The impact of aid on a countries economic growth and development
The numerous debates following the release of the World Bank’s Report on Assessing Aid, the debates have by far become more intense. World Bank (1998) stated the most satisfactory results of aid on growth can be present in certain recipient countries regarding the structure of policies they adhere to which includes them having strong commendable policies and governments. This statement created the perception that aid should be channelled to these set of countries (Dollar and Pritchett 1998). There are those who support this idea, such as Burnside and Dollar (2000), Dollar and Levin (2006), Collier and Hoeffler (2002) Collier and Dollar (2002) and some others who do not; Boone (1994), Mosley et al (1987) and Easter et al (2003).
What is Aid?
Aid has been defined in so many ways, but is often referred to as a country rendering support or assistance to another country, mostly in the form of resources. The Development Assistance Committee (DAC)’s view of aid is that of the transfer of aid to developing countries which the DAC termed Official Development Assistance (ODA), classified under the Part I countries- comprising of the very poor and middle-income countries while other countries much ahead fell under the Part II and received what was termed Official Aid (OA). ODA can be categorised into either humanitarian or emergency aid which are for developmental purposes and OA is categorised into bilateral and multilateral aid. Bilateral aid is transferred through governments between donors and recipients while the later is through agencies with the sole purpose of development (Riddell, 2007).
The heated arguments about the recipient country conditions for aid to be effective have been viewed from different perspectives. There are those who look at aid as having no positive impact on growth unmindful of the propositions brought about by others who include other factors such as conditions which can enable a recipient country achieve growth.
Prosterman (2007 p. 1) sees the origination on aid being based on selectivity, from former US Secretary of state, George Marshall in 1947 because this “created a region of prosperous, democratic, free-market economies”. While Dollar and Levin (2006 p. 2034- 2044) point to examples such as china in the 80’s. In the 80’s aid, was once being allocated to countries with poor governance but later on a basis of “selectivity” because it was abused in these countries.
Boone (1994, cited in Ouattara and Strobl 2004 p. 1) viewed as a basis for consumption and observed that there was no definite outcome of the correlation between aid and growth. Mosley et al (1987) illustrates that the total volume of aid is incapable of being logically proven to have an impact on economic growth and concluded that the relationship between aid and growth in poor countries could not be determined. While Easterly and Pfutse (2008, cited in Wright and Winters 2010 p. 63) comments on the fact that in spite of international trade having been spread across nations for over five decades with a “2.3 trillion dollar cumulative”, no dramatic impact in the level economic growth has been achieved. Easterly et al (2003) did not necessarily state that aid had no impact on growth, but that aid based on certain conditions such as those of Burnside and Dollar (2000) creates a mixture of fillings, less enthusiastic about the effect of aid in increasing economic growth in recipient countries. Moreover, the issues sounding the role of conditions in easing growth is still yet to be solved which is why Easterly et al (2003) sees the study of Burnside and Dollar (2000) as not being the full answer, as is observed below.
Burnside and Dollar (2000) is frequently being addressed and criticised, by many who do not conform with the ideas of aid being given to countries on the bases of selectivity, such as; having healthy and effective political, social and economic environments. These policies include; “low inflation, low budget deficits and high trade volume” (Wright and Winters 2010 p. 62). Burnside and Dollar (2000 p. 864-848) refer to bilateral aid as being given for the reasons of politics and find that it does not compliment effective policies unlike multilateral aid. There is also emphasis that the countries adopting good policies experience faster economic growth and that aid is being wasted if it is not used effectively. Collier and Hoeffler (2002) attribute the reason Africa’s prone to civil wars and conflict due to the nature of poor environments. While Wright and Winters (2010) mentions all previous studies played little emphasis political aspects. It was also mentioned how corruption negatively affects the governments of the countries and that if aid is being channelled to particular to relevant sectors of the economy and carefully monitored, growth could be achieved.
Guillaumont and Chauvet (2001 p. 66) says aid can be seen “as an insurance as well as a reward”. In the study there is the focus on the role of human capital and how its influence on these systems or policies brings about a more desirable effect. Guillaumont and Chauvet (2001 p. 66) also conforms with the view that recipient countries need to adopt certain conditions, and notes that aid’s impact does not inevitably have a good outcome on growth but is capable of achieving better results in countries with weak environments which they termed “vulnerable countries” being exposed to external shocks. The trends of growth examined on the context of each being actually achieved, rises with the combination of a sound system and weak environment and this combination strengthens the impact of aid, although the environments are better at achieving a transparent result unlike systems. Collier and Dehn (2001 p. 2-10) when referring to the complexity in bringing in “shocks” into aid “effectiveness” is based on the happenings of the economy being internal to “both policy and aid” which is why shocks should be observed from an external perspective. These unpleasant shocks decrease the level of growth but can be reduced by rises in aid.
There can be a negative impact on the level of aid which can be attributed to climatic factors. Recipient countries dependent on their agricultural sector mostly in tropical areas can be affected by certain ailments usually due to the nature of these environments and this can affects human capital and labour productivity, resulting in less returns to capital with no better effect on growth (Daalgard, Hansen and Tarp 2004). A somewhat similar study is that of Kosack and Tobin (2006 p.236) who focus on the role of human development and aid. Aid is seen as a driving force with a good and positive impact on the recipient country which in turn increases “human capital”. However, the reduction in human capital in the form of Foreign Direct Investment” has a negative impact on growth, but can create a striking positive impact in the event of a slight increase in “human development”.
There are also those who see aid having an effect on growth in recipient countries, but on a set of more advanced reasons far beyond propositions set forth by others regarding certain conditions needed to be adopted.
Clemens et al (2004) refers to Burnside and Dollar (2000)’s statement on better polices influencing growth and Daalgard et al (2004)’s study on climate conditions having a positive influence, but stresses that there are alternative forms to aid than focusing solely on growth. Clemens et al (2004 p.32) disregards these growth models as being inaccurate and also points out that it is inexplicable to conduct a “four year observation”, but looks into the short term observation and admits aid accounted for “2.75%” of Gross Domestic Product (GDP), and GDP also had a “0.58% annual on growth in the four year period”. Although aid does have a positive impact on growth, Dayton-Johnson and Hoddinott (2003) aside from criticising Burnside & Dollar (2000)’s report, also focused on the question, that irrespective of recipient country conditions and aid driving growth, what main profit can be derived if not attaining the achievement of poverty alleviation? And more so, that aid should be allocated to countries with greater levels of poverty, income inequalities and good policies. Lensink and Morrissey (1999 p.22) when referring to the level at which aid contributes positively to the role of investment- which in itself spurs growth, explains that uncertainty is also seen to have an unfavourable impact on aid, investment and growth and that “the links between aid, policy and growth are more complex than simply stating that aids works if the right policies are present”.
There is no general consensus regarding the recipient country conditions for aid to be effective on growth. Aid can increase or reduce the level of growth depending on how it is utilised. A country solely focused on aid can abuse it. However, if the recipient countries have a more transparent and effective system, this can influence the way in which aid is utilised and thus, have a favourable impact on growth.
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