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International Cooperation for Development

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  • Aid, Growth, and Development 1

    Page 1 of 37

    PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2015.All Rights Reserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of amonograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: PontificiaUniversidad Catolica del Peru (PUCP); date: 13 May 2015

    UniversityPressScholarshipOnlineOxfordScholarshipOnline

    ForeignAidforDevelopment:Issues,Challenges,andtheNewAgendaGeorgeMavrotas

    Printpublicationdate:2010PrintISBN-13:9780199580934PublishedtoOxfordScholarshipOnline:May2010DOI:10.1093/acprof:oso/9780199580934.001.0001

    Aid,Growth,andDevelopment1FinnTarp

    DOI:10.1093/acprof:oso/9780199580934.003.0002

    AbstractandKeywords

    Foreignaidloomslargeinthepublicdiscourse;andinternationaldevelopmentassistanceremainssquarelyonmostpolicyagendasconcernedwithgrowth,poverty,andinequalityinAfricaandelsewhereinthedevelopingworld.ThepresentreviewtakesaretrospectivelookathowforeignaidhasevolvedsincetheSecondWorldWarinresponsetoadramaticallychangingglobalpoliticalandeconomiccontext.Ireviewtheaidprocessandassociatedtrendsinthevolumeanddistributionofaidandcategorizesomeofthekeygoals,principles,andinstitutionsoftheaidsystem.Theevidenceonwhetheraidhasbeeneffectiveinfurtheringeconomicgrowthanddevelopmentisdiscussedinsomedetail.Iaddperspectiveandidentifysomecriticalunresolvedissues.Ifinallyturntothecurrentdevelopmentdebateanddiscusssomekeyconcernsthatshouldbekeptinmindinformulatinganyagendaforaidinthefuture.

  • Aid, Growth, and Development 1

    Page 2 of 37

    PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2015.All Rights Reserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of amonograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: PontificiaUniversidad Catolica del Peru (PUCP); date: 13 May 2015

    Keywords:foreignaid,aidimpact

    2.1.IntroductionForeignaidanditseffectivenessinpromotinggrowthanddevelopmentindevelopingcountrieshasbeenanareaofintensecontroversyeversinceRosensteinRodan(1943)advocatedaidtoEasternandSouthEasternEurope.Earlyoptimismandconfidenceintheimpactofforeignaidhavebeentemperedwithtime.InthefirsteditionofhisLeadingIssuesinEconomicDevelopment,Meier(1964)dedicatedsomeeighteenpagestotheissueofforeignaid.Hestartedbyasking,Howmuchaid?Bythetimeofthesixthedition(Meier1995),thetreatmentofforeignaidhadbeencutinhalfandthequestionsraisedwere:Whyofficialassistance?andDoesaidwork?Inthe2000edition(MeierandRauch2000)foreignaidisnotlistedintheindex.

    Meanwhilethedebateabouttheusefulnessanddesignofforeignaidhascontinuedunabated.Someinsistaidisawasteofresourcesandevenharmfultoaidreceivingcountries(Dichter2005).TheypointinparticulartoAfricaandscoresoffailedprojectsandswiftlyconcludethataidhasbeenanoutrightdisaster.Othersaredisappointedandsceptical,aprominentexamplebeingEasterly(2001,2003,2008),whohighlightsaid'sinabilitytobuygrowth.(p.21) Birdsall,Rodrik,andSubramanian(2005)viewthepotentialimpactofaidasseriouslycircumscribed,butremainlargelysupportive.Acomplementaryapproachinthemiddlegroundisthataidhasworkedinthepastinfurtheringgrowthanddevelopment,butaidisnotequallyeffectiveeverywhereandmuchremainstobelearntabouthowaidimpactsintheoryandpractice(seeTarp2000).Giventhis,thefocusshouldbebothonwaysandmeanstoimprovetheeffectivenessofforeignaiddisbursementsandonincreasingthetotalflowofresources.Afinalapproachistoemphasizethatadoublingofworldwideaidflowsisourgeneration'schallenge,amoralobligationofrichcountriesthatwillsendforthmightycurrentsofhopeandleadtotheendofpoverty(seeSachs2005).

    Theanalysisofaid'simpactongrowthbecamedominatedbymodernpaneldatamacroeconometricframeworksduringthesecondhalfofthe1990s.2Muchofthisdebatehasfocusedonwhethertheeffectivenessofaidisconditionalonpolicy,orwhetheraidcanbeexpectedtohaveaseparateandpositiveimpactindependentofpolicy.Thishasinvolvedamixtureofconcerns.Theyrangefromtechnicallydemandingeconometricmodellingissues,tofundamentallydifferentapproaches,tothedesignandimplementationofdevelopmentstrategyandpolicy.Overall,asubstantialbodyofliteraturehasemergedwhichsuggeststhataidworksinpromotinggrowthanddevelopment.3However,othersremainscepticalanddisagreementischaracteristicinassessmentsofthenecessaryandsufficientconditionsforaidtohaveapositivecontributiononthedevelopmentprocess.Thesamegoesinrelationto(i)differentviewsonwhatconstitutesgoodeconomicpolicyandhoweconomicpolicyanddeeperstructuralcharacteristicsinteractwiththeefficiencyofforeignaid;and(ii)theinstitutionalframeworkthroughwhichaidischannelled.

    WidespreadcallshavealsobeenmadeforabigpushoraMarshallPlanforAfrica.Sachs(2005)isapassionatespokesmanforthisapproach,whichissetoutintheUNMillenniumProjectReport(2005).AlsotheWorldEconomicForum(2005)andtheCommissionfor

  • Aid, Growth, and Development 1

    Page 3 of 37

    PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2015.All Rights Reserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of amonograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: PontificiaUniversidad Catolica del Peru (PUCP); date: 13 May 2015

    Africa(2005)reportscanbeconsulted.TheCommissionforAfricawaslaunchedbytheformerBritishPrimeMinisterTonyBlairinFebruary2004,withtheaimoftakingafreshlookatAfrica'spastandpresentandtheinternationalcommunity'sroleinitsdevelopmentpath.Theseinitiativeshaveattractedbothpraiseandcriticism,withSachsandEasterlyappearingtooccupyopposingendsofthespectrum.Viewingtheirassessmentsfromtheperspectiveofhistoricaldevelopmentsinforeignaidontheone(p.22) hand,andtheanalyticalliteratureonaideffectivenessontheother,isageneralaimofthischapter.

    Theremainderofthischapterisstructuredinsixparts.Insection2.2,Idefinewhatismeantbyforeignaid(ormorepreciselyOfficialDevelopmentAssistance(ODA))andprovideselecteddataonamountsandtrendsinvolved.Section2.3containsgeneralhistoricalbackground,whilesections2.4and2.5turntotheallocationandimpactofODA.Insection2.6,Idiscussthecurrentdebate,whilesection2.7concludes.

    2.2.Whatisforeignaid?Whatisforeignaid?ForaprecisedefinitionitisusefultoturntotheDevelopmentAssistanceCommittee(DAC)oftheOrganisationforEconomicCooperationandDevelopment(OECD).TheDACistheprincipalbodythroughwhichtheOECDdealswithissuesrelatedtocooperationwithdevelopingcountries.AccordingtotheDAC,thetermdevelopmentassistancereferstofinancialflowsthatqualifyasofficialdevelopmentassistance(ODA).ODAisdefinedasthesumofgrantsandloanstoaidrecipientsthatare(i)undertakenbytheofficialsectorofthedonorcountry;(ii)withpromotionofeconomicdevelopmentandwelfareinrecipientcountriesasthemainobjective;(iii)atconcessionalfinancialterms,wherethegrantelementisequaltoatleast25percent.4Inadditiontofinancialflows,technicalcooperationcostsareincludedinODA;but,grants,loans,andcreditsformilitarypurposesareexcluded,andtransferpaymentstoprivateindividualsareingeneralnotcounted.Thesamegoesfordonationsfromthepublic,commercialloans,andforeigndirectinvestment(FDI).

    OnlyaidtotraditionaldevelopingcountriescountedasODAuntil2005.Forthese(PartI)countriesthereisalongstandingUNtargetfrom1970thattheyshouldreceive0.7percentofdonors'grossnationalincome(GNI)asaid.AssistancetothemoreadvancedEasternEuropeanandmoreadvanceddeveloping(PartII)countrieswasrecordedseparatelybytheDACasofficialaid(OA),notincludedaspartofODA.DACcountrieshaveovertheyearsaccountedforsome95percentofallaidflows,butthedistinctionbetweenPartIandPartIIcountriesisnolongerused.5

    (p.23) In2006thetotalamountofforeignaiddisbursedbydonorstodevelopingcountriesandmultilateralorganizationsreachedUS$113.6billion;seeTable2.1,whichalsoshowsthattheaveragecitizeninthedonorcountriescontributedlessthanUS$112asODAin2006.ThiscanbecomparedtoafigureofaroundUS$64in196073andUS$99in1992.ItisequallyclearfromthetablethattheUNtargetof0.7percentofGNIiswithfewexceptionsveryfarfrombeingreached.Inthisperspective,itishardlysurprisingthatSachs(2005)andmanyothersfindpresentlevelsofaidunacceptablylow.Itcanalsobenotedthatdonorsin2006disbursed25.7percentoftotalforeignaidtomultilateralorganizations.Some84percentofthisflowwasdisbursedtodeveloping

  • Aid, Growth, and Development 1

    Page 4 of 37

    PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2015.All Rights Reserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of amonograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: PontificiaUniversidad Catolica del Peru (PUCP); date: 13 May 2015

    countries,withtheEuropeanUnionandtheInternationalMonetaryFund(IMF)andWorldBank(includingtheInternationalDevelopmentAssociation(IDA))asthemainsourcesfollowedbytheUNandtheRegionalDevelopmentBanks(Table2.2).

    Table2.3givesanoverviewofaidpercapitaandaidasapercentageofGNIinaidreceivingcountrieswithapopulationofmorethantwomillion.Itisawidespreadperceptionthatforeignaidamountstoaverysignificantresource,inbothabsoluteandrelativeterms,andaidisindeednotaninsignificantflowmeasuredrelativetodevelopingcountryproductionandincome.Atthesametime,aiddoesnotappearthatsizeablewhenmeasuredinrelationtoGNIorgovernmentbudgetsinthedonorcountriesorincomparisonwith,forexample,populationsizeofaidreceivingcountries.Figure2.1presentsratiosoftotalODAtoGNIandpopulationinaidreceivingcountries.ODApercapitaalmostdoubledinrealtermsfrom1970to1990;butperhapsthemostrevealingaspecthereisthedownturnfrom1991to1992afterthesteadyincreaseinthepreviousdecade.Itisalsoe