Explain why foreign aid is sometimes ineffective
The international aid doctrine has been one of the main economic components in the foreign policy jigsaw since the end of the Second World War as it has been widely used according to the evolution of geopolitical matters and ‘development thinking’. According to the OECD, foreign aid usually takes the form of a grant or a loan made to a developing country by the ‘official sector’ of a donor country in order to ensure economic growth as well as stable development for the recipient country (Kanbur, 2006). Despite the major role played by international aid during the second half of the 20th century, it has been strongly criticised and coined as infective in many cases due to the negative externalities that it sometimes creates. Therefore, in this essay, we will argue that there are both theoretical and empirical arguments explaining why foreign aid is not always successful. Indeed, we will first look at the economic theory behind these transfers, looking at how conditional and unconditional transfers can often prove to have adverse effects. Secondly, we will analyse empirical evidence, such as aid dependency or corruption which also play an active role in explaining why aid is sometimes rendered ineffective.
When looking at foreign aid transfers in a purely theoretical way, one of the main reasons for explaining why it is sometimes ineffective is that an inflow can change domestic production patterns towards a distorted sector of the economy meaning that the ‘social value’ of national output could fall even though even though the total resources have gone up (Bauer, 1971). One specific type of distortion that induces this immiserization, is the ‘Dutch disease’, which describes how an inflow of foreign aid will eventually make a country’s currency stronger therefore limiting exports as they are more expensive for other nations and thus damaging certain parts of the countries manufacturing economy (Kanbur, 2006). An example of this would be the discovery of oil in Nigeria in the 1970’s were the development of this industry caused other manufacturing industries to falter. This point is made even worse by the fact that replacement cost of fixed assets linked to the original developments can often be too expensive for recipient country making their losses more important (Bauer, 1971). It is therefore clear, that due to certain macro-economic principles aid is often rendered ineffective as it creates distortions inside a countries economy. It is true however, that an aid transfer that does not disturb the general equilibrium or creates any distortion could be beneficial to the recipient country is the original donation is subject to some conditions.
Conditionality has always played a central role in foreign aid policies as it is a way for the donor country to control the use of the distributed aid by the recipient countries. Indeed, donor agents will often find that certain laws and policies are extremely important when considering development and that therefore without applying these principles aid is made futile. In fact, Kanbur even argues that aid is a mere lever to promote political reform developing countries (Kanbur, 2006). In theory, conditionality should make both the donor and the recipient better off however this is not always the case as there are three major problems with conditionality. The first problem is that it is not clear what development policies are the best to ‘ensure economic growth’. Indeed, according to Radelet, views on development have varied greatly over the last half-century moving from a state led approach to an open market approach, creating many contradictions in terms of the best way to promote economic development (Radelet). Therefore, the debate created by these evolving views have caused many to doubt some of the conditions set by donor countries on recipient countries as they are not always best suited for economic development. This shows one of the limits of foreign aid and conditionality as it still unclear what the best policies to promote development are. The second problem we encounter with conditionality, which plays a role in making foreign aid ineffective, is the fact that often the interests of the donor party are different to that of the recipient party. Indeed, the triadic nature of these payments means that many contractors from the donor country working in the recipient country depend highly on the releasing of the aid. Therefore, even though sometimes conditions are not fulfilled the aid will still be released as there is a lot of economic pressure on the donor showing once again why foreign aid is sometimes ineffective (Kanbur, 2000). This point is further emphasized by the fact that, on the short run, conditions such as austerity can make the recipient country worse off creating a ‘Samaritan’s dilemma’ and meaning that the donor agent will often bypass the original conditions it set itself (Radelet, 2006).
When looking at why foreign aid is sometimes ineffective, there are also many empirical factors to take into account. Indeed, the first is that government corruption is widespread amongst developing countries and that therefore foreign aid is not always used properly (Kanbur, 2006) highlighting the importance of committing to the conditions set on these transfers. Indeed, President Mobuto Sese Seko of Zaire amassed a large personal fortune to the detriment of his population thanks to the constant flow of international aid which help promote corruption in the country (World Bank). The lack of selectivity in choosing the countries which should benefit from the aid therefore leads to aid being ineffective. However, this problem could be solved through the installation of higher criteria allowing the distribution of aid in order to give more money to countries who have strong institutions who would use the money accordingly (Radelet, 2006). Another observed reason for foreign aid not fulfilling its purpose is the lack of coordination in both donor and recipient countries when using such policies. Indeed, recipient countries are often overwhelmed by the multiple incoming flows of aid as they have to deal with the various different methods imposed by donor agents leading to a loss of both time and efficiency. Indeed, the fault here lies also on the lack of coordination of the donor agents when distributing the aid as they usually insist on using unique processing methods (Radelet, 2006). This lack of coordination which leads inevitably to a lot of administrative tasks makes foreign aid ineffective as an important amount of time and energy are wasted on unimportant matters. The instauration of ‘common pooling’ which would coordinate the transfer process by creating a ‘unique’ donor party would very much resolve this problem as administrative tasks would be facilitated and vested interest would be reduced (Kanbur et al., 1999).
The final argument I will evoke in explaining why foreign aid is sometimes ineffective is aid dependency. This self-perpetuating problem, described as a situation in which a country can not ‘perform many of the core functions of government’ without foreign aid is of major concern for many developing countries (Brautigam, 2000). Indeed, as we can see in table 1, aid can reach up to 50% of GNP for some African countries as well as reaching more than a 100% of gross domestic investment for others. This problem is particularly highlighted by the domain of ‘technical assistance’, were the knowledge of foreign personnel coming to work in recipient countries is not shared with the local population. This creates a situation in which the recipient country does not build its capacity to deal with technical problems therefore halting local development and underlining the ineffectiveness of foreign aid in this situation (Berg, 1993).
Overall, it is clear that foreign aid has been less effective in dealing with development problems that it is generally considered. Indeed, a combination of both macro-economic failures such as the ‘dutch disease’ and a lack of coordination and understanding between donor and recipient agents explain why foreign policy does not always fulfil its roll. Nevertheless, this does not mean this doctrine has been useless as global redistribution is crucial for developing countries. Therefore it seems that the correct selection of recipient countries based on solidity of institutions as well as the type of policies run by local governments are fundamental for the distribution of this aid to be a success even though there is no ‘systematic evidence at this point that these changes will lead to greater aid effectiveness’ (Radelet, 2006).

Bibliography :
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