Foreign Aid - Overview and Challenges

Economic Growth and Savings

• Economic growth requires saving and investment.
• A key question is what happens when people are too poor to save and invest.

The Financing Gap

• There's a gap between potential savings for investment (e.g., buying a plow) and actual investment.
• This can be considered at the individual farmer level or the national level.
• International donors can potentially fill this gap.
• Harrod-Domar growth equation: Growth is a function of savings (G = f(s)).
• The idea is that if savings (s) can't be supplied internally, it can be supplied externally through foreign aid.
• Foreign aid aims to provide resources for countries to invest and achieve higher growth.

Poverty Alleviation Rationale

• Angus Deaton estimated that in 2002-2008, 800 million people lived on less than $1 a day.
• On average, each person was $0.28 short of that threshold.
• Eradicating poverty (by the dollar-a-day definition) would cost about $225 million a day.
• This involves topping up the income of poor people to surpass a defined poverty line.
• This is a rationale for the international aid regime.

International Aid Regime

• Involves transferring money from wealthy countries to poor countries.
• Approximately 4.7 trillion have been transferred since 1960.
• The aim is to examine this system and its effectiveness.

Origins of the Modern International Aid System

• Major allies met at Bretton Woods, New Hampshire, after World War II.
• They aimed to build an international financial architecture to prevent future wars and rebuild Europe.
• Two key institutions were created:
  • International Monetary Fund (IMF)
  • International Bank for Reconstruction and Development (IBRD), also known as the World Bank
• These are known as the Bretton Woods Institutions.

Purpose of the IMF

• To coordinate rules for money and exchange rates.
• To provide short-term loans to countries in financial difficulty.
• The goal was to forestall economic collapses.
• The collapse of the German economy contributed to the rise of Hitler and expansionist policies.

Purpose of the World Bank

• To act as a bank, providing long-term loans.
• To finance reconstruction of infrastructure (roads, bridges) damaged by the war.
• Over time, its role expanded to include technical advice and research on poverty alleviation.

Evolution of IMF Lending

• Began providing medium-term loans to countries agreeing to policy targets and economic reforms.
• Terms varied but included limiting spending to reduce budget deficits and inflation, lowering trade barriers, freeing up exchange rates, and selling off state-owned companies.
• This signaled the beginning of conditionality.
• Conditionality: Loaning money on the condition of enacting economic policy reforms defined by experts (e.g., in Washington D.C.).

IMF's Role in Policy Reforms

• The IMF determines policies to improve a country's economic performance.
• The World Bank and other donors condition aid on following IMF's reform packages.
• The IMF can stipulate if a country isn't meeting requirements and cut off funding.
• The World Bank and other lenders follow the IMF's lead.

Transformation of International Financial Institutions (IFIs)

• Conditionality transformed the IMF and World Bank.
• It also affected other international lending organizations (e.g., Asian Development Bank, European Investment Bank).
• Shifted them from arms-length lenders to being intimately involved in the economics and politics of recipient countries.

Bilateral Donors

• Individual countries that provide grants and loans to aid developing countries.
• Examples: USAID (United States), AFD (France), EuropeAid (British), GIZ (German), etc.
• Bilateral aid is about three times as big as multilateral aid.
• Two-thirds to three-quarters of foreign aid is channeled through these bilateral relationships.

Total Aid Amounts

• Donors gave about 223 billion in aid in 2023.
• In 2024, it dropped to about 212 billion, the first decrease in 6-7 years.
• The largest donor in absolute dollar terms is the United States, giving 61 billion in 2023.
• The U.S. has been the top donor in dollar terms for decades.

Generosity Relative to Economy Size

• When considering generosity relative to the size of the country's economy, the U.S. fares much less well.
• The U.S. gives about 0.2% of GDP in foreign aid.
• Countries like Norway, Sweden, Germany, the United Kingdom, France, and Turkey give much more as a share of their economies.

Public Perception vs. Reality

• Americans believe the U.S. spends about 28% of the federal budget on foreign aid (Kaiser Family Foundation poll).
• The actual amount is less than 1%.
• The federal budget in 2023 was approximately 6.1 trillion.
• Perceptions greatly influence views on foreign aid.

Misinformation About Global Income

• The average American thinks the global median income is about $20,000 a year (according to NARE).
• The actual amount is about $2,100 a year.
• Most Americans are in the top 10% of the world's income distribution.

Income Disparity

• Income distributions in the U.S. and countries like Burundi barely overlap.
• Americans are much better off than those in the poorest countries.

Impact of Information on Views

• An experiment revealed that informing people about actual aid amounts and income disparities doesn't significantly change their views.
• Support for increasing aid spending only moved from 12% to 22% when people were better informed.
• Reluctance to be more generous goes beyond ignorance.
• This is related to the "America First" sentiment.

Official Development Assistance (ODA)

• Total ODA from all donors was about 212 billion in 2024.
• ODA has increased since 1990 (from about 80 billion).
• However, it's not increasing as a share of rich countries' ability to give.
• ODA as a share of gross national income (GNI) has remained relatively flat.

The 0.7% Target

• In 1970, rich countries committed to giving 0.7% of their GNI in foreign aid.
• Currently, they're only about halfway there (roughly 0.33%).
• Only four countries exceed the 0.7% threshold: Norway, Luxembourg, Sweden, and Denmark.
• The U.S. is near the bottom of the list in terms of generosity as a share of GNI.
• Meeting the 0.7% target would result in an additional 200 billion each year in available foreign aid.

Remittances vs. Official Development Assistance

• Remittances from migrants working in rich countries are many times larger than ODA.
• Migration is crucial to understanding the fortunes of families in poor countries.
• India received approximately 111 billion in remittances and 7 billion in foreign aid in 2022.

Total Aid Flows

• 212 billion a year is a significant amount.
• About 4.7 trillion has been sent from the global North to the global South since 1960.
• This only counts official development assistance.
• 25-30% of aid flows come from charities and civil society organizations.

Aid and Investment

• If aid (s) generates growth (g), then, g = f(s).
• But this assumes the aid is invested, and much of it is simply consumed.
• Growth requires investment rather than consumption.
• Aid is supposed to be spent on productive things (hospitals, roads, schools).

Corruption and Misuse of Aid

• Much aid is squandered on patronage and corruption.
• Examples: Extravagant palaces built by corrupt leaders (Yanukovych, Ceaușescu, Hussein, Mugabe).
• In 2014, the U.S. committed 320 million in assistance to Ukraine, but some of it likely went to building a lavish palace.
• Similarly, some aid to Zimbabwe financed Mugabe's lifestyle.

Corruption in Aid Distribution

• A study in Uganda tracked money from the Ministry of Education to local schools.
• Only 13% of the money reached the head teachers at the primary school level.
• William Easterly examined aid spending in 81 countries.
• Only in 7 cases was there credible evidence that the money was spent on intended investments.

Case of Zambia

• Zambia received around 2 billion in foreign aid by 1995.
• Its investment rate went down rather than up.
• Easterly compared expected income growth with actual growth.
• The money was not spent productively but was consumed or went into the pockets of leaders.
• Just throwing money at the problem isn't the solution.

Success Stories: Onchocerciasis Control Program

• The Onchocerciasis (river blindness) Control Program in West Africa was highly successful.
• Launched in 1974 by the World Health Organization, later joined by the Carter Center.
• Halted transmission of river blindness in 11 West African countries.
• Prevented about 600,000 cases of the disease.

PEPFAR (President's Emergency Plan for AIDS Relief)

• Launched in 2003 by President George W. Bush.
• Provided money for antiretroviral drugs, testing, and prevention.
• Has halted the AIDS pandemic in Africa.
• Credited with saving more than 25 million lives.

Global Vaccination Programs

• The global push to vaccinate children has had huge positive impacts.
• The World Health Organization estimates that childhood vaccinations prevent 2-3 million child deaths per year.
• There has been a significant drop in child mortality.

Aid's Limited Success

• Aid often doesn't reach the neediest people and may prop up corrupt governments.
• But it's important to remember successful programs and the benefits they bring.
• If those programs are stopped, the benefits will cease.

Aid to Africa

• Africa has received more foreign aid than any other region.
• Between 1965 and 2005, Africa received hundreds of billions of dollars.
• But the typical African country was no richer than at independence.
• There's no clear relationship between economic performance and aid flows.
• Aid and growth often move in opposite directions.
• Aid may be responding to poor growth conditions.

Long-Term Impact of Aid

• Over a forty-year period (1960-2000), more aid is associated with slower growth.
• The question of whether aid affects growth is a major unanswered question.
• Some studies suggest aid promotes growth, others find no relationship or a negative association.
• This is due to differences in study periods, countries included, measurement of variables, and modeling specifications.

Circumstances for Effective Aid

• Aid can have a positive effect only under certain circumstances.
• Aid can generate growth only when the money is spent properly.
• Effective aid is associated with countries that have curbed corruption and pursued sound macroeconomic policies.
• There's a tension between directing aid to well-run countries (where it's less needed) and countries with great distress (where it may do little good).

Conditionality Revisited

• Donors attempt to use conditionality (policy changes) when giving aid.
• An example is the Kenya railways, where donors pleaded for reforms for over 20 years.
• The Kenyan government dragged its feet, yet donors continued to provide aid and loans.
• Donors often lack leverage.

Dynamics of Aid Negotiations

• Corrupt leaders exploit the fact that donors care about the plight of the poor.
• Todd Moss describes a hypothetical but typical negotiation scenario.
• A donor and an African government negotiate an aid deal with conditions (e.g., reducing military spending, ending a state-run trucking monopoly).
• A compromise is reached, and the aid is delivered.
• However, the military budget isn't cut, and the market isn't liberalized.
• The cycle repeats, with the donor official facing a dilemma.
• The easy choice is to keep the aid flowing.
• This explains why donors often don't have as much power as they might think.

Targeting Aid to the Poorest

• Aid is supposed to be directed to the poorest people.
• Pandy et al. highlight that aid tends to bypass people in countries that are improving on average.
• This includes middle-income countries like India, Nigeria, Bangladesh, Indonesia, and Kenya.
• These countries have many poor people but receive relatively low aid per person.
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• In 1987, 9/10 poor people lived in low-income countries.
• By 2015, 7/10 have lived in middle-income countries with a combination of poor and wealthy citizens.
• Nigeria and India have large populations of extremely poor people but receive low net aid per person.

Conclusions

*This transcript provides a comprehensive overview of the history, theory, and practical challenges of foreign aid. It emphasizes the importance of economic growth and savings, explores various rationales for foreign aid, and delves into the complexities of the international aid system.
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