Does Reliance on International Aid have a Negative Impact on Developing Countries?

By Ayesha Adeel – Pakistan

International aid is one of the most important tools used in global programs to combat poverty, mitigate the aftermath of disasters, and promote economic development in the developing world. 

However, whether reliance on external aid actually sacrifices the independence of aid-receiving countries is a moot point. International aid supporters emphasize aid can spur development, create and strengthen institutions, and allow effective responses to emergencies. Opponents argue such aid promotes dependence, undermines governance, and stifles individual efforts and growth of developing countries. This debate gains further relevance given the substantial scale of international aid, which, as per the Organisation for Economic Co-operation and Development (OECD, 2022), totaled over $178 billion in 2021. This paper aims to determine whether the overall effect of international aid on developing countries can be considered negative, rather than positive, by considering economic, social, and institutional factors. 

In this essay, the term "international aid" refers to financial, technical, and humanitarian assistance provided to developing countries to combat poverty, address post-conflict recovery, respond to disasters, and promote economic development. The essay highlights debates surrounding its effectiveness, with proponents emphasizing its role in spurring development and strengthening institutions, while critics argue it can foster dependency, undermine governance, and entrench corruption. Various global examples, including Malawi and Rwanda, illustrate the complex and context-dependent impacts of international aid. 

In her publication Dead Aid (2009), Dambisa Moyo, a Zambian-born economist with a PhD from Oxford University, contends that the provision of international aid perpetuates a cycle of dependency, especially within African countries. She argues "foreign aid has trapped developing nations in a cycle of aid dependency, corruption, market distortion, and further poverty" (Moyo, 2009, p. 47). She argues such aid deters governments from implementing revenue-generating activities, like setting up taxation regimes, resulting in economic stagnation. For instance, Malawi receives over 40% of its national budget as foreign aid, hence it becomes vulnerable to donor pullout and international shocks (Moyo, 2009). In such a scenario, where there is no immediate necessity to generate internal revenue, governments might be reluctant to implement reforms necessary for improvements in tax collection or diversification of their economic frameworks, creating a vicious cycle of aid reliance. This view is supported by the book, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly in 2006, who is the co-founder of the NYU Development Research Institute. The books argues "Aid bypasses local governance frameworks, weakening state accountability and undermining its ability to provide services to its citizens" (Easterly, 2006, p. 89). In Uganda, for example, donor-funded projects have been criticized for developing "parallel bureaucracies” (Easterly, 2006) which bypass local institutions and make the state weak in the provision of health care and education services. 

In his work, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Paul Collier, Professor of Economics at Oxford University and a former chief of the World Bank's Development Research Group, gives a comprehensive critique of the negative impacts of aid dependence on corruption and official failure, particularly in conflict or fragile states. In his opinion, foreign aid, rather than bringing about sustainable development, is often an instrument subject to manipulation by elites: "Aid often finances the luxuries of the elite while leaving the poor in destitution" (Collier, 2007, p. 126). His book bears witness to the fact that in the situation where institutions are weak, foreign aid can become a revenue source alternative for corrupt officials and allow them to evade essential economic reforms and even fortify their base further. Collier (2007) argues in his book that in weak states, large sums of money that were meant to be used on infrastructure and humanitarian relief were embezzled by government officials. This led to the loss of popularity of foreign aid among citizens. This is illustrated by aid embezzlement in countries like South Sudan. The Office of High Commissioner for Human Rights (OHCHR) states that “President Salva Kiir himself admitted as far back as 2012; South Sudan’s ruling elites had diverted more than $4 billion USD” (OHCHR, 2021). 

Economists James A. Robinson and Daron Acemoglu support Collier. They write about the interplay between foreign aid and failing institutions in their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012). Acemoglu, an MIT economist, and Robinson, a political science researcher at the University of Chicago, think that foreign aid can prop up bad political systems. This assists those in power in keeping power and resources in their hands. They think, "foreign aid can reinforce extractive political institutions, enabling elites to tighten their grip on power and resources" (Acemoglu & Robinson, 2012, p. 202). Their book demonstrates that in Haiti, among other places, donors' lack of coordination resulted in aid programs that increased inequalities rather than decreasing them (Acemoglu & Robinson, 2012). Their book supports Collier's argument by giving historical and contemporary examples that demonstrate how aid filtering through weak institutions results in no forward progress. 

Afghanistan's reliance on foreign aid during its post-conflict reconstruction period suggests the overlap of security issues and governance failures. In responding to this query in their study on the effectiveness of aid, development economics experts Dirk Bezemer and Richard Jong-A-Pin provide evidence to the claims of Collier and Moyo. Foreign aid, according to their study, breeds dependency and not independence unless supported by the strengthening of institutions (Bezemer & Jong-A-Pin, 2013). Their analysis of the Afghan experience suggests that regardless of the massive amounts of money spent on infrastructure and public services, lack of good governance and lack of local engagement ensured that most projects relied on unsustainable undertakings. 

Dambisa Moyo, an economist educated at Oxford and with work experience at Goldman Sachs and the World Bank, happens to be one of the most influential foreign aid critics. Her perspective does have its flaws, though: she mainly advocates for private investment and trade as alternatives, without addressing cases where aid has successfully contributed to development. For instance, Rwanda's success at levering aid to rebuild institutions and spur economic growth defeats the general argument she advances that aid is inherently harmful. Paul Collier poses similar criticalness about aid practices reinforcing corruption instead of helping break chains of patronage that reduce governments to such frail structures. He writes about the relationship between aid and elite enrichment; however, one gets the impression that, as a whole, he does not place any significant portions of these governance failures anywhere but entirely on the shoulders of aid. Paul Collier points out problems emerging from aid use in South Sudan but tends not to analyze deeply the problem of deep political instability that dates far back from even the emergence of massive influxes of aid into the nation. In important ways, both Moyo and Collier give essential insights into the risks associated with aid dependency; however, their arguments rest upon debates from the late 2000s and early 2010s. So much has changed globally in the conduct of aid since then, with developments in regional partnerships and China's increasing role in development financing instead of growth models they respectively denounce. 

Moyo and Collier's arguments have a similar approach, although on different fronts. Moyo claims that aid negates self-sufficiency in that it kills revenue generation and local enterprise development. In the case of Collier, weak governance permits aid to feed into corruption and inefficiency. Both, although differing in emphasis, argue that aid promotes underdevelopment even if intended well. In his analysis of the budgetary dependence of Malawi, Moyo illustrates how structural flaws in aid manifest in a different context, as does Collier in his study on corruption in South Sudan. Their argument is further corroborated by Acemoglu and Robinson (2012), who argue that foreign aid reinforces extractive institutions, and by Easterly (2006), who argues that bypassing local governance weakens state accountability. 

The opposing argument is exemplified in Jeffery Sachs' 2005 book, The End of Poverty. Sachs is a well-known development economist and former director of the Earth Institute at Columbia University who claims that foreign aid "when properly designed and targeted, can break the poverty cycle by investing appropriately in health care, education, and infrastructure." These targeted investments are significant to foster long-term development and make national self-sufficiency better. Based on the case of the Millennium Villages Project, Sachs demonstrates his argument that improvements in health care, education and infrastructure have, in fact shaped the living standard of rural Africans. Nobel Laureates and MIT professors, Banerjee and Duflo further support this opinion with strong evidence from microeconomics in Poor Economics (2011). They propose that "small changes can make a big difference," as proven by the influence of conditional cash transfers, which created Bolsa Família in Brazil, through which school enrollment increased and poverty decreased. 

The Nobel Prize-winning economist, Amartya Sen of the book Development as Freedom, 1999, asserts that "the process of widening human freedoms is what development is about, and assistance can have an important role in the strengthening of democratic institutions and human rights." He cites Ghana, which has seen increased political stability following public health- and education-related initiatives supported by aid. More precisely, the case of Rwanda clearly exemplifies how aid is very vital to the reconstruction of post-conflict institutions. From the reports from UNDP, "aid helped rebuild judicial and administrative systems, fostering long-term governance stability," where there was an overt function of foreign support to govern institutions. Analogous to that is the contribution made by the World Bank as aid for infrastructural development that helped greatly in recovering the nation toward stability. These examples clearly show how aid can stabilize nations and contribute to long-term development. 

To evaluate, “The End of Poverty”, written by Sachs in 2005, presents a case where aid can break poverty traps- an exemplar of the Millennium Villages Project. While the richness of experience in fieldwork and policy-making adds credibility, his optimism overpowers governance challenges and long-term sustainability. Harvard Nobel Prize-winning economist Amartya Sen has taken a more general institutional approach in Development as Freedom (1999), which takes aid to enhance human capabilities and democracy. His credibility is unquestionable, but his qualitative approach lacks the empirical rigor of more data-driven studies. Since his view has not been empirically tested, it is more theoretical than the newer studies. Other economists include Banerjee and Duflo from MIT, Nobel laureates in their own right. They discuss how Bolsa Família-style targeted aid is actually effective, by using randomized controlled trials. These arguments, already developed in the essay, help to point out just how well-targeted specific interventions can really affect poverty alleviation. However, doubts still linger about whether their findings will scale up since, in most of their studies, they tend to be localized to a specific context. The problem is whether similar success can be replicated on a much larger national scale with a myriad of different institutional and economic variables coming into play. 

From the synthesis of Sachs and Sen's arguments, it is evident that international aid may be strategic and work to build self-sufficiency. Sachs focuses on breaking the poverty traps by investing in infrastructure and economic development while Sen brings in institutional freedoms and stability. 

While Sachs emphasizes concrete outcomes such as the Millennium Villages Project, Sen focuses on democratic and human rights improvements as seen in countries such as Ghana and Rwanda. 

Together, these views show that successful coordination of aid can be a contribution to not only immediate development goals but also to long-term self-sufficiency. 

Both arguments on international aid are strong in their own ways, yet they also raise the complexity and double-edged nature of aid's impact. The first argues that aid would lead to dependency and a degradation of governance. The second focuses on the possible impetus aid gives to development and institutional change. When weighing these two perspectives, one can easily determine that the effectiveness of aid varies with context in terms of factors such as governance, implementation, and external conditions. The case of Malawi and Rwanda highlights how the effective use of aid depends not just on the volumes of aid delivered but also on the capacity of governments to implement and utilize those volumes of aid effectively. 

While both sides argue for the complexity of aid and self-reliance, I find the argument against aid dependency more convincing. Evidence from Malawi and South Sudan shows how, without proper management, it makes the recipient country corrupt and stagnant. Cases like Rwanda, however, show that with good governance, aid can be useful in supporting development. I would therefore tend towards a middle ground: aid is beneficial under certain conditions. The key issue is not aid itself but how it interacts with governance and institutions, making its impact highly context-dependent. 

In hindsight, if I had more word space, perhaps I would really explore how those countries have best transitioned successfully from aid dependence to self-sufficiency-the role of governance in shaping these processes. As a matter of fact, South Korea and Botswana are perfect examples for studying what policies they used to implement their aid very effectively. I would like to investigate in more detail how emerging donors like China and India are transforming global aid dynamics because of their alternative approaches. Of course, one of the topics that interests me is the promise of technology for aid distribution-the study of data analytics for making aid programs more transparent and accountable would be another direction. 

Bibliography 

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