Foreign aid to developing countries: Is it essential ?

From the 16th century onwards, European powers acquired colonial empires throughout most of what we call the Third World today. Colonies were acquired for various reasons, but one major factor was economic gains. In the colonial model of the 19th-century European countries supplied capital to their colonies. They built roads, railways, and factories and invested in agriculture. So there were net capital flows to the Third World. However, these capital flows were more than outweighed by the repatriation of interest, profits, and dividends from the Third World. 

The former colonial powers have short-term bank loans, long-term bank loans, aids, and foreign direct investment. Let us now concentrate on foreign aid to developing countries. Foreign aid can take a variety of forms. They may be in the form of grants, loans, tied aid, bilateral and multilateral aid. Foreign aid has undoubtedly helped millions in the Third World achieve a better standard of living. The smallest and most resource-poor countries are the least likely to receive substantial and private capital flows among the least developed countries. These countries still need official aid flows to finance health, education, the environment, and infrastructure investments. Aid could be highly effective in promoting growth and reducing poverty. Since aid is a scarce resource, it needs to be used well, and using it well requires good decisions by governments and donors alike. 

Foreign Aid (FA) can be defined as the International transfer of Capital, Goods, or services from one country to another or International Organizations for the benefit of the recipient country or its population. FA involves the transfer of financial resources or commodities (food or military goods) or technical advice and training. The resources may be grants, or credits. The standard form of FA is the Official Development Assistance (ODA), where assistance is extended to support the recipient country’s development and fight poverty. The ODA in many countries represents a small portion of the assistance –is bilateral grants, though a portion of aid is in the form of loans. It may also be channeled through International Organizations or through Non-Government Organizations (NGOs).

The earliest form of foreign aid was military assistance to help warring parties that were in some way considered strategically important. Foreign aid’s use began in the 18th century when Purissia subsidized some of its allies. In the 19th and 20th centuries, European power provided a large amount of money to its colony’s economic output and improved infrastructure. The primary foreign aid could be traced back to the Marshall Plan (which the US provided to rebuild war-devastated Europe and set up the IMF, UN, and World Bank). These International Organizations 

Played a significant role in allocating foreign aid. The post-World War II programs of the UK, France, and other European colonial powers grew out of the assistance they provided to their colonies. On the other hand, US and Soviet Union allies during Cold War used foreign aid as a diplomatic tool to foster political alliance and strategic advantages; it was withheld to punish states that seemed too close to the other side. Besides Marshall plan the US in 1947 extended foreign aid to Greece and Turkey to resist the spread of communism and after the death of Joseph Stalin in 1953, Russian bloc donated huge fund to less develop countries and to close allies as a means of gaining influence as well as promoting economic development.

Foreign aid is at times provided to countries to enhance their own security. Economic assistance may be used to prevent friendly governments from falling under the influence of unfriendly ones or as payment for the right to establish military bases on foreign soil. Foreign aid is also gran ted to achieve a country’s diplomatic goals to gain diplomatic recognition or to gain support to enter into some International Organizations. Foreign aid is granted to promote a country’s export to use to purchase donor country’s products and to spread its language, culture and religion. 

Foreign aid is granted to alleviate the sufferings caused by natural disasters such as famine, flood, diseases, war (Present military Aid to Ukraine by US) and to promote economic development. At times it is provided to develop political institutions and to address some transnational problems such as to fight Covid-19 pandemic, or fight terrorism (IS) and crimes and fight destruction of environment. Since most of the foreign aid is designed to serve several purposes, it is difficult to identify which one is most important.

Many Non-European countries also implemented their own aid programmes after World War II. Japan provided extensive foreign aid programs that provided assistance primarily to Asian countries. Much of Japan’s aid came through procurement from Japanese companies, which helped economic development in Japan. By the late 20th century, Japan had become one of the World’s two leading donor countries. Much of its foreign aid had extended to Asian countries.

The majority of ODA comes from the Organization of Economic Cooperation and Development (OECD) countries. Nearly two dozen countries made up OECD’s Development Assistance Committee (DAC). The DAC included Western European countries, the US, Canada, Japan, Australia, New Zealand, and other providers are Brazil, China, Saudi Arabia, Iceland, Republic of Korea, India, Kuwait, Poland, Qatar, Taiwan, Turkey, and the UAE. In 1970, the international community through United Nations set up 0.7 per cent of a country’s Gross National Income (GNI) as the benchmark of foreign aid. However, Denmark, Luxemburg, the Netherland, Norway, and Sweden reached the benchmark whereas the US and Japan have fallen short of the UN’s benchmark.

After the end of the Cold War, the US extended aid to peacekeeping in the Balkans, Northern Ireland, and some countries of Africa. US aid has been granted to a smooth transition to democracy and capitalism in the former communist bloc of the Soviet Union. Foreign aid promotes economic development in Asia and Latin America during the second half of the 20th century. Support was extended to Africa to fight AIDS/HIV in Sub-Saharan countries. Sometimes foreign aid has been given to poor countries to fund or monitor the election to poor countries, to facilitate judiciary reforms and activities of Human Rights Organizations and labour groups. Since1990s IMF has made aid conditional on market-oriented economic reforms by lowering trade barriers and going for privatization. In the last part of the 20th century, private capital flows and remittances from migrant workers became the two most significant sources of aid from wealthy countries to poor nations, surpassing the amount of ODA provided by these countries. These forms of aid have been used to pursue a trade and economic liberalization policies and access into larger markets (Brazil, China and India). By the first quarter of the 21st century, China has emerged as a big provider of aid. China offers infrastructural loans to many countries in East and South Asia, Africa, and Latin America as part of its massive Belt and Road Initiative.

But in the long run severe criticisms have been leveled at both the donors and the recipient countries of foreign aid. Some groups in recipient countries have viewed foreign aid suspiciously as nothing more than a tool of influence of the donor countries. Critics of the IMF allege that the required Structural Adjustment Programs are politically tricky and too stringent. The debt incurred through IMF loans helped create poverty, as the capital that could have been invested instead was channeled into debt repayment. (Sri Lanka’s current crisis is an example). The World Bank, which critics claimed in the 1970s and 1980s was insensitive to local needs and often approved projects that did more harm than good, altered many of its policies. Generally, the opponents of the way that foreign aid programs have been operated charged that foreign aid has been dominated by corporate interest , has created an unreasonable burden on developing economies e.g. Sri Lanka and has forced countries to avoid using strategies that might protect their economies from the open market.

Many critics of US aid illustrate the continued importance of political consideration over-development ones. Regardless of the commitment to democracy and human rights, US has been extending help to fight terrorism following 9/11 in 2001. Some critics view foreign aid is to be ineffective as well as wasteful. Public opinion in the US believes that US is spending colossal amount of money (to say around 20 per cent of their budget, but in reality, it has been less than 1 per cent). Most recipients of foreign aid do not deserve it nor do they use it wisely. Such criticism is often made because of the disappointing result of foreign aid use, when many countries are in poverty, corruption and at times Civil War despite the disbursement of foreign aid. Efforts have been on to rebuild Iraq and Afghanistan, to curtail drug production and trafficking and battle HIV/AIDS, ODA is to increase in the 21st century. At times it is concluded that foreign aid retards and distorts the process of economic development of the recipient country and results in dependence and exploitation. It also replaces domestic savings and flows of trade. It seems clear that most countries are economically dependent on rich nations. Several donor countries concentrate so much on the government and other major agencies based in these developing countries that they fail to address the real needs of the people. This means that most aid does not actually go to the poorest, instead massive and grand strategies fail to help the vulnerable and the money/grants find its way to the powerful politicians who use it to benefit their interests. At times conditions are tagged to aid that recipient countries must use overpriced goods and services from donor countries. In return, the aid given fails to sustain the needs of the developing countries; rather it finds its way back to the donor countries in one or the other. Many aid givers dictate projects that they would like to support even if the projects are not priority projects. Judging from the number of positives and negatives effects on foreign aid, the negatives seem to outweigh the positives. Even then to many of the aid seeking countries, foreign aid is a forward step to development.  

The writer is former Director General, EPB and Adjunct Associate Professor at ULAB, Primeasia, South East and BGMEA University of Fashion & Technology. He can be contacted at hassan.youngconsultants@gmail.com