Foreign Aid Dependency in Third World Countries: Its Pros and cons

Khem Raj Subedi

Assistant Professor

Far Western University of Nepal

Abstract

This paper tries to analyze and synthesize both negative and positive aspects of foreign aid dependency of the third world countries on developed countries to fulfill their resources gap. Increasing trend of foreign aid dependency has created global power structure in which weaker countries are economically reliant on stronger countries, allowing the stronger countries to exercise significant control over the weaker countries’ economic and political behaviour. In the early decades of development assistance, it was underpinned by an economic logic that stressed its contribution to filling two 'gaps' constraining development. Aid supplements savings and enhances investment, making possible an expansion of productive capacity. It furnishes foreign exchange for essential imports like machinery and, in many cases, fuel and food. But, critics argue that foreign aid leads to dependency because the donors insist on aid-tying to the purchase of goods and services at costs much higher than the competitive world price, and on monetary and fiscal policies detrimental to the national interests of the recipients of aid. Foreign aid leads to dependency because the donors insist on aid-tying to the purchase of goods and services at costs much higher than the competitive world price, and on monetary and fiscal policies detrimental to the national interests of the recipients of aid.

Key Words: Capital Movement, Debt Crisis, Foreign Aid, National Security, Post colonialism.

JEL Classification: F21, F34, F35, F52, F52, F54

1. Introduction

Foreign aid dependency refers to the financial reliance of the third world countries on developed countries to fulfill their resources gap and has ushered new wave of international economic order aftermath of World War Second. Foreign aid may have several forms, including transfers of finance, commodities and other goods, technical cooperation and debt relief. In fact, it has paved way for long term capital movement from developed world to developing world. Official Development Assistance (ODA) is the heart of foreign aid. The Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) defines ODA as resources transferred on concessional terms, with the promotion of the economic development and welfare of the  as the main objective(Burnell,2011). Chakravarti (2005) defined aid as all official concessional flows from bilateral and multilateral agencies, whether in the form of a loan, or grant that can be considered developmental in intent. Krueger (1986) also defined aid as capital inflows into the country; this includes, among others, foreign direct investments. In the 1960s the Development Assistance Committee (DAC) was established to improve and coordinate international aid efforts. Probably over 95 percent of ODA now comes from DAC members, comprising 22 countries plus the European Commission (Burnell, 2011).

Foreign aid can be multilateral or bilateral. Multilateral aid is given by an organization consisting of more than one state such as the World Bank, International Monetary Fund (IMF) or assistance provided by development agencies of the United Nations (UN) such as the United Nations Development Programme (UNDP) and World Food Programme (WFP), as well as concessional assistance provided by limited membership multilaterally established by the European Community (Krueger & Ruttan, 1989). On the other hand, bilateral aid is given by individual donor countries (such as Britain and US) directly to another state. There are also Non-Governmental Organisations (NGOs) such as World Vision, Care Africa and Oxfam that give aid. Of late, development practitioners have been advocating channelling aid through NGOs, rather than governments as NGOs have earned the reputation of getting aid to the poorest people (Madeley, 1991).

Increasing trend of foreign aid dependency has created global power structure in which weaker countries are economically reliant on stronger countries, allowing the stronger countries to exercise significant control over the weaker countries’ economic and political behaviour. Foreign dependency generally fosters underdevelopment in the dependent country; a country’s adoption of policies tailored to the interests of a stronger country may inhibit the weaker country’s domestic growth, speed environmental destruction, or create temporary growth that precludes sustainable development and economic independence.

2. Historical Background of Foreign Aid

After World War II, there was seen rivalry between the US bloc and the Soviet bloc to provide reconstruction aid to their allies. The US Marshall Plan (1948-51) set up to aid economic reconstruction in Western Europe. But the pattern of US aid was strongly motivated by political reasons of national security and superpower rivalry ( Burnell, 2011 ).At the same time, the Organization for European Economic Co-operation (OEEC) was formed in 1948( which was later named as Organization of Economic Cooperation and Development (OECD)  ) to administer American and Canadian aid in the framework of the Marshall Plan for the reconstruction of Europe after World War II(https://en.wikipedia.org/wiki/Organisation_for_Economic_Cooperation_and_Development).  Similarly, The Council for Mutual Economic Assistance (COMECON) was an economic organization from 1949 to 1991 under the leadership of the Soviet Union that comprised the countries of the Eastern Bloc along with a number of socialist states elsewhere in the world. The COMECON was the Eastern Bloc's (also militarily allied with the Soviet Union in the Warsaw Pact) reply to the formation of the Organization for European Economic Co-Operation in Western Europe (https://en.wikipedia.org/wiki/Comecon). Other donors who became prominent later have also pursued multiple goals, although with individual characteristics. These range from economic objectives (Germany and Japan), and a mission civilisatrice (France), to maintaining close historical relationship. For example, two-thirds of Britain's aid has traditionally gone to commonwealth countries. The Netherlands, Canada and the Scandinavians are sometimes called 'like-minded' donors: they are presumed to share an attachment to goals of 'humane internationalism'. After the 1973-74 oil price rise, some oil-exporting countries (OPEC), chiefly Saudi Arabia and small Gulf States like United Arab Emirates(UAE) have emerged as important donors (Burnell, 2011).

3. Overview of Foreign Aid Flow

United States have become leading donor since the inception of Marshall Plan. As per the OECD 2005 data, United States provided US $ 27.45 billion assistance, followed by Japan US $ 13.10 billion, United Kingdom US $ 10.75 billion, France US $ 10.05 billion and Germany US $ 9.91 billion based on volume of foreign assistance. But based on GNI size of donor country, Norway is the leading country providing 0.93 percent followed by Sweden 0.92 percent, Luxemburg 0.87 percent, Netherlands 0.82 percent and Denmark 0.81 percent (Table 1)

Table 1 Net Official development assistance, leading donors, 2005

By Volume			By percentage of GNI
Donors	Volume (US $ billions)	Percentage of GNI	Donors	Percentage of GNI	Volume (US $ billions)
United States	27.45	0.22	Norway	0.93	2.77
Japan	13.10	0.28	Sweden	0.92	3.28
United Kingdom	10.75	0.48	Luxemburg	0.87	0.26
France	10.05	0.47	Netherlands	0.82	5.13
Germany	9.91	0.35	Denmark	0.81	2.10

(Desai & Porter: 2011, p 504)

According to the OECD 2005 data, Iraq is the leading recipient of foreign assistance receiving US $ 4.65billion assistance, followed by Afghanistan US $ 2.19 billion, Vietnam US $ 1.83 billion, Ethiopia US $ 1.82 and Democratic Republic of Congo US $ 1.81billion based on the volume of foreign assistance. But based on GNI size of recipient country, Democratic Republic of Congo is the leading country receiving foreign assistance 98.61 percent of its GNI followed by Sao Tome and Principe, Guinea-Bissau, Micronesia and Eritrea respectively (Table 2)

Table 2 Net official development assistance, leading recipients, 2004

By volume			By percentage of GNI
Country	Percentage of GNI	Volume (US$billions)	Country	Percentage of GNI	Volume (US$ million)
Iraq	N/A	4.65	D R Congo	98.61	1,815
Afghanistan	34.75	2.19	Sao Tome and Principe	66.59	33
Vietnam	4.51	1.83	Guinea- Bissau	63.59	76
Ethiopia	23.54	1.83	Micronesia	47.26	76
D R Congo	98.61	1.81	Eritrea	42.38	260

(Desai & Porter: 2011, p 504)

4.  Debates on Foreign Aid

The pertinent questions here are: Why donors give aid? Do we believe that they are altruist? There is no unanimous answer of this million worth question amongst the academia and scholar.  In other words, the academia and scholars have their different logics in this regard. The scholars argue that donor-country governments give aid primarily because it is in their political, strategic, or economic self- interest to do so. Some development assistance may be motivated by moral and humanitarian desires to assist the less fortunate (e.g. emergency food relief and medical programs), but there is no historical evidence to suggest that over longer periods of time, donor nations assist others without expecting some corresponding benefits(political, economic, military, etc.) in return ( Todaro & Smith, 2012).

 

4.1 Pro Aid Theory: Capital diffusion

There is a growing international awareness that poverty anywhere is a danger to prosperity everywhere and prosperity anywhere must be shared everywhere (Jhingan, 2001).In the early decades of development assistance, it was underpinned by an economic logic that stressed its contribution to filling two 'gaps' constraining development. Aid supplements savings and enhances investment, making possible an expansion of productive capacity. It furnishes foreign exchange for essential imports like machinery and, in many cases, fuel and food (Burnell, 2011). The proponents of the modernization theory presume that the development of third world countries will happen through the diffusion or trickling down of capital, technology, and organization methods from modern capitalist areas to developing countries. This theory views underdevelopment as an original condition of backwardness and proposes that, for developing countries to draw level with the developed countries there is need for greater penetration of modern economic principles and institutions (De Beers et. al., 2000). This postulation given by the modernization theorists is that underdevelopment is primarily a result of the lack of capital and technological expertise, thus underdevelopment is looked upon as a kind of deficiency disease which can be taken care of through injections of missing ingredients with foreign aid being one of these missing ingredients. In other words, aid represents supplementary capital and is essential for speeding up economic development. Given these suppositions, it is evident that modernization theory places strong weight on the need for intervention in promoting economic development and on the thought that more capital leads to greater development.

4.2 Anti-Aid Paradigm: Dependency Theory

Foreign aid leads to dependency because the donors insist on aid-tying to the purchase of goods and services at costs much higher than the competitive world price, and on monetary and fiscal policies detrimental to the national interests of the recipients of aid (Jhingan, 2001).  In this line of thinking, by the 1970s heavy criticism was directed at most of aid, by dependency thinkers and many others in the North and the South, many of whom vied aid as an instrument of domination and exploitation. Dependency exits when one party relies on another without the reliance being reciprocal. Baldwin (1980) defined dependence in terms of reliance on others, lack of self-sustenance and self-sufficiency. He also defined it in terms of the benefits that would be costly for one to forego. Thus, most developing countries found themselves in this tragic situation. McKinlay (1977) further elaborated that in such a relationship, one party may choose to terminate the relationship with little or no costs while the other can do so only at considerable costs. Given the above suppositions, the reliant state, therefore, operates in a subordinate or dependent position. More so as Moon (1983) puts it, the dominant party establishes a dependent relationship because it generates a degree of control or influence, and the main use of aid is the potential to control. Caporaso (1978) alluded to the fact that this control can be used for a variety of reasons dictated by the dominant state. The critics doubted that it could be an effective means of reducing Third World poverty, and noted that it benefited privileged elites in the South as well as donor countries. Rather, they argue that aid has led to the re-colonisation of the Third World countries through the strings attached to it. Likewise, in the 1980s, ODA was challenged by the rise of the neoliberal agenda in the west. They maintained that aid was responsible for excessive government and thereby distorting the market.  Neoliberals, especially, claim it can damage donor economies too, by distorting resource allocation. Thus, both groups of critiques saw aid as part of problem but not the part of solution.  In fact, these LDCs have become addicted to foreign aid. Foreign aid leads to dependency because the donors insist on aid-tying to the purchase of goods and services at costs much higher than the competitive world price, and on monetary and fiscal policies detrimental to the national interests of the recipients of aid.

 

The 1980s saw a dramatic expansion of conditionality-based lending linked to recommendations for economic policy and institutional reforms. The advice embraces neoliberal tenets and embodies what became known as the 'Washington Consensus'-structural adjustment loan (SALs) for structural adjustment programmes (SAPs) became major features. The conditionalities incurred much resentment, not least because they appeared to be coercive and offensive to sovereignty (Killick et.al.,1998). Eventually, it has created foreign debt crisis thereby threatening the national security.

5. Concluding Remarks

Foreign aid was thought to be indispensable for accelerating pace of economic development of resource deficient least developed countries (LDCs) in their early stage development. It is a matter of fact that prior to the World War II, most of such LDCs were the former colony of developed countries of the contemporary world. They gained freedom after World War II and tried to give pace of development on indigenous base. But unfortunately they were desperately lacking human capital, physical capital, financial capital, technical know- how, governance system and so on so forth which were key for unlocking the  road map for overall development. Under such a situation, they once again sought foreign assistance from developed countries. They received bilateral and multilateral loan package as per the terms and conditions set by donor countries as well as Britton Wood institutions like International Monetary Fund (IMF) and World Bank. But, unfortunately most of the LDCs were not able to pay back loan consequently they were engulfed in debt-trap circumstances and ruined their domestic economic infrastructure. It has led to a situation where LDCs have failed to set their own pace and direction of development, free of external interference. Since development plans for developing countries are drawn thousands of miles away in the corridors of the IMF and World Bank based on the blind path of false paradigm model. The most of the LDCs lost their autonomy to control and direct national capital and even increase its bargaining position with respect to foreign capital. In the light of this, LDCs' postcolonial pace of development has been thwarted by external pressure acting against internal values and traditions. In short, aid has led to the re-colonization of LDCs through the strings attached to it.

References

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