Foreign Aid: The Double-Edged Sword

The coronavirus pandemic, dubbed the ‘Inequality Virus’, will push a further 150 million people globally into poverty by the end of 2021. The pandemic’s negative repercussions have been worst felt in low-income countries (LICs), where they have been described as ‘a serious setback to development progress’. Foreign aid has been at the forefront of supporting developing countries for many years, reaching ‘an all-time high of $161.2 billion in 2020’. Many regard it as one of the best mediums to stimulate growth in developing countries and believe it does little harm. Is this really the case?

Aid can take many forms such as bilateral, project, and voluntary. These in theory, can all support LICs during times of need. For instance, aid can help rebuild an economy after a disaster, as seen in the $10bn of aid pledged by various nations in response to the 2010 Haiti earthquake. By solving the issues at the root cause of growth prevention, such as the availability of good quality healthcare, aid has the potential to lift a country out of poverty through economic growth and increase the standards of living of its citizens. It can prepare a healthy and educated future generation of the workforce that can propel a country into economic independence. However, in reality, this is not the case as the issues that can arise from aid’s implementation pose it as a detrimental method of advancing low-income countries.

Financial aid can be given as a loan (debt) as well as in the form of a gift, with the former being far more common than people perceive. According to the OECD, in 2018, the USA’s tied aid represented 39.8% of the total bilateral aid that they provided. The debt between donor high income countries (HIC) and LICs creates a climate of economic subservience, especially in tied aid situations. Tied aid is a foreign aid loan that must be spent in the donor country. Through such aid, scenarios are created whereby debtors are forced to abide by the creditor’s parameters. This prevents developing countries from taking total responsibility for where the aid is spent which puts the power of decision making in the developed country’s hands. With this lack of power, aid recipients are unable to invest in their own economies, which in turn hinders development. In addition to these problems, the ability to service this debt becomes challenging, especially in the common case that the LIC does not have large cash reserves.  This creates a spiral where more debt will be sought as a method of repayment, leading to deeper levels of subservience, increased lack of control for LICs over their own economies, and more damaging, longer-lasting economic effects.

Aid is based on the fundamental principle that it works to reduce poverty. However, poor governance undermines its ability to do this effectively. Sending increasing amounts of aid to LICs fails to assist economies and is instead known to corrupt governments of these countries. For every $1 the government allocated to education, Ugandan schools only received 20 cents: funds are side-tracked from their original intention due to corruption and are instead used for personal or political gain. This siphoning of money not only results in aid going to waste but also, through the creation of a dishonest political system, damages a nation’s economic growth prospects. The government could have used the money allocated to them to benefit their economy in the long run by, for example, increasing the productivity of the workforce or improving the availability of education. Instead, the actions of unprincipled governments make domestic and foreign investment unattractive, both of which are crucial to productivity growth. Since ‘economic growth is the most powerful instrument for improving the quality of life in developing countries’, this lack of investment caused by corruption jeopardises the future standards of living of people in LICs. 

Dependency culture can arise from aid, particularly when it is used as a long-term strategy and is ingrained in society so much so that it becomes the norm. Food aid is an example that can cause a dependency culture. Increasing dependency on this aid results in a larger supply of food into the country. This rise in supply causes prices to drop and disincentivises local farmers to produce. In the long run, the domestic agricultural industry may stagnate meaning that when aid is withdrawn, food security will be dependent upon imports. Farmers will not have the funds necessary to innovate and therefore cannot stay competitive. Therefore, it is crucial that the recipient countries have favourable terms of aid so that dependency cultures can be avoided at all costs. For example Botswana, an aid graduate, often rejects aid that does not promote their principal goals of rural development and self-sufficiency.

Foreign aid is extremely complicated and its many arising issues undermine aid’s efficacy in uplifting economies of LICs. Developing countries are mainly involved in primary and secondary sectors – agriculture, forestry and fishing contributed to 14% of GDP in Sub-Saharan Africa, compared with a mere 0.86% in North America. Rather than allowing reliance on aid as a method to sustain standards of living, we must encourage capital, labour skills, and innovation to move into new sectors. Stand-alone projects do not tackle the structural changes necessary for development. Large-scale, diverse projects are required, to allow for higher and more sustainable economic growth in LICs. The aid must be in the control of those who receive it, not those who give it. However, at present, corruption impedes the ability of economies to progress. At the centre of aid’s success must lie a development-minded, selfless and well-managed government  – ‘if the rules make such a difference, then it becomes very important who gets to make them’ (Banerjee and Duflo).

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