Introduction its 1996 self evaluation report, the
Introduction International development has been closely linked to the study of the role of aid in development. As ul Haq points out, ‘… in fact aid has established itself as a mini-neoclassical political economy theory in development studies’ (ul Haq in Martinussen 2002:271). However, studies which have been done to establish the nexus between aid and development besides being, ‘inconclusive, have also been contradictory and rife with inconsistencies’ (Edgren 2002:261). Two competing paradigms have emerged.
A well entrenched view which is identified with neoclassical economics and the Brettonwood institutions maintains that aid is an important engine for development. The alternative interpretation is that development aid does not make any difference. This line of argument is often associated with the neo-Marxist political economy and has its origins in the writings of authors such as Andre Gundar Frank, Samir Amin, and more recently, centre left liberal economists such as Hans Singer.
The fact that aid has been attacked by both the right and left cast doubt on the credibility of the paradigme de l’aide’s (aid paradigm) notion that aid is the prime mover of development. Interestingly, in its 1996 self evaluation report, the World Bank acknowledged that aid has often been, ‘an unmitigated failure’ (Riddell 1997:157). This line of argument represents the key message of this paper. But before venturing much into the discussion a qualification has to be made; It is important to acknowledge Maizel and Nissanke’s observation that, ‘…
both aid and development, each have particulars [specific forms] and to come up with a comprehensive discussion of the relationship between aid and development calls for the consideration of each form of aid (concessionary loans, grants… ) on each development variable such as growth, savings, education, health, the environment… ‘ (Maizel and Nissanke 1984:879). For the sake of brevity this paper shall take a general approach to the question and will only consider the specific forms of aid and development where it is inescapably imperative to illustrate a point.
The discussion shall unfold as follows; formulation of concepts, a critique of the supposed development benefits of aid and finally concluding remarks. Definitions The fundamental idea of aid is a transfer of resources on concessional terms; that is on terms more generous or ‘softer’ than loans obtainable in the world’s capital markets. (Cassen 1994:02). The World Bank defines aid as, ‘the official development assistance directed at the promotion of economic development’ (World Bank 1997:08).
Development has been a more contested concept. It is defined as a process of enlarging choices, not only one choice, that is income which has traditionally been seen as the prima facie for development. Choices here include the enlargement of all human choices, whether economic, social, cultural or political (ul Haq in Martinussen 2002:270). The supposed Benefits of Aid and their Critique. Pronk maintains that aid has positive effects on the development of a country.
The argument put forward is that aid raise growth through the provision of resources to supplement domestic savings (Pronk 2001:612). Using the Chenery and Strout model another argument put forward is that aid can be used by developing countries as a basis for significant acceleration in investment . Chenery and Strout’s ‘two gap’ model argues that to achieve growth, a developing country must have adequate savings for investment and sufficient foreign exchange to buy capital goods necessary for development from the international market.
If the country is deficient in either area, then foreign aid can fill the gap by providing foreign savings to supplement inadequate domestic savings; runs the argument. ‘Thus, by specifying a particular growth rate and holding productivity constant, one can determine the amount of aid needed to achieve that growth by subtracting the domestic saving rate from the growth rate’ (Chenery and Strout in Syder 1990:175). Cassen says that South Asian countries have used aid effectively and this has seen positive impact on growth in India, Bangladesh, South Korea and Taiwan’s economies.
Aid is also said to have promoted growth by supporting productive activities in the export sector. (Cassen 1994:32) Countries which are said to have increased their exports as a result of aid are South Korea, Taiwan, Ivory Coast and Malawi (Cassen 1994:33). Studies using statistical models and aggregate data on aid on a large number of countries seem, though to a lesser extent, to support the notion that aid and growth are positively related.
However studies by economists such as Peter Boone on the impact of aid on growth point otherwise. Boone concluded that , ‘in terms of growth prospects ,no amount of foreign aid can substitute for a developing country’s internal policies'(Boone 1996:290)Using cross-sectional data Griffin,Enos and Weisskopf concluded that there is in fact a negative relationship between aid and economic growth(Griffin et al 2002:14).
In contrast to Cassen’s findings aid in particular leads to a direct fall in domestic savings levels ,setting in motion a vicious circle, further causing a decline in savings and hence in investment, thus leading to a lower growth rate. Challenging the assumed relationship between aid and domestic savings by Cassen, Haalvemo argues that, if the capital inflow is large, then domestic savings could be negative because the inflow could be used to substitute savings as well as for augmenting investment(Haalvemo in Laplagne,Treadgold and Baldry 2001:371).
Gang and Khan slightly adapted Haalvemo’s view and drew the conclusion that governments of developing countries may, ‘deliberately relax domestic saving efforts when more foreign aid is available’ (Gang and Khan 1988:356). Papanek also disputes examples cited by Cassen. Cassen is accused of having manipulated data to support his claim. In fact South Korea and Taiwan did not experience growth as a result of aid but instead, began to register growth only after massive cut off of aid by the United States.
Papanek compares the period 1955 to 1960 when South Korea had 10 percent of its GNP as aid with an annual growth rate of only 2. 3 percent with the 1960 to 1965 period where official US aid was reduced to 3percent of the South Korean GNP and the economy grew by an average 7percent (Papanek in Edgren 2002:264). Lavy and Sheffer examine the cases of Egypt, Syria and Jordan which are now worse off after years of very high aid flows than they were in the 1970s.
They argue that aid resulted in high consumption in the form of subsidised government services and the governments of these countries continued to borrow in order to maintain consumption resulting in the suspension of fiscal adjustment(Lavy and Sheffer in Lensink and White 2002:42)Writing within the Marxist framework where aid is seen as a form of exploitation,Jalee concludes that, ‘growth is preceded by a decline in aid'(Jalee in Riddell 1997:132). According to Cassen aid is important when it comes to relieving poverty in developing countries.
He argues that by contributing to growth, it creates conditions for raising the incomes and consumption of the poor (Cassen 1994:45). However, as noted above aid does not lead to growth, but instead retards growth. Aid is then said to reduce poverty through specific sectoral programmes. The World Bank contends that through its funding of welfare programmes such as education, health, nutrition and housing, aid reduces poverty. (World Bank in Cassen 1994:46). Through the pattern and pace promoted by aid some of the fastest growing economies are said to have managed to reduce poverty ,for example South Korea and Taiwan.
Even welfare indicators are used to show how aid has added life expectancy in China and halved infant mortality rate in India between 1965 and 1983 (Cassen 1994:50). Barro also supports the claim that aid relieves poverty. He argues that this can be done through fiscal policy (Barro in Boone 1996:291). Using economic theorems Barro presents an endogenous growth model where a government uses distortionary taxation to finance productive public expenditures that provide more public goods to benefit the poor (Barro in Boone 1996:291-292).
A close analysis of the relationship between aid and poverty shows that aid is a form of exploitation and its contribution to the well being of people in the Third World is negative. Petras and Veltmeyer who view aid as a form of neo-mercantilism, point out that the flow of aid has been having a regressive impact on the poor in Latin America (Petras and Veltmeyer 2002:284). From the perspective of developing countries, particularly the working classes and peasants, aid like other flow of international resources has caused poverty and declining income.
Under the facilitating conditions such as structural adjustment programmes in Africa and Latin America aid has led to a drastic deterioration of the living conditions of the populations (Petras and Veltmeyer 2002:286). Riddell notes that this incidence in the increase in poverty as a result of aid and its associated policies is evident in the wide range of indicators of socio-economic development, such as a general decline in living conditions ,steep fall in the value of wages and a deepening of social inequalities in the distribution of income (Riddell 1997:172).
Knor agrees by saying that, ‘Not even the World Bank’s efforts to reduce the incidence of poverty by statistical fiat; that is defining as poor only those with incomes of less that two dollars a day and one dollar for those in extreme poverty have succeeded in disguising the extent of the effects of structural adjustment and aid’ (Knor in Ruttan 1989:411). The fact that even aid which has been channelled through NGOs has not helped in reducing poverty shows how limited and flawed is Cassen’s perspective that aid reduces poverty.
In a study in Bolivia, Arellano demonstrated how aid directed towards NGOs undermined the country’s successful rural development programmes resulting in widespread rural poverty (Arellano in Petras and Veltmeyer 2002:287). Therein and Lloyd noted that in Sub-Sahara Africa where aid has been concentrated over the last generation, both the relative and absolute numbers of poor appear to have increased between the mid 1970s to the mid 1990s.