Assessing The Impact Of Foreign Aid

Updated: 5 days ago

Why are poor countries stuck in poverty despite the larget amount of foreign aids? This article analyzes the reason behind the persistent poverty in developing countries from the angle of the System of Exchange.


The world’s richest countries spend a lot of money on aid to developing countries. The United States, the largest contributor in absolute terms, gives over $30 billion in development aid each year. (Luxembourg is the most charitable country in relative terms, giving 1% of their gross national income. In contrast, the United States gives 0.2%.) In total, rich countries have spent over $2 trillion on development aid in the last 50 years.

Despite this aid, poverty continues to persist in many developing countries. Africa receives a significant proportion of global development aid, yet the average GDP in sub-Saharan countries has dropped by 15% in the last 20 years. Rather than fueling economic growth, development aid in many countries is exacerbating poverty and forcing countries into substantial debt. If rich countries spend so much money on development aid, why are poor countries still suffering so much? 

To answer this question, we might consider what motivates rich countries to give aid using the Systems of Exchange typology. The immediate humanitarian aid that follows natural disasters is largely motivated by a Moral logic; when communities abroad are devastated by tsunamis, hurricanes, or earthquakes, both citizens and governments offer donations out of a substantive desire to help. However, most foreign aid is directed not at immediate disaster relief but toward longer-term development projects. These projects may be partly motivated by a Moral desire to reduce poverty, but they are primarily motivated by a Price-based desire to support domestic economies and political agendas. 

By helping poor countries develop technologies and infrastructure to participate in international trade, rich countries create new markets for their goods and gain access to precious natural resources for their production processes. For example, the US food aid program is motivated as much by a desire to support American farmers as it is by the desire to relieve hunger abroad. Food aid distributors hope that recipients will develop preferences for American goods and become loyal customers once they get back on their feet. Additionally, rich countries hope that aid programs will foster goodwill among poor countries and help them achieve future policy victories.

The Price-based motivations for international aid are quite explicit. The U.S. Agency for International Aid (USAID) is responsible for distributing American foreign development aid, and their mission is to “provide economic development and humanitarian assistance around the world in support of the foreign policy goals of the United States” (emphasis added). Their website provides further explanation:

Our assistance develops the markets of the future; long-time aid recipients have become strong trade partners and are the fastest growing markets for American goods. USAID is developing partnerships with countries committed to enabling the private sector investment that is the basis of sustained economic growth to open new markets for American goods, promote trade overseas, and create jobs here at home.

Many aid programs appear to be Associative arrangements between rich countries and the rich members of poor countries. In some cases, the development aid never reaches poor people but is hoarded and squandered by corrupt governments instead. Advocates of aid programs claim that foreign aid can be used to develop good governance systems and reward democratic governments abroad. However, research by the National Bureau of Economic Research found that foreign aid is positively correlated with corruption, so we cannot conclude that foreign aid reduces corruption in other nations.

Once we acknowledge the instrumental, Price-based motivations for rich countries to give aid to poor countries, it becomes less surprising that aid programs have contributed to persistent poverty, long-term dependence, and corruption abroad. After all, rich countries’ Moral-based goals of eradicating poverty and corruption are secondary to their Price-based goals of supporting domestic economies and political agendas. By these latter metrics, aid programs appear much more successful.   Image from USAID.


Citations:

  1. “Aid to Poor Countries Slips Further as Governments Tighten Budgets.” (2013). OECD. (http://www.oecd.org/dac/stats/aidtopoorcountriesslipsfurtherasgovernmentstightenbudgets.htm) 

  2. “The Cost of Aid.” (2013). Al Jazeera. (http://www.aljazeera.com/programmes/countingthecost/2013/02/201321612043800534.html) 

  3. Biggart, Nicole Woolsey and Rick Delbridge. (2004). “Systems of Exchange.” Academy of Management Review 29(1): pp. 28-49.

  4. “USAID: What We Do.” (2013). U.S. Agency for International Development. (http://www.usaid.gov/what-we-do) 

  5. Alesina, Alberto and Beatrice Weder. (2002). “Do Corrupt Governments Receive Less Aid?” American Economic Review 92(4): 1126-1137.


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