Is Aid an Effective Tool for

Development?

January 2013

Mohammad Haris Wahidi

University of Birmingham

United Kingdom

January 2013 1
Introduction:

It is fair to argue that in order for aid to be effective, it is most important that it is properly
distributed based on the objective assessment of development needs in recipient countries.
This is probably the most important starting point and therefore one of the themes of this
paper will be a discussion of donor motives and their impact on the development agenda. For
example, some countries such as the UK and France are motivated by their colonial past
when determining the amount and recipients of aid and the US is often motivated by its
strategic interests. On the other hand, China is motivated by its interest in the African raw
material. Some examples of this instances shall be provided in the discussions that follow.

A discussion of the relationship between aid and development may be best understood by first
exploring the meaning of the concepts of aid and development. Therefore, this paper shall
first seek to define both aid and development and introduce the biggest donors and recipient
countries. Then the link between aid and development will be explored in some detail before
drawing a conclusion as to whether aid is an effective tool for development.

Definition:

Aid can be defined as a voluntary transfer of money from a rich country to a poorer country.
Mainly, there are two types of aid i.e. humanitarian aid and development aid. Humanitarian
aid is an ad hoc response and is aimed at saving and protecting life and alleviates immediate
suffering. In contrast, development assistance (ODA) is long term and aims to reduce poverty
in general by stimulating economic growth. Insofar as ODA is concerned, the OECD defines
it as "..flows to countries or territories on the DAC list of ODA recipients and to multilateral
development institutions…" (OECD 2008). This flow of money needs to meet two
requirements in order to be classed as ODA.

1) "It should be provided by official agencies, which includes states and local governments,
including their executive agencies" (OECD 2008);

2) each transaction of which:

a) is administered with the promotion of economic development and welfare of developing

b) is concessional in nature and conveys a grant element of at least 25% (OECD 2008).

The definition offered by OECD does not include types of assistance that have historically
been considered as aid, such as military aid or aid provided by new donor countries such as
China. Aid can be divided further into three types. 1) project aid consists of a number of ad
hoc initiatives aimed mainly at construction such as building schools, roads and other
infrastructure; 2) program aid supports specific sectors within the recipient country such as
health and education and is mainly administered through the through the relevant government
ministry; 3) budget support is help provided to the overall budget of the recipient country.

On the other hand, development can simply be defined as a process of growth and progress,
which should have a positive impact on the lives of people by, for example, reducing poverty,
access to services and the provision of education. The following discussions shall therefore
focus on who the biggest donors are and what motivates them. It shall also focus on whether
or not aid has been effective in achieving development goals.

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Who are the main donors?

United States, the United Kingdom, Germany, France and Japan were the largest donors by
volume in 2010 (OECD. Denmark, Luxembourg, the Netherlands, Norway and Sweden
continued to exceed the United Nations ODA target of 0.7% of GNI, whilst the largest
increases in real terms in ODA between 2009 and 2010 were recorded by Australia, Belgium,
Canada, Japan, Korea, Portugal and the United Kingdom. The amount of ODA donated by
Australia rose from just over $1.219 billion in 2003 to over $3.826 billion in 2010 (OECD
2011. Similarly the amount donated by the United Kingdom rose from $6.262 billion in 2003
to just over $13 billion in 2010, whilst aid from other countries mentioned earlier also grew
substantially between 2003 and 2010 (ibid).

In addition to traditional donors, China has been playing an increasingly significant role in aid
world. However, in contrast with traditional donors, China provides aid through its own
banking system rather than aid agencies. Countries in Asia, Latin America and specifically
Africa have been the biggest recipients of Chinese aid (China's Foreign Aid 2011:1).

Relationship between aid and development:

The link between aid and economic development is generally controversial. Historically,
different models of aid have had different levels of effectiveness. In the 1980s, it was argued
that aid was effective only at microeconomic level and that it was hard to identify any
positive aggregate impact of aid (Arndt et al 2009:1). Consistent with this, Moyo argued in
favour of a complete cessation of aid to Africa citing reasons from corruption to civil war and
lack of growth (Moyo 2009:54-56). Fuelling more pessimism about the effectiveness of aid,
Rajan and Sabrimanian concluded in 2008 (p.660) that it was difficult to find any systemic
impact of aid on growth (Arndt et al 2009:1). However, an excellent research by Arndt et al
in 2009 has carried out a detailed review of the literature surrounding the impact of aid on
growth and development and after a detailed analysis of the evidence have concluded that
there is strong support for the view that the effect of aid on growth is positive (Arndt et al
2009:29). It has also been argued that a reasonable level of foreign aid can enhance the living
standards of more than a 1 billion of the poorest people around the globe (Arndt et al
2009:30). Therefore it will be a mistake to either abolish or cut back foreign aid. In addition
to this, where aid has led to some growth in many situations, it has been argued that
expectations surrounding the potency of aid have been too high (Arndt et al 2009:1).
Therefore high expectations could have well led to some degree of criticism in relation to the
effectiveness of aid.

Notwithstanding the above view, it must be acknowledged that historically, different aid
modalities have delivered different results. For example, between 1947 and 1952, aid
delivered to Europe through the Marshall Plan contributed to Europe's economic recovery and
led to unprecedented economic growth (George Marshall Foundation). The economic
prosperity that followed the implementation of the Marshall Plan and the role played by the
coal and steel industries in Europe led to the emergence of what is now known as the
European Union (ibid). This has resulted in increasingly strong political, financial, trade and
military ties amongst many European nations.

Later in the 1980s and 1990s, the implementation of the Structural Adjustment Programmes
(SAPs) by borrowing countries, particularly in Latin America in response to the 1973 OPEC
oil crisis failed to deliver good results. SAPs were based on the Washington Consensus and
Chile was one of the first countries where these reforms were implemented. This was
followed by the implementation of the SAPs in many other countries in Latin America such
as Argentine, Nicaragua, Bolivia and Mexico. These transformations not only failed to
produce the expected results, it led many countries to financial crisis. In Argentine, the
implementation of the SAPs led to what has been dubbed as the worst crisis in the history of

January 2013 3
the country where the country's debt from $7 billion in 1976 to $139 billion in 1998 (Teubal P.
2004:175). In Chile, the transformation brought about by the SAPs resulted in the worst
economic crisis in half a century (Win 2006 : 40) and in other countries such as Nicaragua
and Mexico, SAPs led to violent uprisings. In Bolivia, it led to the resignation of two
presidents (Sandbrook 2007:48).

Despite the many failures of different aid models to achieve the expected development results,
the impact of the Millennium Development Goals (MDGs) despite all the shortcomings is a
cause for optimism. Its impact, particularly on extreme poverty is encouraging. According to
the MDG report for 2011, global poverty rate will fall to 15% by 2015 as opposed to the
initial forecast of 23% (MDG Report 2011:4). By 2009, child mortality had declined to 8.1
million compared to 12.4 million in 1990. Furthermore, a drop of 21% was recorded in the
number of people who were newly infected with HIV between 1997 and 2009. Access to
clean water increased to 1.1 billion in urban areas and 723 million in rural areas (MDG
Report 2011:4). Therefore there is evidence that aid can reduce poverty and lead to
development.

However, this does not mean that all criticism of aid is therefore unjustified. Amongst valid
grounds for criticism are the motives of donor countries, increase in donor activities in
recipient states and lack of a coherent aid policy. By far the biggest ground for criticism can
be the motive of donor countries, for this is what determines the amount and the recipients of
aid. Unfortunately amongst the biggest aid donors, the primary motivation for aid giving is
commercial, political, military and strategic interests. For example, although the United
Nations Human Development Index classes Israel as a highly developed country, it has
nevertheless been the biggest recipient of US bilateral aid and as of 2012, it had received
$115 billion in US bilateral aid alone (Sharp 2012:8). Egypt has been the second largest
recipient of the US bilateral and military aid since 1979 (ibid). On the other hand, Uganda,
Zambia and Mozambique who are amongst the poorest countries in Africa have received
between $262 million and $799 million in 2011 (US Consensus Bureau 2011). Other biggest
donors such as the United Kingdom, France and Portugal are motivated by their colonial links
to recipient countries (Hoeffler and Outram 2008:4).

Therefore, although in the right context, many criticisms of aid are valid, but we must not
loose perspective. Criticism of aid on grounds of donor motivation or lack of a coherent aid
policy may be justified, but they certainly do not constitute a valid case for arguing that aid
itself has failed. Instead, these criticisms can provide an explanation as to why aid has not
worked as well as expected.

Conclusion:

It was argued earlier that there is evidence that aid can make lives better and lead to economic
growth, reduction in poverty and development as a whole. However, it should also be
acknowledged that some aid modalities failed to deliver results and some even led to
economic disasters in many countries examples of which were discussed in the earlier
paragraphs. There are several factors, which may have contributed to the failure of aid to
achieve good results in the past. Focus on strategic and military interests during the cold war
had shifted focus away from development goals amongst donor countries who were all
involved in one way or another in the cold war. Therefore, the demise of the cold war coupled
with the availability of better data to measure the impact of aid may be plausible reasons why
aid can now be considered to have a positive impact (is aid effective:3). Furthermore, some
countries embraced aid modalities such as the SAPs and neoliberal reforms in response to
pressure and coercion, as they had no other choice (Harvey 2005:3). Therefore the success of
such a modalities was doomed from the start.

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Furthermore, studies have shown that whilst aid works better in countries with good policy
regimes, it has had a positive impact in all countries regardless of the quality of policy
regimes (McGillivray 2004:3). In addition to this, making the MDGs the main focus of
international aid since 2000 has revealed that if utilized properly, aid can be an effective tool
for development. Therefore aid is not inherently ineffective. However its effectiveness
depends largely on two factors. A) donor motivation and B) project design. Two possible
proposals may be considered in order to make aid more effective:

1. Insofar as donor motives are concerned, it must be acknowledged that where donors
are motivated by their strategic and political interests, the impact of their donations
will inevitably not lead to the level of development expected from aid. For example,
aid provided to Israel by the US is highly unlikely to have a positive impact on global
poverty and development, simply because the latter objectives are not the primary
target of aid in this case. On the contrary, however, if the same amount of aid is
allocated to a country with no roads and infrastructure, the impact on development
will undoubtedly be positive, even if it does not reach the expectations of opponents
of aid.

The introduction of the MDGs as the main focus of international aid has sought to
address the problem of donor motives by creating clarity of purpose and a
time limit for achieving development goals. It has been argued that the emphasis of
the international community on the eight MDGs was a clever tactic to prevent the
diversion of aid to non-development goals (Barder 2010:1). It is beyond doubt that
unless donors move away from their emphasis on strategic, political and military
interests as the primary motivation for aid, the impact of aid will always be
controversial.

2. Insofar as project design is concerned, it has been argued that in the process of setting
up development goals, those involved often tend to focus only on goals that can be
measured fairly easily. This has reduced attention to many important development
goals such as democracy, human rights, governance, corruption and violence against
women and children, which are more difficult to measure, but yet vitally important
(Hulme 2007:2). Therefore development goals should be determined by their impact
on the development of a given country and not by whether or not they can be
measured easily.

Therefore to conclude, aid is not inherently ineffective. Its impact is often assessed with
reference to the total amount of aid provided by donor countries and the results are often
disappointing. It should be acknowledged that the impact of aid on development depends
more on the attitude of donors towards development and less on the amount of aid that they
provide. As mentioned earlier, there is unambiguous evidence that aid has had a positive
impact on development, but time and again, donor motives have been criticised for hampering
the achievement of development goals. Therefore the focus should move from assessing
whether aid is an effective tool for development to whether development is the primary focus
of aid, as far as donors are concerned.

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 BIBLIOGRAPHY

Barder, O. 2009. What Is Poverty Reduction?. Working Paper 170. Centre for Global
Development

Harvey, D. 2005. A Brief History of Neoliberalism. Oxford University Press

Hoeffler, A., Outram, V. 2008. Need, Merit or Self-Interest - What Determines the Allocation
of Aid?. Centre for the Study of African Economies. University of Oxford

Hulme, D. 2007. The Making of the Millennium Development Goals: Human Development
Meets Results-based Management in the Imperfect. University of Manchester

Information Office of the State Council. 2011. China's Foreign Aid. People's Republic of
China

McGillivray, M 2004. Is Aid Effective? WIDER, Helsinki, Finland

Moyo, D. 2009. Dead Aid. Farrar, Straus and Giroux, New York

OECD 2008. Is It Aid? Fact Sheet, November 2008

OECD 2011. Development Aid: Net Official Development Assistance

Sandbrook, R. 2007. Alternatives to Neoliberalism in the Third World. Renewal, Vol

Sharp, J M. 2012. U.S Foreign Aid to Israel. Congressional Research Service, 7-5700, RL
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Sharp, J M. 2012. Egypt: Background and U.S Relations. Congressional Research Service, 7-
5700, RL 33003

Teubal, M. 2004. Rise and Collapse of Neoliberalism in Argentina: The Role of

Winn, P. ed 2006. Victims of the Chilean Miracle. Workers and Neoliberalism in the
Pinochet Era 1972-2002. USA. Duke University Press

United Nations: The Millennium Development Goals Report 2011

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George Marshall Foundation Website [online] available at
http://www.marshallfoundation.org/ accessed 12 January 2013

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