FOREIGN AID IN PROMOTING DEVELOPMENT IN AFRICA; CITING EXAMPLE OF FOREIGN AID IN TANZANIA
1.1 Introduction
Foreign aid[1] is a transfer of resources on concessional terms which are undertaken by official agencies which consist of financial aid and technical co-operation. Financial aid includes grants and concessional loans having a grant element of at least 25 per cent. Technical co-operation includes grants to nationals of aid recipient countries receiving education or training, and payments to consultants, advisers, administrators and similar persons working on assignments of interest to the recipient.
The following essay will attempt to demonstrate the role of foreign aid in promoting development in Africa citing example of foreign aid in Tanzania. It will be discussed under theoretical review, empirical review and lastly the conclusion will be drawn was that mismanagement of the aid is a key impediment to economic development recovery in the recipient countries Tanzania among them. For the effectiveness of foreign aid to yield intended result the management of the aid become a crucial point.
Foreign aid[1] is a transfer of resources on concessional terms which are undertaken by official agencies which consist of financial aid and technical co-operation. Financial aid includes grants and concessional loans having a grant element of at least 25 per cent. Technical co-operation includes grants to nationals of aid recipient countries receiving education or training, and payments to consultants, advisers, administrators and similar persons working on assignments of interest to the recipient.
The following essay will attempt to demonstrate the role of foreign aid in promoting development in Africa citing example of foreign aid in Tanzania. It will be discussed under theoretical review, empirical review and lastly the conclusion will be drawn was that mismanagement of the aid is a key impediment to economic development recovery in the recipient countries Tanzania among them. For the effectiveness of foreign aid to yield intended result the management of the aid become a crucial point.
1.2 Theory behind the foreign aid
Berg, E.L. (1993), argued that, donors have justified aid with various theories and political motivations, but its core justification of the foreign aid is the ‘gap theory’. This theory assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that savings/investment ‘gap’ exists in practice. As a result, aid has failed to fill the gap. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. This is proved by study done by Rugasira which shows that, between 1970 and 2000, Africa received more than US$ 400bn in foreign aid the highest aid to gross domestic product (GDP) ratio in the world. Yet today, most African countries are mired in poverty. Evidently, the foreign aid proposition is failing to deliver sustainable, welfare-enhancing economic growth. Gap theory premise fundamentally flawed that; the reason countries are poor is not that they lack infrastructure i.e. roads, railways, dams, pylons, schools or health clinics. Rather, it is because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government.
1.3 Empirical review
The main question on foreign aid lies in its effectiveness to promote economic development in the recipient countries, which remains ambiguous to find the truth. How does foreign aid affect the economic growth of developing countries like Tanzania? This is a question which has drawn the attention of many scholars over time. Since independence in 1961, Tanzania has been one of the largest recipients of aid in sub-Saharan Africa in absolute terms, and the country still receive considerably more aid as a percentage of GDP than most other countries in the region. Tanzania’s share of total aid from all the Development Assistance Committee (DAC) countries was 8.3 per cent during the 1970s the country then was the largest recipient of aid in Sub-Saharan Africa (Nyoni, 1997). This share started to decline in 1981 and by 1985 it was down to5.8 per cent. Nevertheless, Tanzania still ranked as the second largest aid beneficiary of aid after the Sudan during the 1980s. Even more remarkable is that even in the mid-1980s, when the policy environment was very poor in Tanzania, it received more than twice as much. It continued to remain among the 10 poorest countries in the world; its economic performance is still very poor. In some other countries as noted by Papanek (1972) finds a positive relation between aid and growth. Scholars like Burnside and Dollar (1997) claim that aid works well in the good-policy environment, which has important policy implications for donor’s community, multilateral aid agencies and policymakers in recipient countries. Developing countries with sound policies and high-quality public institutions have grown faster than those without them, 2.7% per capita GDP and 0.5% per capita GDP respectively. One percent of GDP in assistance normally translates to a sustained increase in growth of 0.5% per capita. Some countries with sound policies received only small amount of aid yet still achieved 2.2% per capita growth. The good-management, high-aid groups grew much faster, at 3.7% per capita GDP (World Bank, 1998). Studies carried by Fayissa and El-Kaissy (1999) show that, aid has a positively affects economic growth in developing countries. Singh (1985) also finds evidence that foreign aid has positive and strong effects on growth when state intervention is not included. This can be referring to the new industrialized tiger countries in Far East e.g. China, India, and Indonesia.
The record of the last 50 years, from the Marshal Plan aid shows that the efforts of recipients to help themselves have been instrumental to their success. Development assistance has successfully complemented many achievements such as the green revolution, the fall in birth rates, improved basis infrastructure, improvement in health and reduction of poverty (DAC, 1996). The nature of aid relationships between donors and recipients has critical influence on aid effectiveness. The results from the seven country studies in Africa suggest that the aid relationship between African governments and donors has been unequal and characterized by the passivity of recipients and the dominance of donors Carlsson et al, (1997). The unequal nature of the relationship has probably contributed to misunderstanding, resentment, and quite often conflict between the partners SIDA, (1996). The study concludes that both recipient and donor benefits from the foreign aid.
Recipients’ Gains from Aid
Some proponents of foreign aid claim that overseas capital inflow is necessary and sufficient for economic growth in the less developed countries. They argue that it is theoretically justified because it closes the gap between investment and domestic savings, overcoming shortages of capital and low levels of skills, it supplements export earnings to finance imports generally and capital goods more specifically, and helps to close the foreign exchange gap as noted by Bichaka et al (1999).These conclusions are confirmed with the experience of individual countries such as Bangladesh and India where foreign aid appears to have played an important role in the development process. For instance, 100 percent of Bangladesh’s development budget depends on aid which has made a significant contribution to the reconstruction of its economy. In India, foreign aid has financed over 8 % of the domestic investments and about 15 percent of imports (ibid).
Some conditions applied to foreign aid can be said to indirectly benefit the recipient country as well. Some states, such as the United States, are increasingly rewarding democratic states with foreign aid, especially since the end of the Cold War, regardless of strategic importance. As an example, former-President Clinton called the promotion of democracy and human rights the “third pillar” of his foreign policy. Foreign aid programs such as the “Support for Eastern European Democracy Act of 1989” and the “Africa Conflict Resolution Act of 1994” are especially geared toward promoting democratization James (1998). This may create incentives for reform, which have the potential to drastically increase the standards of living, including the advancement of personal rights and freedoms, for many who would otherwise suffer.
In an alternative respect, multilateral agencies such as the IMF and World Bank promote development by focusing on structural adjustment requirements in return for aid packages and loan guarantees. These requirements include the liberalization of foreign exchange and import controls (freer trade), devaluation of the currency (encouraging exports), anti-inflationary programs including the abolition of price controls, and the promotion of foreign investment. These measures are meant to encourage responsible fiscal management in order to sponsor growth and sustainable development.
The main question on foreign aid lies in its effectiveness to promote economic development in the recipient countries, which remains ambiguous to find the truth. How does foreign aid affect the economic growth of developing countries like Tanzania? This is a question which has drawn the attention of many scholars over time. Since independence in 1961, Tanzania has been one of the largest recipients of aid in sub-Saharan Africa in absolute terms, and the country still receive considerably more aid as a percentage of GDP than most other countries in the region. Tanzania’s share of total aid from all the Development Assistance Committee (DAC) countries was 8.3 per cent during the 1970s the country then was the largest recipient of aid in Sub-Saharan Africa (Nyoni, 1997). This share started to decline in 1981 and by 1985 it was down to5.8 per cent. Nevertheless, Tanzania still ranked as the second largest aid beneficiary of aid after the Sudan during the 1980s. Even more remarkable is that even in the mid-1980s, when the policy environment was very poor in Tanzania, it received more than twice as much. It continued to remain among the 10 poorest countries in the world; its economic performance is still very poor. In some other countries as noted by Papanek (1972) finds a positive relation between aid and growth. Scholars like Burnside and Dollar (1997) claim that aid works well in the good-policy environment, which has important policy implications for donor’s community, multilateral aid agencies and policymakers in recipient countries. Developing countries with sound policies and high-quality public institutions have grown faster than those without them, 2.7% per capita GDP and 0.5% per capita GDP respectively. One percent of GDP in assistance normally translates to a sustained increase in growth of 0.5% per capita. Some countries with sound policies received only small amount of aid yet still achieved 2.2% per capita growth. The good-management, high-aid groups grew much faster, at 3.7% per capita GDP (World Bank, 1998). Studies carried by Fayissa and El-Kaissy (1999) show that, aid has a positively affects economic growth in developing countries. Singh (1985) also finds evidence that foreign aid has positive and strong effects on growth when state intervention is not included. This can be referring to the new industrialized tiger countries in Far East e.g. China, India, and Indonesia.
The record of the last 50 years, from the Marshal Plan aid shows that the efforts of recipients to help themselves have been instrumental to their success. Development assistance has successfully complemented many achievements such as the green revolution, the fall in birth rates, improved basis infrastructure, improvement in health and reduction of poverty (DAC, 1996). The nature of aid relationships between donors and recipients has critical influence on aid effectiveness. The results from the seven country studies in Africa suggest that the aid relationship between African governments and donors has been unequal and characterized by the passivity of recipients and the dominance of donors Carlsson et al, (1997). The unequal nature of the relationship has probably contributed to misunderstanding, resentment, and quite often conflict between the partners SIDA, (1996). The study concludes that both recipient and donor benefits from the foreign aid.
Recipients’ Gains from Aid
Some proponents of foreign aid claim that overseas capital inflow is necessary and sufficient for economic growth in the less developed countries. They argue that it is theoretically justified because it closes the gap between investment and domestic savings, overcoming shortages of capital and low levels of skills, it supplements export earnings to finance imports generally and capital goods more specifically, and helps to close the foreign exchange gap as noted by Bichaka et al (1999).These conclusions are confirmed with the experience of individual countries such as Bangladesh and India where foreign aid appears to have played an important role in the development process. For instance, 100 percent of Bangladesh’s development budget depends on aid which has made a significant contribution to the reconstruction of its economy. In India, foreign aid has financed over 8 % of the domestic investments and about 15 percent of imports (ibid).
Some conditions applied to foreign aid can be said to indirectly benefit the recipient country as well. Some states, such as the United States, are increasingly rewarding democratic states with foreign aid, especially since the end of the Cold War, regardless of strategic importance. As an example, former-President Clinton called the promotion of democracy and human rights the “third pillar” of his foreign policy. Foreign aid programs such as the “Support for Eastern European Democracy Act of 1989” and the “Africa Conflict Resolution Act of 1994” are especially geared toward promoting democratization James (1998). This may create incentives for reform, which have the potential to drastically increase the standards of living, including the advancement of personal rights and freedoms, for many who would otherwise suffer.
In an alternative respect, multilateral agencies such as the IMF and World Bank promote development by focusing on structural adjustment requirements in return for aid packages and loan guarantees. These requirements include the liberalization of foreign exchange and import controls (freer trade), devaluation of the currency (encouraging exports), anti-inflationary programs including the abolition of price controls, and the promotion of foreign investment. These measures are meant to encourage responsible fiscal management in order to sponsor growth and sustainable development.
Donors’ Gains from Aid
According to Cassen Robert (1994 study on foreign aid shows that even though altruistic behavior may be part of the motivation in both types of aid, bilateral aid is more likely to be oriented toward the donor’s economic and strategic interests). States are able to take advantage of their direct control of the funds they bestow by requiring, requesting or expecting certain gains (in various forms) in return. For example, Britain and France give much of their aid to former colonies; in these cases, national interest shapes the style of aid in the hopes that it may allow them to strengthen ties with recipients for economic, political, strategic or cultural reasons (ibid).
In the economic sphere, the use of tied aid has consistently featured appreciably in foreign aid. Tied aid is the practice of requiring the recipient "to spend a proportion of the aid given on goods and services produced by the donor nation," specifically with reference to bilateral aid, on which the donor has greater control. Watkins et al (1994) study shows that the strategy of foreign aid is intended to create job opportunities and promote export industry domestically by securing increased sales to the recipient country, and allowing domestic firms to penetrate these new markets. Tied aid also avoids the prospect of subsidizing future competitors in other countries with one's own tax dollars. And the good examples are United States, Canada and Spain has been the greatest tiers with about 30% of their aid.
Political and strategic motivations such as security goals, access to military bases and strategic natural resources, diplomatic ties and prestige have been prominent features of aid policy for the governments’ states. They link aid to ‘exchange conditions’, or quid pro quos, either expressly or implicitly. Studies have proven the link between US and Soviet foreign aid and international political support, especially, during the Cold War period, where aid given by the United States and the Soviet Union was meant to solidify their respective alliances and allow them access to territory from which to involve themselves in proxy wars and political currency in order to contain the enemy. Such politically motivated aid can be observed with respect to American aid to its biggest recipients, Israel and Egypt, since 1977 and Soviet assistance to Cuba and Syria.
According to Cassen Robert (1994 study on foreign aid shows that even though altruistic behavior may be part of the motivation in both types of aid, bilateral aid is more likely to be oriented toward the donor’s economic and strategic interests). States are able to take advantage of their direct control of the funds they bestow by requiring, requesting or expecting certain gains (in various forms) in return. For example, Britain and France give much of their aid to former colonies; in these cases, national interest shapes the style of aid in the hopes that it may allow them to strengthen ties with recipients for economic, political, strategic or cultural reasons (ibid).
In the economic sphere, the use of tied aid has consistently featured appreciably in foreign aid. Tied aid is the practice of requiring the recipient "to spend a proportion of the aid given on goods and services produced by the donor nation," specifically with reference to bilateral aid, on which the donor has greater control. Watkins et al (1994) study shows that the strategy of foreign aid is intended to create job opportunities and promote export industry domestically by securing increased sales to the recipient country, and allowing domestic firms to penetrate these new markets. Tied aid also avoids the prospect of subsidizing future competitors in other countries with one's own tax dollars. And the good examples are United States, Canada and Spain has been the greatest tiers with about 30% of their aid.
Political and strategic motivations such as security goals, access to military bases and strategic natural resources, diplomatic ties and prestige have been prominent features of aid policy for the governments’ states. They link aid to ‘exchange conditions’, or quid pro quos, either expressly or implicitly. Studies have proven the link between US and Soviet foreign aid and international political support, especially, during the Cold War period, where aid given by the United States and the Soviet Union was meant to solidify their respective alliances and allow them access to territory from which to involve themselves in proxy wars and political currency in order to contain the enemy. Such politically motivated aid can be observed with respect to American aid to its biggest recipients, Israel and Egypt, since 1977 and Soviet assistance to Cuba and Syria.
Policy review
In the last years, a series of global campaigns have called for increases in foreign aid. In the run-up to the Monterrey Summit in 2002, for example, Kofi Annan and James Wolfensohn (head of the World Bank) traveled around the globe several times to campaign for doubling spending on aid, claiming that this was necessary to reach the Millennium Development Goals (MDGs) by 2015. The call was repeated more recently by Jeffrey Sachs both in his capacity as Director of the UN Millennium Project and in his most recent book The End of Poverty.
The (UN) Millennium Development Goals (MDG), which was adopted in September 2000 aimed at Poverty Reduction in the number of individuals who subsisted on an income of less than US$ 1 a day. One and eight hundred heads of states including that of the United Republic of Tanzania pledged to combat extreme poverty and hunger by 2015. The Government has taken initiatives to undertake policy and law reforms with aim of eradicating poverty, particularly in rural areas. The formulation of Tanzania Development Vision 2025, the National Strategy for Growth and Reduction of Poverty (MKUKUTA for Tanzania mainland and MKUZA for Zanzibar this are some of the major achievements in this regard. Through these reforms foreign aid is directed to budget support through the Ministry of finance under government treasury.
In the last years, a series of global campaigns have called for increases in foreign aid. In the run-up to the Monterrey Summit in 2002, for example, Kofi Annan and James Wolfensohn (head of the World Bank) traveled around the globe several times to campaign for doubling spending on aid, claiming that this was necessary to reach the Millennium Development Goals (MDGs) by 2015. The call was repeated more recently by Jeffrey Sachs both in his capacity as Director of the UN Millennium Project and in his most recent book The End of Poverty.
The (UN) Millennium Development Goals (MDG), which was adopted in September 2000 aimed at Poverty Reduction in the number of individuals who subsisted on an income of less than US$ 1 a day. One and eight hundred heads of states including that of the United Republic of Tanzania pledged to combat extreme poverty and hunger by 2015. The Government has taken initiatives to undertake policy and law reforms with aim of eradicating poverty, particularly in rural areas. The formulation of Tanzania Development Vision 2025, the National Strategy for Growth and Reduction of Poverty (MKUKUTA for Tanzania mainland and MKUZA for Zanzibar this are some of the major achievements in this regard. Through these reforms foreign aid is directed to budget support through the Ministry of finance under government treasury.
Conclusion
Given the magnitude of aid received by Tanzania, the poor growth record poses an obvious question of aid effectiveness. It is clear on the face of it that aid has not had a strong payoff in terms of growth. Constructing a proper counterfactual is extremely difficult; however, it is crucial for assessing the impact of aid on growth in Tanzania. The answers to the question of whether aid works only in good policy environment is still left hanging in the air due to the fact that even thought the country have done a lot on policy reforms to receive foreign aid its effectiveness to bring developmental changes is questionable as many Tanzanians continued to live below poverty lines.
Reference
Berg, E.L. (1993) Rethinking Technical Co-operation: Reforms for Capacity Building in Africa. United Nations Development Programme, New York.
Sachs, J. (2005). The End of Poverty: How We Can Make it Happen in our Lifetime. London: Penguin
Fredrik E. (2005).Aid and development: will it work this time? Han way printer London Great Britain.
Holmgren, T., Kasekende, L., Atingi-Ego, M., and Ddamulira, D. (2001). ‘Uganda’, in Devarajan, S., Dollar, D. and Holmgren, T. (eds.) Aid and Reform in Africa. Washington, DC: World Bank.
Sachs, J. (2005). The End of Poverty: How We Can Make it Happen in our Lifetime. London: Penguin
World Bank (1998) Assessing Aid: What Works, What Doesn’t, and Why. Washington, DC: World Bank
RSA Journal, Andrew Rugasira’s article‘Africa needs trade, not aid: The case for a new paradigm’, visit http://www.rsa.org.uk/events
Cassen, Robert. (1994). Does Aid Work, Second Edition. Clarendon Press, Oxford
Rugumamu, S.M. (1997) Lethal Aid: The Illusion of Socialism and Self Reliance in Tanzania. African World Press, Trenton
Bichaka F. and Mohammed I. El-Kaissy. (1999) “Foreign Aid and the Economic Growth of Developing Countries: Further Evidence” in Studies in Comparative International Development. Washington
James Meernik, Eric L. Krueger and Steven C. Poe. , (1998) “Testing Models of US Foreign Policy: Foreign Aid During and After the Cold War” in The Journal of Politics, Vol. 60, Issue 1. Southern Political Science Association
Boone, Peter (1996). “Politics and the Effectiveness of Foreign Aid” European Economic Review Vol. 40. Elsevier Science, p. 289-329
Peter Burnell. (1997). “The Changing Politics of Foreign Aid – Where to Next?” in Politics, Vol. 17, No. 2. Political Studies
Nyoni, T. (1997), Foreign Aid and Economic Performance in Tanzania, Research paper no 61, AERC, Nairobi
[1]Sometimes is referred as Official Development Assistance (ODA)
Given the magnitude of aid received by Tanzania, the poor growth record poses an obvious question of aid effectiveness. It is clear on the face of it that aid has not had a strong payoff in terms of growth. Constructing a proper counterfactual is extremely difficult; however, it is crucial for assessing the impact of aid on growth in Tanzania. The answers to the question of whether aid works only in good policy environment is still left hanging in the air due to the fact that even thought the country have done a lot on policy reforms to receive foreign aid its effectiveness to bring developmental changes is questionable as many Tanzanians continued to live below poverty lines.
Reference
Berg, E.L. (1993) Rethinking Technical Co-operation: Reforms for Capacity Building in Africa. United Nations Development Programme, New York.
Sachs, J. (2005). The End of Poverty: How We Can Make it Happen in our Lifetime. London: Penguin
Fredrik E. (2005).Aid and development: will it work this time? Han way printer London Great Britain.
Holmgren, T., Kasekende, L., Atingi-Ego, M., and Ddamulira, D. (2001). ‘Uganda’, in Devarajan, S., Dollar, D. and Holmgren, T. (eds.) Aid and Reform in Africa. Washington, DC: World Bank.
Sachs, J. (2005). The End of Poverty: How We Can Make it Happen in our Lifetime. London: Penguin
World Bank (1998) Assessing Aid: What Works, What Doesn’t, and Why. Washington, DC: World Bank
RSA Journal, Andrew Rugasira’s article‘Africa needs trade, not aid: The case for a new paradigm’, visit http://www.rsa.org.uk/events
Cassen, Robert. (1994). Does Aid Work, Second Edition. Clarendon Press, Oxford
Rugumamu, S.M. (1997) Lethal Aid: The Illusion of Socialism and Self Reliance in Tanzania. African World Press, Trenton
Bichaka F. and Mohammed I. El-Kaissy. (1999) “Foreign Aid and the Economic Growth of Developing Countries: Further Evidence” in Studies in Comparative International Development. Washington
James Meernik, Eric L. Krueger and Steven C. Poe. , (1998) “Testing Models of US Foreign Policy: Foreign Aid During and After the Cold War” in The Journal of Politics, Vol. 60, Issue 1. Southern Political Science Association
Boone, Peter (1996). “Politics and the Effectiveness of Foreign Aid” European Economic Review Vol. 40. Elsevier Science, p. 289-329
Peter Burnell. (1997). “The Changing Politics of Foreign Aid – Where to Next?” in Politics, Vol. 17, No. 2. Political Studies
Nyoni, T. (1997), Foreign Aid and Economic Performance in Tanzania, Research paper no 61, AERC, Nairobi
[1]Sometimes is referred as Official Development Assistance (ODA)
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