The terms aid or development aid (often also foreign aid or development assistance) are not entirely unambiguous and are often used with slightly different meanings by different writers and organizations. However, there is agreement that in essence resource transfers from a more developed to a less developed country (or from a richer country to a poorer country) qualify for inclusion in ‘aid’ provided they meet three criteria:
1
The objective should be developmental or charitable rather than military.
2
The donor’s objectives should be non-commercial.
3
The terms of the transfer should have a concessional element (‘grant element’).
Each of these criteria gives rise to some conceptual difficulty. The first one neglects the factor of ‘fungibility’, that is, that up to a point the use of resources by the recipient country is somewhat flexible. For example, aid may be given and ostensibly used for developmental purposes, but in fact the recipient country may use its own resources set free by this transaction in order to buy armaments; or the aid may lead to leakages and abuses and result in the building up of bank accounts in Switzerland, rather than to the ostensible developmental objectives.
The second criterion, that the objective should be non-commercial, also presents difficulties. Much of the bilateral aid, that is, aid given by a single government to another government, is ‘tied’, which means that the proceeds must be spent on classified goods produced in the donor country. Here we clearly have a commercial objective mixed in with the developmental objective; it is again impossible to decide statistically at what point the transaction becomes a commercial transaction rather than aid. The line of division between export credits and tied aid of this kind is clearly a thin one. Moreover, many acts of commercial policy, such as reduction of tariffs or preferential tariff treatment given to developing countries under the internationally agreed GSP (Generalized System of Preferences) can be more effective aid than many transactions listed as aid—yet they are excluded from the aid concept.
The third criterion—that the aid should be concessional and include a grant element—is also not easy to define. What, for example, is a full commercial rate of interest at which the transaction ceases to be aid? The grant element may also lie in the duration of any loan, in the granting of a ‘grace period’ (a time lag between the granting of the loan and the date at which the first repayment is due). The DAC (Development Assistance Committee of the OECD, the Organization for Economic Cooperation and Development in Paris) makes a valiant attempt to combine all these different aspects of concessionality in to one single calculation of the grant element. However, such calculations are subject to the objection that the grant element from the donor’s point of view may differ from that from the recipient’s point of view. In DAC aid in 1990/91, some 72 per cent was direct grants and the loans had a 59 per cent grant element, resulting in an ‘overall grant element’ for total aid of 85 per cent. The Development Assistance Committee is the main source of aid statistics, and its tabulations and definitions are generally recognized as authoritative. DAC publishes an Annual Report under the title Development Cooperation;the 1992 volume contained detailed tables and breakdowns of aid flows.
The OECD countries (the western industrial countries including Japan, Australia and New Zealand) and the international organization supported by them, such as the World Bank, the Regional Development Banks, the UN Development Programme, and so on, account for the bulk of global aid. DAC also provides some data on other aid flows such as from OPEC (Organization of Petroleum Exporting Countries) countries and from former USSR countries. Private investment, lending by commercial banks and private export credits are by definition treated as commercial and thus excluded from aid, although they compose a significant proportion of inflows into developing countries. Bank lending and export credits were exceptionally high by historical standards during the late 1970s and early 1980s. These levels proved unsustainable due to changes in the external environment and imprudent fiscal policy. The ensuing ‘debt crisis’ resulted in a sudden collapse of resource flows into developing countries. The total resource flow into developing countries in 1991 was $131 billion, of which $57 billion was ODA (Overseas Development Administration) from DAC countries (excluding forgiveness of non ODA debt), an average ODA/GNP ratio of 0.33 per cent (OECD 1992).
There is a growing concern over the unbalanced geographical mix of these flows. An increasing percentage of official development assistance is being directed to Sub-Saharan Africa, which has very low foreign direct investment, hence becoming increasingly aid dependent, which is not desirable in the long term. There is a broad consensus among donors and recipients that the aim of aid should be to assist in basic objectives of sustainable, participatory economic and social development. The role of aid is increasingly considered to be one of poverty alleviation rather than growth creation.
One of the main distinctions is between bilateral aid and multilateral aid (contributions of multilateral institutions such as the World Bank, the Regional Development Banks, and so forth). This distinction is also not entirely clear. For example, the western European countries give some of their aid through the EU (European Union). EU aid is not bilateral nor is it fully multilateral as the World Bank is; it is therefore to some extent a matter of arbitrary definition whether EU aid should be counted as bilateral or multilateral. Multilateral aid is more valuable to the recipient than tied bilateral aid, because it gives a wider choice of options to obtain the imports financed by aid from the cheapest possible source. Untied bilateral aid would be equally valuable to the recipient; however, on political grounds, the recipient (and some donors, too) may prefer the multilateral route. Multilateral aid constitutes about 25 per cent of total aid.
It has been frequently pointed out that aid donors could increase the value of their aid to the recipients without any real cost to themselves, either by channelling it multilaterally or by mutually untying their aid by reciprocal agreement. However, this might lose bilateral aid some of the political support which it acquires by tying and which gives national producers and workers a vested interest in aid. This is particularly important in the case of food aid. Non-governmental organizations (NGOs), often in partnership with southern NGOs, are being increasingly recognized as holding an important role in aid distribution, particularly as a channel for official aid.
The 1980s saw a growing disenchantment with aid and consideration of the possibility that aid may even be damaging to the poor. Critics from the left have claimed that aid leads to the extension of international capitalism and supports the political motives of neocolonial powers (the high percentage of US aid flowing to Israel and Egypt is an example of aid fulfilling political interests). From the right, critics have claimed that aid supports the bureaucratic extension of the state, acting against the interest of free market forces and long-term development (e.g. Bauer 1984) and that developing countries have a limited capacity to absorb aid.
Aid appraisals at a micro level have generally concluded that aid had a positive impact. A World Bank study in 1986 estimated a rate of return of 14.6 per cent for its projects (White 1992). Cassen found that ‘projects on average do produce satisfactory results in a very large proportion of cases’ (Cassen 1986:307). However, some macroeconomic studies have failed to find a significant relationship between aid and growth. The macroeconomic role of aid can be modelled by a two gap model, shortages in capital creating savings and foreign exchange gaps, or bottlenecks, which can be bridged with foreign aid. However, whether or not aid does fulfil a positive macroeconomic role has not been empirically proven. Fears are often expressed that aid may be used to displace savings, particularly public sector savings. Additionally aid may have ‘Dutch disease’ effect, inflows of foreign aid increasing the price of non-tradable goods relative to tradables, hence creating the equivalent of a real exchange rate appreciation. This leads to a reduction in export competitiveness which may leave the country increasingly dependent upon aid.
Emergency relief is a part of ODA which is used in handling the consequences of an abnormal event which results in human suffering, including refugee assistance. Emergency aid is often considered as a separate category from a budget and planning perspective, although more effort is being made to link relief and long-term development assistance. In 1991 food aid comprised 6.1 per cent of total ODA aid by members of DAC (1993 Food Aid Review: 138), with a multilateral share of 23 per cent, similar to the multilateral share in financial aid. One-third of total food aid went to Sub-Saharan Africa, but Egypt and Bangladesh were the two largest recipients.
H.W.Singer
University of Sussex
References
1993 Food Aid Review, World Food Programme, Rome.
Bauer, P. (1984) Reality and Rhetoric: Studies in the Economics of Development, London.
Cassen, R. and associates (1986) Does Aid Work? Report to an intergovernmental task force, Development Committee, Oxford.
OECD (1992) Development Cooperation 1992 Report, Paris.
White, H. (1992) ‘The macroeconomic impact of development aid: a critical survey’, Journal of Development Studies 28(2).
Further reading
Krueger, A., Michalopoulos, C. and Ruttan, V. (1989) Aid and Development, Baltimore, MD.
Mosely, P., Harrigan, J. and Toye, J. (1991) Aid and Power: The World Bank Policy-based Lending, 2 vols, London.
