Foreign Aid

Which theoretical approach best explains why states give foreign aid?

The most important question surrounding aid in the study of International Relations is why states give aid. Theoretical approaches have since been vital to understanding this activity. So, to address the question, I have mainly focused on bilateral aid-aid given by states to other states. Just to clarify the structure of my essay, I will first provide some definition and background on aid to build a platform for thinking about the existence of aid. I will then turn to explain the theoretical approaches that may, or may even not, explain why states give foreign aid. Lastly, I will conclude by summing up the arguments on the features of those theories, and if it has at all, if not in the best possible manner, described the action of states providing foreign aid.

First off, the term ‘aid’ or ‘overseas development assistance’ (ODA), as used interchangeably, can be defined as “gifts and concessional loans of economic resources, such as finance and technology, employed for economic purposes provided to less developed countries by governments of developed world”, excluding military aid however.[1] According to Guy Arnold, the definition of the term aid can be often misunderstood and also open to more than one interpretation. So he defines aid as “the flow of resources (both of capital and technical assistance in the form of people with their skills) from the more advanced or developed economies to the less advanced or developed ones”. (Arnold G, 199…pg-1)* So, as also stated by D Williams, in practice, aid is given by the developed world, which means the members of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Thus there is an element of the exertion of power by the developed states to influence the poorer and less economically significant countries.

If we look back in the history, we will find examples of aid and understand why it was introduced in the first place. The launch of the Marshall Plan to bring about “financial and economic recovery of the post-World War Europe”, which resulted in the initiation of the US Foreign Aid Act on 3 April 1948, was the platform for introducing an idea of aid as providing swift assistance, mainly American assistance, to the war-torn European states to reorganize economically.[2] This, however, is different in kind to the aid as we know it today. The real beginning of modern aid was actually set by the Colombo Plan, which was aimed to stimulate economic development in South and South-East Asia. As stated by Arnold, the end of the European empires left many newly independent states in the requirement of economic assistance in terms of development, as most of the states then, especially those if Asia, were underdeveloped. So from the years between the 1950s and 1980s, a total of 65.1 billion dollars were donated in aid.[3] This is significant in our understanding of why aid is given because, before the 1940s, aid was more or less non-existent. (Williams D, 2009) Hence it gives us a sense of how the period of post-war and decolonisation, has been different when talking about flows of aid, especially bilateral aid, which emphasises the desire by the developed countries to exercise influence over the newly independent states.

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Bilateral aid as such, can also be translated as the US inclination to set up a more accentuating hegemonic world order in the post-World War II era. Besides the obvious and humanitarian reasons for donating aid, which is ‘growth’, the urge to maintain the domestic politics and foreign policies of the developed states, such as the US, has caused a reasonable increase in the percentage of aid given. As aid statistics show, almost 73 percent more aid is given by the US than before.[4] Thus foreign aid has grown steadily over the years, and international aid has become widespread as a ‘common norm’ in international politics.

Throughout the ‘aid age’, there is also abundant evidence that a lot of assistance were given for Cold War or ideological reasons. For example, as also noted by Arnold, big amounts of Soviet aid go to Cuba and Vietnam, who are both considered to be in the Soviet-Communist sphere of influence.[5] So we can see that ‘ideological’ structural factors are at work here, which clearly highlights the attempt by such states to maintain close relations and allies. Having said that, if we assume that a lot of aid is given as Cold War manoeuvres, we begin to see the paradox of the extent to which Cold War has helped development, or if it has at all? To quote Arnold, in the light of Cold War confrontations to provide development assistance, “such aid, moreover, may have helped development even though the only concern of the donors was to keep the recipient government friendly to their cause”. (Arnold G, 19..pg-17).

Contrary to the expectations though, the universal networks of foreign aid have survived the end of the Cold War, most considerably because of its requisite in international development. As also Alesina and Dollar notes, aid is dictated by political and strategical considerations, as much as it is decreed by “economic needs and policy performance of the recipients”.[6]Given the above political and strategical reasons for aid, it is, however, important to stress the underlying factor of development. Be the reasons as they are, the establishment of ‘development as a norm’ has also influenced states to increasingly continue giving aid. As stated in Truman’s Speech, development assistance is “necessary to restore internal order and security so essential for economic and political recovery”.[7] Hence it can be noted that international development has apparently become a common concern between states besides the political strategies.

In the light of that context, I want to now introduce the theoretical frameworks for why states give foreign aid. There is good diversity among the body of thoughts when it comes to development theory, out of which the dependency theory and the neoclassical theory (neo-liberalism) rival the orthodox development economics. ***Before I go into arguing which theoretical approach can best explain foreign aid, I want to briefly mention the assumptions under development theory so as to provide a canvas for comparison, while keeping the concept of expertise, the emergence of developing countries and Keynesian economics in mind, where the role of the state was important as an intervener in the market to make it work, which otherwise might not produce beneficial outcomes in all circumstances.[8]

According to Hans Morgenthau, no type of foreign aid, whether it is prestige aid or humanitarian, pose any major expense of theoretical questions. But foreign aid for ‘economic development’ has been a key area for theoretical analysis and so has mainly been economic in nature. Based on true economic traditions, foreign is thus looked at as if “it were a self-sufficient technical enterprise to be achieved with the instruments and judged by the standards of pure economics”, to quote Morgenthau.[9] Since the Western developed world has been “due to the formulation of capital and the accumulation of technical knowledge”, there has been a sense of these very same factors to propel economic development in underdeveloped nations of Asia, Africa and Latin America (Morgenthau,1962,pg-304). Thus development theory, in terms of aid, assumed that development was possible and inevitable in the existing international economy but was not guaranteed, as stated by David Williams. I think this theory explains, only to an extent, why foreign aid is given by states in terms of a transition from the pre-modern to a more industrialised development, such as the ‘developed West’.

Bearing this assumption in mind, that development just couldn’t leave to market mechanisms alone and had to be devised through assistance, it can be noted that aid in the form of state intervention or development assistance were driven by Western policy makers for the developing countries. According to this theory, the element of development was understood through industrialisation or ‘modernization’, where productivity in traditional agriculture had to be increased. Since rural agriculture was linked to a large pool of unproductive labour, industrialisation was expected to lead to a higher level of productivity for the underdeveloped economy because this surplus pool of labour could be then put to work in industries from their rural subsistent farming. Also because of the newly independent states from colonial influence, as mentioned before, were heavily reliant on the export of these agricultural products, the limited demand of such good by the developed countries made these sites very vulnerable. Hence, the demand for primary products rises very slowly and may imply an unbalanced growth for the developing countries and market mechanisms only cannot be relied upon to bring about a balanced growth. Thus state intervention is needed to allocate capital and manage this process of industrialisation, as stated by David Williams. Hence foreign aid in the form of capital from outside is to be injected in order to promote this sort of development.

As underdevelopment, according to Morgenthau, was seen as a “deficiency disease at its worst kind, and could only be taken care of “through subcutaneous injections of the missing ingredient”, (Morgenthau 1962) Development theory in this context provides an inefficient insight in terms of aid provided as development assistance by states as a part of Western rationalization for industrialization. This is because, as Morgenthau explicates, some nations, such as Jordan and Somalia, may suffer from social, natural and insuperable deficiencies which no amount of capital or technical assistance from the outside can cure. Thus such recipient nations can be incapable of economic development in spite of subsistent inflows of foreign aid. [10]In my opinion, the economic development of such underdeveloped economies cannot be thought to impel by Western states providing capital as foreign aid or foreign investment alone, as state capacity may act as a hindrance. So a restructuring of the domestic economic environment and authoritarian political planning within the nation itself may be necessary.

It can also be noted, however, that the machinery of foreign aid, under this theory of economic development, has become a universal proposition that the “highly developed industrial nations have an obligation to transfer money and services to underdeveloped nations for the purpose of economic development” (Morgenthau 1962). So economic development can be seen as an ideology where this transaction by the West is rationalised and justified. But the question then is why provide this aid to such economically insignificant nations, unless there was an element of a political bargain. So it can be explained that foreign aid given by states is merely the price paid for political services to be performed. Hence it is actually staging the pretence of ‘giving aid’ for economic development.

So bribery disguised as foreign aid under developmental theories captures the role of the giver and the receiver in a play, which is difficult to distinguish from reality. In practice, such economies get considered as being ‘rent-seeking societies’,[11] where government restrictions, such as tariffs on import or trade barriers, give rise to rise to ‘rent-seeking’ in many forms, such as corruption, bribery and so on. For instance, when quantitative restrictions are imposed which manipulates constrained imports, import license becomes a valuable commodity in countries such as India. So Government interventions in the forms of aid have effective costs and political implications of competitive rent seekers related to such policies. So the existence of rent-seeking then portrays an unequal distribution of income and market mechanism becomes a suspect due to the wealthier individuals becoming successful rent-seekers while the poorer ones are precluded. [12]This, in turn, results to an “inevitable temptation to resort to greater and greater intervention”, as stated by Kreuger, to ‘influence’ political activity for economic development. As a result, a political “vicious circle of poverty” may develop. If we relate this to the Keynesian idea of equilibrium, it can be implied that fewer savings in developing nations mean a lack of capital, i.e. less money to invest on productive facilities such as infrastructure or agriculture, which in turn leads to low productivity culminating low income. Therefore, countries characterised by this circle have an environment of low development.

Having said that, in the light of development theory, a breakout from this vicious circle can be achieved by providing capital assistance from outside in the form of foreign aid, the result of which influx will lead to economic development. But this may not always be successful in explaining the infusion of foreign aid, as referring back to Morgenthau (1964), the characteristics of some nations make them handicapped when taking advantage of this economic opportunity, because the short of transformation of their collective intelligence and character cause them to not fully use what they receive from outside for economic development, such as governments which are corrupt, or whose bureaucracy’ is relatively small to carry out the functions effectively.

So it could be questioned if this economic development theory of the industrially advanced countries applicable to underdeveloped countries, as asked by Hly Myint. It cannot fully imagine that in practice, the implementation of policies under this theory will be will be applicable to underdeveloped nations with traditional values and attitudes. This is because, as institutional economists have argued, the generalisation of economic theory are based on circumstances of the developed countries and therefore, not “universally valid”. (Myint 1965) Also, to quote Myint, “the social and institutional settings and stages of development between the advanced and the underdeveloped countries” have differences. Such attack of the ‘realism’ of the economic theory, as described by Myint, thus makes the policies under this theory fairly incompetent for underdeveloped states.[13]

Another problem being, that this “Western” economic theory seems to be more preoccupied with western economic environments that have already achieved sustained growth, and therefore is out of focus on the central issues, such as optimum allocation of resources, the maintenance of full employment and so on, that shapes underdeveloped economies.[14]

Hence the substance of such a theory becomes, almost impertinent to address the central problem of the underdeveloped countries, notably India, which is to “initiate and accelerate the “take-off” into sustained growth” (Myint 1965).

Unlike, orthodox development theory, insists that “it is not the internal characteristics of particular of particular countries so much as the structure of the international system, particularly in terms of economic aspects, that is the key variable to explain the form of development that has taken place in non-communist industrializing countries”, as quoted by Tony Smith (1979). As it seems, it tends to emphasise the political and economic interfaces than “the developmental rival”, and in doing so is unambiguously supportive of the change in the South to strengthen the poorest and the most oppressed members of society. This idea can only be grasped, if put in a historical canvas, so as to comprehend the logic of development process, because according to Smith, “contemporary political and economic change in the South must be understood as aspects of imperialism today and yesterday” (Smith T, pg-248, 1979) What the idea of dependency or ‘neocolonial’ theory portrays is the perspective that sovereign states of the South have been preliminarily dependent on technology, financial assistance, market and basic imports on the international economic system ascended by the Northern capitalist powers, including Japan. As Smith interprets, Third -World countries, because of their form of incorporation into the international system, cannot do without the dependence on from aid, but also cannot do with it, as their assimilation in the international system restrains industrialization making their economies inferior with the dynamic forms of growth associated with agriculture or the extractive industries.[15]

Hence the logic of states providing aid in this context, is merely an element of imperialism, because of the Northern corporations, however much they bring in form of managerial or technical assistance, take more than they give, and thus prevents self-sustaining industrialisation from occurring in underdeveloped economies. (Smith 1979).

However, it is important to stress that the Third-world countries cannot also do without this dependency on foreign aid because the North or the ‘political elites’ have created a structure of dominant rule favourable to an international connection. Thus, to quote Smith, “it is not the sheer economic might of the outside that dictates the dependent status o the South, but the sociological consequences of this power”. (Smith pg-251 1979) So this international order, according to dependency theorists, is to be respected by the South if it wants the system to continue providing the services needed.

In many underdeveloped nations thus, foreign aid provided by states can be regarded primarily as a financial exploitation and ‘underdevelopement’ can be labelled as a product of “capitalist, imperialist, and colonialist exploitation”. For instance, the case of India under British imperialism can be take in point to note the Indian economic development; which although misses out the probability of the price to be paid, such as constant warfare under the Mogul rule of the pre-British system, accomplish any transformation of industrial development, according to Smith. Bearing the state structures in the South, we can make sense of their experiences under the light of this theory.

However again, the power of state capacity of local interests and structures, restrain this theory to reductionist in explaining why foreign aid is provided by states in practice. States which turn into bureaucracies in the government, only act on behalf of the foreigners’ interests if it coincides with theirs. So, the term neocolonial and dependency which suggests that states which are subjected to neocolonialism are in theory “dependent and has the trappings of international sovereignty”, leaves out the reality, in practice, of state apparatus that depends on the combination of local interests and also any initiatives taken in regard to domestic and international issues. As a result, it provides a rather simplistic explanation of the dependent status amidst the social structure of the states that engendered authoritarian regimes, such as in Latin America.[16] As justified by Smith, “the major historiographic shortcoming common to most of the dependency theory”, doesn’t merely measure the relative autonomy of the various Third-World countries derived from local traditions and institutions.

As I have mainly focused on foreign aid is given bi-laterally, I will not go into much details of analysing the neoclassical approach to explain why states give foreign aid. However, for argument’s sake, I want to mention that the understandings of development have shifted during the period of the 1980s, which was partly a reaction to the various crises that emerged at that time, notably in Latin America and in Sub-Saharan Africa. This is important to note in the context of foreign aid, because the triumph of neo-liberal values and the dispense of orthodox development economics, according to David Williams, portray a rationalization of multi-lateral lending through institutions such as the IMF and the World Bank, who have embraced the neo-liberal values to pursue inspired policy changes in developing countries. So the innovations in development theory during the 1990s are all framed, in one way or another, within the broad neo-liberal paradigm.[17] As Frances Stewart notes, countries that have adopted such neoclassical policies, relying on price system and an open trade regime, were relatively enhanced compared to the countries that adopted policies of detailed political planning and other forms of government interventions.[18] But criticism applied, this theory makes a rhetorical emphasis on the capabilities of the poor, and also provides a conflicting view of politics against the rest of the society.[19]

So to conclude, foreign aid policy and the assumptions that lie with it, are highly controversial. As I see it, there is no one-way of pinning down any approach that would explain why states give foreign aid. The theories I have explained above all have, one way or another, shortcomings in their nature when explaining the concept of foreign aid. Orthodox development economics for one, explains foreign aid as foreign policy and political bargain for economic development, but by being very politically and strategically driven, becomes inapplicable for explaining the element of capital and technical aid in underdeveloped countries where ‘Western’ ideology of industrial development may not be sustained in practice due to the internal structure and bureaucracies of the newly independent states. Dependency theory also somewhat omits the interests of colonial states when explaining aid as intervention from outside, i.e. from the imperialist countries. It leaves out the question of state capacity to actually carry out the functions under imperialism, which highlights the inability of the poorer nations to fulfil the conditions of “development” in the international structure, predominantly created by the North. Hence the theoretical approaches expunge the rhetoric and the reality that has been applied with the giving of aid.

Most importantly, the theoretical frameworks for foreign aid, by stressing on economic development for states and a transition from pre-modern society to an industrialised one, whether it be for the self-interests of Western states, to begin with, fades out the humanitarian element of basic development from epidemics, or natural disasters and so on. But even if it did highlight foreign aid under such category, the non-political function of foreign aid as the humanitarian aid then becomes political when operated in that context. Hence humanitarian aid extended by governments may end up having political effects,[20] if put under the microscope of such theoretical approaches. Nevertheless, it cannot be dismissed that aid-giving has become increasingly widespread as an international norm in politics, whatever the underlying theoretical implications may be, and thus promotes foreign aid as a contribution toward international development.

Footnotes

[1] Global Politics of Development (lecture on foreign aid), pg-2 by David Williams, 2009.

[2] Guy Arnold, ‘Aid and the Third World’: introduction, pg-1.

[3] Guy Arnold, ‘Aid and the Third World’: pg-4,

[4] Global Politics of Development: handout, Aid Statistics 2008

[5] Arnold, G ‘Aid and the Third World’, Pg-17

[6] Alesiana A and Dollar D, Who gives Foreign Aid to Whom and Why: Journal of Economic Growth, (March 2000)

[7] The Truman Doctrine Speech, by Harry S Truman, March 12th, 1947.

[8] Global Politics of Development, David Williams, lecture: Development Theory 2009

[9] Hans Morgenthau, A Political Theory of Foreign Aid (pg-304): The American Political Science Review (Jun 1962).

[10] Hans Morgenthau, A political Theory of Foreign Aid: The American political science review (Jun 1962).

[11] Anne O. Krueger, The Political Economy of the Rent-seeking Society: American Economic Association (Jun 1974)

[12] Anne O Kreuger, The Political Economy of the Rent-seeking Society: American Economic Association (jun 1974).

[13] Hly Myint, Economic Theory and the Underdeveloped countries: The journal of Political Economy (Oct 1965)

[14] Hly Myint, Economic Theory and the Underdeveloped countries: The journal of Political Economy (Oct 1965)

[15] Tony smith, The Underdevelopment of Development Literature-the case for dependency theory: World Politics (1979)

[16] Tony Smith, The Underdevelopment of Development Literature: the case for dependency theory, World Politics (1979)

[17] David Williams, lecture Global Politics of Development: Neoliberalism and Development Theory (2009)

[18] Frances Stewart, The Fragile Foundations of the Neoclassical Approach to Development (1983)

[19] David Williams, lecture Global Politics of Development: Neoliberalism and Development Theory (2009)

[20] Hans Morgenthau, A political Theory of Foreign Aid: The American political science review (Jun 1962).