Is Foreign Aid Working?
Is Foreign Aid Working?
Europe lay in ruins Iron curtains and cold wars Independence movements in the colonies Decolonisation by the colonisers Laissez-faire economics questioned State power could be directed towards
development Intellectual confidence All of above combined to bring about the
rise of foreign aid from rich to poor countries
A new governance framework was required to manage the world economy
Thought that conflicts between nations had been exacerbated by the collapse of international trade, economic isolationism leading to the 1930s depression and rise of ultra-nationalism
Note that UN membership rose from 51-156 between 1945-1981
Set up in 1944 to facilitate post-war international economic stability◦ General Agreement on Tariffs and Trade (GATT)◦ International Monetary Fund (IMF)◦ World Bank (WB)
The WB and IMF = IFIs (international financial institutions)
IMF◦ Short-term loans to nations experiencing balance
of payments problems◦ Loans dependent on borrower taking measures to
correct problems◦ Voting structure proportionate to invested capital
World Bank◦ Initially funds for reconstruction of Europe◦ After, for loans to poor countries for large-scale
infrastructure◦ Loans were ‘concessional’
USA was major subscriber to IMF and WB, its currency was the international medium of exchange
Smaller but more powerful organisation than WB
Located in Washington DC adjacent to WB WB can only lend to IMF-member countries
and when they are not in dispute with IMF Stabilisation of economies is IMF major role
Comprised of:◦ International Bank for Reconstruction and
Development (IBRD)◦ International Development Association (IDA)◦ International Financial Corporation (IFC)◦ Multilateral Investment Guarantee Agency (MIGA)◦ International Centre for Settlement of Investment
Disputes (ICSID)
Dominant non-private lender to developing countries
Highly influential generator of ideas about development
Main provider of technical advice to developing countries
Informal ‘rating’ agency for bilateral donors (eg AusAID)
Originally seen as a catalyst for development (leading agent of modernization theory)
But critics say that WB◦ Leads poor countries into debt◦ Has financed many projects which have brought
poor developmental returns◦ Is only concerned with capitalist development◦ Has not (until recently) been concerned with
corruption◦ Only plays lip-service to sustainability and
popular participation◦ Should let market determine economic
development
Critics also say that the WB and IMF have exerted undue influence on poor countries policies through structural adjustment loans (SALs) or programs (SAPs)
SALs/SAPs carry conditions which generally involve◦ Tighter fiscal control◦ Liberal economic reforms◦ Rolling back the state
◦ Controlling inflation through wage controls◦ Privatization of publicly owned enterprises◦ Balancing state budgets through reducing
government expenditure◦ Eliminating or reducing government
expenditure◦ Eliminating or reducing state subsidies on basic
goods◦ Generation of foreign exchange through export-
oriented industries◦ Elimination of controls on foreign capital
◦ Net transfer of money out of indebted countries increased since 1980s
◦ Debt burden shifted from private banks to IFIs◦ Forced liberalization has entailed greater
participation in world economy◦ SAP implementation results in ‘cat and mouse
games’ between IFIs and recipient countries◦ SAPs have increased control of poor countries
by IFIs◦ Poor people bear considerable burden◦ Inappropriate fiscal restraint where enormous
problems need addressing
Now claimed to be a ‘post Washington consensus’ which recognises need for state action as well as market forces
Declared prioritization of poverty◦ IMF has Poverty Reduction and Growth Facility
Loans (PRSCs)◦ WB has Poverty Reduction Strategy Credits
(PRSCs) Both require Poverty Reduction Strategies
(PRSs) Is this a genuine shift or cynical
maintenance of old policy?
IFIs also signed up to the MDGs Agreed September 2000 at largest ever assembly
of world leaders Addressed at resolving the world’s major
problems – especially poverty Goal-oriented with clear targets, eg
◦ reduce extreme poverty by half between 1990-2015
◦ reduce by 2/3rds the under 5 years mortality rate between 1990-2015
Goal 8 – Develop a Global Partnership for Development◦ Target 12: Develop further an open, rule-based
predictable, nondiscriminatory trading and financial system (includes commitment to good governance, poverty reduction)
◦ Target 13: Address special needs of Least Developed Countries
◦ Target 14: Address the special needs of landlocked developing countries and small island developing states
◦ Target 15: Deal comprehensively with debt problem to make debt sustainable in the long term
Aid from DAC countries is increasing◦ 2003 = US$69 billion◦ 2004 = US$80 billion◦ 2005 = US$106 billion In real terms average
annual growth of 5.6% Decline in 2011due to GFC
◦ 2011= US$133.5 billion, a fall in real terms of 3% and only 0.31 of combined GNI
Grants from NGOs◦ US$11 billion in 2004
Aid from non-DAC countries increasing◦ Estimated at $11 billion pa or more◦ China now gives more each year than World Bank◦ India announced plans to establish an aid agency in 2011
and $11 billion funding over next 7 years◦ South Africa, Brazil and Arab states significant donors◦ Much more explicitly ‘soft power’ to gain leverage in
pursuit of strategic interests◦ ‘No strings attached’ leads to questions about human
rights, sustainability, relevance, environmental concerns◦ Little evaluation, accountability and transparency
mechanisms
Much of the increment in ODA reflects global and regional security concerns with Iraq and Afghanistan accounting for over half of the 2001-2004 increase
Nearly half the increase in net ODA 2001-2004 is in the form of debt relief and technical cooperation and a quarter for emergency assistance
Innovative forms of funding eg airline departure taxes
Agreement of many donors and recipient countries for ‘aid harmonization and alignment’ to increase effectiveness of aid
Trying to improve aid ‘modalities’ (ie instruments through which donors deliver aid) to improve aid ‘quality’
Highly Indebted Poor Countries Initiative (HIPIC)
Multilateral Debt Relief Initiative (MDRI)
Paris Declaration on Aid Effectiveness 2005 by OECD countries/donors◦Ownership of aid implementation by partners◦ Donor alignment with country strategies◦Harmonization of donor development
approaches and activities◦Managing for better results through national
development strategies and performance frameworks
◦ Mutual accountability between partners and donors
There has been a reported general improvement in donor-recipient relations
By 2010 target met on only one indicator (improvement on others)
Criticisms◦ China, Brazil and Arab states not involved◦ Indicators don’t measure ‘real outcomes for real
people’◦ Data often fragmented◦ Country context not appreciated enough in
measurement eg fragile states
Volume of aid is increasing Still not enough to tackle the immense problems
of developing countries Only 5 donors have ODA/GNI ratios of 0.7 or
above (DAC average only 0.33%) Still concern about the amount of IFI influence on
domestic policies of developing countries WTO remains a major concern of developing
countries The effectiveness of aid remains a contentious
issue Pronounced international inequality still evident
and the gap is widening for some countries