foreign aid Flashcards
Foreign Aid in Theory
o Foreign aid is often cited as a means of fostering growth in poor countries
o From a theoretical viewpoint –aid could ‘plug the gap’ in the rate of domestic savings needed for vital investment
o Remember the Solow-Swan growth model…
o However - the motives and effects of foreign aid flows in practice are highly controversial
Types of Aid: Broad Classification
o Humanitarian aid: Assistance designed to save lives, alleviate suffering and maintain and protect human dignity during and in the aftermath of emergencies (OECD 2000)
o Non-humanitarian aid: Development aid, which seeks to address the underlying socioeconomic factors which may have led to a crisis or emergency
Types of Aid: How it is administered
Paying entity
▪ Bilateral (government → government)
▪ Multilateral (government → multilateral organisation → government)
▪ NGO aid (non-governmental organisations)
Method of delivery
▪ Project aid (infrastructure, public goods etc)
▪ Debt relief
▪ Cash transfers or in-kind, e.g., food aid
Official Development Assistance (ODA)
o Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent
o ODA is reported for OECD countries by the OECD Development Assistance Committee (DAC)
Caveats of ODA
o Not all countries are included – China’s aid, in particular, is not included in DAC reporting
o Only aid flows that fulfil characteristics defined by the OECD enter the DAC statistics
Donors: Who Spends How Much?
o In 1970, the UN set a target of all member countries spending 0.7% of GNI on ODA
o Note that - most countries - including the UK - are still a long way from this target
o Only Luxembourg, Sweden, Norway, and Germany were spending at least 0.7% of GNI on ODA in 2022
o While the United States is the largest donor of ODA, the US share of GNI is only 0.23
Recipients: Who receives how much?
o Among the countries who receive the highest amounts of ODA per capita are:
▪ Syria
▪ Afghanistan
▪ Jordan
▪ South Sudan
▪ Georgia
▪ Somalia
o Some of these countries are very poor, but not all..?
o Some countries are heavily reliant on ODA - Especially in Africa
o In Somalia and the Central African Republic (CAR) this equates to more than 100% of government spending
Determinants of Aid Flows
o Foreign policy concerns and the promotion of trade - The provision of aid leads to the establishment of commitment, enabling the donor to realize certain foreign policy utilities(McKinlay & Little, 1977, 1978)
o Political and ideological similarities – For example, a sudden increase in US foreign aid spending in Palestine around the 2006 Palestinian elections (Faye & Niehaus, 2012)
o Economic interests such as access to raw materials – American, Japanese, French and Swedish aid is influenced by economic and trade concerns (Schraeder et al., 1998)
o Colonial ties – Countries with Colonial past and political alliances with donors are more likely to receive foreign aid (Alesina & Dollar, 2000)
o Economic needs – Yes, but only 1.69% to 5.25% of total aid is directed to the poorest countries
Aid Conditionalities
o Aid often comes with expectations of how it should be spent – Although recipients sometimes do not always follow the expectations imposed by donors, or donors do not enforce them
o As a result, aid is often tied to certain requirements – including conditionality and selectivity, and ex-post evaluation
Conditionality and selectivity - definition and potential drawbacks
To receive aid a country has to fulfil certain criteria- e.g., macroeconomic stability, minimal institutional quality, no interventions in markets
Some potential drawbacks:
▪ Limited autonomy of recipients, limited policy discretion
▪ The poorest countries may be excluded
Ex-post evaluation - definition and potential drawbacks
Should be an important process, but rarely happen in practice… Why?
▪ Evaluation may be costly
▪ Outcomes may be difficult to measure
▪ Lack of will on the part of donors – principal-agent problem
The Principle-Agent Problem with Aid
o Aid is collected and distributed by governments, charities, or NGOs acting as intermediaries between individual donors and recipients – an example of a principle-agent problem
o The initial donors – taxpayers, charity donors, philanthropists – have no contact with the recipients of their donations and vice-versa
Is Aid Effective at Promoting Growth? - Aid can promote growth and development
o Dollar & Burnside (2000) - Aid can promote growth and development
▪ They find that aid is effective in countries with good policy environments, suggesting that aid effectiveness depends on the quality of recipient country institutions
▪ They use data on 56 countries between 1970 and 1993
Is Aid Effective at Promoting Growth? - Aid has no effect on growth
o Easterly et al. (2004) - Aid has no effect on growth
▪ They critique Burnside and Dollar’s findings, arguing that their results are sensitive to data and methodological choices
▪ They extend the number of countries to 62 and the time period considered to 1997
▪ They also use an alternative definition of aid to include ‘Concessional’ (low interest) loans, rather than just grants
o By extending the number of countries, the time period, and by using an alternative definition of aid - Easterly et al. were able to overturn Burnside and Dollar’s results
Why Are the Results between relationship aid and economic growth is so Unclear?
Some likely reasons would include:
o The time frame – aid intended to benefit growth through some channels may take a generation to yield payoffs (e.g., ais for early childhood health)
o Aggregation - the term ‘aid’ is a black box, and country-level analysis does not disaggregate between a multitude of projects
o Heterogeneity in donors and recipients – the same type and amount of aid can have very different effects depending on the circumstances
