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Does Foreign Financial Aid Work Economics Essay

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Published: Mon, 5 Dec 2016

The current world is categorized into industrialized and developing countries. The chief difference between these countries is the sum of money applied by the governments in their important sectors like health, commerce, and education. A developing nation or a less-developed nation is any country with a significantly lower lever in terms of her material well-being. There is no internationally recognized definition of a developing country. The development levels may vary greatly within the developing nations with some having high average living standards. A developed nation on the other hand is any nation allowing all her citizenry the right of enjoying healthy and free life in a considerably safe environment (Sullivan & Sheffrin 471). Aid, or overseas aid, foreign aid, or international aid is a free resources transfer from one nation to the other with the aim of benefiting recipient nation. Giving of aid is a social responsibility of the rich nations and is not just a mere obligation or duty. It entails an element of morality as the rich nations have a moral duty of redressing the diverse economic inequalities, which they have created across the world (Fajardo 184).

Majority of the poorer countries are masked in debts due to their unbalanced finances reflected in weak international trade, unstructured system of education, and failed health care. Due to this vicious cycle, the wealthy nations have shown interest in reducing the global economic differences by taking more responsibility towards assisting the unfortunate nations (Sunstein 163). However, this paper wishes to critically examine giving of aid to the poorer nations and take a stand supporting that such aid should not be given. In this, the paper shall examine the fact that foreign financial aid does not work for the poorer nations; the rich nations should not give aid to the poorer ones; and giving aid leads to dependency of the poorer nations. The paper shall also examine the need for refurbishing of the internal issues instead of relying on international aid, whether there are better ways of helping the poorer nations other than giving aid to them, and the reasons why the poorer nations should be denied aid from the international community.

Today, people and nations across the world are more closely linked. This has seen an increment in trade as well as people’s movement between nations in greater levels than ever. However, millions of individuals still live in much poverty, with the gap between the rich and poor widening in many places. Thus, there are numerous reasons for assisting the poor nations with humanitarian reasons topping the list. Just like the individuals who give towards charity, many nations consider it their social, moral, or religious obligation/duty to assist people in the other nations suffering from drought, famine, diseases, or war. However, a good number of rich nations also make donations for diplomatic or political reasons. This is aimed at maintaining a dependency relationship with the recipient countries’ governments, or simply to manipulate such government and/or the countries’ direction. Another factor facilitating giving of aid to the poorer nations is for economic issues. Donors may wish to control supply of commodities like oil, wheat, or water. Alternatively, such rich nations may wish to ensure readily available markets for their products, whether they are shoes, computers, or planes (Sustein 162-163).

However, foreign aid is not automatically the most effective means of helping a nation. One reason for this is that millions of dollars obtained from such aid is often misappropriated or goes missing into the inefficient administration and corrupt governments. Secondly, most foreign-aided projects are inappropriate for the target nation. Numerous agencies construct huge industrial projects or dams, which fail after some few years. Worse still, some of those projects ignore the local people and fail to involve them in the project yet it is meant for them. Furthermore, much of such aid proceeds to the donor in form of expensive experts and specialized equipment from such a donor nation (Birdsall, Rodrik & Subramanian 137).

Should the Rich Nations Give aid to the Poor Nations?

Considering Vietnam and Nicaragua, the two nations are poor with their economies primarily being agriculture-based. The two have suffered due to prevalence of conflict and have also benefited from significant foreign aid. However, only Vietnam has minimized her poverty level dramatically as well as enjoyed a steady economic growth (5% per capita since the year 1988). On the other hand, Nicaragua has floundered in terms of economic performance with her per capita growth being too modest to cause a real dent towards the population of poor people. Until 1994, Vietnam faced an embargo from the US and the nation is still not adopted as a WTO (World Trade Organization) member. Regardless of such obstacles, the nation has found reliable markets for its coffee exports as well as other agricultural products. In addition, the nation has started diversifying her economy into manufacturing sector, especially of textiles. In comparison, Nicaragua benefits from the preferential access of the lucrative markets of the US and had a huge debt waved off in 1990s. However, her clothing and coffee export industries lag much behind those of Vietnam (Birdsall, Rodrik & Subramanian 137).

Why does Nicaragua fall some few steps from Vietnam yet they have been exposed to international aid? Answers to such a question are internal: political and economic institutions and history have trumped the other factors in determination of economic success. The access to the American market as well as the donors’ largesse has not had powerful impacts to overcome the history of Nicaragua in terms of economic and social inequality. In addition, power and land in Nicaragua have been concentrated in hands of some few elites with the government notable in failing to invest substantially in public welfare and infrastructure.

Experiences of numerous other developing nations confirm the significance of the specific internal factors. Just like Vietnam, neither India nor China- the two emerging economic powerhouses of the later quarter of the 20th century- has accrued much benefits from international aid and trade preferences. Neither of these two nations has received much international aid compared to the nations in Central America and Africa. Their success is attributed to enactment of creative domestic reforms within their governance systems leading to their notable prosperity as well as plunging of their poverty levels (Hardin 2).

Most of the African nations have not managed to match the success of Vietnam despite being more agrarian or no poorer. True, health and education indicators have improved notably in Africa with some countries having achieved higher levels of macroeconomic stability. However, even within the best-performing nations, productivity and growth remain modest with their investment initiatives depending solely on international aid infusions. It could be luring to ascribe some rare African successes such as in Mauritius and Botswana to the high international demand for their garments and diamonds respectively, but limited explanation has been offered so far. Obviously, the two nations could be considerably poorer if they had no access to the international markets. What distinguish these nations “is not the external advantages they enjoy, but their ability to exploit these advantages.” (Birdsall, Rodrik & Subramanian 138) Many developing nations have been hurt by their natural resource endowments. For instance, diamond has hardly conjured images of prosperity and peace in Sierra Leone while oil has been a blessing in disguise for Nigeria, Angola, Equatorial Guinea, and many others.

Mexico is a perfect example of how foreign aid can be detrimental in development. The nation has an advantage of bordering the US (a strip of about 2,000 miles), which is the greatest economic power across the world. Since the enforcement of the North American Free Trade Agreement (NAFTA) in 1994, the US has given goods from Mexico a duty-free access into its markets, has continued absorbing thousands of Mexicans into its labor-force, and has made large investments into the Mexican economy. In the course of peso crisis of 1994-95, the United States Treasury underwrote the financial stability of Mexico an implication that outside economic assistance gets no better. Since 1992, the economy of Mexico has grown at barely 1% per capita on annual average rate. This figure is far much below the rates exhibited by the growth superstars of Asia. In fact, this is a fraction of the nation’s own growth rate of 3.6% on annual basis in the 2 decades, which preceded her debt crisis of 1982. Access to external resources and markets has not given Mexico a platform of making up for her internal problems (Sunstein 163).

The membership of the European Union (EU) is a remarkable exception to limitations of international assistance. By offering their poorer southern and eastern neighbors not just market access and aid transfers but also the hope of joining their union, the European Union has stimulated far reaching institutional changes and policy as well as impressive growth rates in around 20 nations. Unfortunately, accession to EU or even to any other such major power is a nightmare for majority of the poorest economies across the world. In addition, increasing the trading opportunities and financial solutions for the poorest nations is an insufficient substitute (Birdsall, Rodrik & Subramanian 138).

Which is the Best Way of Helping the Poorer Nations?

There exist numerous ways of helping the poor nations as opposed to giving them aid. Some of the mechanisms include opening up the existing trade barriers, removing subsidies to facilitate easier and fair competition of the imported products from poorer nations, or forgiving their international debts. In fact, most of the poor nations’ economic performance is maimed by the huge interest repayments imposed on their old loans. The requirements of the poorer nations may seem obvious but there is need of examining their real needs as well as implementing solutions, which will benefit them as well as the donors.

Material and economic help is essential towards the poor nations that are victims of sickness and famine though it is only a short-term solution. The rich nations should assist the poorer ones but it is a rather utopian idea to envisage that their aid will never be affected in diverse ways by political corruptions in the poorer nations. Furthermore, helping them is a paradoxical action since the political and economic system impoverishes these countries. The best solution could be changing the exchange between needy and wealthy nations, as it is not right to continue living in the current system with so many individuals dying due to the inequalities that have been created (Andre & Velasquez Para 2-3).

There are many kinds of aid ranging from food aid, to humanitarian emergency assistance, military assistance, etc. The developed nations have for long recognized development aid as vital to assist the poor developing countries to grow out of their poverty. The world’s richest nations in 1970 agreed to offer an annual 0.7% of their Gross National Income (GNI) as an official foreign development aid. Since then, regardless of the billions given out each year, the rich countries have hardly met their promised targets (AJWS 7). For instance, the United States is the largest donor but is rated amongst the lowest when it comes to meeting the agreed upon 0.7% target. International financial aid has always come with some costs towards the developing countries. The first one is that such aid is mostly wasted on the conditions since the recipient nations are required to use overpriced commodities and services from the donor nations. The majority of such international aid does not go to the most needful countries, which would need it most. Thirdly, the aid are often dwarfed by the rich nation protectionism, which denies access of international markets to the products of the poor nations, while the rich ones use aid as levers of opening markets of the poor countries for their products. Finally, massive grand strategies or large projects often fail to assist the vulnerable in such nations as money can easily be embezzled away.

Presently, the international system of trade has a wide range of inequities. Rich nations place high tariffs on the imports like agriculture and garment products, which are vital to the economic performance of the developing nations. These tariffs escalate with increase in processing level; hence discourage industrialization within the poor nations. Besides, multilateral trades negotiations are short of transparency hence exclude the developing nations from real action. Employing the procedures of WTO in settling trade disputes and other anomalies needs technical expertise and money, which the poor nations lack. However, saying that such flaws are serious deterrents of development in the struggling economies would qualify as overlooking the notable and outstanding success of China and Vietnam over the preceding two decades in exportation of manufactured products, Chile’s wine and salmon exportation, and services exportation in India. All these nations have realized success in exportation regardless of the impediments. In fact, barriers on the manufactured exports sourced from the developing nations were higher when Asian “tigers” arrived on the international scene in 1960s and 1970s (Sullivan & Sheffrin 145).

Why Deny aid to the Poor Nations?

Some ethicists claim that wealthy countries are under no obligation to help the poor ones. They claim that their moral duty is acting in manners, which will maximize happiness of the people as well as minimize their suffering. Aiding the poor countries, in the long term, will produce more suffering compared to the one it will alleviate. Countries with the highest poverty incidence have the highest rates of birth also. One-report estimates 90% of the total population growth of the world by 2025 will happen in the developing nations. Provision of aid to such nations will only facilitate survival and reproduction of more of these people, placing greater demands upon the limited food supply of the world. And as these countries’ populations’ swell, more individuals will be forced into the environmentally fragile and marginal lands, resulting into widespread degradation of land, which will further reduce the available land for food production. Increase in the demand of the limited supply of food combined with a reduction in food production will certainly threaten the future generations’ survival (Andre & Velasquez Para 4).

Other ethicists argue that little benefit, even within the short-run, is accrued from offering aid to the poor countries. The aid offered to the developing nations hardly reaches the individuals intended to benefit. On the contrary, it is utilized by the oppressive governments in subsidization of their military or on projects, which benefit the local elites only, or even end up on black market. Over 80 percent of the 596 million-food aid offered to Somalia was channeled towards the military as well as other public institutions within 1978 and 1984. Worse still, El Salvador channeled 80 percent of the US dry-milk-aid into the black market (World Bank 17). These illustrations imply that giving aid to the poor nations undermines any form of incentive on these nations’ part in their efforts of becoming self-sufficient via the programs, which would be of great benefit to their citizenry. Such programs include the ones that would help in controlling population growth or increasing production of food. Food aid, for instance, depresses the local prices of food; hence discourage local production of food as well as agricultural development. The poor dairy farmers from El Salvador found themselves facing stiff competition against the US-free milk. Consequently, many nations, such as Sudan, Zaire, and Haiti have become dependent on international aid.

There are also some other ethicists who maintain that principle of justice dictates against giving aid to the poor countries as justice needs a fair distribution of both the benefits and burdens among peoples. Countries that have laid out effective plans for the requirement of their citizens through regulation of food production in order to foster an adequate supply of food for the present and a surplus in case of emergencies, as well as the countries, which have implemented programs for limiting population growth ought to enjoy their foresight benefits. Majority of the poor countries have irresponsibly failed adoption of policies, which would stimulate production and development of food. On the contrary, their resources are spent irresponsibly on military regimes or lavish projects. Consider the air-conditioned cathedral worth $200 million, constructed just recently in the impoverished Cote D’Ivoire nation. Worth consideration is also the 1986 fact that the developing nations spent about 6 times, of what they received as foreign aid to strengthen their armed forces (WCED 12). These nations failed the test of acting responsibly and should thus bear their consequences. Therefore, it is unjust for such nations to ask the others that acted responsibly to assume their burdens.

All people are entitled to a basic right of freedom that includes the right of using all the resources acquired legitimately as they desire. The UN has somehow coerced the wealthy countries to offer financial and other humanitarian aid to the poor countries, which is a violation of their right of using their resources freely. Thus, aiding the poor nations is not obligatory but is praiseworthy.

Summary

International or foreign aid is essential towards the social, economic, and political issues facing the poorer nations. In fact, such aid has been significant in the humanitarian crisis faced by numerous nations, including the rich ones such as Japan, and this paper does not refute that fact. Moreover, a good number of rich nations also make donations for diplomatic or political reasons in the poorer nations. Most of the African nations seek international aid to sponsor their elections or referendums as was the case in Kenya in 2010 during the nation’s urge for a new constitution. However, the paper has shown that there are so many funds that are channeled into inappropriate programs and projects especially the ones favoring the governments receiving them. In addition, the donors (the rich nations) attach strings to their aid and the poorer nations benefitting from their aid must agree with their conditions.

The paper has also shown that international aid is not essentially the only means of developing the poorer nations. Increasing market access and aid for the poor nations makes sense but do not have that much effect in terms of such nations’ development and economic performance. The wealthy countries should push some other measures, which could be more rewarding. Such measures could include giving the poor nations more control towards their economic policy, opening labor markets, as well as financing new technologies that are development-friendly.

It is also clear that the rich countries should avoid giving aid to the poorer nations and give them space for their individual economic development. An illustration is the state of Vietnam, which has flourished without market preferences from the leading economic centers or much international aid. One essential means of developing the poorest nations across the world is giving their producers an effective access to the international markets, especially in America and Europe. Foreign development assistance or aid is viewed as being wasted on some corrupt recipient governments, or too much despite the good intentions from the donor nations. In reality, both quality and quantity of such aid have been quite poor and the donor countries have rarely been held accountable. Assumptions by the developed nations that the poor and/or the developing nations can only be developed via aid ignore some key lessons learnt over the past couple of years as well as the ones of economic history. Development can only be determined to a large extent by the poor nations themselves while outsiders can only play a limited role. The developing nations have emphasized this stand but the rich ones often overlook it. Thus, it is true that financial aid as well as the further expansion of the wealthy nations’ markets are tools possessing only a small ability of triggering growth in such poor nations. This paper concludes that the poorer nations should not be given foreign aid as a means of developing their economies. The nations should rather look into their internal political and economic institutions to foster their governance, which could in the long-run boost their economic performance, development, and independence.


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