Essay: Underdevelopment and foreign aid

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  • Underdevelopment and foreign aid
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After the Second World War, development economics emerged with the aim of narrowing the gap between developed and underdeveloped through the implementation of foreign aid. While the impact of aid on economic growth has been well-documented, there has been increasing calls to look at the effectiveness beyond the economic growth criterion (Feeny, 2005). Since its inception in 2000, the Millennium Development Goals (MDGs) have become a widely accepted benchmark to measure development progress across the globe. Achieve universal primary education, improve maternal health, reduce child mortality, combat HIV/AIDS and other diseases were among the eight goals to be reached by 2015. Generally, the success of the MDGs has been by and large inconsistent: some indicators saw positive and promising results, while others lagged behind. Disparities between rural and urban gaps, between countries, and even regions are another concern. Among all targets, health recorded some successes, such as a decline in new HIV infection and remarkable accomplishments occurred in the fight against malaria and tuberculosis (United Nations, 2013). Some improvements in education were also noticeable but the ultimate goal of achieving universal primary education was missed. The story, however, tells us little about whether development assistance is attributable to these positive changes. Despite significant gains, inequalities still persist and some countries still face tremendous challenges such as lingering deprivations, widespread conflicts and violent extremism (HDR, 2016).

Given the growing awareness that foreign aid did not always appear to foster economic growth or better living conditions (Dollar and Easterly, 1999), this issue gave rise to the following questions:

1. What are the causes of underdevelopment?

2. What impact has foreign aid had in promoting development and human welfare?

A new set of targets, the Sustainable Development Goals (SDGs), have replace the MDGs.

• The political and economic interest of donors have contributed to the changing focus of foreign assistance over the years of foreign aid and has consequently distorted the development objective of aid.

There is considerable evidence now that suggests that poor countries were largely affected by their historical past. As we will soon see, research has shown that foreign aid can be effective in reducing poverty and measures of human welfare as infant mortality rates, literacy and nutrition, but only when given to countries with sound economic management and effective government institutions.

The genesis of this divergence will be explored.

2. Methodology

The study will use a comparative analysis based on various theories with a hermeneutics philosophy approach. This approach was selected as an appropriate research strategy since the aim of this paper is to investigate theories of underdevelopment through an interpretative lens as opposed to an empirical lens. It will provide a critical exploration of development theories with the specific aim of understanding the causes of underdevelopment as well as the role of foreign aid on development and human welfare, in less developed and underdeveloped countries. It first considers popular theories that have been used to explain the root causes of underdevelopment is investigated, before describing the current approach that shifted the rhetoric of development from economic growth to human need and capabilities (Riddell, 2008). Extensive research using secondary resources will provide

3. Literature Review

3.1 The Dependency School of Thought

While there is no single unified theory of dependency, there are some core propositions which underlie the analyses of most dependency theorists. Introduced by its proponents as an explanatory analytical framework with which to analyse economic development in the periphery from the viewpoint of the peripheral countries, dependency has since the early 1950s become the dominant paradigm, colouring much of the analysis relating to development. Formulated as a critique of the inability of orthodox theories to explain the causes of the economic-backwardness of Latin America, it attempted to serve as a historical and dialectical explanation of how capitalist penetration into those areas resulted in their underdevelopment and increased dependency on foreign capital.

Dependency theorists, such as Mahbub ul Haq and Raul Prebisch, argue that the origins of the inequality between developed and underdeveloped countries was rooted in their historical past, in which the disparities between the rich and poor countries were exacerbated by the era of colonialism (Haq, 1976). While Haq emphasised the impact of colonialism, Prebisch was more concerned with the impact of western industrialisation on the position of the poor states. As its proponents note, the main crux of dependency theory is that western imperialist and capitalist expansion into pre-capitalist areas was the major cause of underdevelopment, in that traditional structures (economic, cultural and political) were disrupted and distorted to suit the interests of the developed countries. Furthermore, underdevelopment was seen as the result of the integration of colonised societies into the world capitalist system, whereby development and underdevelopment are partial, interdependent aspects of one global system (Culley, 1977), that is the world capitalist system. This borrows from the Hegelian-Marxian concept of totality (i.e. the whole being greater than the sum of its parts), leading the radicals, Immanual Wallerstein and Andre Gunder Frank to argue that capitalism is inextricably linked to the world capitalist system through capitalist relations of exchange or market relations, and therefore cannot exist as a separate, national entity. Thus, in this sense, it is impossible to analyse various states separately from the context of the single integrated system. This idea of world capitalism contradicts basic aspect of Marx’s critique of political economy. Capitalism, for Marx, is a system of class power which manifests itself economically, politically and culturally-ideologically (Milios and Sotiropoulos, 2009). It claims, therefore, that capitalist power has been constituted in its adequate forms only on the level of the separate capitalist society. A world economy, on the other hand, is the result different capitalist societies embedded into a single system, which historically takes the form of what Lenin calls the “imperialist chain”. The core assumption of Marxism maintains that capitalism development and socialism emerges as a result of class conflict between the bourgeoisie and the proletariat. In contrast, dependency theories reduce class conflict and class power in the underdeveloped countries to merely decisions made by the colonisers, in the developed countries. From this standpoint, dependency theory has been criticised for seeking to become a neo-marxism without Marx (Cueva, 1976). Therefore, the idea that class conflict occurs on a global level largely ignores the capitalist state and translates Marxism into the evolutionary dogma of economism (Milios and Sotiropoulos, 2009).
Dependency theory does appear to share some similarities with economic imperialism but there is a clear distinction between the two. While the Marxist theory of imperialism explains capitalist expansion, the dependency theory explains (under)development. Simply put, Marxist theories provide explanations of why imperialism occurs, while dependency theories provide explanations of the consequences of imperialism. In this regard, imperialism is, for a Marxist, part of the process in which the world is transformed and therefore accelerates the communist revolution. Moreover, to a large degree the dependency models rest upon the assumption that economic and political power are profoundly concentrated and centralised in the developed countries, an assumption that Marxist theories of imperialism also shares. If this assumption is valid, then any differences between economic and political power is spurious and it would also be erroneous to expect Western policies to succeed in underdeveloped countries. When considering the impact of foreign aid under this theory, instead of bridging the gap between developed and underdeveloped countries, aid may instead serve to widen the gap considerably, as it encourages dependency between the donor and recipient countries. However, aid is not intrinsically related to dependency (Stanford, 2015) and that there are several determinants of dependency.

Aid dependency can be measured by __ indicator.
However aid dependency is not necessarily a bad thing.
In order to be free from dependency, recipient countries must be independent and self-sufficient. However, that it not to say
. studies? If
On the extreme end, dependency theory views globalisation in terms of the spread of capitalism and the exploitation of cheap labour, raw materials and agricultural commodities in return for manufactured goods and obsolete technologies of the West. In some ways, globalisation and capitalism within the context of dependency may degrade the quality of network linkages (Tacoli, 1998) and negatively impact the livelihoods of those in the rural areas.
Marxists reject the reformist and evolutionary path to development. Instead, they posit that capitalist exploitation, which takes the form of unequal exchange between the wealthy ‘core’ nations and poor ‘peripheral’ nations as development in the centre occurs at the expense of the periphery nations, enforcing rigid international division of labour in which trade patterns are controlled by the West (Veltmeyer, 1980). Thus, in terms of trade, the relation between the core and periphery is one of dominance and subordination. This further suggests that, rather than sequentially-related stages of growth, underdevelopment is seen as a discrete historical process, where underdevelopment is not a necessary stage in the process of achieving the modern capitalist economies but a process resulting from capitalist penetration. Furthermore, in Development of Underdevelopment, Frank (1966) claimed that periphery countries have been underdeveloped by the process of capitalist exploitation, whereas developed countries in the past were undeveloped and free of structuralist constraints. Thus, the route to development is not viable for underdeveloped nations
Haq and Prebisch refute the Marxist’s idea of a socialist revolution as the means to sever the dependency situation. Instead, they maintain that the existing international economic system can be reformed to accommodate peripheral countries. Specifically, Prebisch emphasised that peripheral states can adjust to international economic conditions through government intervention in the form of import substitution and industrialisation through protective measures that encourage economic integration among peripheral countries (Namkoong, 1999). Though Prebisch’s idea is neither liberalist nor Marxist, his approach, rather, stresses the autonomous nationalist development. Although Furtado also commonly stressed for national autonomous development, unlike Prebisch, Furtado recognised the limitations of import substitution and industrialisation. For example, internal markets in the poorer countries were not large enough to support the economies of scale used by the richer countries to keep their prices low. Instead, Furtado emphasised nationalist central planning and investment by the state as a solution to overcome dependency and underdevelopment. However, Africa has provided evidence that this solution is ineffective as investment has contributed considerably to their mounting international debt. Yet, they have shown very little signs of development and are still receiving increasing amounts of aid (Omotola and Saliu, 2009). Frank and Dos Santos (1970), on the other hand, rejects these solutions, arguing that it is unrealistic to assume that the state, who is supported by the bourgeoisie, might face the excesses of international capitalism and promote development along nationalism. Instead, they call for profound political-structural change to release countries from dependency, though it would be extremely difficult to accomplish in some countries as existing political actors such as African dictatorships, often remain entrenched. Take Zimbabwe’s former president, Robert Mugabe as an example. He came into power in the 1980s and led a violent reign which led the county into poverty. Moreover, Haq (1976) viewed poverty as a global problem in which there is a shared interest in North-South cooperation, a point where he differs from dependency theorists with Marxist views, who believed that the notion of the existence of a shared North–South interest is unrealistic given the inability of the South to modify the system (Hoogvelt, 1984). Unlike the non-Marxist theorists, Marxists argue that the system cannot be restructured to accommodate the periphery nations since the benefits from the prevailing system is largely controlled by the core nations (Ferraro, 2008).

The dependency argument has been criticised, by free-market proponents, for attributing the blame of underdevelopment entirely on external factors (Namkoong, 1999). Talk about network linkages and the rural urban divide as examples of internal factors affecting dependency. The dependency of rural/small communities on the urban centers is a condition of weak network linkages, and thus could be solved through free market mechanisms if rural market places had better access to global markets. Remember to critique this argument as well though, because multinantionals with economies of scale will crowd out certain businesses e.g. coca cola crowding out traditional or other local drinks manufacturers or brewers.(
Although, the dependency theory has disappeared from the mainstream of economic theory, since the collapse of Communism in the early 1990s, there is still some support for the theory. For example, Mkandawire, Kayembe and Katombosola (2016) contends that most African countries remain underdeveloped because donor countries often provide tied aid, which forces perpetual dependence in favour of the donor countries. The agricultural and mineral products that Malawi produces, for instance, are often sold back at a higher price in their processed form. Consequently, conditions for giving most projects do not allow full ownership by Africans thereby ensuring that Africans do not develop the required capacity to become independent. (also argue that limiting ownership also prevents inequality? As capitalists are not allowed to reap the full surplus value of the labour they employ?).
Dependency theory, although problematic, on the most fundamental of levels has contributed to contemporary Marxist theory in several ways. Firstly, it has highlighted weaknesses in many theoretical explanations of development and underdevelopment, secondly, it has questioned outdated interpretations of imperialism and thirdly, it has advocated that the dynamics and effect of imperialism be analysed, not from the point of view of the imperialist societies, but from the view point of the less developed countries.
While the Marxist view of dependency has some historical validity, the theory cannot explain for the rapid developments in Asia, as evidenced in the newly industrialised countries (NICs) of South Korea, Singapore, Thailand, Malaysia and Taiwan, as they theory only accounts for impoverished nations. The rapid progression of these countries suggest that North–South cooperation can lead to positive and successful outcomes in terms of economic and social development; a development that would not have been possible to achieve anywhere if the Marxist argument was valid (Moles, 1999). The theory, as a result, has not been able to provide an adequate conceptual framework with which to analyse the causes of development and underdevelopment.

3.2 Two Sides of Capitalism

Ruyle (2001) offers an alternative case to the unilinear view of capitalism shared by Marxism and conventional economics, by taking a modern anthropological view with aspects of scientific socialism to explain underdevelopment, Ruyle (2001). Drawing from the Marxist concept of capitalism, this Ruyle (2001) maintains the Marxian interpretation of the capitalism system that, European capitalism represented the highest stage of human development, laying the groundwork for the socialist future. Capitalism is an international system that has manifested itself differently in different parts of the world; transforming Asia, Africa and Latin America in a different capacity than the West. Whereas in LDCs, capitalism appears to take an underdeveloping form characterised by widespread poverty, ill-health and other features seen as backwardness, the West has assumed an overdeveloping form, with consumerism, pollution, and other characteristics seen as modern or even postmodern. Hence, underdevelopment and overdevelopment can be seen as two different forms of capitalism and not stages through which developed countries have already experienced. Both are equally far removed from the traditional societies which preceded them and can therefore be considered equally as advanced, but in different respects. Similarly to dependency theorists, Ruyle (2001) claims that development does not occur in stages in a unilinear sequence, but rather, they launch interdependent trajectories of development within the global capitalism system. This has important implications for our understanding of the modern world as it gives us insight into how we can maintain or change trajectories for economies in the future. we can shape the economies to converge to become more similar to one another?

Considering the thousands of years since civilisation began in Asia and Africa and millions of years since the human species separated from our ancestors in Africa (Howell, 2015), different groups of humans have developed a wide variety of lifestyles, informal institutions, social structures and belief systems. This variation, as modern anthropology would explain, does not represent higher or lower stages of unilinear development, but rather as an equally valid way of development (Graeber, 2011). This is evident by the fact that many indigenous people and tribes have chosen to follow a different route than Europe. One example is the Waiapi tribe, one of the world’s most isolated tribe, who are struggling to maintain their way of life as the Brazilian government attempt to expropriate their land for the region’s deposits of gold and other metals. In line with the dependency theory, at the expense of the indigenous people
For Marx, indigenous people reflect the underdeveloped stage of production and would eventually disappear as the world capitalist system shows no other alternative besides the European path.
Relative to European societies, pre-colonial societies are considered to be undeveloped but should be regarded as developing in their own right and at their own pace.
Through environmental degradation, resource exploitation and elite formation
Once again, the workings of capitalism, exploitation and ____ have forced
This produces the idea that the Third World countries do not have the respectable form of capitalism of European nations
It is critical to abandon the unilinear and Eurocentric views of capitalism proposed by Marx, and understand that capitalism comes in two distinct forms: an overdeveloping form in the imperialist nations and an underdeveloping form in the poor nations.
Does the literature bridge the gap between capitalism and socialism with social capital? If not could you propose this as a bridge?)

3.3 The Capability Approach

At the core of this renewed focus on development is the capabilities approach, first articulated by Amartya Sen in the 1980s and later developed by philosopher Martha Nussbaum (2000). Sen adopts a liberal egalitarian approach to development, placing particular emphasis on the equality of fundamental freedoms over inequalities of income (Dean, 2009). In this case, development represents what people are able to do and be and on the quality of life that individuals are able to achieve (Osmani, 2016) through the expansion of human capabilities and choices. While functionings refer to the things a person succeeds in ‘doing’ or ‘being’, e.g. lead a long and healthy life, capabilities refers to a person’s freedom to achieve such functionings, ranging from the most basic capabilities such as adequate nourishment to more complex ones such as one’s ability to participate in society or achieving self-respect (Sen, 1999).
In essence, Sen’s analysis of development diverts the focus away from the means of living (e.g. income) to opportunities a person has to live (Sen, 2009).
.This departs from liberal tradition as Sen holds more priority on equalising capabilities than on Rawl’s emphasis on the equality of primary goods (Dean, 2009).
Although Sen recognises the need for basic capabilities, he did not explicitly specify the basic capabilities are needed to avoid poverty. While this makes it difficult to judge the equal standing of people belonging to different societies and cultures, Sen’s equality of capability should be seen more as a framework to deliberate normative issues on equality rather than a prominent egalitarian theory, as it is commonly misinterpreted as (Alexander, 2003).
Central to Sen’s (1999) concept of Development as Freedom, is the idea of the freedom of choice, such as the ability to access healthcare and education. Without these basic freedoms, poverty and other deprivations may occur (Riddell, 2008). Under this perspective, for aid to be effective, rather than provide recipient countries with resources that they lack, unfreedoms that restrict choices and opportunities should be removed to expand citizen’s capabilities. Thus, it may be implied that foreign aid in the form of financial assistance is counterproductive as it does not seek to reduce unfreedoms, but instead, accumulates large external debts for the recipient country, which has opportunity costs that would be better spent on supporting human welfare programs. Technical assistance, on the other hand, may be more useful in increasing access and opening up opportunities to things that citizens of recipient countries have reason to value, which in turn will lead to development.

Consistent with Adam Smith’s (1776) analysis of necessities and living conditions, Sen (1983) agrees that economic growth and the expansion of goods and services are essential for human development. This notion is supported by Collier and Dollar (2001) who find that the impact of aid on poverty depends on per capita income growth which, in turn, reduces poverty. Moreover, Sen’s approach bears some resemblance to Aristotle’s understanding of human flourishing in that people are responsible for their own lives. Increasing poor people’s incomes contribute to the expansion of their freedoms as income alone cannot improve human welfare and thus is not sufficient in terms of quality of life (Sen, 1990). Ultimately, development should have the aim of providing opportunities to live a life they have reason to value (Basu and Kanbur, 2008, Ch. 2). What people are able to achieve is more important when judging one’s quality of life (Clark, 2005). This leads to the argument that it is no longer adequate to measure development in terms of income per capita alone as it cannot be reduced to simply increasing basic incomes (Sen, 1999). Traditional income-based measures of development is widely criticised by Joseph Stiglitz and others, as they hide the real impact of foreign aid on development outcomes (Shirazi, Mannap and Ali, 2009). In line with this argument, Berger (2008) adds that economic planning with monetary leads to selective growth and profit maximisation at the expense of environmental goals, which in turn endangers the achievement of basic human needs. Thus, GDP is not a suitable representative of human welfare (Kramp, 2010) as a country may be affluent in traditional economic terms but simultaneously have low achievements in the quality of life (Sen, 2003). For example, real GDP growth in India accelerated from 5.8 percent in the 1980s to about 9% in 2010 and was simultaneously accompanied by a consistently low HDI. Although GDP and economic growth emerged as a leading indicator of national progress in many countries, it was never intended to be used as a measure of wellbeing in the first place (Gomanee, Morrissey, Molsley and Verschoor, 2005). Nevertheless, the example underscores the limitation of GDP as an indicator of a country’s wellbeing and progress as it fails to capture improvements in welfare such as better health care and education (Dang and Pheng, 2015). If development is about advancing freedoms and capabilities, then people and their capabilities should be the ultimate measure for assessing the development of a country.
Furthermore, this approach gave rise to the introduction of the Human Development Index (HDI) in 1990 by developmental theorist, Mahbub ul Haq, which was later adopted by the United Nations Development Programme (UNDP) (Elkan, 1995). Sen’s capability approach has also guided the works of development agencies, including the UNDP’s Human Development Reports and UN’s MDGs in 2000, to address major issues in developing countries such as poverty, poor sanitation, lack of education and child mortality through collaborative action (Hulme, 2009). Guided by Sen’s work, development quite rightly focuses on the wellbeing of those at the bottom of society as opposed to those at the top. By focusing broadly on human welfare and capabilities rather than narrowly on the monetary income and wealth of economies and individuals, the capabilities approach adds another dimension to development and an alternative perspective with which to improve aid policy.
Several studies have found HDI indicators to be highly correlated with the level of poverty in developing countries (Doessel and Gounder, 1994) and may even be superior to income measures of poverty, which do not take into account non-monetary factors (Kumlar, 2007). For example, Moe (2008) indicates that there were discrepancies in human development dimensions, namely health, income and education in Southeast Asia, existing both within and between countries. Aid provided for educational purposes was low compared with other allocations of aid targeted at various components of human development, presumably because of unique circumstances. Among developing nations, aid allocation is not equally dispersed, as some countries with a low level of education and human development are provided with small amounts of aid in proportion to others (Moe 2008). Shockingly, Collier (2007, p102) found that, in Chad, less than 1 percent of aid actually reached rural health clinics and about 11 percent was diverted to finance military spending. Even though aid may have the objective of improving development, it is often the case where the actual allocation of aid ends up nowhere near where it was meant to go (Collier and Dollar, 1999), giving foreign aid a reputation of ineffectiveness. This suggests that the focus of aid should target efficient aid allocation and skills development as well as improve governance and institutions.
When analysing the impact of foreign aid types on HDIs, Masud and Yontcheva (2005) found that non-government organisation (NGO) aid had a significantly positive impact in reducing infant mortality and was far more efficient than bilateral aid. However, the effect of both types of aid on illiteracy rates was insignificant. Similarly, Asiama and Quartey (2009) studied the impact of foreign aid on HDIs in thirty nine Sub-Saharan African countries and found that, unlike aggregate bilateral aid which had insignificant effects, disaggregated aid that was sector-specific and project-specific had significant effects on HDIs and other welfare indicators such as infant mortality. The World Bicycle Relief, a form of disaggregated aid, for instance, improves access to education and connecting individuals to basic needs by providing bicycles for children, for them to attend school, in rural developing countries (World Bicycle Relief, 2018). Through this, children’s’ substantive freedom to be knowledgeable and ability to expand their real opportunities is important for improving human welfare. By ensuring inclusive and equal opportunities of education for all, this project-specific aid also works towards the Sustainable Development Goals (SDGs) to eradicate poverty. Alternative and innovative methods of aid delivery that target specific sectors can therefore be considered as more effective than financial means of assistance, in that they have the opportunity to reduce unfreedoms and poverty. It is important to note, however, although opportunities to improve the standard of living are widened, children may still be required to work in order to provide for their families, rendering this form of aid to be counterproductive.
The individualist component of the capability approach has been criticised for ignoring social and class structures. Furthermore, its pro-capitalist views on development contradict the principles of the dependency theory as capitalism is assumed to have negative impacts on development and human welfare. Therefore, foreign aid will have negligible effects as it will only create dependency between the donor and recipient nations.

3.4 Institutional economics

The notion that poor quality institutions are the root cause of differences in economic development in developing countries became widespread in the late 1990s (Chang, 2011). It was widely held that recipient countries of aid needed ‘better’ institutions and improved governance (Kapur and Webber, 2000). During that time, the International Monetary Fund (IMF) and the World Bank began to pressuring underdeveloped countries to adopt the Global Standards in Institutions (GSI) , despite these institutions being specific to Anglo-American countries, who themselves, only adopted them after they had achieved economic development (Chang, 2005)
From an institutional perspective, human development and capabilities are strongly linked with institutions (Knight, 1992). Relating back at Sen’s approach, institutions and growth are considered a means towards an end, that is, human development (De Muro and Tridico, 2008); suggesting that institutions are somewhat necessary for human development to occur. Thus, institutions that improve citizen’s ability to make real choices and encourage participation in society, according to Sen, will lead to development. However, colonisation has meant that many underdeveloped countries have inherited poor institutions (Kourtellos, 2010). In a large number of colonies, especially those in South Asia, Africa and Central America, “extractive” institutions were established, with the purpose of, as the name suggests, extracting as much income and resources from the nation as possible. Acemoglu, Johnson, and Robinson (2001) were perhaps the first to propose empirically validated explanations in this area. Their study investigated the impact of institutions on economic development by using European mortality rates. Based on the above conviction, the course of institutional development is expected to be different from areas where Europeans faced high mortality rates.
For example, there is a general consensus that democracy has a positive effect on human development. Kosack (2003) provided support for this and found that while aid enhances the level of HDI, these effects are contingent on the level of democratisation in the recipient country. Specifically, there is a significant positive and relationship between aid and quality of life when the recipient country is democratic. A number of studies comparing democratic with non-democratic regimes have found that, while aid allocation is often ineffective, democratic nations tend to have a higher likelihood of have aid allocated to its intended target (Knack, 2004; Svensson, 2002; Gerring and Thacker, 2001). These studies have found that democratic regimes are typically better at allocating aid more effectively and tend to invest larger amounts towards the public than non-democratic regimes (Knack, 2004). However, there is no clear evidence that aid received by democratic countries actually reaches the poor or produces better development outcomes than non-democratic countries (Ross, 2006). In contrast, Acemoglu, Naidu, Restrepo and Robinson (2013) conceive that inequality tends to increase after democratisation, when the economy has already undergone significant structural transformation.

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