Making Foreign Aid Work

Carol Graham and Michael O'Hanlon

From Foreign Affairs, July/ August 1997

Article preview: first 500 of 2,784 words total.

Summary:  Decades ago, donors saw aid as a transfer of resources from rich to poor countries. Today they see it more as a means of improving recipient countries - use of domestic resources. And though aid has had its successes in humanitarian relief and family planning, its record is mixed when it comes to promoting economic growth. Many nations in sub-Saharan Africa are poorer than when they began receiving aid. The solution is not to end foreign aid, but for donors to know when to say when, cutting off countries that fail to adopt sound economic policies and rewarding those that do.

Carol Graham is a Visiting Fellow and Michael O'Hanlon a Research Associate in the Foreign Policy Studies Program at the Brookings Institution. Graham is also a Special Adviser to the Executive Vice President of the Inter-American Development Bank. They are co-authors of the April 1997 Brookings study A Half Penny on the Federal Dollar: The Future of Development Aid.

NO PAIN, NO AID

Foreign aid is facing difficult times. Even some aid practitioners have called its effectiveness into question. While aid has had success in humanitarian relief, family planning, and reducing infant mortality, its record in promoting economic growth has been mixed. Economic growth is not the sole objective of U.S. foreign aid, and it may be the least important goal for policymakers concerned with security, short-term solvency, human rights, or democracy. But the effects of aid on growth can be measured empirically, and growth is a necessary condition for meeting most of the broad objectives of aid.

While aid has succeeded in promoting growth in some countries, in many others it has failed or even been counterproductive. A number of countries, many in sub-Saharan Africa, are poorer than when they began receiving aid several decades ago. Donors have often subsidized unsound economic policies. In such situations, foreign aid has perpetuated poor policies and weak economic performance. The solution is not to end or even reduce aid flows, but for donors to allocate resources more selectively.

In the 1960s and 1970s, aid was driven primarily by the security concerns of the Cold War, with an underlying focus on reducing poverty. During the debt crisis of the 1980s, the rationale for aid shifted to limiting the liability that developing country debts increasingly placed on the international economic system. Concerns about reducing poverty also resurfaced, but a new emphasis on promoting democracy and human rights complicated those sentiments. In the 1990s these rationales are joined by new priorities such as supporting export markets in developing countries. It is not clear that aid can achieve all these goals simultaneously; at times they may work at cross-purposes.

It is clear, however, that the manner in which the United States conceptualizes and evaluates aid has changed dramatically. Decades ago donors saw aid as a transfer of resources from rich to poor countries. Today they see it more as a means to improve the use of domestic resources in recipient countries. The focus of aid has changed from development-related projects in health, education, and agriculture to encouraging the adoption of growth-oriented fiscal, trade, and monetary policies.

While convincing governments to implement development projects, particularly when donors provide the bulk of the resources, is not difficult, convincing them to implement a new macroeconomic framework requiring painful fiscal adjustments is no small task. The politically unpopular costs of these policies are visible up-front. But the benefits of sustained growth tend to become visible only in the longer term. Donors' skepticism about recipients' fiscal discipline has led to a growing reliance on conditional aid, and the conditions placed on multilateral development bank loans increased markedly during the 1980s. But these conditions can be difficult to implement. While compliance with some conditions, such as the stabilization of inflation or the devaluation of the exchange rate, is easily measured, it is much more difficult to assess and enforce others, such as progress in reforming the tax system ...

End of preview: first 500 of 2,784 words total.