required to show flexibility, judgement and
the ability to balance different aims.
Improving Aid Effectiveness
● Country Selectivity- donors should provide aid to countries with stronger institutions and
good policies, post-conflict countries with weaker policies, and countries which
demonstrate a will to implement key reforms.
● Recipient Participation and Country Ownership- ​it requires a more participatory approach
from the recipient government and public in setting priorities and programs. Donors are
more likely to promote it in less corrupted and dictatorial countries.
● Harmonization and Coordination ​a good management of aid flows is essential for
recipient countries as they usually find themselves overwhelmed by several requirements
from the donors to meet.
 ● Results based managemen​t better monitoring and evaluation of existing programs in
order to achieve quantifiable goals. This can happen by the right fund allocation, an early
problem detection, and an improvement in the design of future programs.

CONCLUSION
Although aid fell after the end of the Cold War, it grew again in the late 1990s. Some studies
showed that there is a strong relationship between aid and economic growth, but it is clear that
aid is strictly connected to bad governments and corruption, which lead to low domestic savings
and a poor private sector production. The complex chain of principal-agent problems can also
worsen monitoring and evaluation of projects. Even if great efforts are now being made by
donors in selecting recipients, setting priorities, establishing clear objectives and designing aid
programs, there is no evidence that those changes will be beneficial for recipient countries.

References​:
Desai, V., & Potter, R. B. (2008). ​The companion to development studies​ (2nd ed.).
London: Hodder Education
Lancaster, C., & Dusen, A. V. (2005). ​Organizing U.S. foreign aid: Confronting the challenges
of the twenty-first century​. Washington: Brookings Institution Press. doi:10.7864/j.ctt12810s
External source:
-Foreign Aid and the Failure of StateBuilding in Haiti from 1957 to 2015:

Why foreign aid failed in Haiti:

Haiti was tied to US foreign Policy so it was thought it was normalized and ready for aid when it
was barely out of the period of military coups. The Government that was supposedly built was
designed to minimally manage its affairs. The end result was a dysfunctional, aid-dependent
system. Privatization, decentralization, planning, economic development, and civil service
reform initiatives were poorly timed and the donors were impatient with Haiti.
Donors must reassess what programs are appropriate for conflict, reconstruction, or for
normalization efforts. They should know when and how democratization should be pursued
and they should learn how to build capacity to absorb aid and spend it. The donors should be
able to partner with the Haitian government.
The United States, along with other donors, needs to rethink the potential long-term effects
of embargoes, boycotts, aid suspensions, aid tying, and delayed aid disbursement

Citation:
Buss, T. F. (2015). Foreign aid and the failure of state building in haiti from 1957 to 2015. Latin
American Policy, 6(2), 319-339. doi:10.1111/lamp.12080

Second reading
“Can Foreign Aid Buy Growth?” Easterly William.

● In the beginning the author display the impact of the paper written by Burnside and
Dollar that correlates foreign aid with economic growth with the condition of good
 governance. After its publication international institutions would site it to justify the
increasing amount of foreign aid.
● Other studies were carried later on to investigate the same relation while addressing the
impact of other variables. Besides, the author argues that good policies is subjective and
the categorizing is a weak spot.
● Then the role of aid is analyzed, one study claims that aid fills the gap between required
imports and foreign exchange earnings. The other study argues that aid help countries
lacking enough capital for investment due to low saving rates. The first argument is
further expanded through discussing the effect of the business environment, meaning if
the country is hindering investment then foreign aid wouldn’t help.
● Another point is the role of international institutions measuring its performance through
the amount of aid provided. Despite that, countries may have misused the money,
institutions insists on transferring the money.
● A lot of success stories have been witnessed concerning the optimum usage of aid and
reaching the target. Yet still other countries utterly failed, so the question is how to direct
the money.
● Conditionality is not exclusive to credit agencies, foreign aid is now provided to countries
applying economic reforms and improving macroeconomic indicators.
● Aid institutions lack evaluation, despite that could help promote efficiency and better
policies to achieve the developmental aspirations. Also the limited assessments carried
are kept away from the public.