The world’s big economic countries, such as the USA, UK, Germany, Japan, and China, assist in the socio-economic development of relatively poor countries around the world, known as foreign aid. In 2021, these assistance-providing countries gave a total of $179 billion in foreign aid, which was 4.4 percent more than in 2020. Countries that provide foreign aid always do not provide economic support directly but through various NGOs, non-profit organizations, and monitoring funding organizations such as ADB, IMF, etc. For example, in FY 2021-22, Bangladesh also collected a total of $10 billion in foreign aid from several developed countries and international organizations such as ADB, the World Bank, Japan, Russia, and China. However, despite billions of dollars worth of foreign aid, many developing countries worldwide remain poor. Does foreign aid actually work?
Foreign aid refers to any voluntary assistance given by a country or organization to another country, which may be in the form of grants or loans. Although many people think of foreign aid as financial aid, it can also be services such as food, supplies, humanitarian aid, and even military aid. In 1961, high-income economic countries established an international organization called “Organization for Economic Co-Operation and Development (OECD)” to stimulate global economic progress and world trade. Later, OECD formed an international committee named the “Development Assistance Committee (DAC)” under its patronage. This committee distributes foreign aid to undeveloped, underdeveloped, and developing countries every year for all kinds of development projects, such as infrastructure, education, environment, etc. However, no country gives the entire portion of their donated foreign aid directly to the recipient country’s government. Instead, it is diverted through international organizations such as the World Bank, IMF, ADB, non-profit organizations, and various NGOs. When a developed country or international organization gives help to an underdeveloped or developing nation for an emergency or humanitarian reason, such foreign aid is called Humanitarian assistance. Such assistance is usually provided as immediate support in response to short-term problems such as floods, famines, disease outbreaks, natural disasters, wars, or major accidents. On the other hand, the kind of foreign aid given for the development of the country, starting from logistics, to internal infrastructure, education, and medical sector is usually called development aid or foreign assistance. Such support is generally given for the long term and may have several other conditions besides repayment with interest.
According to the Guardian, in 2021, DAC member countries gave a total of $179 billion in foreign aid, which is 4.40 percent more than in 2020. About $18 billion of this money was given as a response to the corona pandemic. In addition, DAC gave another $18 billion in humanitarian aid. In 2021, the USA provided the highest amount of global foreign aid of $42.3 billion. In addition, Germany was second with $32 billion in foreign aid, Japan was third with $17.6 billion, and the UK was fourth with $15.8 billion. The majority of total US foreign aid in 2021 was donated to countries such as Ethiopia, Jordan, Afghanistan, South Sudan, Congo, Nigeria, Syria, Sudan, and Somalia. In addition, Bangladesh also received a total of $10 billion in foreign aid from friendly countries and international organizations such as AD, World Bank, JICA, Russia, and China in the FY 2021-22. Among these, Bangladesh receives a maximum of 26 percent or $2.6 billion of foreign aid from ADB.
Even though the world’s developed countries spend hundreds of billions of dollars on foreign aid each year, countries like Somalia, Uganda, Sudan, Congo, and Nigeria have yet to see the light of development. For example, according to the UN’s Voluntary National Review 2022, 7 out of 10 Somalis live below the poverty line. In addition, only 53 percent of Somalia’s children and 55 percent of Somalia’s youth attend school only. On the other hand, reports from different international media and scholars and research firms point out that foreign aid adds no value to these countries.
Why Doesn’t Foreign Aid Work?
Even after receiving billions of dollars in foreign aid, corruption and poor-decision making can cause failure in a country. International organizations and developed countries give foreign aid to meet a particular issue or need of a nation. For example, in 2021, the World Food Program has given more than 338 million metric tons of direct food and $221 million worth of financial aid to 15.5 million people in 12 countries, including Angola, the Democratic Republic of Congo, Namibia, Tanzania, Zambia, and Zimbabwe.
In this way, every year, the World Food Program allocates billions of dollars only as food assistance to the world’s poverty-stricken countries. But, along with food and monetary aid, if the donor countries and organizations also find out the root level problems in the existing agriculture and fisheries sectors and resolve those, which would help the undeveloped countries to overcome such situations gradually. This way, the countries would be less dependent on foreign aid and become more self-sufficient in the future. In economic development language, it’s called “Big Push”, which means, addressing all the root level problems of a country together for its economic development. However, since foreign aid doesn’t help to solve several such root-level issues simultaneously, the developing countries of the world are still struggling to catch up. For example, in 2005, Jeffrey Sachs, the popular economist and Director of the Sustainable Development of Colombia, started the Millenium village project to restore the economy of impoverished countries of Africa. Under the project, Jeffrey Sachs and his team set up maize cultivation in the village of Ruhiira, Uganda, which initially yielded excellent results. In the first year of the project, Maize production increased from 1.8 tonnes to 3.7 tonnes per hectare. But due to the lack of adequate storage facilities in Ruhiira village, it was impossible to store so much maize. Moreover, Southern Ugandans’ did not like maize so much, so there was little demand for it in the local market. Along with that, the transportation cost from Ruhiira to the nearest local market was also very high, so selling maize to the nearest city market wasn’t a viable option. Due to this scenario, farmers were forced to sell their maize at a very low price in the local market. Therefore, although distributing high-yielding seeds and fertilizers to farmers in Ruhiira villages was a timely idea, the project still failed due to a lack of proper infrastructure in its later stages.
It is common for foreign aid to be wasted in any country after receiving it due to mismanagement by the government, private companies, and non-governmental organizations, as well as corruption by donor groups. Due to poverty, the administrative infrastructure of countries, like communication, transportation, electricity, education, and healthcare sectors, is very backward. Because of this, when an NGO is entrusted with the task of disbursing foreign aid, in many cases, it is seen that the various operations of these organizations, such as office expenses, official salaries and allowances, travel, and accommodational expenses, are mainly borne by the funds received. For example, in the case of Afghanistan, almost 30 percent of USAID’s funds are spent on the administrative costs of the NGO. If foreign aid is given directly to the government for a specific project, then a lot of money is spent on disbursement-related administrative work. In addition, lending organizations like ADB, World Bank, IMF, or JICA impose various conditions while granting loans.
For example, while working on a project, a certain portion of manpower or machinery sourcing is to be taken from organizations recommended by lenders. In many cases, recipient countries lose most of their money while complying with these conditions. According to The Guardian, there was a paragraph on USAID’s website till 2006 stating that, “80 percent of America’s foreign assistance program’s international development contracts and grants go directly to American firms. This aid creates jobs for millions of Americans and new opportunities for industrial exports.” In 2012 alone, developing countries received a total of $1.3 trillion as aid, investment, and foreign income, but lost $3.3 trillion also during that same period. From another source of The Guardian, the net outflow of developing countries from 1980 to 2017 was $16.3 trillion.
According to a World Bank Study, one-sixth of the foreign aid given to developing countries goes to the country’s elite people’s bank accounts in various countries known as tax havens. Even if they dont have any bank account in those countries, they spend the money on real estate or luxury goods. For example, on February 10, 2020, an appeal court in France found that Equatorial Guinea’s vice president Teodorin Obiang had embezzled $33 million from foreign aid given to the country’s common people to maintain his lavish lifestyle. Among these, he has a property worth $26.9 million in Paris. This scenario proves that, a significant amount of foreign aid that any developing country receives ends up in the pockets of their officials, which is one of the reasons behind foreign aid not working. Another reason why foreign aid doesn’t work is trade misinvoicing. Trade misinvoicing is the practice of knowingly submitting an invoice that misrepresents the value of goods being imported or exported. According to a report by Global financial integrity, during 2008-2017, developing countries lost $8.7 trillion due to trade misinvoicing, where the amount of loss in 2017 alone was $817.6 billion. In addition to that, developing countries are also exposed to trade misinvoicing during international trading for ongoing development projects. Another Global financial integrity report stated that, a developing country loses 24 times more due to unfair trade rules, fraud, and fake invoicing than it receives as foreign aid.
Besides, funds-landing countries also play a biased role while distributing aid. The Guardian reported that Congo, Mozambique, Uganda, Tajikistan, and Haiti were the top five poorest countries in the world in 2018. Still, none of these five countries received any lion’s share of foreign aid from the world’s top two developed countries, the USA and the UK. Instead, Pakistan, Syria, Ethiopia, Nigeria, Afghanistan, Egypt, Jordan, and Kenya received a lot of aid from these countries. Therefore, it appears that, the most impoverished countries have not received enough foreign aid to developing their situation.