subject: Economic Effects Of Financial Aid: [print this page] The issue of the economic effects of aid, especially public aid, like that of the effects of private foreign investment, is fraught with disagreement. On one side are the economic traditionalists, who argue that aid has indeed promoted growth and structural transformation in many LDCs. On the other side are critics who argue that aid does not promote faster growth but may in fact retard it by substituting for, rather than supplementing, domestic savings and investment and by exacerbating LDC balance of payments deficits as official aid is further criticized for focusing on and stimulating the growth of the modern sector, thereby increasing the gap in living standards between the rich and the poor in developing countries.
Some critics on the left would even assert that foreign aid has been a force for antidevelopment in the sense that it both retards growth through reduced savings and worsens income inequalities. Rather them relieving economic bottlenecks and filling gaps, aid - and for that matter private foreign investment - not only widens existing savings and foreign-exchange resource gaps but may even create new ones (e.g.. urban-rural or modern-sector-traditional-sector gaps). Critics on the right charge that foreign aid has been a failure because it has been largely appropriated by corrupt bureaucrats. has stilled initiative, and has generally engendered a welfare mentality on the pan of recipient nations.
Quite apart from these criticisms, in the 1980s and 1990s, donor countries grew increasingly disenchanted with official foreign aid as domestic issues such as unemployment, government deficits, and balance of payments problems gained priority over international politics. Aid weariness had set in. Taxpayers wanted to focus on domestic economic problems, especially as they came to realize that their tax dollars allocated to foreign aid were often benefiting small elite groups in LDCs who in many cases were richer than themselves.
One of the most promising developments of the new century has been the emphasis on rigorous testing of the impact of development assistance. In 2005, national and multilateral officials concerned with international development met in Paris and agreed to place greater emphasis on monitoring and systematically measuring aid effectiveness. Accompanying this policy emphasis is a growing acceptance of the value of evaluating programs through randomized trials, as is the standard for medical advances. Although not all valuable development activities can be studied with these methods, randomization has been adapted to study a growing range of education, health, microfinance and social welfare programs. Many of these studies have been conducted on programs operated by nongovernmental organizations with their active assistance, including Pratham in India. ICS in Kenya, FINCA in Peru, and Project HOPE in Ecuador further enhancing the value of the NGO role in development and poverty alleviation.
In recent years, the public has been increasingly willing to donate development assistance via NGOs, and the development crisis in sub-Saharan Africa has mobilized public opinion in support of greater development assistance. As the United States and the United Kingdom announced significant increases in aid in the early years of this century, and many other countries made greater contributions to global health funds, hope was renewed that more reasonable levels and uses of aid might be forthcoming.
The attention to improved assistance to reduce extreme poverty at the G8 and UN meetings in 2005, the promise of the Paris Declaration, and some enhancement of resources were widely viewed as hopeful signs of progress.
by: Rashid Javed
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