Lecture 7: Does Aid Do More Harm Than Good?

Question 1

Definition: Aid

Answer 1

The aid we talk about is usually Overseas Development Assistance (ODA): Government aid that promotes and specifically targets the economic development and welfare of developing countries… And is concessional

Question 2

4 types of concessional aid

Answer 2

1. Grants (free money)
2. Loans with below-market interest rates
3. Debt relief
4. Direct supply of goods and services

Question 3

Where is increasingly involved in aid-giving?

Answer 3

China as well as new middle-class economies like Russia, South-East Asian and African countries

Question 4

Private investment is…

Answer 4

More volatile than ODA, remittances and private philanthropic flows

Question 5

Is ODA bilateral or multilateral?

Answer 5

Can be both

Question 6

How much aid is the world giving?

Answer 6

0.3% of income for all developed countries -> a lot less than in the 1970s

Question 7

Which continent is the major recipient of aid?

Answer 7

Africa

Question 8

4 things aid resources can be used to

Answer 8

1. Provide food
2. Build specific infrastructure
3. Support rural development programs
4. Budget support (no specific project)

Question 9

All aid involves

Answer 9

Conditionalities on what the money should be used on, reporting, monitoring and evaluation, sometimes good governance and democracy

Question 10

The two logics of aid

Answer 10

1. Aid as financing development (breaking the poverty trap with a big push, helping where private markets cannot finance risky investments)
2. Aid as a lever for governance reform (a way of ‘buying’ better governance through conditionalities)

= modernization theory -> getting them to look like modern countries through aid

Question 11

Aid’s impact on public health, economic growth, good governance, and democracy

Answer 11

1. Public health investments from aid are really effective, saving millions of lives
2. Most evidence shows no effect on economic growth because it boosts consumption, not investment (money is spent immediately)
3. Hard to measure effect on good governance, but some evidence that aid worsens governance, and some that it has 0 effect
4. Aid incentivizes ongoing democratization (esp. 1990s Africa after end of cold war), but does not stop democratic backsliding (India, Nicaragua), and can prop-up dictators (Cameroon, Chad) as richer governments tend to survive

Question 12

Mention the 5 political effects of aid

Answer 12

1. Coordination problems
2. Dependency
3. Corruption
4. Reducing local political ownership and accountability
5. Bypassing the state to NGOs

Question 13

The political effects of aid: Coordination problems (2 points)

Answer 13

Too many donors and too many projects, each requiring separate project management, reporting and accountability structures -> hard to coordinate

Donors hire the smartest people in your country, making them work on donor-led projects instead of state-led development projects

Question 14

The political effects of aid: Dependency (5 points)

Answer 14

1. Aid creates paternalism/neo-colonialism where developing countries become dependent on Western ideas/exports
2. Aid can become another resource curse as there is less need to collect domestic taxation
3. Food aid discourages domestic agriculture
4. Vicious circle: less development leads to a need for more aid
5. Aid causes political instability and violence through competition for food aid, diversion to security forces

Question 15

The political effects of aid: corruption (4 points)

Answer 15

1. Aid creates large flows of rent, propping-up corrupt regimes
2. Rent-seeking will lead politicians to focus on ‘accessing’ governments
3. 5.7% of aid to diverted to tax havens
4. Development industry is judged by how much they give, not its impact

Question 16

If it’s so obvious that aid is vulnerable to blatant manipulation, give 5 reasons why donors continue to donate aid

Answer 16

1. Political pressure in donor countries to donate
2. Direct corruption from Western countries
3. The development industry is set up with the sole purpose of giving out money and are judged on how much they give
4. Geopolitical interests and making friends with government
5. 92.5% of aid is still going to the right government

Question 17

The political effects of aid: reducing local political ownership and accountability (4 points)

Answer 17

1. The local government becomes accountable to donors, not citizens
2. Prevents organic local democratic debate to determine own development policies
3. Prevents crises that force political change (e.g. Zambia’s copper crisis cushioned by aid)
4. Donors are overly-concerned with corruption, making too many layers of management and accountability

Question 18

The political effects of aid: Bypassing the state to NGOs (5 points)

Answer 18

1. Aid distracts from improving the state
2. Another form of neoliberalism where skilled personnel leave the state to work in NGO
3. Prevents politicians from being held accountable for failures
4. Only the state can solve national development problems
5. NGOs can become dependent, chasing grant opportunities, not citizens

Question 19

4 dilemmas of giving aid

Answer 19

1. Where to send aid? (need vs. ability, crisis vs. progress)
2. What kind of aid (developing vs. incentivizing better governance)
3. What conditions to attach? (limiting corruption vs. maximizing local ownership, maximizing donor’s domestic support for aid vs. avoiding paternalism)
4. Which organizations receive aid? (building state capacity vs immediate impact of NGOs)

Question 20

4 reasons to give aid to other countries

Answer 20

1. Altruism
2. Preventing spillovers of poverty, refugees, pollution, terrorism
3. Geopolitics (giving aid to trading partners, ex-colonies, SC members)
4. Domestic politics (giving aid to ‘deserving’ countries, demand for no corruption)