The question isn’t whether or not foreign aid does any good, because we know unequivocally that foreign aid saves lives and mitigates suffering. What we have been left wondering over the last 100 years, and what I aim to tackle in this essay is; ultimately, how effective is foreign aid? Does foreign aid really facilitate and stimulate economic growth or does it, as James Buchan said, “sometimes compound the disruption and debauch the survivors.”
Throughout this essay, I will be siding with Nancy Birdsall, Jeffrey Sachs, and many others, to argue that the problem with foreign aid lies in its quality, not its quantity. That at the most basic level, foreign aid is not effective, and while I do not agree with William Easterly about the futility of this international endeavor, I must concur with his argument that the purse strings are held not by the poor, whose interests the aid establishment should serve, but by rich politicians, who have little knowledge of the poor, meaning that institutions are chasing unrealistic goals and causing inefficiency. I want to emphasise that I personally believe in foreign aid and think that it has been of utmost use in some cases, however, with a few changes it can do so much more. In ‘The End of Poverty’ (2005), Sachs explained that extreme poverty could truly be eliminated by 2025, if and only if, the correct development policies are put in place. Ensuring that the right policies are used and implemented is and will continue to be the hardest and most time-consuming facet to international aid. However, it is the most essential to increasing the effectiveness of the process.
Reverting back to Birdsall and her 2004 paper, ‘Seven Deadly Sins: Reflections on Donor Failings,’ she identifies seven problems (or sins) associated with foreign aid. The paper focuses on how the way in which aid is transferred can end up undermining a countries’ long term development opportunities. This, she says, can be solved by addressing the seven sins of donors. The first sin that is mentioned is that of impatience with institution building. Ultimately, it is noted that “economies without the right institutions will falter” (Birdsall, 2004) and that to solve this problem of weak political and economic institutions, the first step is to acknowledge past failures and crucially, to consult with the locals to collectively assess how to go about fixing it. New aid delivery systems are needed and a long-term goal needs to be set in order to prevent impatience for results, impatience for the distribution of money and impatience for policy change. This, according to Birdsall, will take time and needs to be implemented by starting low and slowly increasing. The second sin of envy revolves around collusions and coordination failures. Many donors find themselves competing with one another for visibility, quick success and the goal of taking the credit. Unfortunately, this means that the limited public sector capacity of recipient countries are being treated as a common pool resource (Birdsall, 2004). This ends up compromising that resource instead of building it up and in the end, does more harm than good for recipient countries. The third sin of ignorance focuses on the failure to evaluate the impact of an aid program due to its costs and to the problem of attribution. Due to the lack of a controlled experiment and baseline information, it is hard to discover whether the success or failure of the programs should be attributed to the program itself or to other external stimuli. Therefore, it is difficult to assess and evaluate whether the set program is actually working or not. The fourth sin is pride and the inability and unwillingness of aid programs to exit from countries where they are not doing any good (Birdsall, 2004). Exiting a country where financial aid is going to waste should not be seen as a punishment but must be established as a norm in order to remove the failure banner from this process. Aid programs remaining in countries where they are not effective is futile and a waste of valuable resources. Sloth or pretending participation is sufficient for ownership is the fifth sin. Basically, third world country recipients need more of a say in the decision making surrounding how the donor support is used. Greed is the sixth sin and Birdsall references the fact that not many countries have met the goal of giving 0.7 percent of GDP as aid thus far (Birdsall, 2004), meaning that these rich countries are stingy. A larger aid budget is needed without a doubt, in addition to reliable aid. Lastly, and the sin that needs the most work is foolishness. While funding for global public goods which benefit the developed countries has increase, funding for the global public goods which help third world countries is still dire. Donors need to stop focusing on a singular country and instead focus at a regional level. These seven sins are barriers to perfectly efficient and effective foreign aid, meaning that they need to be overcome before we can positively answer the question; Is foreign aid efficient?
The effectiveness of aid is an age-old argument and one which is extremely important in the economic and political climate that we face today. However, with the Trump administration proposing to cut foreign aid funding, it is one that must be solved. Much of the major debate over foreign aid no longer asks if it does in fact work, but what aid mechanisms can be further strengthened in order to continue helping third world countries. Overall, there is little evidence to prove that foreign aid contributes massively to the growth of economies but we need to look at the bigger picture – aid programs for healthcare. The President’s Emergency Plan for AIDS Relief (PEPFAR), which provides treatment to around 11.5 million people, has been a crucial reason as to why global deaths from this particular disease “have fallen by almost half since 2005” (Radalet, 2017). The same is true for malaria, tuberculosis, polio, diarrheal diseases and many others. Foreign aid related to health has saved millions and millions of lives and will continue to. Another example of the good that aid does is examined in the 2004 article ‘Randomized Evaluation of Interventions in Social Service Delivery,’ written by Duflo, Glennerster and Kremer. This paper focuses on education, and in particular that of girls’ participation in school. The paper looks at random evaluations in Mexico and Kenya and concludes that ‘school participation is quite elastic to cost’ (Duflo et al, 2004). Their research showed that, by decreasing the cost of schooling in addition to providing incentives for attendance, that there was a total average increase of enrolment of all students.
More so again, look at recent research by a number of economists that has agreed that aid does support growth. Ardnt et al (2016) found that “sustained inflow of foreign aid equivalent to 10 percent of GDP is roughly expected to raise growth rates per capita by one percentage point on average.” This is quite a significant figure. Even long regarded sceptics of development aid such as The Economist have changed their opinion and have concurred that aid leads to growth (Radalet, 2017). In ‘Aid Effectiveness – Opening the Black Box’ (2007), Bourguignon and Sundberg present data which infers that the relationship between aid and economic growth and development is “fragile and often ambiguous” (Bourguignon and Sundberg, 2007). But what does this mean? They found there to be a small positive relationship between the two variables. This also can be largely due to aid being spent on disaster relief and military ends rather that developmental outcomes and also due to the inconsistencies and lack of a control variable in the information that is gathered. The paper focuses on the causality chain, meaning that one variable in the chain will ultimately influence the next. ‘Opening the black box’ identifies three different types of links within this causality chain that may in fact influence the effectiveness of development aid. The first of the three links is policies to outcome. Development outcomes are very much influenced by the quality of policies made. Better quality policies mean better outcomes and according to the World Bank’s CPIA indicator, they can lead to higher gross in GDP. The second link is that of policymakers to policies. Basically, this is how good governance and institutional capacity will lead to efficient policies. The third link is from donors to policymakers, how donors can positively or negatively affect policy debate and its formulation. Unfortunately, a donor’s (incorrect) view on what is a good policy can be enforced upon policy makers due to the conditional aspect of aid and this can lead to the failure of the program.
There has been much talk of how to increase the effectiveness of aid, and I have already discussed Birdsall, Bourguignon and Sundberg’s views. However, ‘The Paris Declaration on Aid Effectiveness’ in 2005 outlines some crucial problems that need to be addressed in order to achieve Millennium Development Goals. In this paper, it is recognised that the effectiveness of aid must be a priority over the volume or quantity of it. That better governance and institutions need to be the prime concern for the foreseeable future. The problems that were identified to be addressed fall in line with a lot of what I have mentioned previously – that being the better alignment of aid with countries’ priorities, transparency, accountability, the simplification of procedures and processes and to challenge corruption. ‘The Commitment to Development Index: 2009 Edition’ by Roodman, follows the same theory as Birdsall’s sixth sin; that countries aren’t funding enough foreign aid. The paper rated developed countries based on how they contribute to development in poorer countries, considering 7 components of aid, trade, investment, environment, security and technology (Roodman, 2009). The Nordic countries came out on top in comparison to the US and the UK who do not allocate enough resources for aid.
According to the Solow growth model, developing countries that are way below the steady state should grow a lot faster than other developed countries that are already at the steady state. Ultimately the convergence hypothesis believes that Less Developed Countries will effectively catch up to the living standards experienced in first world countries. The role of technology and again education, significantly impacts the growth of these countries. However, savings are really the catalyst for economic growth and for poor, third world countries, these can be difficult to generate. This is where foreign aid needs to step in and act, ensuring that different factors of production are invested in and used correctly.