Is Foreign Aid Working?

Europe lay in ruins Iron curtains and cold wars Independence movements in the colonies Decolonisation by the colonisers Laissez-faire economics questioned State power could be directed towards

development Intellectual confidence All of above combined to bring about the

rise of foreign aid from rich to poor countries

A new governance framework was required to manage the world economy

Thought that conflicts between nations had been exacerbated by the collapse of international trade, economic isolationism leading to the 1930s depression and rise of ultra-nationalism

Note that UN membership rose from 51-156 between 1945-1981

Set up in 1944 to facilitate post-war international economic stability◦ General Agreement on Tariffs and Trade (GATT)◦ International Monetary Fund (IMF)◦ World Bank (WB)

The WB and IMF = IFIs (international financial institutions)

IMF◦ Short-term loans to nations experiencing balance

of payments problems◦ Loans dependent on borrower taking measures to

correct problems◦ Voting structure proportionate to invested capital

World Bank◦ Initially funds for reconstruction of Europe◦ After, for loans to poor countries for large-scale

infrastructure◦ Loans were ‘concessional’

USA was major subscriber to IMF and WB, its currency was the international medium of exchange

Smaller but more powerful organisation than WB

Located in Washington DC adjacent to WB WB can only lend to IMF-member countries

and when they are not in dispute with IMF Stabilisation of economies is IMF major role

Comprised of:◦ International Bank for Reconstruction and

Development (IBRD)◦ International Development Association (IDA)◦ International Financial Corporation (IFC)◦ Multilateral Investment Guarantee Agency (MIGA)◦ International Centre for Settlement of Investment

Disputes (ICSID)

Dominant non-private lender to developing countries

Highly influential generator of ideas about development

Main provider of technical advice to developing countries

Informal ‘rating’ agency for bilateral donors (eg AusAID)

Originally seen as a catalyst for development (leading agent of modernization theory)

But critics say that WB◦ Leads poor countries into debt◦ Has financed many projects which have brought

poor developmental returns◦ Is only concerned with capitalist development◦ Has not (until recently) been concerned with

corruption◦ Only plays lip-service to sustainability and

popular participation◦ Should let market determine economic

development

Critics also say that the WB and IMF have exerted undue influence on poor countries policies through structural adjustment loans (SALs) or programs (SAPs)

SALs/SAPs carry conditions which generally involve◦ Tighter fiscal control◦ Liberal economic reforms◦ Rolling back the state

◦ Controlling inflation through wage controls◦ Privatization of publicly owned enterprises◦ Balancing state budgets through reducing

government expenditure◦ Eliminating or reducing government

expenditure◦ Eliminating or reducing state subsidies on basic

goods◦ Generation of foreign exchange through export-

oriented industries◦ Elimination of controls on foreign capital

◦ Net transfer of money out of indebted countries increased since 1980s

◦ Debt burden shifted from private banks to IFIs◦ Forced liberalization has entailed greater

participation in world economy◦ SAP implementation results in ‘cat and mouse

games’ between IFIs and recipient countries◦ SAPs have increased control of poor countries

by IFIs◦ Poor people bear considerable burden◦ Inappropriate fiscal restraint where enormous

problems need addressing

Now claimed to be a ‘post Washington consensus’ which recognises need for state action as well as market forces

Declared prioritization of poverty◦ IMF has Poverty Reduction and Growth Facility

Loans (PRSCs)◦ WB has Poverty Reduction Strategy Credits

(PRSCs) Both require Poverty Reduction Strategies

(PRSs) Is this a genuine shift or cynical

maintenance of old policy?

IFIs also signed up to the MDGs Agreed September 2000 at largest ever assembly

of world leaders Addressed at resolving the world’s major

problems – especially poverty Goal-oriented with clear targets, eg

◦ reduce extreme poverty by half between 1990-2015

◦ reduce by 2/3rds the under 5 years mortality rate between 1990-2015

Goal 8 – Develop a Global Partnership for Development◦ Target 12: Develop further an open, rule-based

predictable, nondiscriminatory trading and financial system (includes commitment to good governance, poverty reduction)

◦ Target 13: Address special needs of Least Developed Countries

◦ Target 14: Address the special needs of landlocked developing countries and small island developing states

◦ Target 15: Deal comprehensively with debt problem to make debt sustainable in the long term

Aid from DAC countries is increasing◦ 2003 = US$69 billion◦ 2004 = US$80 billion◦ 2005 = US$106 billion In real terms average

annual growth of 5.6% Decline in 2011due to GFC

◦ 2011= US$133.5 billion, a fall in real terms of 3% and only 0.31 of combined GNI

Grants from NGOs◦ US$11 billion in 2004

Aid from non-DAC countries increasing◦ Estimated at $11 billion pa or more◦ China now gives more each year than World Bank◦ India announced plans to establish an aid agency in 2011

and $11 billion funding over next 7 years◦ South Africa, Brazil and Arab states significant donors◦ Much more explicitly ‘soft power’ to gain leverage in

pursuit of strategic interests◦ ‘No strings attached’ leads to questions about human

rights, sustainability, relevance, environmental concerns◦ Little evaluation, accountability and transparency

mechanisms

Much of the increment in ODA reflects global and regional security concerns with Iraq and Afghanistan accounting for over half of the 2001-2004 increase

Nearly half the increase in net ODA 2001-2004 is in the form of debt relief and technical cooperation and a quarter for emergency assistance

Innovative forms of funding eg airline departure taxes

Agreement of many donors and recipient countries for ‘aid harmonization and alignment’ to increase effectiveness of aid

Trying to improve aid ‘modalities’ (ie instruments through which donors deliver aid) to improve aid ‘quality’

Highly Indebted Poor Countries Initiative (HIPIC)

Multilateral Debt Relief Initiative (MDRI)

Paris Declaration on Aid Effectiveness 2005 by OECD countries/donors◦Ownership of aid implementation by partners◦ Donor alignment with country strategies◦Harmonization of donor development

approaches and activities◦Managing for better results through national

development strategies and performance frameworks

◦ Mutual accountability between partners and donors

There has been a reported general improvement in donor-recipient relations

By 2010 target met on only one indicator (improvement on others)

Criticisms◦ China, Brazil and Arab states not involved◦ Indicators don’t measure ‘real outcomes for real

people’◦ Data often fragmented◦ Country context not appreciated enough in

measurement eg fragile states

Volume of aid is increasing Still not enough to tackle the immense problems

of developing countries Only 5 donors have ODA/GNI ratios of 0.7 or

above (DAC average only 0.33%) Still concern about the amount of IFI influence on

domestic policies of developing countries WTO remains a major concern of developing

countries The effectiveness of aid remains a contentious

issue Pronounced international inequality still evident

and the gap is widening for some countries