Aid may be offered by donors for multiple reasons: (a) to provide assistance during emergencies or humanitarian crises; (b) to support developing nations to achieve their respective developmental( growth and poverty reduction) goals; (c) to display solidarity; (d) to secure political, commercial and strategic interests of the donor; (e) to strengthen historical ties (f) promoting human rights. More recently, aid to fight the war against terrorism is also being provided.<\/p>\n\n\n\n
It is worthwhile to note that aid can be bilateral, extended from the donor to recipient or multilateral, channelled through a multilateral development agency like the United Nations and World Bank. In addition, aid may be given by private philanthropic organizations to developing countries. A leading example of the same would be the aid given by Bill and Melinda Gates Foundation for public health interventions such as immunizations in India.<\/p>\n\n\n\n
Development aid can be deployed on a plethora of projects. These include infrastructure projects like roads and bridges, agricultural technology improvements. Aid may be used to expand educational and health-based interventions. Additionally, it may be given to address humanitarian crises and natural disasters which could provide life-saving support to those displaced due to natural disasters\/ disaster-like situations or war.<\/p>\n\n\n\n
A Historical Perspective<\/h4>\n\n\n\n
A relatively fresh concept in economics, the foremost\nlegislation dealing explicitly with official aid was passed by the Parliament\nin the United Kingdom in 1929. Further, new laws were enacted in 1940 and 1945\nto aid former British colonies thereby increasing the corpus of funds available\nfor longer periods of time. A progressive feature of the 1945 statute was to\nprepare aid plans \u2018in consultation with the representatives of the local\npopulation\u2019 to suit local needs.<\/p>\n\n\n\n
In the United States of America, 1948 saw the European\nRecovery Program(ERP also hailed as the Marshall Plan)<\/strong>, the pilot\ninitiative to rebuild Europe post World War II with the massive infusion of\nAmerican aid to support developmental efforts in Europe. <\/p>\n\n\n\n Generally regarded as the result of the intensification of\nthe Cold War, the US revised its position on bilateral aid. Along with other\nadvanced countries, it laid the foundation of the Development Assistance\nCommittee (DAC)<\/strong> at the newly formed OECD in order to reduce the influence\nof socialism and the USSR on poorer nations.<\/p>\n\n\n\n Influential academic research (Rosenstein-Rodan, 1943; Lewis, 1954) suggests that foreign aid renders the required capital to propel developing countries onto a path of self-sustained economic growth. They have argued for a \u2018big push\u2019<\/strong> to enable poor countries to free themselves from the clutches of a poverty trap. In the 1950s and 1960s, aid policies were influenced by the Harrod\u2013Domar growth model and by W. Arthur Lewis\u2019 unlimited labour<\/strong> supply model. These studies provided intellectual support for development aid. Thus, most agencies funded very large capital-intensive projects and neglected policies, projects, and programmes related to labour, human capital, and productivity.<\/p>\n\n\n\n Robert Solow\u2019s Nobel Prize-winning neoclassical model of growth, and the development of the \u2018basic needs\u2019 approach to welfare economics changed the course in the late 1960s and 1970s. Aid policies changed focus, and a higher percentage of funds were devoted to social programmes (health and education), programs aimed at directly reducing poverty, and programmes that strengthened skills and human capital.<\/p>\n\n\n\n The\nwork of Anne Krueger and Jagdish Bhagwati that related openness and export\nexpansion to productivity growth made international assistance increasingly\nconditioned on the recipient countries liberalizing their economies through the\nelimination of quantitative import restrictions and the reduction of import\ntariffs.<\/p>\n\n\n\n The debate on the effectiveness of\ndevelopment aid is as old as aid itself. <\/strong>Multiple\nstudies and heated deliberations have led to the emergence of three distinct\ncamps<\/strong>. Firstly, there are aid optimists<\/strong>.\nThese proponents of foreign aid are of the opinion that aid levels have been too low\nand recommend that large increases in aid allocations would help reduce\npoverty. However, they urge a rethinking on the way in which aid is provided\n(Sachs, 2009 and Stiglitz, 2002). Secondly, there\nare aid pessimists<\/strong>, suggesting that official assistance is ineffective,\nand has harmed poor countries throughout the years.\nLastly, there are those who take an intermediary position on the subject.<\/strong><\/strong><\/p>\n\n\n\n The debacle between the optimists and pessimists has been captured coherently in Nobel laureates Esther Duflo and Abhijeet Banerji\u2019s book \u2018Poor Economics\u2019. Jeffrey Sachs of the Columbia University suggests that poor countries have remained poor because they are caught amidst unfavourable climatic and geographical conditions and are infested with communicable diseases. This, in turn, makes it difficult for them to be productive without an initial large investment to help them to overcome these endemic problems. However, \u201cthey cannot pay for the investments precisely because they are poor\u2014they are in what economists call a poverty trap.\u201d Until these issues are addressed (through development aid), neither free markets nor democracy can achieve much for these countries. In his best-selling 2005 book, The End of Poverty, Sachs argues that if the rich world had committed $195 billion in foreign aid per year between 2005 and 2025, poverty could have been entirely eliminated by the end of this period.<\/strong> <\/p>\n\n\n\n There\nare, however, two main problems with this aid-growth nexus: (a) it fails to directly\naddress the primary objective of aid allocation, which is poverty reduction;\n(b) there is an implicit assumption that aid reduces poverty through growth\n(Burnside & Dollar, 2000; Collier & Dollar). However, the idea that\naid promotes growth which in turn implies poverty reduction is not completely\nsatisfactory because aid can affect poverty directly or through other channels.<\/strong>\nThis idea is documented in Mahembe and Odhiambo (2017): channels through which\nforeign aid affects poverty include economic growth, pro-poor public\nexpenditure (such as education, health and other social programmes),\nmacroeconomic stabilization effect, and funding of infrastructure and other\ndevelopment initiatives.<\/p>\n\n\n\n William Easterly from the New York\nUniversity and Dambisa Moyo, a former economist at Goldman Sachs have both\npropounded that aid does more bad than good. Moyo\nlaunched a scathing attack against the aid industry\u2014calling it not just ineffective,\nbut \u201cmalignant\u201d in her latest book \u2018Dead Aid\u2019. <\/strong>Moyo suggests that\nwhen markets are free and the right incentives are provided, problems can be\nsolved. According to Peter Bauer, a pioneering\ncritic of foreign aid and the \u2018big push\u2019, \u2018government-to-government aid is neither\nnecessary nor sufficient for development, as it only entailed the danger of\nincreasing the government\u2019s power, promoting corruption and the misallocation\nof resources, destroying economic incentives, eroding civil initiatives and\ndynamism.<\/strong>\u2019 <\/p>\n\n\n\n William Easterly has attempted to\ncorroborate his claim with empirical evidence from Africa, the recipient of\nsignificant development aid and a suitable economic laboratory for testing aid\neffectiveness which is given below:<\/strong><\/p>\n\n\n\n The\u00a0data above shows that the claims of the aid community were sometimes not borne out.\u00a0Even as the level of foreign aid into Africa soared through the 1980s and 1990s, African economies were doing worse than ever. However, this was not confined to just Africa. Arvind Subramanian and Raghuram Rajan have shown that countries receiving huge sums as foreign aid tended to be correlated with lower economic growth as\u00a0in the figure below.<\/p>\n\n\n\n The countries that receive less\naid, those on the left-hand side of the regression, tend to have higher growth\n\u2014 while those that receive more aid, on the right-hand side, have lower growth.\nNobel Prize awardee Angus Deaton has provided an interesting explanation for\nthe above illustrated trends. According to him, foreign aid changes the\nrelationship between a government and its subjects. Normally, a government\nrelies on tax collections from the citizens thereby making governments more\naccountable to the citizens. In other words, the citizens exercise a certain\namount of power on their government. An acute \u2018dependency syndrome\u2019 (on foreign\naid) leaves governments less accountable to the people thereby altering the\nrelationship.<\/strong><\/p>\n\n\n\n However,\nit must be noted that econometric results produced by the research community\nmay be inconclusive as they are based on aggregate data. Bourguignon and\nSundberg (2007) suggest that aid impacts economics performance both directly\nand indirectly through a myriad of channels. Treating all development aid as\nhomogeneous can be deeply misleading and hence recommend a \u2018deconstructed\u2019\nanalysis.<\/strong> This research can throw light on the effectiveness of specific\naid mechanisms such as technical assistance, conditionality, level of donors\u2019\ninvolvement and understanding of the local conditions and requirements and the\nquality of governance in the recipient country to successfully implement\npolicies.<\/p>\n\n\n\n The\nintermediate camp of economists does not look at the effectiveness of aid from\na strictly dichotomous lens<\/strong>. Paul Collier in his influential book \u2018The Bottom Billion\u2019\nanalyses evidence and suggests that over the past 30 years official assistance\nhas helped boost GDP growth amongst the poorest countries of the world- mostly\nin the African continent approximately by 1% per year which is significant as\nthis period has witnessed the most impoverished nations with a stagnant\naggregate per capita growth. This implies that \u2018in the absence of official\nassistance, the billion people that live in these nations \u2013 the so-called\n\u2018bottom billion\u2019 \u2013 would have seen their incomes retrogress year after year.\u2019<\/p>\n\n\n\n In Africa, development\naid has contributed crucially to reduce the outbreak of HIV-AIDS. It is estimated\nthat up to 4 million Africans have received life-saving HIV\/Aids treatment\n(increased from 50,000 in 2002) by the Global Fund alone. These conclusions are\nevidence that development assistance can have a positive impact on the\ndeveloping countries of the world, especially if it is shared with devoted and\nevident leadership and policies intended for economic growth.<\/p>\n\n\n\n In the book \u2018Poor Economics\u2019, Duflo and Banerji advocate a\n\u201cradical rethinking of the way to fight poverty.\u201d According to them an\naggregate view on aid or the Sachs-Easterly debate misses the point. The\ncentral focus should be in the evaluation of the specific programs funded by\naid. This is because some projects are a success while some fail miserably. <\/strong><\/p>\n\n\n\n For\nthree decades post independence, India\u2019s economic growth rate remained arrested\nat 3.5% per annum popularly called the Hindu Rate of Growth, a moniker coined\nby renowned economist Raj Krishna. However, the LPG reforms of the 1990s\nushered in a new era of growth. India became the poster child of the successes\nof globalization. In 2006-07 India had touched double-digit growth rates. Until\nrecently, India was one of the fastest growing nations of the world. Despite\nthese economic gains, India continues to be a recipient of development aid. <\/strong>This\nis on account of various reasons which include obscene levels of disparities in\nincome and wealth as well high levels of human depravation. A summary of the\ninequality prevalent in India that has been prepared by Oxfam is given below:<\/strong><\/p>\n\n\n\nTheoretical foundation and the potential\nrole of development aid<\/h4>\n\n\n\n
The Bitter Policy\nDuel between aid optimists and the aid pessimists <\/h4>\n\n\n\n
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\nRaghuram G. Rajan and\nArvind Subramanian, \u201cAid and Growth: What Does the Cross-Country Evidence\nReally Show?\u201d<\/em><\/p>\n\n\n\nAid and India<\/h4>\n\n\n\n
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