Why may official aid programmes prove disappointing in their impact?

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Tony DarbyTony Darby

• In 2008 official aid or ODA (official development assistance) amounted to $119.8 billion, the largest amount ever recorded.

• These aid programmes date back to July 1944 at Bretton Woods in the US, when delegates from 44 countries agreed a far-reaching global system of financial and monetary control, which was the catalyst for the Marshall Plan.

• This was a US-financed project to reconstruct Europe after the 2nd World War, worth approximately $85 billion at current prices.

• The Marshall Plan had far-reaching goals, including fixing broken infrastructure and providing political stability.

• Also it meant the US could protect its manufacturing base by helping these huge consumer markets back to life.

• The Marshall Plan established the principle that aid could be given for short-term humanitarian needs and long-term development.

• The desire to alleviate poverty and address emergency needs is still the basis of UK aid today.

• By providing capital for greater investment in Europe the Plan was aimed at helping economies back towards expansion.

• The Gleneagles agreement in 2005 required the world’s 8 largest economies to double aid by 2010, whilst writing off the debts of the 43 poorest nations.

• In March 2010, Chancellor Alistair Darling, confirmed a UK overseas development budget of £9.1bn for 2010/11, amounting to 0.56% of Gross National Income, and that this would be increased to 0.7% by 2013.

• The current Chancellor, George Osborne, has committed to honour these planned increases.

• Aid can prove disappointing in its impact as the majority of aid has been bilateral,that is distributed by one country to another.

• This has meant that money has not been allocated in any systematic, rational or efficient way.

• For governments dealing with a humanitarian crisis in their country, this haphazard approach from donors is difficult to deal with and sometimes counterproductive.

• A year later it is clear that this has not been provided for many of Haiti’s citizens, and fewer than 30,000 people have moved back into permanent housing.

• For example, the 2010 earthquake in Haiti killed over 300,000 and made over 1.5 million homeless.

• The international community pledged $1.5 billion to be spent over the next 12 months on providing an “environment for safe and healthy living.”

• The vast majority of aid is not given to solve humanitarian crises.

• 95% of money goes towards helping poorer nations to develop.

• There are four basic means by which official aid may be distributed.

• Firstly, it may fund consulting work, say on education or transport.

• Around 75% of donor support in Africa is provided by such project aid.

• Secondly, it may go directly to a charity.

• Thirdly, it may be in the form of a direct financial transfer to another national government.

• Finally, it may be donated for specific projects as detailed by the donor country.

• Deciding between competing projects can be a real dilemma for donors.

• There is ample evidence of donors picking the wrong projects to fund.

• Often teams of expatriate experts will be needed to see how the money is spent, and it is estimated there are 100,000 technical experts in Africa alone.

• In 2003 India decided to only accept aid from its six largest donors.

• This gives the potential for a lack of coordination on projects, which can lead to the recipient country failing to gain from aid.

• Coping with all the separate requirements from different donors can be overwhelming for recipient countries.

• Aid in the form of financial transfers can give recipient countries more autonomy to decide how to help their citizens develop.

• The key problem here is the assumption that the recipient country has good, strong governance.

• If a country lacks the political will to develop, or finds that much of its ruling elite are corrupt, then it becomes impossible for aid to have an impact.

• It can also lead to charges of “tied aid”, with crude commercial and political goals being mapped out for recipient countries.

• A survey that tracked money released by the Ministry of Finance in Chad intended for rural health clinics, concluded that less than 1% of the cash reached the clinics.

• A way round this is to allocate funds according to levels of governance.

• However, this remains a very subjective judgement by the donor country.

• Tied aid could be through an explicit agreement to purchase goods and services from the donor country.

• Or, indirectly through subsidising export-credit schemes.

• Over half of ODA is tied according to the OECD, and 70% of US aid is tied.

• This suggests that business interests exert a strong influence over the amount and destinations of official aid, reducing its potential impact.

• The tying of aid is not costless to the recipient country.

• The OECD reports that this type of aid will often increase the cost of foodstuffs that countries will be tied into buying from the donor country.

• Often when a country is at the early stages of development, there are not enough skilled workers or firms strong enough to take advantage of the aid available.

• Using the law of diminishing returns, it is probable that additional amounts of aid will be used less and less efficiently.

• Eventually, the ‘absorption threshold’ will be reached, when providing more aid will be totally ineffective.

• When aid exceeds this threshold, one solution is often to switch money away from the sectors donors are funding to other capital projects, or more worryingly to other consumption priorities.

• This is known as the fungibility of aid – using the opportunity from aid funds to finance other non-developmental projects.

• Even if aid can be allocated successfully, it may create further economic side-effects.

• One potential problem is the ‘Dutch Disease’, which is when a country experiences an upward pressure on its exchange rate due to a large inflow of aid.

• This aid has to be converted from the donor’s domestic currency to that of the recipient.

• The resulting increase in demand and strengthening of the exchange rate can lead to export-led growth being curtailed, and ultimately unemployment.

• If aid leads to a loss of international competitiveness this can ultimately affect the level of economic growth of the recipient country.

• Another damaging effect that aid can have is to create a crowding-out effect upon inward foreign investment.

• This means that aid money displaces potential funds from private investors.

• For some economists this aid dependency is a key reason why development has been much slower in Africa compared to China and India.

• This crowding-out effect may be further exacerbated by the volatility in how aid is donated. Many nations find aid inflows fluctuate considerable from year to year.

• 2005 saw the biggest campaign for more aid the world has ever seen.

• It led to the EU and G8 committing to double their ODA commitment within a matter of years.

• How have the G8 countries done five years on from their 2005 pledges?

• Overall the OECD has estimated that there is a shortfall of $18 billion.

• However, the UK is on course to achieve its aim of 0.7% ODA/GNI by 2013.

• ODA has been successful in providing basic humanitarian needs in many world crises. But not all economists are convinced by increased spending on long-term ODA.

• The key worry is that this aid may have an adverse effect on economic growth.

• Dependency issues, as well as effects such as the Dutch Disease, and absorption questions all provide a potential limit on the impact of ODA.

• With such a rapid increase in international ODA budgets, there is also the worry of diminishing returns to aid.

• There are also potential conflicts of interest as expenditure priorities are skewed as recipient countries listen more closely to donor countries.

• Ultimately, the success of aid will depend upon the motives of both donor and recipient countries.

• The origins of modern day aid programmes can be dated back to the Marshall Plan after World War Two.

• Official aid programmes can be divided into hose having humanitarian aims (usually short term) and those that have development and reduction of poverty aids (normally long term).

• The G8 agreement at Gleneagles in 2005 led to a promise of a substantial increase in official aid but not all pledges were honoured.

• A significant amount of official aid goes to a limited number of countries. This can prove difficult to manage and distribute for the countries who receive large donations.

• Many donor countries prefer to donate to specific projects and also make their aid conditional. This can create further problems for recipient countries and reduce the effectiveness of aid.

• Why did the G8 decide that it wanted to donate a greater proportion of its resources to ODA in 2005? Has the G8 achieves these aims?

• How can countries ensure that they do not experience the Dutch Disease when receiving aid?

• How can donor countries ensure that their donations are not stolen by corrupt governments?

• To what extend do you think that development aid should be radically reduced so that countries become less dependent on it?