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date: 17 February 2018

Foreign Aid

Summary and Keywords

As a policy tool, aid has not been confined to the roles that foreign and economic policy theorists have prescribed for it. Foreign aid attracts controversy because it structures how global poverty will be addressed. Aid’s proponents believe that it can eradicate absolute poverty and close the income gap between rich and poor countries, but its critics believe it holds out only false hope and obscures the real nature of the problem. The unrequited transfer of wealth from a weak nation to a stronger one is an ancient tradition, but the notion that it would be powerful nations transferring wealth to advance the economic development of weaker ones was virtually unheard of until the post-World War II era, particularly during the highly polarized Cold War climate. During this time, aid was used as a means of competition between the United States and the Soviet Union for influence over Third World countries. Aid also became a tool for opening up the markets of the developing world and integrating them into the global economy. The fact that foreign aid has come to mean development assistance since has raised a series of questions debated in the scholarly literature. Moreover, it is universally acknowledged that donors use aid to achieve objectives other than development and poverty reduction.

Keywords: foreign aid, global poverty, development assistance, economic development, Cold War, developing nations, poverty reduction, impoverished nations

Introduction

Foreign aid involves a negotiated transfer of free or heavily discounted economic resources by a donor government to a recipient government, either directly or via an international organization, for the purpose of assisting the recipient in improving its economic and social welfare. However, there is not much that is straightforward about aid with respect to its motivations, effectiveness, and future prospects.

This essay is divided into four sections. The first deals with the origins and evolution of foreign aid. The next section examines foreign aid in its role as development assistance. The third section deals with foreign aid’s uses by donors to pursue interests and promote norms, and the fourth outlines contending views on aid. The essay ends by pointing to promising areas for further research.

Foreign Aid from the End of World War II to the Present

The Marshall Plan and Point IV

The unrequited transfer of wealth from a weak nation to a stronger one is an ancient tradition, but the notion that it would be powerful nations transferring wealth to advance the economic development of weaker ones was virtually unheard of until the Marshall Plan for post–World War II European economic recovery (Liska 1960). The unique aspect of the Marshall Plan was the voluntary, unrequited, and systematic transfer of economic resources by the US to its Western European allies in order to reconstruct their shattered economies. It was successful in restarting their economies, but De Long and Eichengreen suggest that the reason for this success was not so much the amount of aid as implanting a policy framework favorable to growth (De Long and Eichengreen 1993).

The genesis of aid to less developed countries was President Harry S. Truman’s vision of containment. In a speech made in 1951, he cited four key points in an overall strategy for “peace and freedom,” and the fourth was “a bold new program […] for the improvement and growth of underdeveloped areas” (Daniels 1951:10). At the time, Chester Bowles explained the reason for Point Four thus: “military power is not enough […] we are also faced with an idea, the idea of world communism” (Bowles 1951).

After Stalin’s death, the Soviet Union began giving foreign aid to the Third World in order to win friends and influence among the emerging nonaligned nations and, not unlike the US, it had economic security and humanitarian reasons as well. In the 1950s the Soviet Union began extending capital-intensive project assistance, beginning with Afghanistan but most notably in Egypt, where it helped build the Aswan Dam. One of the important consequences of Soviet aid was that the nonaligned countries now had choice in foreign aid relations. The US had to compete with the Soviets in foreign aid giving, and this made the quantity, quality, and symbolic meaning of aid an important consideration for the first time (Goldman 1967).

In this new setting aid no longer worked well as a form of patronage, and it turned into a way of providing hope for development to the new countries of the Third World, of which 16 gained independence in 1960 alone. At the same time, Walt Rostow, who became a national security adviser in the Kennedy and Johnson Administrations, argued in a journal article entitled “The Stages of Economic Growth” that recent economic growth theory (the Harrod-Domar model) showed that the key to growth is dynamic capital formation (Rostow 1959). This seemed to provide a basis for policy and a path to success for foreign aid in a new role as development assistance (Butterfield 2004). Meanwhile, the Soviet Union and the People’s Republic of China both developed significant aid programs that continued through the 1960s (Lancaster 2006:31–32).

The Construction of the Western Aid System

In his inaugural address, President John F. Kennedy pledged a more cosmopolitan style of leadership, and on taking office responded to Soviet aid competition for influence in the Third World with major aid initiatives at three levels – the global, the Western alliance, and the bilateral – that still shape how foreign aid is done today. The reasons given to Congress for bolstering multilateral aid were that multilaterals had advantages over bilateral assistance in a polarized Cold War climate. They can be neutral in conflict situations, recipients can avoid giving the appearance of taking sides when seeking aid, there is no suspicion regarding the motive behind multilateral assistance, it is insulated from political pressures, it can harness the financial and technical resources of many countries, and it can organize work across national borders. The US also had an advantage in multilateralism because the Soviets refused to join the World Bank and IMF (Feis 1964:214–35). One study of IMF governance at the time noted with satisfaction: “The IMF enjoys the advantage of not having any executive directors who are fundamentally opposed to traditional monetary arrangements and policies” (Hexner 1964; also Krasner 1968).

The US took the initiative by sponsoring the creation of the International Development Agency, today by far the largest and most influential global multilateral aid institution, which is the central pillar of the World Bank. It also sponsored the creation of a follow-on to the Organization for European Economic Cooperation that coordinated Marshall Aid spending in Europe, now renamed the Organisation for Economic Cooperation and Development (OECD). The Development Assistance Committee (DAC), which originally existed for a short time independently, was incorporated into the OECD and its role has been to set aid quality and quantity standards for the bilateral aid programs of its members (Organisation for Economic Cooperation and Development 1992). When the DAC first began, however, it was mainly important as a mechanism to get allies to start giving aid. At the national level, the Kennedy Administration sponsored the Foreign Assistance Act of 1961, which laid the framework of bilateral foreign aid, and created the Agency for International Development (AID), the main US agency in bilateral development assistance.

The UN General Assembly, where developing countries outnumbered the rich countries, took a significant turn in 1961 when it declared that the 1960s would be a Decade of Development and passed a resolution enjoining the rich countries to be giving 1 percent of GDP in assistance to the developing world by the end of the decade. To organize this effort among UN members, the first UN Conference on Trade and Development (UNCTAD) was held in 1964. At this meeting, the attending 77 developing countries of the global South formed the Group of 77 to advance a common development agenda vis-à-vis the North within UNCTAD. Today the G-77 has 130 members. Its Northern counterpart would be the OECD.

This change in the meaning and use of foreign aid troubled some. The fundamental norm in Cold War foreign policy was Hobbesian; that is, in anarchy the only duty is to protect oneself. In 1962 Morgenthau opined: “none has proven more baffling to both understanding and action than foreign aid.” He objected to development assistance because this “tends to look at foreign aid as a self-sufficient technical enterprise to be achieved with the instruments, and judged by the standards, of pure economics” (Morgenthau 1962). In his view, the economic development of the recipient was only one of six possible goals in foreign aid (the rest being political in nature). At Morgenthau’s suggestion, Liska wrote an entire book on this mistaken turn in US foreign aid policy (Liska 1960).

Their concerns may have been misplaced, however, because subsequent empirical studies of US aid allocation concur that the strongest influence in US aid policy was military-political considerations (Mckinlay and Little 1977; Lebovic 1988; Meernik and Poe 1996).

The G-77 at UNCTAD’s first ministerial meeting in 1967 pressed for “North–South global negotiations” on a broad agenda of ways the North could help the South to develop. ODA was actually only a small part of the plan that the G-77 was pushing, but attention focused on it because of the North’s aid decline from about one half of 1 percent of GDP at the beginning of the decade to only one third by its end. Anticipating a failure to achieve the Decade of Development goals, Robert S. McNamara, then President of the World Bank, asked former Canadian Prime Minister Lester B. Pearson to form a commission to review the previous 20 years of development assistance and recommend a plan of action going forward. In 1969, the Pearson Commission finished its report, “Partners in Development,” in which a strong case was made for collaboration and increased resource transfers to the South.

Thus, the 1960s were a critical turning point when foreign aid went from being an overt part of western Cold War containment and became Official Development Assistance (ODA), a term invented by the DAC to represent the political neutrality and exclusively developmental standards that foreign aid would have to meet to be considered primarily developmental (Browne 1990).

When the Second UN Development Decade was declared at the 1970 UN General Assembly, the goal for rich country official development assistance was 0.7 percent of GDP. This figure subsequently became the benchmark for measuring donor performance. (In 2008 the OECD countries recorded a net ODA commitment of 0.30 percent of GDP.)

The 1970s was a decade of economic turmoil that saw the end of the dollar–gold fixed exchange standard in 1971 and the oil shocks of 1974 and 1979. Bangladesh experienced a shocking famine in 1974 and it was a time of strident Third World resource nationalism and calls for global North–South negotiations to establish what the G-77 called the New International Economic Order (NIEO). However, the idea of a negotiated scheme of international economic relations would be a radical departure from liberal trade principles (Hirsch 1976). As it became clear that the Second Development Decade goals would not be met, McNamara created another commission to study development, this time headed by former German Chancellor Willy Brandt, to find ways to break the political impasse in North–South dialog.

The main Brandt Commission report, North–South: A Programme for Survival, was published in 1980 (Brandt 1980). It examined wealth inequality and development problems that could threaten human survival if left unchecked. It concluded that North–South negotiations were urgently needed, outlined an agenda for action, and called for a world summit to begin to address these issues. Twenty-two heads of state representing the global North and South attended a summit held in Cancun, Mexico in 1981 to discuss the Brandt Commission agenda. However, the recently elected President Ronald Reagan and British Prime Minister Margaret Thatcher rejected the notion that negotiated wealth transfers from rich to poor countries best assisted development. Instead, they saw the development of markets as the key to development in which the role of aid should be that of a market facilitator, and their supporters pointed out that successful development in East Asia was market led, with only a minor role for aid.

Foreign Aid and the Washington Consensus

In the new era under Reagan and Thatcher, aid began to function as a tool for opening up the markets of the developing world and integrating them into the global economy. This new free enterprise approach was based on the theory that free markets could be relied on to develop the global South through trade and foreign investment, and that government was inimical to growth because it distorted market incentives. This philosophy was summarized by Federal Reserve Chairman Alan Greenspan thus: “markets are an expression of the deepest truths about human nature and […], as a result, they will ultimately be correct” (Wade 2002:201). The policies of neoliberalism were the liberalization of trade, investment, and financial flows, with minimal government interference achieved through deregulation, privatization, and reduced government spending. These policies came to be called the Washington consensus because the US Treasury Department, the IMF, and the World Bank, all headquartered in Washington, DC, were united in promoting them (Williamson 2008).

The US and Britain used their power in the World Bank and the IMF to put these policies into practice. The main institutional and policy innovations were showcased in the World Bank and the IMF. After the Smithsonian Agreement, the IMF lost its role in maintaining the Bretton Woods fixed exchange rate system, but retained its role in short-term balance of payments emergency lending. However, it gained a new function when neoliberal orthodoxy took root after 1980. It began to require recipients to institute Washington consensus reforms in order to borrow (“conditionality”). The IMF also broadened its terms of reference to include new multiyear lending programs designed to reward those who agreed to institute reforms. This is how the IMF crossed from short-term crisis lending into development finance (Cohen 1982; Feinberg 1988). The IMF’s main activity became monitoring recipient country economic reform as it doled out multiyear conditional loans (Bird 2001:1996).

The Latin American debt crisis touched off by Mexico in 1982 offered the first big opportunity to test conditionality. The results were successful insofar as Latin America accepted conditionality as well as the need for further neoliberal reform (Haggard 1985). And the crisis forged a debt management regime in which private creditors and other official lenders would fall in line behind the IMF when a borrower had trouble meeting debt obligations (Lipson 1981). This meant that without an IMF agreement, a borrower in trouble would not have access to additional financing from any source and would have to rely on the IMF to work out a comprehensive deal with its creditors. This close working association with private and other official lenders may have turned the IMF into their agent, who then pushed conditionality into areas beyond traditional IMF concerns to serve the interests of its lending associates (Gould 2003).

In the World Bank, the main innovation was structural adjustment lending, which paralleled what was happening in the IMF. Whereas previously the World Bank had been chiefly concerned with project finance for hard infrastructure and industrial development, it now expanded into program lending with conditionality guided by Washington consensus principles. By the end of the 1980s, the Bank’s loans had an average of 56 conditions attached (Dreher 2004). This conditionality took the Bank into a policy area previously handled only by the IMF, even as the latter intruded into the World Bank’s area of development finance (Feinberg 1988; Pereira 1995; Einhorn 2001), and the two institutions presented a united front when negotiating with borrowers, because an IMF agreement was a precondition for a World Bank structural adjustment loan.

With respect to Latin America, which experienced a debt crisis for much of the 1980s, instead of being a net provider of credit, the net cash flow of the Bank toward Latin America in the 1988–92 period reached negative $6.0 billion and became part of what Pereira called a “debt power structure” headed by the US Treasury (Pereira 1995). In addition, AID added conditionality to its aid and took its cues from the World Bank in many countries. Thus, conditionality by the IMF and the World Bank changed the tenor of development assistance and put the task of development more in the hands of the private sector in the developing world.

With the collapse of the Soviet Union, aid (designated “official assistance” by the DAC) was put to a new use in helping the transition to capitalism in Eastern Europe and the former Soviet Union. It was guided by Washington consensus market orthodoxy, but, according to Wedel, applied in simplistic and stereotypical ways that may have worsened an already difficult situation. As can be the case in the developing world, Western aid officials and consultants came in with misplaced confidence to make plans according to how things ought to work in theory but, when applied, these did not fit the facts on the ground (Wedel 1999, 2001).

Poverty Alleviation and the Millennium Development Goals

The next turn in development assistance emerged at the end of the 1990s, when it became undeniably clear that the Washington consensus was achieving notable results only in a subset of developing countries able to attract foreign investors, but doing little or nothing for the impoverished nations that were unable to compete for rich country trade and investment. With the failure of trickle down growth to reach the poor, the pendulum began to swing back toward the direct remediation of poverty and attention to aid volume. However, it was also apparent that the approach of the 1960s and 1970s that stressed capital transfers to the Third World was a failure. The first sign of a new consensus among aid professionals was an OECD report entitled Shaping the 21st Century: The Contribution of Development Co-operation (1996), which called for a “development partnership” of donors and recipients to implement formally agreed programs that had target outcomes with respect to poverty alleviation. Aid policy would not stress the amount of wealth transferred as it had in the early days of development assistance, nor would it be adjustment linked as it had been in the 1980s, but rather would use a results oriented design for aid in which the roles of donors, recipients, NGOs, and the private sector would be negotiated.

Meanwhile, the prestige and credibility of the Washington consensus came under attack after the Asian financial crisis of 1997–8. During the crisis the IMF continued to urge the liberalization, structural reform, tight money supply, and budget austerity that exacerbated and prolonged the crisis, for which it came under attack from both conservative and liberal economists (Kapur 1998). In November of 1998, the US Congress established the International Financial Institution Advisory Commission (or the Meltzer Commission, named for its chair, Professor Allan Meltzer) to review the roles of the IMF and the World Bank in the wake of the 1994–5 Mexican peso crisis and the Asian financial crisis.

Further doubts were raised in 1999 at the inaugural meeting of the WTO in Seattle, which saw violent street protests and a walkout by the developing countries, objecting to a trade liberalization agenda that left out their main concerns. And in 2000 change reached the heart of Washington with the publication of the annual World Development Report 2000, the flagship publication of the World Bank (World Bank 2000). The subtitle of the Report was Attacking Poverty. It highlighted the plight of the impoverished, called for reorienting aid toward poverty alleviation, and advocated such ideas as land reform, pro-poor aid spending, and intervention to maintain financial stability – which are not the same thing as prioritizing market-led economic growth.

Table 1 The Millennium Development Goals

Goal 1 Eradicate extreme poverty and hunger.

Goal 2 Achieve universal primary education.

Goal 3 Promote gender equality and empower women.

Goal 4 Reduce child mortality.

Goal 5 Improve maternal health.

Goal 6 Combat HIV/AIDS, malaria, and other diseases.

Goal 7 Ensure environmental sustainability.

Goal 8 Develop a global partnership for development. In addition, new donor coordination practices emerged centered on country-specific Poverty Reduction Strategy Papers (PSRP), designed to advance the MDGs.

The Chief Economist of the World Bank at that time, Joseph Stiglitz, openly criticized the IMF after the Asian financial crisis and, consequently, was forced to resign, although he did not depart the Bank before appointing Ravi Kanbur to write the World Development Report and publishing a scathing denunciation of the IMF in The New Republic (Stiglitz 2000). Then, under US Treasury Department pressure to revise the World Development Report, Kanbur resigned (Wade 2002). The whole episode raised further doubts about the Washington consensus.

The new aid agenda was carried forward by the UN General Assembly in 2000 when it issued the Millennium Declaration. This instituted a results oriented plan for development aid encapsulated in the Millennium Development Goals (MDGs), which had previously been endorsed by the DAC and the World Bank. The plan conceives of development as something more than income per capita, and uses eight general goals to define a more holistic vision (see Table 1). Under each general goal there are targets defined in measurable terms to be achieved by 2015. For example, under the first goal (to eradicate poverty), one specific target is to reduce by half the number of people living on under $1 per day by 2015. Donors pledged increased aid to finance the MDGs at the Marrakech Conference in 2004; at the Paris Conference in 2005, donors committed to aid coordination and consultation with recipients and other stakeholders in devising country aid programs (Riddell 2007).

A notable change in the approach to development assistance is the explicit acknowledgement of NGOs as a “partner in development.” In the 1990s nongovernmental organizations (NGOs) became important as providers of knowledge, goods, and action that link up with official actors and the public to facilitate communication and cooperation (Finnemore and Sikkink 1998), and as an integral part of the Millennium Development Goals program (Brinkerhoff 2007). They are dialog partners with states, international organizations, private foundations, and multinational corporations in the governance of aid. They advocate causes, marshal public attention, and provide skilled manpower in aid implementation (Martens et al. 2008).

Foreign Aid as Development Assistance

The fact that foreign aid has come to mean development assistance has raised a series of questions debated in the scholarly literature. With respect to the motivation for aiding the poor, Lumsdaine suggests that moral considerations are at the root of the Western aid enterprise (Lumsdaine 1993). Others point to vested interests in aid (Hellinger 1988:16–18). Ruttan asserts that these interests are predominant drivers in aid policy because they determine actual questions of quantity, aid terms, and aid allocation (Ruttan 1989; McGuire and Ruttan 1990).

Another question is why the effort put into aid remained well below official commitments. The OECD members’ pledge to devote 0.7 percent of GDP to aid is four decades old, but the average for OECD members in 2007 was only 0.28 percent (OECD 2009). One explanation is that donors are sincere but have competing domestic priorities (Wall 1973; Tisch and Wallace 1994). A related problem is “aid fatigue”; that is, the hope and enthusiasm aroused in the early years of aid giving has subsided (Asher 1970:99–102). This fatigue is perpetuated by the difficulty in demonstrating that aid is effective (Boone 1996). Moreover, the public suspects that governments waste aid (Hellinger 1988:5). Nevertheless, aid persists because the public can see enough small successes to justify the effort (Cassen and Associates 1994; Riddell 2007).

Aid Effectiveness

Several reasons have been advanced for the low impact of development assistance. Aid professionals point to a number of institutional and information failures. Donors and recipients are often bound by bureaucratic policies and procedures that can negatively affect the effectiveness of aid (Tendler 1975; Rondinelli 1987; Radelet 2003). Donors often do not coordinate among themselves, leading to aid redundancy and gaps, and many do not carry out postcompletion studies of aid projects and remain unaware of problems. And a donor’s aid apparatus may be ill organized for the task at hand. The US aid system has different agencies pursuing divergent goals in foreign aid (Lancaster and Van Dusen 2005; Atwood et al. 2008), and the schisms are even worse in Japan (Rix 1980; Arase 1995, 2005; Katada 2002). Critics suggest that decision making is done by outsiders who do not understand the local setting in which aid is to succeed (Hellinger 1988). In addition, there are political priorities (discussed in more detail later) that can make effective aid spending a secondary concern (Mckinlay and Little 1977). Martens uses agency theory to investigate these problems of multiple principals, broken information feedback loops, and the difficulty of measuring the success of institutional reform (Martens et al. 2008:11–28).

Corruption is another obvious hindrance (Boone 1996), as are inappropriate macroeconomic policies (Collier et al. 2002). Some point out that aid has not been properly integrated into a larger strategy of development assistance. It may be that aid must be applied in concert with other pro-development policy measures for it to be effective (Birdsall et al. 2005; Morrissey 2006). For example, the distribution of GSP trade preferences by the US and Japan is concentrated among the higher-income developing countries, indicating that aid results might be improved if trade preferences are realigned (Clark 1991). Also, if rich countries further lowered trade barriers that kept out developing country exports, the gain alone would exceed the aid being given by the West (McCawley 2006; Stiglitz and Charlton 2006). Technologies that are effective at dealing with problems the poor face on a daily basis could also leverage aid results; development can also be financed by labor remittances, which have great potential to increase (Collier et al. 2002).

A more radical explanation for low aid effectiveness is offered by de Mesquita and Smith, who model aid as an exchange of benefits between governments that benefit from the conversion of aid into private political resources. The degree of aid failure (private appropriation of aid) becomes inversely related to the transparency of political institutions (de Mesquita and Smith 2007, 2009). This model suggests why aid can be costly, ineffective, and vulnerable to corruption in more authoritarian recipients.

Making Aid More Effective

Development partnership is a new general approach that tries to coordinate all aid stakeholders in a country within the terms of reference of a general plan that has been negotiated between the recipient and the donors (Kanbur 1999). To ensure the effective use of aid, aid is made conditional on good governance (Harrigan 1995), and more use of NGOs can help monitor and implement aid at the local level. In practice, however, this partnership has not been as easy to carry out as envisioned (Maxwell and Riddell 1998; Riddell 2007).

It may also make sense to channel a greater proportion of aid through multilateral institutions. Milner finds that the public is more willing to entrust multilateral agencies like the World Bank with aid spending than their own government (Milner 2005). Keohane et al. make a similar point in arguing that the public in the EU allow the upward delegation of some national policy functions because multilateral EU organizations are more transparently managed and less beholden to special interest groups.

However, some critics argue that aid itself is the problem, although they may differ in the harshness of their judgment. Some contend that aid in principle cannot work (Bauer 1981), but others merely contend that the present aid model must be discarded and aid begun anew (Easterly 2002). One problem pointed out is that aid is analogous to the “natural resource curse,” where easy government revenue leads to slack government performance and low accountability (Sachs and Warner 2001), and so aid may actually worsen corruption and government failure (Karl 1997). It is also suggested that aid can undermine democracy in recipient countries (Bauer 1981, 2000; Easterly 1999; Erixon and Sally 2006; Smith 2008; de Mesquita and Smith 2009).

If aid itself is the problem, it might explain why sub-Saharan Africa, the region that has received the most aid per capita, has seen low government performance and no progress (Dambisa 2009). It is often pointed out that successful developers like Taiwan and South Korea were not significantly aid dependent.

However, this argument overlooks the chicken and egg problem. Instead of aid causing failure, it may be that failure attracts aid donors, and that success drives donors away. Goldsmith finds no evidence of a negative aid effect and suggests that conditions would have been worse without aid (Goldsmith 2001). Sachs argues that sub-Saharan Africa is a uniquely difficult development problem. Climate and geography do not favor development, and widespread tropical diseases have never been brought under control (Sachs 2005). Thus, more aid of better design is required.

Aid for Promoting Donor Interests and Norms

It is universally acknowledged that donors use aid to achieve objectives other than development and poverty reduction. An example of mixed motives is tied aid, which is a mix of trade and aid objectives. To boost exports, the donor requires the recipient to spend aid only on donor country goods, which lowers the effectiveness of aid but achieves a donor trade objective (Morrissey 1993). This may explain why aid has not been more successful as development assistance. It reflects the values and priorities of the donor at least as much as it is tailored to recipient need (Lancaster 2006). Because the other motives behind aid vary by donor and usually are not advertised, a good part of research in foreign aid goes into discovering a donor’s true motives.

Traditional Foreign Policy Aims

Knorr analyzes aid as a means of political influence. Although it is not a very potent tool in strategic matters, it may be useful when donor and recipient already share interests, or at least have no serious issues dividing them (Knorr 1975). For example, Japan gives an aid bonus to African states that support Japan’s bid for a permanent seat on the UN Security Council (Alesina and Dollar 2000).

To test the efficacy of aid used in this fashion, researchers have looked at how recipients vote in the UN. During the Cold War, Wittkopf found a significant correlation between US aid and the recipient’s voting (Wittkopf 1973). This makes sense if the US aided only clients and neutrals. Toward the end of the Cold War, Kegley and Hook found that the Reagan Administration’s threat to cut aid to countries that did not agree with the US did not significantly change voting patterns in the UN General Assembly (Kegley and Hook 1991). However, counting only votes that the US considered to be important, Wang found that aid distribution and UN voting did correlate (Wang 1999). However, the crucial factor may not have been aid itself, but other threats and blandishments that were used to win votes on crucial issues.

The contemporary case of Afghanistan from 2000 to 2007 illustrates how the geographic distribution of Western ODA changes quickly to meet geostrategic threats. Two years before 9/11, the US gave Afghanistan only $2.4 million in foreign aid. After the US invasion in 2002, ODA increased fifteenfold to $367.6 million, and ODA with other forms of assistance reached $3 billion in 2007. DAC increased aid to Afghanistan until it became the third largest recipient of bilateral aid in recent years. In addition, the World Bank organized the Afghanistan Reconstruction Trust Fund in 2002, which other multilateral lenders and UN specialized agencies joined. The World Bank alone has extended over $600 million in grants and loans since 9/11. Thus, Western ODA can respond quickly to strategic needs.

DAC Motivations

Schraeder et al. compared the aid of France, Japan, Sweden, and the US to sub-Saharan Africa in the 1980s. They found that humanitarian criteria did not best explain the pattern of aid allocation; instead, donor political and economic interests provided a better fit. Sweden was the least biased by economic self-interest and most clearly targeted the poorest countries, but whether or not the recipient government shared Sweden’s democratic socialist orientation influenced the amount of aid given (Schraeder et al. 1998).

Alesina and Dollar (2000) examined the influence of humanitarian, commercial, cultural, and political factors on aid allocation by DAC members. They found that, as a group, DAC aid is best explained by political considerations. In their words: “An inefficient, economically closed, mismanaged non-democratic former colony politically friendly to its former colonizer, receives more foreign aid than another country with similar level of poverty, a superior policy stance, but without a past as a colony.” They also found that countries that democratize get an aid bonus, but those that liberalize economic access do not. In addition, Alesina and Dollar found that individual donors weigh factors differently. Democracy, low income, and economic openness influence the amount of US aid (after excluding aid to Israel and Egypt), but these factors have no effect on French aid and only a small effect on German and Japanese aid.

A study by Van Belle et al. (2004) found that aid allocation in the US, the UK, Canada, France, and Japan responds to domestic media coverage, showing a domestic influence on aid allocation.

Individual Donors

There is significant variation among individual donors with respect to their priorities in aid. What follows is a brief indication of the nature of these differences. The US spent $67 per person in aid (0.17 percent of GDP) in 2004, and 50 percent went to least developed and low income countries (income under $2 per day). It allocated 7.2 percent of AID funds to counterterrorism, and 6.4 percent to regional stability operations in line with a new “fragile states” policy of giving development assistance to failing, failed, or recovering states (US Agency for International Development 2005).

France spent $136.60 per capita on aid (0.41 percent of GDP) in 2004, and 67 percent of its aid went to least developed and low income countries. It devotes a portion of its ODA to sustaining its cultural influence in former colonies, most notably through French language instruction and scholarships to students in France. Ten of its top 15 ODA recipients in 2007 were former French colonies.

Germany spent $91.30 per capita on aid (0.28 percent of GDP) in 2004, and 66 percent went to least developed and low income countries. It uses ODA to develop its persona as a “good citizen” in the world and devotes over half of its aid to the Middle East and Africa, while emphasizing good governance. It contributes about one fifth of its aid to the EU’s aid program, and gives significant aid to Eastern Europe and Israel.

The UK spent $131.40 per person in aid (0.36 percent of its GDP) in 2004, and 75 percent went to the least developed and low income countries. By statute the main purpose of aid must be poverty reduction, and it must be in line with the MDGs. Thirty-nine percent of the UK’s aid budget went to multilateral institutions. NGOs strongly participate in the aid system. For example, their pressure got the above mentioned aid policy law enacted by Parliament. However, Britain’s strategic partnership with the US has led it to begin conflict-related aid.

Japan retains a focus on Asia, where it has political ambitions and economic interests (10 of its top 15 recipients are in that region and China was at the top of the list in 2007). Per capita aid spending was $69.70 (0.19 percent of GDP) in 2004, and 59 percent of bilateral aid went to least developed and low income countries. The commercial character of Japan’s aid drew attention some years ago for its degree of economic self-interest (Ensign 1992; Potter 1996; Soderberg 1996; Hook and Zhang 1998). However, Japan also uses aid in lieu of military assets to support US strategic aims when requested (Brooks and Orr 1985; Yasutomo 1986; Orr 1990). According to Katada, Japan’s assistance in managing the Latin American debt crisis reflected this partnership with the US (Katada 2001). Japan also has been one of the largest contributors to multilateral banks and UN agencies, and in this respect is more public spirited than most other donors (Bobrow and Boyer 1996). This split in Japan’s aid corresponds to a division of aid policy between the Ministry of Economy, Trade, and Industry (METI) and the Ministry of Foreign Affairs (Katada 2002).

The Nordic countries use ODA to express social democratic values and the charity of Protestant Christianity. Aid is overwhelmingly targeted at the poorest countries, given exclusively as grants, and scores among the highest in ODA/GDP ratios (Sweden, Denmark, and Norway exceed the 0.7 percent of ODA/GDP target). For example, Sweden gave $302.10 per capita in aid, or 0.78 percent of GDP in 2004.

China has quickly emerged in recent years as a foreign aid donor. In 2007 it gave an estimated $25 billion in aid. However, only a small percentage of China’s aid would qualify as development assistance under DAC guidelines. China’s aid consists mainly of government investment and loans to finance resource development projects in Africa, Latin America, and Southeast Asia (Lum et al. 2009). Its aid policy ignores the recipient’s respect for democracy and human rights, so China has attracted Western criticism for aiding Sudan and undermining Western efforts to promote good governance in Africa.

Multilateral donors such as the World Bank and UN specialized agencies give slightly more aid to countries that are former Western colonies and are democratic, but corruption and personal integrity (human rights) do not have a significant impact (Neumayer 2003b).

Aid and Economic Interests

Bilateral donors often have commercial objectives in aid, most commonly pursued through tied aid. Another technique is associated financing, which gives an aid agency equity partnership with private investors in a project, as sometimes happens in large and risky resource development projects. Aid can also complement private sector interests by financing roads and water supplies to mines and agricultural estates, or industrial parks to host offshore assembly and production. Japan has provided the clearest example of economic interests in aid (Bobrow and Boyer 1996). One reason is that its aid program grew out of its war reparations program, which used strict aid, tying careful project selection to secure markets and resources (White 1964). The coordination of the state and private sector in aid was managed by putting aid under the shared jurisdiction of the Foreign Ministry, the Ministry of Finance, the Ministry of Trade and Industry, and the Economic Planning Agency (Rix 1980), and posting private sector employees inside Japanese aid agencies (Arase 1995).

Democracy, Human Rights, Gender Issues

Western donors regularly emphasize the need for recipients to respect democratic, human rights, and gender rights norms, but a recent study found that human rights played a negligible role among bilateral donors (Neumayer 2003a). Another study found that as a group, the EU, the UK, France, and Germany in the 1978–2003 period did not vary aid according to the human rights record of recipients (Carey 2007). This result is somewhat unexpected and Carey suggests that bureaucratic inertia may explain it. However, other studies have found that human rights does affect US aid allocation (Apodaca and Stohl 1999; Lai 2003), with increasing weight since the end of the Cold War (Demirel-Pegg and Moskowitz 2009).

A question of special interest to the US is whether aid can assist democratization. The US has taken a “targeted approach” in directly aiding pro-democracy groups in a target country (Meernik et al. 1998; Shattuck and Atwood 1998; Carothers 2004) using US AID and the National Endowment for Democracy. One study found “a significant, albeit modest, impact on democratic outcomes as measured by both Freedom House and Polity IV scores” (Finkel et al. 2007). In other words, aid may be effective in promoting democracy by empowering change agents at critical moments.

Western statements make good governance a main criterion in aid giving (Robinson 1998). The term refers to honest government, market-friendly policies, respect for human rights, democratic politics, and reduced budget priority for security forces. Donors believe that aid needs good governance to work. However, it has been difficult to detect its influence in aid allocation. Zanger (2000) found that the governance practices of recipients did not play a consistent or prominent role in the aid allocation of France, Germany, the UK, or the EU in the 1980–95 period. Instead, strategic and economic interests seem to have been predominant.

Aid cannot ignore the issue of gender, because women are poorer and have less opportunity to achieve their human capacities than do men. This disempowerment of women is at the crux of many development problems, but the problem is institutionalized and unlikely to change in itself. Women’s NGOs have been pushing governments to address the problems that women face using aid that encourages women to organize for mutual assistance and puts resources in their hands (Selvaggio et al. 2008), as in the case of micro-financing that women organize and administer to generate income and become an active participant in development (Yunus 2008).

Contending Assessments of Aid

Foreign aid attracts controversy because it structures how global poverty will be addressed. Aid’s proponents believe that it can eradicate absolute poverty and close the income gap between rich and poor countries, but its critics believe it holds out only false hope and obscures the real nature of the problem.

Liberal

Liberals tend to believe that poverty is the result of a market, institutional, or policy failure that can be rectified. Jeffrey Sachs argues that Africa’s developmental problems are the result of “poverty traps”; that is, obstacles (such as disease, the lack of finance, or lack of public goods) that can be removed with properly designed aid (Sachs 2005). The motivation behind the effort is moral because, in Rawlsian terms, justice requires conditions that give everyone an opportunity to succeed, and in this sense the poor have a right to development. However, there are trenchant liberal critics such as Easterly who want to take aid out of the hands of “planners” – those with comprehensive plans that purport to solve all problems – and put aid in the hands of “seekers” – pragmatists who work inductively toward answers (Easterly 2008).

Conservative

There is a conservative libertarian view that goes back to Hayek’s view that justice is not a matter of outcomes, but one of observing rules: “no conceivable rules for the conduct of individuals supplying each other with goods and services in a market economy would produce a distribution which could be meaningfully described as just or unjust” (Hayek 1978). The conservative realist critique of aid is summed up by Banfield: “Our political philosophy does not permit our government any right to do good for foreigners” (Banfield 1963:31). The economic conservative argument is that, if an entity is viable in the market, then it does not need aid. If it is not viable, then aid is unlikely to change the situation (Bauer 1981). Conservatives also suggest that aid creates incentives for corrupt and undemocratic government (Djankov et al. 2006). Effective aid would not involve resource transfers to the poor, but the improvement of market institutions, for example consider De Soto’s argument that poverty is the result not of insufficient capital, but of insufficiently developed property rights that prevent the mobilization of existing assets (De Soto 2003).

Radical Critiques

Postdevelopment theory questions the aid paradigm from different perspectives. A postmodern critique views the mainstream discourse on aid as a “colonization of reality” that makes it impossible even to imagine the failure of aid, though the evidence abounds. The imagined world of foreign aid authorizes the rich West to continue to intervene in the developing world to transform the poor into an image of itself, but in reality the West is exploiting and destroying those cultures it purports to help (Escobar 1994).

Foreign aid is also critiqued from an ecological perspective, because it allows the present model of globalization and development to continue to destroy the environment. The idea that localities will be saved by globalization is also problematic. Instead, it should be the unsustainable global system learning from localities that are living sustainably (Sachs 2000).

For those who believe that corporate capitalism is inherently exploitive, the notion that aid will end poverty and close the wealth gap is an illusion. Broad and Landi (1996) point out that no more than 10–15 developing countries are benefiting from the present system, without improving life for the poorest billion. They use World Bank data to show that from 1985 to 1992, the net negative cash flow from South to North on debt service alone totaled $280 billion, not to mention the South’s declining terms of trade and the environmental cost to the South that results from closer economic relations with the North. This transfer of financial, natural, and human resources from the poor to the rich is what foreign aid perpetuates.

Areas for Further Research

As a policy tool, aid has not been confined to the roles that foreign and economic policy theorists have prescribed for it. Politically, it can be coercive if used politically against an aid-dependent country when there are no alternative sources of finance, and can be effective as an inducement to start or maintain a dialog between rich and needy countries. And it can be useful as a symbol of hope, moral commitment, and the human community. As an economic instrument, it is a transfer of resources that can provide public goods and complement the roles of trade and investment in growth. Under the influence of commercial interests it can promote private profit making; because of the growing role of NGOs, today aid promotes humanitarianism, human and gender rights, and sustainable development.

It seems valid to suggest that aid has had only a small direct impact on macroeconomic growth in the developing world. Its greatest significance as a development tool seems to lie in the ability it gives donors to influence the norms and economic policies of recipients. The question is whether the advice given will actually work to benefit the developing world.

The ambition and scale of the MDGs has sparked a vigorous debate involving liberals, conservatives, postdevelopmentalists, and neo-Marxists over the wisdom and feasibility of this undertaking. The examination of the data to find the theory that best “fits” is likely to continue for some time.

The aid establishment agrees on the need for more spending, more comprehensive planning and coordination, and more policy dialog between all stakeholders. Counting not only states, but the international organizations, private foundations and philanthropists, NGOs, local community organizations, the military (who play a role in stabilization and postconflict assistance), and interests in manufacturing, financial services, and resource development with roles in aid, the overall regime is now sprawling and hard to capture with theories commonly used to understand foreign aid. The governance of the system, its operation, and who benefits provide ample opportunities for research.

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