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FOREIGN AID


Elly Twineyo Kamugisha, author and public policy analyst, December 2019

Most of the harm in the world is done by good people, and not by accident, lapse, or omission. Isabel Paterson: God of The Machine Chapter XX: The Humanitarian with the Guillotine, 1943, p.241. New York: G.P. Putnam’s Sons, Van Rees Press.

Foreign aid

Why continue the debate on aid when variously it has been discussed – albeit with no agreement on whether continued aid flows are actually helping Africa – by those on right and left, with some on the centre. Notable on this debate include Peter Bauer (who begun the critical debate on aid), William Easterly, Paul Collier, Homi Kharas, and recent books by Dambisa Moyo (Dead Aid), and Twineyo-Kamugisha (Why Africa Fails). There has been an emotional rather than rational and facts debate about aid recently engaged in by analysts and those supporting aid flows1. The aid debate continues because it is a topic relevant to current affairs in Africa, and there is new evidence why it has not worked. Please follow us and read through.

Foreign aid has been defined broadly as a government transfer from developed countries to poor countries aimed at the latter’s development (Tarp 2006). The standard definition that is commonly used for foreign aid is that one of the OECD’s Development Assistance Committee (DAC). DAC defines foreign aid as the financial flows, technical assistance and commodities that are (i) designed to promote economic development and welfare as their main objective ( it thus excludes aid for military or other non-development purposes); (ii) provided as either grants (at least 25 percent of total granted) or subsidized loans. We will refer to aid as the total sum of both concessional loans and grants. This definition refers only to official development assistance2. Grants and subsidized loans are what are referred to as concessional finance. There is no unique definition of concessionality3. The IMF Balance of Payments Expert Group have defined concessional debt as lending extended by creditors at terms that are below market terms with the aim of achieving a certain goal. They say that the governments, for example, may provide loans at low or zero interest rates, either to provide a benefit to the recipient or to encourage some action by the recipient (such as purchasing goods from the lender’s country)4.

1 There have been ‘hot’ exchanges between those committed to aiding projects in Africa, those fundraising for Africa, and those who are critical aid. Some have seen Dambisa Moyo as a conservative celebrity, held- high by Steve Forbes, and embraced by the US CATO Institute. Bill Gates has said that Moyo’s book on aid promotes evil. Jeffery Sachs has criticized Moyo and Easterly for their narrow views on aid.

2 Twineyo-Kamugisha (2012:105). Why Africa Fails. Cape Town: Tafelberg
3 The DAC2 definition of concessional lending which is based on loan “grant element” computes concessionality as “the difference between the face value of the loan and the sum of the discounted future debt service payments to be made by the borrower expressed as a percentage of the face value of the loan”. DAC uses a discount rate of 10 percent as the market rate of interest which raises the question as to whether the same discount rate should be applied in all cases irrespective of varying opportunity cost of capital in different economic environments. (IMF (2004), “Concessional Debt” , Committee On Balance Of Payments Statistics Balance Of Payments Technical Expert Group (BOPTEG), Issues Paper (BOPTEG) # 29, p.4).
4IMF (2004), “Concessional Debt” , Committee On Balance Of Payments Statistics Balance Of Payments Technical Expert Group (BOPTEG), Issues Paper (BOPTEG) # 29, p.3

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Foreign aid in form of commodities? Yes. Aid can be in form of commodities. For example according Tarnoff and Lawson (2011), US assistance can take the form of cash transfers, equipment and commodities, infrastructure, or technical assistance5.

Some countries with a developed agricultural and related sector have been giving some countries in Africa aid in form of commodities such as maize floor (call it ‘posho’ in some African countries terms), and cooking oil. This is the case of USA where maize products and beans, and cooking oil have been part of the aid projects for decades in Africa (and Asia among others).

Food aid has been a big debate at the WTO and in 2006 at the WTO Hong Kong Ministerial (which could be finalized until in Bali 2013) WTO had agreed that governments be given the money to procure food locally. The argument was that it becomes expensive to procure and transport maize flour (‘posho’) from say USA to any African country. In a discussion with high level government operatives in Uganda in 2006, it was explained that during the insurgency (with people in internally displaced camps (IDPs)) in Northern Uganda, a kilo of maize flour from the US to Uganda cost 5,000 Uganda Shillings. A kilo of maize flour in the local Ugandan market was around 1,000 Uganda Shillings. In terms of US dollars, a kilo from USA was at US$ 2.8 while locally it was around US$ 0.6! Imported the food aid from the US was therefore five (5) times more than the cost of a kilo in the local Ugandan market. According to the Congress Research Services Report by Tarnoff and Lawson (2011), the Foreign Assistance Act of 1961 limits the expenditure of foreign assistance funds outside the United States6. Aid conditioned in this way on the procurement of goods and services from the donor-country is sometimes called “tied aid,” Studies have shown that tying aid increases the costs of goods and services by 15-30 percent on average, and up to 40 percent for food aid, reducing the overall effectiveness of aid flows. (Tarnoff and Lawson 2011:19)

Why countries need aid

This a good question. If we think aid may not help a country achieve economic growth and reduce poverty in the recipient country, why do donor countries give it, and why do recipient countries seek and accept it?

There have emerged various schools of thought about the role of foreign aid as a development tool in Africa. One school views aid as counterproductive – inhibiting the growth it is supposed to enhance. The other school views aid as very important for addressing lack of funds by governments for budgetary allocations to provide public goods such infrastructure, defense, security, and funds foreign missions.

The debate on the future of international development assistance has tended to become oversimplified into two warring camps: aid-optimists, who believe that drastic increases must be made in international development assistance to fill the investment gaps that inhibit growth in

5Tarnoff, C., and Lawson, M, L., (2011), “Foreign Aid: An Introduction to U.S. Programs and Policy”, CRS Report for Congress prepared for Members and Committees of Congress, Congressional Research Service. 6 Section 604 of the Foreign Assistance Act of 1961 (P.L. 87-195; 22 U.S.C. §2151)—often referred to as the “Buy America” provision—requires that funds be spent “only in the United States, the recipient country, or developing countries” unless the assistance requires commodities or services that are not available in any such country or the President determines that procurement from an otherwise excluded country is necessary.(Tarnoff and Lawson 2011)

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Africa; and aid-pessimists, who contend that such massive increases will exacerbate economic under performance and weak and autocratic governance on the continent (Joseph and Gillies 2009:13). In their Smart Aid (2009), Joseph and Gillies assuming a more modest perspective, acknowledge the limited but real potential benefits of foreign assistance to accelerate growth and development. They offer no easy and glib solutions7.

Countries may need aid to use it for covering the budgetary deficit. They have a short fall in their budget. The government cannot meet all its current year’s budgetary requirements – under the national priorities. They need to finance a budget deficit. A fiscal or budget deficit can be defined as the difference between current plus capital expenditure and current receipts. In other words, planned expenditure exceeds expected revenue. There are two major ways of covering the deficit: borrowing and appealing and get foreign aid. Borrowing can be done internally (domestic borrowing) or externally (foreign borrowing). The government can may borrow domestically, borrow from abroad or receive aid for three reasons: public investment; avoid increases in tax that maybe distortionary; and the stabilisation of macroeconomics generally.

The government may borrow or obtain aid to finance the procurement of capital assets such as roads, schools, health facilities, etc. These are massive investments that require large expenditures. Given the level of tax/GDP ratios which for most SSA are less than 15 per cent, such investments need funds from outside of government. They have long terms paybacks and therefore may not be attractive to the private sector domestically and sometimes internationally (FDI). Where the private sector is interested, it may be on public–private sector partnership not that the private sector meets all the costs. Even then the government needs funds from some source. That source could be aid grants or borrowing on concessional terms. Getting funds from abroad may help the government avoid the temptation of financing the deficit by printing money called seigniorage. Printing money not backed by production, causes inflation if the economy is near or at its potential output. Inflation will cause a fall in the real value (not the nominal value) of the incomes and savings of all economic agents.

The government may need funds from donors for revenue smoothing purposes. Most of the SSA suffers from weak domestic tax bases. They have narrow tax bases because most of their economy of small business is informal, agriculture is on subsistence and the raw or primary export commodities from mainly agricultural sector face international price volatility. Even those oil exporters and other resource rich SSA countries will have significant commodity (oil) related revenues (from licenses and royalties, taxes and others sources0 but still generally suffer from weak domestic tax bases. Trying to introduce new taxes on same bases or the same small formal sector may that may be distortionary. The alternative is to undertake short term borrowing or get aid as grants.

Lastly, stabilisation of macroeconomics in the country is important. The stabilization function was identified my Musgrave as one of the three functions of government. Stabilization function covers the use of fiscal and monetary policy to try and maintain a more stable level of economic activity and output and reduce to a reasonable minimum the fluctuations in unemployment. The fiscal policy refers to the decisions relating to government expenditure, taxation and borrowing aimed at smoothing the booms and slumps in business within an economy8.

7Joseph, R., and Gillies, A., (2009:13). Smart Aid for African Development. Boulder: Lynne Rienner
8 In most cases, developing countries borrow to stabilize the value of their currency and stop it from depreciating against the foreign currencies. The approach of stabilizing economies by smoothing out the

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There is need for government to intervene and help speed up this adjustment. If aggregate demand in the economy is falling and total growth or output (GDP) is slowing down to boost production and demand the government should cut taxes. Reducing taxes means that the government has to meet the shortfall of government revenue by borrowing. This is the Keynesian approach in economics. What is important here is the role of government in enhancing growth and stability of the economy both in the short and long term. On other hand the monetary policy is about money and the behaviour of the financial sector. The government through the central bank can apply restrictive or lenient monetary policies to boost investment, employment and manage inflation under inflation targeting9.

Before we discuss other reasons why countries seek aid, there are other ways of reducing a budget deficit. According to Easterly and Irwin (2007)10, who looks at the ‘fiscal illusion’11, give ways of reducing the deficit as privatization and the sale of other public assets, reducing current spending in a way that actually increases spending in the futures (failure to spend on HIV/Aids affect spending in future), reducing public investment (has some negative effects on future growth as it reduces net-worth and lowers future revenues e.g. user changes and fees), substituting private for public investment (the public– private partnerships which have been criticized for replacing explicit public debt with off-the – balance sheet commitments especially where governments offer implicit or explicit guarantees that may result in future fiscal liabilities), reducing operations and maintenance spending (this is postponement to removal), postponing expenditure to a future fiscal years or bringing forward tax receipts to the current fiscal year, and requiring public pension funds to lend money to government at negative real interest rates.

There is another reason that is more important to the regime in power when aid is given. This key reason for receiving aid is political. Getting more aid is viewed by both the local and international publics as positive image for the regime in power. Most opposition parties visit embassies and rich capitals to convince their leaders to withhold aid as a sign that the regime is doing poorly on democracy, human rights and the sort. To the opposition, aid provides greater political leverage to the existing leadership to maintain its power and suppress opposition.

Why developed countries give aid?

cyclical fluctuations in the economy has been common in developed countries since the 1940s following the writings and advice of Keynes. Keynes (the Keynesian theory and Keynesian economics) argued that if an economy was left to itself, it might self-stabilize following a recession but do so in the long – run. As he said “ In the long-run we are all dead”

9 Inflation targeting – controlling inflation through monetary policy is known as inflation targeting. The central bank forecasts the future path of inflation; the forecast is compared with the target inflation rate (the inflation rate the government believes appropriate for the economy); the difference between the forecast and the target determines how much monetary policy has to be adjusted. (source: http://www.imf.org/external/pubs/ft/issues/issues15/ ( accessed on 01/03/14))

10 Easterly, W., Irwin, T., and Servén, L., (2007), “Public Investment and Fiscal Stability”, Policy Research Working Paper 4158, Washington DC: The World Bank.
11 Fiscal illusion is defined by Easterly and Servén (2007) as fiscal adjustment that lowers the budget deficit but leaves government net- worth unchanged. The government can change accounting and other arrangements to make the deficit appear smaller than it was. Net-worth is defined as government assets minus liabilities. Accruals accounting where a balance sheet shows the assets and liabilities of the economy would reveal the impact on assets and future revenues that governments may acquire by incurring debt today (Easterly 2007)

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Experience has shown that over the medium-term development in countries receiving aid leads to increased consumption, which in turn produces growth in their imports of goods and services from the donor countries………For every 100 ECU spent on aid, the community recovers ECU 48 in projects, supplies and technical assistance purchased from European companies. (Source: European Commission, (1996:7), “20 Questions and Answers”, Development, Vol. VIII/53, March 1996

There are various reasons for giving aid; most of these reasons are not economic. EU according to the above statement gives aid for commercial purposes (markets) and jobs for the Europeans. For the US, during the past 65 years, there have been three key rationales for foreign assistance (Tarnoff and Lawson (2011:3) :

i) National security has been the predominant theme of U.S. assistance programs;

  1. i)  Commercial Interests. Foreign assistance has long been defended as a way to either promote U.S. exports by creating new customers for U.S. products or by improving the global economic environment in which U.S. companies compete.
  2. ii)  Humanitarian Concerns. Humanitarian concerns drive both short-term assistance in response to crisis and disaster as well as long-term development assistance aimed at reducing poverty, hunger, and other forms of human suffering brought on by more systemic problems.

Tarnoff and Lawson (2011) write that in addition to the direct benefits derived from aid dollars used for American goods and services, many argue that the foreign aid program brings significant indirect financial benefits to the United States. First, it is argued that provision of military equipment through the military assistance program and food commodities through P.L.480, the Food for Peace program, helps to develop future, strictly commercial markets for those products. Second, as countries develop economically, they are in a position to purchase more goods from abroad and the United States benefits as a trade partner (Tarnoff and Lawson (2011:19).

Aid is supposed to assist in the economic development of poorer countries. The economic objectives of aid are supposed to alleviate poverty and increase savings, and hence investments ultimately increase the rate of growth of GDP for developing countries. Developing countries have to reduce absolute poverty levels and therefore need more financial resources than they have to provide public and social services. There are two main sources of obtaining these financial resources into a country: aid or FDI. Most government go for aid first, and FDI later.

True the most concessional aid is normally provided to the poorest countries. But is support the poor countries to grow the only and most important reason for giving aid? Studies have found out that there are other reasons actually more important reasons for giving aid. Aid has been given to serve the donor’s self-interests which include commercial and economic benefits. Foreign aid doesn’t always go to the poorest countries because of commercial interests and economic benefit donor (developed countries).

Commercially, countries that are major trading partners of the developed country that gives aid have received more aid than the more poor countries. Aid helps to create a market for the recipient’s products. So aid is given to create markets for products of the donor. The donor uses tax payers’ money and in return obtains market for the goods of the tax payer. This creates more jobs in the donor’s country. More effective demand for goods leads to more production of those goods. More production in agriculture and related industries wherever may call for more labour.

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Food aid and technical assistance for aid funded bilateral projects usually come from the donor country rather than the recipient country. This means that more jobs are being created in the recipient country. Most donors insist on their nationals heading the projects even though they may lack the requisite country expertise (with inexperienced ‘young mainly boys’ sent to recipient countries). Some of us who worked with them know that they have deficiencies in understanding the operations and systems of government; and therefore, less competent and less knowledgeable12 to advise their local technical staff who are their supervisees. Sometimes they tend to evaluate the local technical staff so that they don’t deputize them on the next projects. The followers of their taxpayer’s money (‘follow the money’ approach of donors) are paid very well in hard currencies (with a hardship allowance as well). Their salaries are exempted from taxes. They don’t pay local taxes such personal income tax (PIN) – in some countries it is called Pay as you earn (PAYE). Their sometimes-luxurious vehicles that they drive are exempted of taxes. The official vehicles also come from the donor’s country.

There are political and strategic considerations. Studies have found out that aid does not usually go to the ‘neediest’ countries. These studies conclude that “We find considerable evidence that the direction of foreign aid is dictated by political, strategic considerations, much more than by economic needs and policy performance of recipients” (Alesina and Dollar, 2000:213). Most aid based on political considerations goes to relatively better offer countries. According to Todaro (1989:483), the direction of total aid is not always given to the neediest countries. Most aid based on political and military considerations goes to relatively well-off third world countries. For example, of the ODA by income group 2011 (net disbursements) in USD millions, US$ 3 412 million went to the least developed countries. This is the biggest group including majority of SSA countries. Meanwhile, US$11,531 million went to the upper and lower middle-income countries. These are few but in real terms received more aid than the least developed countries. In fact, the lower middle-income countries received around U$ 8,000 million.

Historically, and currently the donors have given aid for political and strategic reasons. Countries like Egypt, Greece, turkey, Israel, Kenya, and Uganda have received more US aid for different activities and projects because of their geopolitical significance. The political motives were and have been to obtain strategic advantages and instill the aspirations of the US such as ending communism, cultivating democracy, political stability, good governance, human rights, and national and regional security- including fighting terrorism.

Historically, USA used aid during the cold war to stop the spread of communism, and to reward friendly countries. It was opined that if the rich country in the western bloc does not help developing countries in Africa (and elsewhere), they will be won over by Russia14. The friendly countries were usually those that would help USA protect against the spread of communism. Soviet Union also poured money into developing countries to expand the communist ideology15.

12 The author witnessed a situation where his American Project Director, with very little knowledge on trade issues, and government policy making processes, instructed him to go to the Permanent Secretary (PS) (highest civil servant in the Uganda government ministry) and ask the PS to withdraw a draft policy that the line Cabinet Minister already submitted to the Cabinet! Among others, the author’s refusal to do a wrong thing resulted in a poor performance evaluation by the Project Director/Chief of Party. The author decided to call it quits. This is the situation associated with aid.

13 Alesina, A., and Dollar, D., (2000), “Who gives foreign aid to whom and why?” Journal of Economic Growth, 5: 33-63.
14 Friedman, M., 1958: “Foreign Economic Aid: Means and Objectives”, Yale Review, Vol: 47.
15Ghatak, S., 1986: An Introduction to Development Economics. Allen and Unwin Ltd., London , p.129

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Some African countries were pro-east and others pro-west. There were few genuinely pro-no bloc. There was a scramble for ‘friends’ by the capitalist and communist blocs with USA making mistakes by choosing those later Africa’s worst dictators (including Mobutu).

So it can be concluded that the decision to grant aid to another is fundamentally a political decision. Foreign aid has been and always will remain part of the country’s foreign policy and strategy. It difficult for example to find that a country can grant aid to countries deemed enemies. Aid from the powerful to the powerless countries is an instrument of power and politics. The end of the WWII witnessed the eventual emergence of the independent states which needed aid support to progress.

Historical ties with former colonies. Some countries give aid for what has been referred to as ‘corrective justice’16. This is what African leaders and civil society in both the developed and developing countries have been using to push for more aid and debt cancellation. Such themes of guilt, atonement and entitlement resound. Countries assert that they need aid to address historical injustices inflicted on them by rich countries due to slavery and colonial exploitation. Colonial exploitation is associated with the cheap labour that was provided in Africa on cash crop farms (like coffee, cocoa, cotton, etc.) and in mines for gold, cobalt, diamonds, etc. Ethiopia is likely to get a large amount of aid from Italy because of Italy’s brief invasion. Cote d’Ivoire is likely to get substantial amount of aid from France, its former colonial master (Abidjan used to be known as Africa’s Paris)17.

There is another issue of corrective justice. Third world countries are said to continue lagging behind the rest because the rich countries which dominate the global balance of power and trade continue to commit injustices against poor countries and poor people. The claims are that there is commercial and trade exploitation, toxic wastes dumping, and modern day slavery.

Aid reducing the effect of global public ‘bads’ or global negative public externalities: This is a new rationale for the rich countries giving aid to the poor ones. It rests much more on the direct spillovers of the lack of development in poor countries on to the well-being of rich countries18. There is no question that the rapidly globalizing world has created major problems of cross-border and global externalities, and highlighted others. Population, environment, migration and refugees, drugs and crime and disease control are all topics likely to emerge at any conference that deals with the foreign policy agenda of the future, and are all areas where developing countries can affect industrial countries (Cassen 1997 cited in Jayaraman and Kanbur1999). Recent reports of African on boats capsizing and killing more than 130 of the around 500 immigrants died at Lampedusa19 to rich Europe. Every now and again Africans are finding visa to go to the rich countries and disappear. The economic conditions in their countries force even the brighter and well educated out of Africa. What do they go to do in these countries? Odd jobs. Their countries may in rich in minerals, good fertile soils, good weather (no winter, no summer), and non-racist population but the economy pushes them out.

16Burnell, P., (1997): Foreign Aid in a Changing World. Milton Keynes: Open University.
17Collier, P., (2008:113), The Bottom Billion, New York: Oxford University Press
18 Jayaraman, R., and Kanbur, R., 1999, International public goods and the case for foreign aid, in: I. Kaul, I. Grunberg and M. A. Stern, eds., Global public goods: International cooperation in the twenty-first century (Oxford University Press, New York), pp. 418-435.
19 Lampedusa: Immigrants from west Africa died when their boat got an accident enroute to Italy (Source: http://www.bbc.co.uk/news/world-europe-24380247 (accessed on 01/02/14))

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Jayaraman and Kanbur (1999:430) caution on about international public goods as a new rationale for aid. They say that international public goods certainly provide a rationale for international cooperation based on self-interest. But only in certain circumstances do they provide a rationale for donors to continue conventional transfers based on self-interest. At the same time, in the actual implementation of many public goods interventions, conditionality, fungibility, monitoring, sanctions and the like are ever present.

Is aid to Africa working?

There are varying views on the impact of aid on growth of recipient countries. Why it does not work? What are motives for giving aid?; how much actually is received? How much is actually utilized? How comes that some countries that have had rapid economic growth in the past 20 years such as China and India – have not been major aid recipients20. How come that DRC (first and most the world’s richest country via mineral resources endowment) which is the top ODA recipient of aid in Africa is the country with all the problems of wars, exploitation, rapes and corruption, and poverty?

Those who criticize the role of aid in poverty reduction and growth cite that aid bureaucracies among other things. According to Collier (2008:102), overall, despite bureaucracy, aid has been much more successful than oil. Aid has raised growth; oil has lowered it21. He finds that the biggest deviation was that far too much aid was going to the middle-income countries rather than to the bottom billion22 (or less developed lower income countries). In his view, aid alone is really unlikely, to be able to address the problems of the bottom billion, and it has become so highly politicized that its design is often pretty dysfunctional23. He supports development aid24 as opposed to direct support for consumption in the landlocked countries is to improve their transport links to the coast. That aid should have been financing the regional transport corridors that are the lifelines for the landlocked. It has hugely failed to so25.

Why aid is not working effectively?

Let us indulge in stating the reasons why aid is not working. We look at them here.

Aid is for creating jobs for the donors……..it is money spent for creating markets for the donor’s products. Before we look at why aid is not in the interest of Africans, we need to know why the donors give it. Is the objective of giving aid for benefiting the recipient or the donor countries?

20 Easterly, W., and Pfutze, T, (2008), “Where Does the Money Go?”, Best and Worst Practice in Foreign Aid’
21 Collier, P., (2008), The Bottom Billion, New York: Oxford University Press
22Collier, P., (2008:104), The Bottom Billion, New York: Oxford University Press

23Collier, P., (2008:99), The Bottom Billion, New York: Oxford University Press
24 IMF developmental aid (DA) as aid expended in a manner that is anticipated to promote development, whether achieved through economic growth or other means. Non-developmental aid (NDA) is defined as aid of all other kinds. One way to think about this definition of DA is that it is possible to rank-order aid expenditures based on the extent to which they are expected to promote development. Subsequently, one can identify a threshold of effectiveness in promoting development that will determine developmental and non-developmental expenditures. (IMF2009:7-8), “Development Aid and Economic Growth: A Positive Long-Run Relation”, IMF Working Paper, WP/09/118).
25Collier, P., (2008:107), The Bottom Billion, New York: Oxford University Press

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Aid is part of the foreign and policy and strategy of the country that is giving another country that aid. No country designs its foreign policy and strategy so that it benefits more other countries than itself. Not true at all. As one South African reggae music icon, the late Lucky Dube sang “Blessed is hand that giveth than the one that taketh”. According to the EU, the motives for giving aid to African, Caribbean and Pacific states (ACP) is to create markets for EU imports and employment for their citizens. In their 28-page publication entitled “20 Questions and Answers”, March 1996, the EU gives two key reasons why it gives aid: markets for imports and employment for EU citizens. “Experience has shown that over the medium-term development in countries receiving aid leads to increased consumption, which in turn produces growth in their imports of goods and services from the donor countries”26. Almost half of the money given in aid comes back to the EU according to this publication. It states that “for every 100 ECU spent on aid, the community recovers ECU 48 in projects, supplies and technical assistance purchased from European companies”27.

A lot is promised but little is actually given. This is the case for the EU and US which are the key donors to Africa. What is promised in the Memorandum of Understanding or cooperation documents is not what is actually received on the ground in Africa. More money is in the contract but never reaches African countries. It remains in the donor’s country paying for maize flour and beans( these can be produced locally with the support) or cooking oil or vehicles that have to be procured from home country (except in rare situations with several approvals can you buy a vehicles for a US project that is not made in the US). Money remains in the donors countries to pay salaries of those ‘following the money’28.

Tarnoff and Lawson (2011: 18-19) try to answer the question: How Much of Foreign Aid Dollars Are Spent on U.S. Goods? Tarnoff and Lawson (2011: 18-19) write that most U.S. foreign aid is used to procure U.S. goods and services, although amounts of aid coming back to the United States differ by program. They continue to write that for some types of aid, the legislative requirements or program design make it relatively easy to determine how much aid is spent on U.S. goods or services, while for others, this is more difficult to determine. They present the following:

1. USAID. Most USAID funding (Development Assistance, Global Health, and Economic Support Fund) is implemented through grants and cooperative agreements with implementing partners. While many implementing partner organizations are based in the United States and employ U.S. citizens, there is little information available about what portion of the funds used for program implementation are used for goods and services provided by American firms.

2. Food assistance commodities are purchased wholly in the United States, and generally required by law to be shipped by U.S. carriers, suggesting that the vast majority of food aid expenditures are made in the United States.

3. Foreign Military Financing, with the exception of certain assistance allocated to Israel, is used to procure U.S. military equipment and training.

26 European Commission (1996), “20 Questions and Answers”, Development, Vol. VIII/53, March 1996, page 7
27 European Commission (1996), “20 Questions and Answers”, Development, Vol. VIII/53, March 1996, page 7

28Research has revealed that most of those who ‘follow the money’ in African countries to work on their country’s donor funded projects are paid at time more than 30 times the salary of their local but qualified deputies.

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4. Millennium Challenge Corporation. The MCC uses procurement regulations established by the World Bank, which calls for an open and competitive process, with no preference given to donor country suppliers. As a result, MCC contracts are sometimes awarded to firms from developed countries other than the United States, which has been a source of some controversy.

5. Multilateral development aid. Multilateral aid funds are mixed with funds from other nations and the bulk of the program is financed with borrowed funds rather than direct government contributions. As a result, the U.S. share of procurement financed by MDBs may even exceed the amount of the U.S. contribution.

Aid is not given to boost economic growth. I have already said that aid is mostly given for non- economic considerations. So why expect it to influence economic growth. It was not given for that purpose. Globally, Curt Tarnoff and Marian Leonardo Lawson29 at the Congressional Research Service, in their CRS Report for Congress prepared for Members and Committees of Congress they show that a small percentage of US aid is for economic growth. According to them, in FY2010, U.S. foreign assistance totaled US$39.4 billion, The U.S. Agency for International Development and the State Department, the primary administrators of U.S. foreign assistance, provided US$10.38 billion in security-related assistance; US$10.93 billion for health, education, and social welfare programs; US$3.64 billion for governance programs; US$5.21 for economic growth activities; and US$4.98 in humanitarian assistance (Tarnoff and Lawson 2011).

Donors concentration of ODA in social sectors: United Nations Commission for Africa (UNECA) based at the AU headquarters in Addis Ababa, identifies an external factor why Africa has not transformed: the disproportionate concentration of ODA in the social sectors as opposed to the productive sectors of agriculture and industry30. According to UNECA (2013), aid should be geared towards promoting structural transformation. It notes that structural transformation is crucial for sustained economic growth and poverty reduction in Africa. UNECA (2013), history and econometric evidence show that countries that have been successful in creating significant employment and reducing poverty are those that have gone through the process of structural transformation involving an increase in agricultural productivity accompanied by an increase in the share of manufacturing and modern services in output. Unfortunately, most African countries have not gone through the normal process of structural transformation. In 2008, the share of manufacturing in output was about 11 per cent and there is evidence of de-industrialization in the region31.

UNECA has identified some of the reasons why aid has not made structural transformation of Africa possible. UNECA research (2013)32 also provides reasons why aid has not played this crucial role of boosting domestic resource mobilization in the past. They are stated as:

i) Current aid allocation mechanisms rely on identifying a financing gap and then seeing how aid could close this gap. This approach can undermine incentives for savings and tax collection and needs to be re-examined33.

29 Specialist in Foreign Affairs and Analyst in Foreign Assistance respectively at the Congressional Research Service
30 UNECA (2013:4), “Economic Transformation for Africa’s Development”, C-10 Meeting April, 2013 Washington D.C.

31 UNECA (2013), “Making Aid Work for Africa”, ECA Policy Brief No.007, 2013 32 UNECA (2013), “Making Aid Work for Africa”, ECA Policy Brief No.007, 2013 33 UNECA (2013), “Making Aid Work for Africa”, ECA Policy Brief No.007, 2013

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  1. ii)  As a result of emphasis on the MDGs, there has been a shift in aid allocation from eco- nomic infrastructure and production to the social sectors. This shift has negative consequences for the development of productive capacity crucial for dynamic and sustained growth. By stimulating growth, Governments create the necessary condition for enhancing domestic revenue and private savings. In this regard, it is important that financ- ing of social sectors is not achieved at the expense of financing of the economic infrastructure and production sectors34. These sectors should not be in competition with each other because financing for economic infrastructure can make a positive contribution to growth and generate more revenue for finance of social sectors. Yet, according to UNECA (2013:8)35, Africa lacks key infrastructure such as paved roads, access to reliable sources of energy, safe water and the internet. In fact, less than 10per cent (in 10 countries) and less than 50per cent (in 33 countries) of roads in Africa are paved, 40per cent of Africa’s population lack access to safe water and despite a fast penetration rate of ICTs across the continent, access to the internet (3per cent) is extremely low. This hinders doing business in these country by increasing the costs of transport.
  2. iii)  ODA flows to Africa often finance domestic consumption rather than investment which is an engine of growth and is necessary to generate revenue36.

Donors decide projects and where to put the aid money, the technical people from the governments of the recipient countries. Experience has shown that some projects on which the donors put money have not been chosen as priorities by the technical people in the beneficiary country. Such projects take long to get local technical buy-in; you also find that the priorities that have been identified by government are not supported. It is not uncommon to find that there are various projects falling under a ministry but yet that ministry has most of its priorities identified in ministerial policy statement, budget framework papers and medium term expenditure frameworks not covered. When the technical try to resists projects that do not fall under their priorities, they will be reported to higher authorities and may lose jobs.

There is competition for giving aid and because of this aid ends up doing nothing. There is another side to aid. First, countries compete to give aid to some countries. Donors often trip over each other and fail to coordinate37. In the end you find that donors are funding the same projects and others important activities are ignored. Technical officials tell researchers that donors don’t consult them but simply come with already made projects; and ask them to work together and implement them. There is some anger brewing within the technical side of government. Usually the departments or ministries of government prepare their strategic plans for at least 3–5 years. These plans identify areas and activities of priority. In line with their strategies, they made ministerial policy statement annually indicating prioritized activities and the budget. Donors ignore this and fund areas and activities that the technical people deem not priorities. So it is possible to find a country with a lot of aid money yet ‘crying’ for underfunding for priorities.

34 UNECA (2013), “Making Aid Work for Africa”, ECA Policy Brief No.007, 2013
35 UNECA (2013),“Economic transformation in Africa: Drivers, Challenges and Options”, Issues Paper, Prepared for the Third Meeting of the High Level Panel of Eminent Persons, 30th January to 1th February, 2013
36 UNECA (2013), “Making Aid Work for Africa”, ECA Policy Brief No.007, 2013
37 See Collier (2008:101). The Bottom Billion. New York: Oxford University Press

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Effects of aid on governance and public institutions: Aid may worsen the governance issues. Corruption is often cited. Corruption has been blamed as the cause of the failure of aid effectiveness. Aid has been used by technical officers in most African countries to enrich them not the target beneficiaries. Aid does not always help to build and strengthen effective local public institutions. Studies38 have found out that instead countries with good local institutions are the most able to use aid effectively.

Domestic and export subsidies for countries such the EU, USA and Japan make aid ineffective in the recipient countries. The donors who give subsidize their exports of agriculture and compete with African countries which face higher production costs.

Could it be that there are modest amount of aid reaching the poor? There in another argument by Kharas and Rogerson (2012:10)39 that the amount of aid money reaching poor people is relatively modest. They state that a considerable fraction of ODA is in the form of studies, administrative overhead, debt relief and other efforts, and country partner administration of the aid projects or programes plus corruption40. This makes the official funding actually available for development projects and programmes in poor countries (what the DAC calls country programmable aid, CPA) as little as $40 per poor person per year41.

Diminishing returns of foreign aid: How much is too much aid?

There is no standard rate of figure that has been suggested and empirically agreed as too much aid. It all may depend on the local conditions; and this varies. Riddell (2007)42 raises the issue of absorptive capacity, indicating that studies have shown that the more aid a country receives, the more likely it is that additional amounts of aid will be used less and less efficiently. Collier (2007) quoting studies from the Center for Global Development which suggest that diminishing returns sets in when aid reaches about 11per cent of a country’s GDP. Moss et al (2008)43 quote studies which in one case suggest the limit of 5per cent of GDP.

In another study, depending on the local conditions, the limit is suggested at anywhere between 15 and 45 percent. There have been suggestions such as that of Wood that the upper limit of aid a country should receive (before diminishing returns set in) should be set at 50 percent of tax revenues (excluding oil and other natural resources revenues)44. The reasons for apportioning this is so that a government is dependent on its citizens for most of its revenues, therefore faces strong incentive to pay attention to the needs of its citizens. More often, it has been argued that too much aid makes governments ‘less listeners’ to their citizens. They are more accountable to

38 Moss, T., Petterson, G., and van de Welle (2008). “An Aid-Institutions Paradox? A Review Essay on Aid dependency and State building in Sub-Saharan Africa” in, Easterly, W., (Ed) Reinventing Foreign Aid, Cambridge Mass: MIT Press.
39 Kharas, H., and Rogerson, A., (2012:10), “Horizon 2025: creative destruction in the aid industry”, Overseas Development Institute, July 2012

40 Kharas, H., and Rogerson, A., (2012:10), “Horizon 2025: creative destruction in the aid industry”, Overseas Development Institute, July 2012
41 Kharas, H., and Rogerson, A., (2012:10), “Horizon 2025: creative destruction in the aid industry”, Overseas Development Institute, July 2012

42 Riddell R.C., (2007). Does Foreign Aid Really Work? Oxford: Oxford University Press.
43 Moss, T., Pettersson, G., and van de Walle, N., (2008). An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State building in Sub-Saharan Africa. In Reinventing Foreign Aid (Eds) Easterly, W., Cambridge MA: MIT Press.
44 Wood, A., Financial Times, 15 September 2008.

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the donors than the citizens. Another reason that Wood suggests that percentage is so that it becomes an incentive for government to raise more tax revenues in order to gain more aid.

Effects of aid on growth: impact of aid

Studies find that aid has a particularly strong negative effect on domestic tax revenues in low- income countries and in countries with relatively weak institutions45. When we look at both direct and indirect effects of aid on the economy, we find this: The direct effects alter production, incomes or consumption as a direct consequence of some project or intervention, while the indirect effects are less easily identified. Aid to public sector projects, for example, releases resources which can be used for cuts in taxation and borrowing, or increases in expenditures. The private sector is indirectly affected, for example, via changes in relative prices. Aid may also affect the policy environment. Both via direct and indirect channels aid may have an effect on investment. Since the long term aim of aid is that the recipient country should grow from its own resources, the impact of aid on domestic resource mobilization is also essential (Bigsten1998:6).

References

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