Foreign Aid Hurts Developing Countries Instead of Helping Them

Introduction

Foreign aid is defined as any type of assistance that one country transfers to another voluntarily, usually in the form of a gift, grant, or loan. While capital is the most common form of aid, food, supplies, and services such as military or humanitarian assistance also fall in the same category. Throughout the development of the modern world, foreign aid has been a fundamental part of relationships between developed and developing countries, especially at times of conflict, economic crisis, or natural disasters.

Even though foreign aid has been championed by prominent politicians and celebrities the likes of Bono or Madonna, the real implications of aid are often misunderstood. Instead of helping developing countries overcome economic crises and strengthen their position in the international arena, foreign aid hinders development and does little to help populations in need.

Reasons Behind Giving Aid

The idea of wealthier states providing aid to nations in need emerged at the end of the 1960s as the humanitarian crises reached mass media and television (Swanson, 2015). Americans were exposed to the images of children starving in Africa and India, igniting public uproar for the wealthy countries to share their wealth and help populations in need. Besides the public supporting foreign aid, there were also political and economic arguments in favor of assisting foreign countries (Swanson, 2015).

Economists of the mid-twentieth century generally believed that the solution to triggering growth, whether in already rich countries or those that are not, was investing as much as possible into factories, infrastructure, and roads in developing regions. Therefore, to embed a Western model of democracy and market-based economies, the US, alongside Western European countries, encouraged foreign aid to borer and smaller countries that could get influenced by the USSR or China.

As a result, the levels of foreign aid distributed globally soared from the 1960s, reaching their pinnacle toward the end of the Cold War, then decreasing and rising again (Swanson, 2015). Live Aid music concerts increased public awareness about the issues that the developing countries encountered, such as starvation in Africa and the US-initiated multibillion-dollar aid initiatives.

Argument Against: Poor Relationships Between Governments and Their People

However, despite the efforts, the influx of foreign aid to Africa or India did not produce the desired or expected level of economic growth. Instead, significant financial support initiated by wealthy nations has shown to be correlated with slower economic growth, as found by Rajan and Subramanian (2005) in their study on the relationship between aid and growth.

Conversely, the countries that have received less assistance tend to show higher levels of growth, which points to a negative correlation between aid and the development of countries that receive it. The answer to why it was occurring was not clear to economists immediately, but further studies into the subject revealed that the money received from external sources would change the relationship between the governments of developing countries and their citizens.

Foreign aid weakens the connection between governments and citizens because the latter have less control over what officials do in terms of taxes and other strings of control. With foreign aid, governments become less accountable to the people, courts, or the parliament. Since most governments depend on people for taxes to run themselves and provide services to the population, those that manage to get the money from aid will listen to citizens less and do what they want to favor their interests and political desires.

The lack of accountability associated with the inflow of foreign assistance to developing countries has enabled the emergence of so-called ‘white elephant’ projects. Such projects are often expensive and expansive, take longer than estimated, and are expected to instill a level of prestige despite them not performing correctly. Examples of ‘white elephant’ projects include the Lobito Corridor in Zambia, Ghana’s Hope City, and the NTPL Thermal Power Plant in India (Bagcchi, 2020). Governments of developing countries have been continuously investing in grand projects to reach the desired level or status without realizing the need to help their citizens instead.

Argument Against: Corruption in Developing Countries

In support of the argument against foreign aid to developing countries, there is evidence showing extreme levels of bribery and corruption in such regions, which hinders the progress that is expected to appear as a result of financial support. As mentioned in the World Bank report prepared by Andersen, Johannesen, and Rijkers (2020), there is evidence to suggest that aid is being captured by the economic and political elites, which entails that the financial support does not reach its intended recipients.

The finding is consistent with vast anecdotal evidence regarding failed development projects and the elites using the money for their interest. In addition, recent research entailing micro-data from tax amnesties and data leaks illustrated that offshore bank accounts were majorly concentrated at the very top of the wealth distribution in countries receiving foreign aid (World Bank, 2017). In contrast to that, the poorest segments in developing countries often do not even possess domestic bank accounts, making it implausible for them to have any level of control over how the money from foreign aid is distributed and used.

Thus, foreign aid often gets misdirected and mistreated, which halters the expected progress, and suggests that the process itself is flawed and results in more harm than good. The majority of organizations that work in developing countries are forced to deal with excessive corruption, bribery, and general misuse of funds, and there is little effort aimed at combatting the challenge.

Many developed states that support the idea have failed to realize that aid can create perverse incentives for countries-recipients not to mobilize their savings or undertake significant government reforms to battle corruption. Instead, they will continue using the aid for other purposes than development. Sadly, there is no current cure for corruption in the context of foreign aid, but the donor countries should be more aware of it and have a higher level of control over how the recipients can use the funds.

Conclusion

Foreign aid to developing countries does more harm than good because of the imbalance in power and shifting relationships between governments and their populations, as well as issues of corruption that limit project success. The governments of developing countries have used the aid to fulfill their immediate economic and political interests, leaving the populations in need with limited resources, even though the aid was intended to target the latter. The entire system of giving aid to developing countries should be reconsidered, taking into account that countries that received less aid usually perform better compared to those that have.

References

Andersen, J., Johannesen, N., & Rijkers, B. (2020). Elite capture of foreign aid: Evidence from offshore bank accounts. Policy Research Working Paper. Web.

Bagcchi, S. (2020). Asia Pacific’s runaway white elephant projects. Sci Dev Net. Web.

Rajan, R., & Subramanian, A. (2005). Aid and growth: What does the cross-country evidence really show? National Bureau of Economic Research. Web.

Swanson, A. (2015). Why trying to help poor countries might actually hurt them. The Washington Post. Web.

World Bank. (2017). The global Findex database. Web.