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WHAT IS FOREIGN AID AND DOES IT WORK?

06 / 02 / 2020 Waya Quiviger

Summary

Foreign aid is assistance given out by donors such as governments or NGOs for several reasons, ranging from moral or altruistic interests to political or economic ones. However, once the aid is distributed, there is no tracking mechanism for this aid. For this reason, some experts question the effectiveness of foreign aid. Others argue it is crucial in order to solve the poverty trap.

 

Professor’s bio

Waya Quiviger has worked for the World Economic Forum in Geneva as Manager of the Global Leaders for Tomorrow (GLTs), a community of outstanding young leaders, many of them social entrepreneurs. She has also consulted for the Women’s Forum and the Club de Madrid.

She currently teaches Global Governance & International Organizations and Aid, Development and Social Entrepreneurship in the Bachelor in International Relations and in the Master in International Relations. From 2009 to 2018, she was the Executive Director of the Master in International Relations.

Quiz

Transcript

What is Foreign Aid and does it work?

Foreign aid or foreign assistance is defined as “the international transfer ofgoods,services or capital from a country or international aid agencyto a recipient country or its population”

It consists of all resources transferred by donors to recipients

There are several types of aid, including:

  • humanitarian and disaster relief, such as in the case of a tsunami, an earthquake, or a conflict causing the displacement and suffering of civilians
  • economic aid to sponsor development or investments in infrastructure for example
  • military support which is used to assist a country or its people in its defense efforts
  • healthcare programs, such as those involving family planning, reducing infant mortality or prevention of a particular disease

So who provides foreign aid?

  • Foreign aid can be public. This is also known as Official Development Assistance (ODA).
    • Public aid can be Bilateral, given by the government of one country to another (such as USAID, the Spanish Agency for International Development Cooperation,AECID),
    • Public aid can also beMultilateral (which is aid provided by one or multiple countries to or through a multilateral agency such as the UN, the World Bank, or the IMF)
  • Alternatively, foreign aid can be Private Development Assistance  is generally provided by NGOs or charity-based organizations such as theRed Cross, or Oxfam

Now, why do countries give foreign aid?

There are multiple answers to this question, ranging from the most idealistic and altruistic motivations to the most cynical and strategic. But in a nutshell, countries give foreign assistance for 3 main reasons.

  1. Moral or ethical or altruistic reasons
    • Aid could be given in compensation for past wrongs, past exploitation or consequences of colonialism
    • It could be given to counter the uneven distribution of global natural resources and global wealth and to promote shared prosperity
    • Or it could be that certain countries feel a moral obligation to help those who are less fortunate and wish to help them improve their standard of living
  1. Economic self-interest
    • Aid could be given to develop or expand markets for a donor country’s goods
      • A good example of this is Tied aid. Tied aid is foreign aid that must be spent on goods or services produced in the country providing the aid (the donor country).
    • Or aid could be used to dispose of surpluses, if a donor country wants to get rid of surpluses in either goods or commodities
  2. Political reasons:
    • Or reasons of strategic self-interest, a country provides foreign aid in order to buy friends and influence, mainly for security reasons. For example, during the Cold War, the US used aid as a way to incentivize countries to side with them instead of the Soviet bloc

So, does aid work?

Well it depends on who you ask. There is currently a raging debate around the impact of aid. I would argue that there are two camps in this debate:

The first camp consists of proponents of foreign aid which include the economists Jeffrey Sachs,Paul Collier and the entrepreneur and philanthropist, Bill Gates.

According to Sachs, foreign aid can solve the poverty trap. Extremely poor people are stuck in a vicious cycle of poverty: low per capita income leads to lower savings which in turn leads to lower investment and poverty. Foreign aid can break the cycle by filling the savings gap.

In this same camp, Bill Gates argues that foreign aid has been instrumental in eradicating smallpoxand providing treatments for HIV-AIDS, TB, and Malaria.

The second camp consists of critics of foreign aidwhich include the economists William Easterly, and Dambisa Moyo. They argue that foreign aid only serves to prop up corrupt governments in poor countries who steal the aid and do not use it to provide public goods. Dambisa Moyo further asserts that providing aid for a young girl’s education in a poor country ,although a worthy cause, does not provide her with a job once she graduates from high school.So, what good is an education if there is no employment opportunity afterwards? According to Moyo, what is more effective than aid are investments and job creation.

Other critics like William Easterly believe that the main problem with aid is the Principal Agent problem. For instance: have you ever bought a gift for an unknown person? Foreign aid is like buying a Christmas present for someone you have never met: someone who will never give you feedback on whether they liked it.

This is also known as the Knowledge Problem

Missing feedback also creates weak incentives for giving recipients what they want (this is the Incentive Problem). Plus you must convince someone to finance this present-giving program (taxpayers)who may be aware of knowledge and incentive problems. This leads to more Incentive Problems.

To summarize, akey issue facing aid agencies is the indirect and distant relationship between taxpayers and beneficiaries and the intermediaries or aid agencies between them.

The objectives, incentives and information available to these agents are not always well aligned with the objectives of either the taxpayers or the beneficiaries.

Last but not least, very little follow up is done once the aid is given to measure whether or not the assistance had a positive impact. Most aid agencies provide aid and then forget about it. This in my view is perhaps the greatest problem is the aid sector: lack of follow up. If aid agencies dedicated a portion of their resources to impact measurement, foreign aid would most likely be overwhelmingly beneficial.