Foreign Aid's Impact on Poverty

Introduction

Foreign aid to the developing nations is a synonymous aspect to the developed nations across the universe with billions of dollars being utilised by western powers in aiding the development of poor nations every year. Cunningham et al. (2017) state that the idea of wealthier nations such as the United States to provide foreign aid in the developing nations blossomed in the 1960’s when the mass middle class citizens in developed nations were exposed to the pain and misery in developing nations through the mass media. A great example was the starving of Biafra children in Nigeria, a region that boasted of riches in oil reserves targeted by American and British oil giants. Edwards (2015) explains that the key role of foreign aid is to foster economic growth in the developing nations in such ways that reduce the poverty levels of the residents of the developing nations. A great example if the Millennium Challenge Corporation of the United States whose purpose is fostering the reduction of poverty through promotion of growth in poor nations which create and maintain sound policies and business environments (Glassman, 2011). Since the year 2004, the MCC has been spending close to $1 billion annually in aid to the developing nations. However, the effectiveness of foreign aid to the poor has elicited a hot debate among practitioners as well as empirical researchers. This essay purposed on evaluating the effectiveness of foreign aid in developing nations as well as assessing whether foreign aid actually helps the poor. The essay will provide reasons for as well as reasons against foreign aid. Towards the end, the essay will provide an opinion as well as summary of its main findings.

Does foreign aid help the Poor

Mohapatra et al. (2016) opine that the idea for foreign aid to the developing nations was fueled by a strong economic and political assertion in the western world towards aiding the growth of the developing nations. By the 1950’s, the common belief among economists in the western world was that the key to triggering economic development and growth of nations both developed and developing was through pumping money into the nation’s factories, public transport systems as well as in the nation’s infrastructure. Brown (2016) argues that though meant to aid the growth of the developing nation’s economies, foreign aid was also viewed as measure by the western nations to spread their model of democracy as well as their ideals on market based economies. The empirical study finding on effectiveness of foreign aid in developing nations is largely mixed. McGillivray et al. (2006) study focused on the effects of foreign aid on the African nations in the four decades spanning 1960 to 2000. The study concludes that the decline in foreign aid to developing nations has a negative effect on the achievement of the Millennium Development Goals in the continent. However, while the study concludes that new innovative measures need to be developed for the achievement of the MDG’s, it also concedes that foreign has a positive effect on poverty reduction. The findings of McGillivray et al. (2006) are in line with the postulations of Karas (2006) study on the impact of aid on the growth of GDP in developing nations. Karas (2006) study utilises 70 aid receiving nations for the study while comparing their GDP growth with the level of foreign aid received by the nations. The study concludes that the relationship between the nations GDP growth and foreign aid is both positive and statically significant. There exists a clear evidence of developing nations that have improved their economies based on foreign aid to achieve the developed nation status. Aburgre (2010) explicates that while the correlation between economic development and foreign aid is largely contested, nations like Korea, Thailand, Malaysia and Indonesia espouse that foreign aid is effective for the developing nations. Indonesia and Thailand for example had close to 70% of their government expenditure in the 1980’s being financed through foreign aid. On the other hand, Malaysian and Korean national government budgets were financed through foreign aid to the tune of up to 55%. However, with the foreign aid provided to these developing nations, came the western push for democracy in the nations as well as the establishment of the right business and economic policies for the development of the nations. Azam et al. (2006) opine that the result of the pressure from the western nations, from which the aid was sourced, resulted in the avoidance of long-term dependency on aid by such nations as Malaysia which survived and thrived by expanding its domestic economy and attracting high levels of foreign investment. In the African context, a great example is Rwanda, whose economy was debilitated following the 1994 genocide in the small nation and has had to rely on foreign aid funding its half its budget. Nonetheless, through the initiation of an ideal business environment and investment in infrastructure, the nation’s economy has doubled over the last decade (Clark and Arnason, 2014).

The second justification for foreign aid to the developing nations is humanitarian. Moran (2016) asserts that there persists a moral indignation associated with the current world which experiences adverse poverty levels in the developing nations and vast amounts of wealth in the developed nations. As such, the wealthy feel that it is morally right to come to the aid of their fellow humans living in developing nations. Jaffer and Hotez (2016) opine that foreign aid can help in saving the lives of the poor both in the short and long-term. Diseases such as Polio, Tuberculosis, cholera and HIV/AIDS in developing nations have largely been managed through the aid efforts of the developing nations. This has resulted in saving of millions of lives of the poor as well as relieved the strain on the meager budgets of the developing nations with regards to their expenditure on health and sanitation. Moreover, foreign aid to the nations in Africa and South America has aided in the vaccination of millions of young children from the scourge of such ailments as measles and polio (Moran, 2016). Additionally, foreign aid in the developed nations has also targeted on the provision of dietary supplements for the poor, cash transfers to the poor, educational sponsorships for the bright students from poor backgrounds as well as provision of mosquito nets for the pregnant mothers. As such, it is fair to allude that with regards to the humanitarian aspect, foreign aid has been effective to the poor in developing nations. On the multilateral front; foreign aid provided by financial institutions in the developed nations to the developing nation possesses several advantages for the poor people in the developing nations. Jayaraman et al. (2016) explicate that foreign aid by multinational firms in the developed nations in developing countries results in the new plans for development being initiated. For example, the development plans may involve the construction of new factories in the developing nations creating employment for the construction workers in the short-term and for the factory workers in the long-term. The developing nations also gain from the external economies realized from the multilateral aid which includes the training of labour in their nation as well as higher inflow of technology, decreasing the production cost (Schabbel, 2007). Moreover, the governments in developing nations impose taxation on the incomes derived from the foreign firms investing in the nation. This also helps in shoring up the revenues derived by the developing nations enabling it to provide better services for its citizens.

Nonetheless, foreign aid is viewed as not being effective by several quarters. According To Swanson (2015) alluding that foreign aid hurts rather than aids the poor may sound crazy to some people; however, it is indeed true. Deaton (2013) study in South Africa and India shows that there exists a negative relationship between the government efforts in the developing nations and foreign aid. According to the findings of the study, by providing foreign aid to developing nations, the wealthier nations are corrupting the poor nations’ governments making them less accountable to their citizens and slowing their economic growth. According to Easterly (2003) foreign aid to developing nations in Africa rose steadily in the 1980s and 1990s with more nations in the western world providing more money for both economic and humanitarian causes. However, with the growth in foreign aid came the decline in the growth of the African economies as figure 1.0 below espouses.

Deaton (2013) argues that nations that receive higher level of foreign aid are less accountable to their people since they rely less on the taxes derived from the incomes generated by its citizens. The poor expect the government to provide services to them based on the revenues it derives from their taxes. The citizens in this case, are capable of removing a government that fails to provide basic services to its people. However, foreign aid alters this relationship as it makes the ruling class less accountable to their citizens and transforming what should be beneficial political outfits into despotic and toxic ones. Moreover, foreign aid in terms of loans to the developing nations results in the increase in the level of dependency of the developing nations on the wealthier nations. Aworinde and Onakoya (2016) assert that developing nations may fail to create new methods of generating revenue internally, but, rather seek loans from the wealthier nations. However, in many instances the poor nations do encounter problems paying back the loans in the long-term. This means that the foreign aid received in the short-term not only impends on the creativity of the developing nations in funding their budgets, but also curtails its growth in the long-term as the nation has to make periodical payments for the loans. Thirdly, projects launched through multilateral aid between the developing nation and firms in the developed nations introduce several disadvantages for the poor people living in the developing nations (Jayaraman et al., 2016). Firstly, as a condition for the aid and investment in the developing nations, the foreign government may require that foreign firms from their nation run the project or that a higher percentage of profits be sent back to their nation. This impacts the developing nation given that only few numbers of its poor will get employment while at the same time the nation may also lose revenues from taxes.

Moreover, foreign aid at many times results in the plunder of the developed nations. Calvo-Gonzalez (2006) asserts that foreign aid follows the carrot and stick approach, where the nations extending foreign aid to the developing nations do so as to achieve their own selfish nations. For example, Democratic Republic of Congo receives large sums of foreign aid from western nations whose firms are then offered a chance to exploit the vast mineral resources in the DRC. On the other hand, the donor nations offer aid to other nations so as to formulate military alliances that cement the power of the donor nations in the world. A good example is the Marshall plan initiated by the US to aid the European nations following the end of the Second World War. Gavin and Lawrence (2014) argue that the $12 billion Marshall plan was one of the key reasons that the Eastern European nations supported the United States wars in Asia in the period 1950-1970. Other interests of foreign aid in the poor nations that do not align with helping the poor include the facilitation of the process of dumping of toxic waste as well as destruction of local culture through the imposition of the western culture.

Opinion and Conclusion

To this end; it is evident that foreign aid can be of benefit or detriment to the poor people living in the developing nations. The key aspect that determines the effectiveness of foreign aid as espoused in the above evaluation is the government that is in place in the developing nations. From a humanitarian point of view, it is widely agreeable that foreign aid has foreign aid has resulted in saving millions of lives from such diseases as malaria, HIV/ AIDS, Polio among others while also contributing positively to healthy living of the poor. However, from an economic point of view, aid has resulted in expropriation of resources from developing nations as well as vesting of western interests in developing nations. Nonetheless, it has contributed to the growth of such nations as Malaysia and Rwanda meaning that aid has been effective in alleviating poverty and creating employment in these nations. Overall, the author concludes that aid is effective in the development of developing nations and positively benefits poor people living in developing nations.

References

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Azam, M., Shahbaz, M., Kyophilavong, P., & Abbas, Q. (2016) ‘External sources and economic growth-the role of foreign remittances: Evidence from Europe and Central Asia’, Journal Of Developing Areas, 50(2), pp.367-387

Calvo-Gonzalez, O. (2006) ‘Neither a Carrot Nor a Stick: American Foreign Aid and Economic Policymaking in Spain during the 1950s’, Diplomatic History, 30(3), pp. 409-438

Cunningham, H., Knowles, S., & Hansen, P. (2017) ‘Bilateral foreign aid: how important is aid effectiveness to people for choosing countries to support?.’, Applied Economics Letters, 24(5), pp.306-310

Gavin, F. J., & Lawrence, M. A. (2014) Beyond the Cold War: Lyndon Johnson and the new global challenges of the 1960s. New York : Oxford University Press

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Jayaraman, T. K., Chee-Keong, C., & Chand, P. (2016) ‘Do foreign aid and remittance inflows hurt competitiveness of exports of Pacific island countries? An empirical study of Fiji’, Journal Of Economic Development, 41(2), pp. 111-125.

McGillivray, M., Feeny, S., Hermes, N. and Lensink, R. (2006) ‘Controversies over the impact of development aid: it works; it doesn’t; it can, but that depends’, Journal of International Development, 18 (7), pp.1031–1050.

Mohapatra, G., Giri, A. K., & Sehrawat, M. (2016) ‘Foreign aid, macroeconomic policies and economic growth nexus in India: An ARDL bounds testing approach’, Theoretical & Applied Economics, 23(4), pp. 183-202

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Schabbel, C. (2007) The Value Chain of Foreign Aid: Development, Poverty Reduction, and Regional Conditions. Heidelberg: Physica-Verlag Heidelberg.

Weissman, A. D. (2013) ‘Pivotal Politics–The Marshall Plan: A Turning Point in Foreign Aid and the Struggle for Democracy’, History Teacher, 47(1), pp. 111-129.