The Implications of Foreign Aid

Foreign aid can be interpreted as a variety of different things, from charities to remittances to government grants. Aid is a vast concept. Foreign aid is loosely defined and is characterized differently by different economists. For the purpose of this paper, I will define aid as any sum of money paid by a government to the government of a different country with the purpose of strengthening the receiving country. Remittances will not be considered to be aid because they are private cash flows. They are little different from someone giving money to a parent or grand parent for survival. They are private gifts. Aid is granted for the betterment of a nation as a whole not for the betterment of an individual or a family. A variety of western countries have governmental agencies focused on delivering aid to the developing world. The United States has granted USAID, it’s aid agency, a budget of 20.1 billion USD for 2015 (USAID, 2013). The British government has committed to approximately 19 billion USD for 2014 (Provost/Tran, 2013). There is no denying that foreign aid puts a significant amount of money into circulation, the question is; does it help?


Allocation of aid poses a significant challenge for both parties involved. Who deserves aid, and how is this aid distributed once it reaches the nation it is intended to help. These issues are one in the same. The main issue is that the countries that need aid the most are the least equipped to actually utilize it fairly.  The poorest countries are often the most corrupt, or have the weakest political structure. Transparency international is an organization charged with ranking countries with a governmental corruption indicator, the corruption perceptions index or CPI. The CPI is a on a scale of 100, 100 being a perfectly transparent government and 0 being the worst. The countries on the bottom of this scale are often the poorest countries. The poorest countries need the most help and in the past have received a substantial amount of help. For example, Afghanistan has a measly CPI of 8 yet it received a total of 2.3 billion USD in aid in 2012 (Patton, 2013).  Although USAID does it’s best to ensure that this aid money is put to good use there is only so much that can be done to avoid it from going to waste. In fact, in late 2013 the US hired two auditing firms to track the progress of the aid they had been shipping overseas, the results were disconcerting. The auditors warned that the 16 ministries charged with dispensing the aid were all unable to properly do so without having the materials lost, stolen, or wasted. Moreover, it was found that just over 234 million USD were nearly misappropriated by the Afghan state. USAID had sent this money over to be used for the ministry of public health, it was however diverged to the Afghan Mines Ministry so that it could be used for, “paying higher prices for commodities and services to finance kickbacks and bribes,” according to the USAID auditor general (Rosenberg/Ahmed, 2014).

Supporters of aid argue that if we take steps in ensuring that the aid is properly handled we can ensure that these missteps don’t happen. By giving countries aid that is contingent on them meeting certain criteria we can ensure that they don’t spend it on less than favorable things. By giving nations half of the aid before hand and then giving them the second half if they meet the necessary criteria we ensure that the aid isn’t wasted. This has a spotty track record. An example of this is the failure of conditional aid in Mozambique in the 1990s. Mozambique had highly protectionist legislation in its cashew industry. It imposed tariffs and exportation bans in order to protect elements of the cashew refining industry. It wasn’t the most lucrative of economic plans but it provided the east African nation with an economic basis.  The World Bank however decided to offer aid to this nation.  The Bank offered aid on the condition that these protectionist policies were removed in the goal of liberalizing this economy. Mozambique, feeling pressured from the international community obliged. The cashew industry faltered, 11,000 workers lost their employment. The nation got 6,6 million USD but lost a total of 6,1 million in revenue do to the unemployment that crippled the country (Powell, 2003).  The issue with conditional aid is that it relies on an external source crafting policy for another nation. States are inclined to accept because they want the capital investment, however this policy doesn’t benefit the people of this state in the long run. This should be the overall goal of aid. Conditional aid doesn’t allow for people who are the best informed on the situation of specific countries to be in full control of the policy within their country. The best way to ensure that countries can develop is to have them craft their own policies and to democratize. No amount of conditional aid can put in place the structure for proper autonomous development because it grants authority to people who are removed from the actual problem.

Hinders economic growth

 Foreign aid relies on the principle that it offers money, goods or services without expecting a product in return. The fact that these are offered for free poses a threat to the people who are typically charged with providing these services. Where do people get food and goods? They purchase them from people who produce them. When foreign governments decide to send in food and products people are more inclined to accept these for free then to buy them. Foreign governments can offer services to other countries without them having to pay for them. The receiving country would rather get the gift then have to pay for local projects. Local industry therefore doesn’t have anyone to sell to.  The local industry’s entire client base is drowned out by foreign aid. This makes legitimate and sustainable development difficult in developing countries. Ghanaian entrepreneur Herman Chinery Hesse states, “I don’t know of any country in the world where a bunch of foreigners came and developed the country. I don’t know one: Japan? Korea? No! No country did that. I know about countries that developed on trade and innovation and business.” (Quoted in poverty cure, n.d.) If external bodies are constantly providing the trade and the innovation it is impossible for local business to develop and local economies are stifled.

But if we give countries money, can’t they spend it on industry in whatever country they want, for instance in their own? That’s where the real issue comes from. A lot of aid is tied aid; in particular major players like the US are comforted because they know that all of the money they send into developing countries returns to their companies. In fact, it was shown that despite countries pledging to formally untie aid, 20% of foreign aid remains tied. This may seem like a relatively small number, however it is still significant to the countries who are receiving the aid. It is 20% less local business, 20% less development, and 20% less towards sustainable economic planning.  Startlingly however, more than two thirds of untied aid ends up being spent on companies from rich countries (Provost, 2011). This is simply boomerang aid. Rich countries essentially give their corporations business through a third party. Developed nations are often times undertaking infrastructure projects or developing technology in the developing world. Although this sounds like a good thing it is ultimately taking business away from local people. It creates a situation in which, aid money is being pumped out of an economy nearly as quickly as it is being pumped into it. Ghanaian business man Herman Chinery Hesse further explains that Ghanaian infrastructure firms are being passed over on contracts that they are far more qualified to perform, for a lower cost, by western companies because they give the aid money to the government (poverty cure, 2013).

Supporters of aid argue that there has been a massive effort to untie aid, allowing developing nations to spend this money however they want to. Ultimately boosting local economies. The issue with this is that despite making these promises, some countries are backtracking. Many European countries have reneged on their promises (Provost, 2011). The aid money ends up being pumped back into the developed world. Moreover, this issue extends far beyond countries reneging on their promises. Even if this aid isn’t formally tied it is still implicitly tied. Governments feel that in order to continue gaining aid payments from the developed world they need to put the money they receive back into the rich economies. When the developed world feels that they are gaining from aid payments they are more inclined to pay them. This doesn’t allow developing countries to have local industry and ultimately undercuts their chances at long-term economic stability. “Donor countries continue to mislead their own citizens and those of developing countries, by passing off what is essentially state aid to donor country firms, as a genuine contribution to poor countries' effective development, (…) buying local would offer a double dividend", says Bodo Ellmers lead author of a report by European Network on Debt and Development (Provost, 2011)


In conclusion, foreign aid is an ineffective tool used by the developed world. It allows western countries to circulate capital that ultimately often ends up being wasted or shipped right back overseas helping out rich companies in rich countries. Governments receiving large aid payments have proven themselves too irresponsible to handle these payments and ultimately large sums of money have been misappropriated or wasted. In the cases where the money has actually been spent on resources and infrastructure it has too often ended up back in the pockets of developed nations. Nations are often contractually obliged to spend their aid money in the donor country, or they feel obliged to do so in order to continue receiving these payments. This boomerang aid ultimately makes it extremely difficult for local industry to flourish and the end goal of the aid cannot be fulfilled. With the influx of aid money comes the exodus of industry and it is ultimately extremely difficult for countries to develop themselves economically, thus sustainability is impossible. Because the primary focus of aid is to provide the developing world with a sustainable economic foundation, foreign aid has failed.


Nikolas De Stefano



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