he foundations of foreign aid have been numerous. In addition to political ideology, foreign policy, commercial interests and national security, there are elements of altruism and a desire to reduce global poverty.
The world of foreign aid is complex and includes Official Development Assistance (concessional flows with a grant element of at least 25 percent) and development, humanitarian and emergency aid provided by non-governmental organisations, civil society organisations, bilateral donors and multilateral agencies.
Even among the most ardent supporters of foreign aid, there is a recurring desire to ensure that disbursed funds are used efficiently and effectively to meet project and programme goals. Thus, we have witnessed, in recent years, a growing interest among aid agencies and consultants to monitor and evaluate what is often termed as “aid effectiveness”.
The arguments in favour of aid typically emphasise the positive and significant impact that it has on growth — even though the magnitude of such an effect may be low. Some argue that aid finances crucial public investments required for infrastructure and physical and human capital, and improves fiscal discipline (e.g. tax collection and reform). Still others claim that sustained donor-recipient dialogue with flexible conditionality may increase aid effectiveness.
The empirical literature, however, does not offer a clear theoretical model on how aid affects economic growth. And many influential quantitative studies do not find an independent effect of foreign aid on economic growth. Thus, those who argue the case against aid typically point to the large number of African countries that have experienced little economic growth despite being major recipients of aid for decades.
They highlight several explanations for this lack of success: large areas with poor infrastructure networks and over-dependence on primary commodity exports; poor governance and week political commitment for market reforms; and inadequate resources for financial investment. With such factors in mind, some conclude that it is not possible to test the “absolute effectiveness” of aid but rather the “marginal effectiveness”.
Economist Damisa Moyo has argued that aid is inherently less effective than trade in promoting growth, and that important conditionalities (e.g. respect for human rights) put in place by donors are often overlooked by donors themselves. Since most aid is earmarked for governments, Moyo and others claim it encourages a large and ineffective public sector, which consequently thwarts private sector development.
Aid is also claimed to discourage recipient governments from imposing fiscal and budgetary discipline. Government spending thus often exceeds domestic revenue, and the availability of aid encourages corruption, supports governments with “bad” policies and discourages accountability.