Economics Of Aid From The Perspective Of Developing Countries

Aid: economic assistance given by one country to another, usually from the developed to the less developed economies

Types of aid

(1) Tied aid. Aid which is given upon the condition that the recipient country must use the funds to purchase goods & services from donor country

(2) Bilateral aid. Aid given by the government of one country directly to another

(3) Multilateral aid. Aid given by the government of a country to an international agency such as World Bank, IMF & European Development Fund before channeled to different countries

Arguments for aid

(1) To promote investment climate. Poor countries particularly from Sub Saharan African regions badly need an international aid. In some places like Zimbabwe, primary school enrolment rate has declined steeply over the 10 years. This stemmed from some fundamental problems like lack of schools to accommodate ever growing number of children. Besides, access to basic healthcare is very limited. There is not much increase in number of hospitals. Even if there is, machineries, surgery equipments etc are often obsolete & do not function well. This could stem a human capital crisis in near future

On the other hand, government can also channel the money to upgrade roads, railways, bridges, airports & ports. Improvement in these will have rewarding supply-side effects. Having all these basics e.g. productive & knowledgeable workforce, efficient transportation system is vital to attract foreign & local investment

(2) Sense of ‘responsibility’. Communities within the less developed countries (LDC) feel that the developed economies have the responsibility to reshape the economic mess faced by them. This could be due to humanitarian reason that the colonial power such as UK has occupied many of these countries & have largely exploited their natural resources. For instance, British colonial have largely exploit resources from East Africa & Asia for their own benefits like fast development. In the process, they only favour & upgrade areas that are resource-rich while ignoring others. This largely explains for the large imbalances faced by many African regions

(3) Savings & foreign exchange gap. Inflow of foreign exchange is viewed as precious source to fill in the savings gap. Very often, domestic savings in LDCs are at very low rate particularly due to majority of households are very low wage-earners & distrust over local financial institutions. As such it is one of the biggest barriers for domestic investment to take place. Providing aid & other form of development assistance can help to finance projects. Also, many LDCs face the problem of acute shortage in foreign exchange due to falling commodity prices which leads to the worsening terms of trade & also due to debt servicing. The hard fact is, many of the currencies of poor LDCs are weak & therefore not accepted on foreign exchange market. To enable them to import, they must therefore have hard currencies such as dollar, euro or pound

(4) Political purposes. In some cases, foreign aid such as military goods could be view as source to maintain existing government in power. The ending of Cold War between NATO & the Soviet Union has contributed to the fall in Official Development Assistance (ODA) to African continent, while countries like Israel remain as the major recipient of ODA

Arguments against aid

(1) Sense of dependency. The record of Western aid to Africa is one the worst failure in history. Throughout 1960 to 1997 more than $500 billion had been pumped into their economy & yet the results produced are at dismal. In fact their standard of living has fallen even more as measured by the real GDP per capita. Unemployment rises everyday, famine is everywhere, increasing number of people are out of school & die everyday due to contagious disease like AIDS, BOP deficit worsen etc. Despite difficulties, I argue that African leaders should seriously adopt free-market. Although it will be more curse than cure in short term, it is necessary to have a more establish economic system in the long run. Many countries like Europe, Japan, Hong Kong, Singapore & Taiwan are economically successful without relying on any aid

(2) Problems of debt repayment. Many LDCs are facing ballooning debts in the 1980s. It had become so serious due to factors like global recession which led to falling exports, falling commodity prices which reduce their foreign exchange earnings, delay in loans which lead to higher interest rate repayments etc. To some countries like Argentina, the value of debt once stood at one-fourth of their GDP & 3 times their export earnings. This explains why it comes to default by 2001. IMF & World Bank can share the blame too. They knew that the amount of debt is unsustainable, but why continue lending?

(3) Aid is often conditional. IMF & World Bank often impose painful SAPs (Structural Adjustment Programs). Measures propose are like increasing interest rates to strengthen local currency, fiscal austerity which include raising tax & reduce government spending to correct for deficit, privatisation to increase efficiencies, deregulation on the operating of banks & capital flows. Although it is understood that these may stabilise the micro & macroeconomic conditions, somehow it may be ill-suited to local environment

(4) Aid is not evenly distributed. Aid is more often than not, fall into the hands of corrupt officials who may siphon it for their own benefits e.g. to pursue political campaign or agenda. Also these recipients could affect the projects that are chosen to be financed. For instance, the aid could be used to construct state-of-the-art school or hospital only in the capital city, which clearly benefits those few rich ministers. If the equivalent amount were spent in rural areas including the purchase of generic drugs, more people could have benefited it

(5) Serves donor’s objectives. Donors often have their own agenda. Aid is given but upon the condition that it will be used to purchase the goods from donor countries. In other word, normally these countries pursue export-led growth. Seeing the demand for their exports to collapse is the last thing they wanted to do! For e.g. Japan has been well known for disproportionately distributing aid to neighbouring Asian countries, which clearly shows that it has commercial interests