FOREIGN AID

TABLE OF CONTENT
1. Introduction
2. THEORITICAL LITERATURE REVIEW
2.1. Definition of foreign Aid
2.2 . Kinds of aid
2.3. Origin of foreign aid
2.4. Conditionality of foreign aid
2.5. The Role of foreign aid
2.6 . Critical view of foreign aid
2.7. Alternative to foreign aid
3. EMPIRICAL LITERATURE REVIEW
3.1. United states aid program after world war II
3.1.1. The Truman Doctrine
3.1.2 The Marshall plan
3.1.3 The Point four program
3.1.4. USAID
3.1.5. New Directions (1970s to the 1990s)
3.2. Other Donors
3.3. Western donors
3.4. Communist Donors
3.5. Multilateral aid
4. Conclusion
5. Reference
INTRODUCTION
This journal paper will try to examine foreign aid through various sub – sections as stipulated in the above table of content.
In an attempt to define foreign aid, the writings of scholars such as Burnside and Dollar, Thomas J. Dilorenzo will provide some materials. We will also get additional definitions from Britannica Encyclopedia and the British Broadcasting Corporation (BBC) dialogue on the topic.
The paper will also try to explore the kinds of aid by once again revisiting Britannica encyclopedia (1974) page 522 to 525. The same book also will assist us in trying to tress the origin of foreign aid.
The paper will then embark on a brief look of U.S. foreign aid program after World War II. In our effort to explore the sub-section, we shall make consultations to different literatures. Various foreign aid programmes launched by different U.S. president administrations will be of much help in trying to fulfill the material need for the paper.
This paper will not end with U.S. aid programme but will go a head to examine other donors which include western donors, communist donors and multilateral aid donors.
In our effort do find the difficulties associated with obtaining foreign aid, we shall sub-title our work as conditionality of foreign aid. We shall also consult the observations of various scholars and aid practitioner with regard to this.
With regard to the role of foreign aid, this paper will take note of the work of different scholars and practitioners. A former deputy administrator, Carol Lancaster and World Bank economists, David Dollar will contribute much out of their writings.
This paper will also provide a critical view of foreign aid. Some scholars and Practitioners writing will again be of much help. Such scholars and practitioners are Carol Lancaster, Bauer, Edwards and David Osterfield.
We shall then have a look at alternatives to foreign aid as suggested by Britannia encyclopedia.
Finally the paper will give conclusion through providing personal opinion on how we can make foreign aid a success and correct the mistakes of the past.

2. THEORITICAL LITERATURE REVIEW
2.1. DEFINITION OF FOREIGN AID
According to Britannica encyclopedia (1974), foreign aid consist of international transfers of capital, goods or services for the benefit of other nations and their citizens.
British Broadcasting corporation (BBC) Bite size (2007), saw aid as the giving of money, goods and advice by one country to another.
Burnside and Dollar (2000) paper defined aid as the grant element of a aid, excluding the loan component of “Concessional” loans, which are made at extremely low interest rates, a measure of aid that is called “Effective Development” Assistance”. However, the standard definition of aid according to the development assistance committee of the OECD is grants and concessional loans net of repayment of previous aid loans a measure that treats forgiveness of past loans as correct aid.
Thomas J. Dilorenzo (2005) while writing on tsunami disaster, saw foreign aid as “throwing money at the problem” Peter Bauer (Lord Banner) (1991) notes that foreign aid is not ”aid” but a transfer or subsidy. And it is typically not transfer to the poor and needy but to the governments.

2.3. KINDS OF AID
According to Britanica encyclopedia (1974), official foreign aid is offered in two major forms:-
(1) Capital transfers, in cash or kind, either as grants or loans and
(2) Technical assistance and training usually as grants in the form of men and technical equipment.
Development assistance -- in form of loans or grants of capital then assumes the dominant role. In countries that are poor with little industrial development, this assistance commonly takes the form of grants or low-interest – bearing loans (as in U.S. aid to Laos or French aid to African states).
Military assistance - in the form of either equipment or training advisers – as been an extremely important part of aid, both east and west. Sometimes such aid is supplemented by grants of funds for “budgetary support” to poor countries where the donor country has substantial military and political interests (as the United States has had in Taiwan, South Korea and South Vietnam).
Disaster relief is another form of foreign aid; for the United States it has become a method of reducing agricultural surpluses by distributing them to famine stricken countries such as India.
The Millennium Challenge Account (MCA) as pointed out by Roy Prosterman of Rural Development institute notes that the New stepped-up U.S. program to fight global poverty – places basic land rights for the rural poor as a fundamental item on the global AID agenda. MCA says “the committee believes that ownership by the poor of a plot of land, at least sufficient to erect basic shelter and have a garden producing food and income, is fundamental importance for empowerment, livelihood, social stability and the creation of wealth.

2.4. ORIGIN OF FOREIGN AID
Britannica concise encyclopedia (2004), tresses the origin of foreign aid from the 18th century when Prussian subsidized some of its allies. After World War II, foreign aid developed into a more sophisticated instrument of foreign policy. International organizations such as the United Nations Relief and Rehabilitation, were created to provide aid to war-ravaged countries and newly freed colonies.
The International Monetary Fund (IMF) and the World Bank have been heavily financed and influenced by the United States and, prior to the end of the cold war, the government of the soviet bloc generally refused to participates in those organizations.

2.5. ALTERNATIVE TO FOREIGN AID
Britannica encyclopedia points out that most Western governments, wishing to reduce aid costs have turned increasingly to the encouragement of private investment through guarantee schemes and tax concessions.
Private investment is only one of several alternatives to government foreign aid that have been suggested. The others include:

2.5.1 Revising the tariffs of developed countries to give preference to
the manufactured exports of underdeveloped countries.
2.5.2 Guaranteeing bond issues of underdeveloped countries in the
International Capital markets;
2.5.3. Devoting some share of the proceeds from exploiting ocean resources
to economic development;
2.5.4. Establishing international machinery to support the prices of
commodities exported by underdeveloped countries; and
2.5.5. Using special Drawing rights as a source of development finance for
poor nations.

2.6. CONDITIONALITY OF FOREIGN AID
William Easterly: Journal of Economic perspectives (2003), points out that the Aid agencies often place conditions on loans and aid. These conditions typically include.
2.6.1. Macroeconomic stability (low-budget deficits and inflation).
2.6.2. Non interference with market pricing.
2.6.3. Privatization of state-owned enterprises
2.6.4. Openness to international trade.
BBC (BITE SIZE revision) (2007) points out that the problem with a lot of bilateral government aid is that it’s tied and that the receiving country has to buy goods or services from the donor country. A good example is the Pergau Dam in Indonesia – Britain helped to fund the dam on the condition that Malaysia bought £ 1 billion worth of military equipment.
David Sogge while writing on foreign Aid: Does it harm or help, points out that, in case of the U.S, foreign aid was long tied to the nations military and geopolitical strategies as defined by the cold war.

2.7. THE ROLE OF FOREIGN AID
Writing in 1978, Ian J. Bickerton noted that ”foreign aid has enabled former colonial powers, such as the United Kingdom and France, to maintain their historic political, economic and cultural ties with former colonies – it is precisely this network of Atlantic - European domination and Imperialism that forms the basis of the current aid programs”.
Carol Lancaster, a former deputy administration of USAID points to progress in lowering the rate of poverty worldwide, from 28 percent in the late 1980s to 24 percent adecade later, and to the trend of rising living standards in Europe, Asia, the Middle East ad Latin America.
U.S. History Encyclopedia points out that in addition to providing aid to Israel and Egypt, the foreign Military financing (FMF ) funds have been used for detonating mines, fighting narcotics traffic, helping to dismantle nuclear weapons in Russia and integrating Hungary, Poland and the Czech Republic within NATO.
Kimura Hidemi under RIETI report 2007 points out that although the direct effect of foreign aid on growth is not clear, it may still promote the growth of the recipient country indirectly, for example by facilitating domestic investment, physical, infrastructure investment, and Foreign Direct Investment (FDI).
Kimura further notes that Japanese foreign aid has been “good aid” due to its capacity to attract private sector funds with a higher possibility of promoting economic growth.
Carol Lancaster and Michael Edwards, both being scholars of high integrity agree that in sub-Saharan Africa (except in oil-producing countries like Nigeria), political independence has been accompanied by a steady rise in dependence on aid. Virtually, all public development – schools, health centers, roads, and power – is paid for by donors.
According World Bank economists David Dollar, A. Craig Burnside and Paul Collier: aid can help, but it should be concentrated on countries with good macro-economic policy and governments genuinely committed to improving public services and infrastructure, and stamping out corruption.
William Easterly (2003) while writing on “Can foreign Aid Buy growth points out that some proponents have argued that aid could also buy time for reformers to implement painful but necessary changes in economic policies.
The author further points out that the loan offered to Brazilian north east in June 2001 facilitated innovative government - led initiatives in land reform, rural electrification and water supply and a fall in infant mortality. Other sectoral success stories from Uganda, South Korea and Taiwan include the elimination of small pox, the near elimination of river blindness family planning and the general rise in life expectancy and fall in infant mortality, in which foreign assistance played some role.
2.8. CRITICAL VIEW OF FOREIGN AID
Lancaster and Edwards agree that aid has rarely helped and sometimes damage the capacity of Africans to govern their own affairs. Both note that aid has propped up autocratic, winner-take-all, incompetent governments and a violent opposition movement or two.
Lancaster further observes that in more than one African country “the accountability of the government to its people gradually (was) replaced by accountability to its major aid donor” Governments that finance their activities through taxes and fees at least have to negotiate to some extent with their citizens, whereas those that rely on foreign aid focus their attention on the source of that aid. Aid, in other words, helps centralize power.
The authors also notes that African governments have also suffered from deliberate efforts, at the belief of aid agencies with powers over development dogmas, to “shrink the state” Massive downsizing, the slashing of real wages and the degeneration of working conditions for public servants have deprived millions of Africans of whatever minimal access to health care, schooling and responsive public services they one had. In these circumstances, petty corruption has grown, fostering yet more cynicism and disorder in the relation between governments and their citizens.
Edwards also traces a direct line between the erosion of public sector capacity and the imposition of one-size-fits-all polices of structural adjustment driven by international finance agencies during the Reagan – Thatcher years.
Kimura Hidemi on RIETI report concludes that foreign aid does not promote foreign direct Investment (FDI) inflows either by supplying economic /social infrastructure in the host country (no infrastructure effect), or by providing information on the business environment in the host country (no vanguard effect), nor does it shrink FDI by encouraging unproductive rent-seeking activities (no rent-seeking effect).
U.S. History Britannica encyclopedia notes that in Vietnam era, however, the consensus of support began to unravel. Like the war itself, foreign aid programs were variously attacked as imperialistic, paternalistic, harmful, wasteful, or just plain useless.
Carol Lancaster argues that a new policy of foreign aid, one that emphasizes humanitarian relief, democracy, human rights, and development latter to be limited to the poorest countries is precisely the mechanism to further an American “diplomacy of values”. Such aid will bring “soft power” to the United States, enhancing “the credibility and trust that the US can command in the world.”
Relief worker, Michael Maren (1990s) recalled that “the relief program was probably killing as many people as it was saving, and the net result was that Somali soldiers were supplementing their income by selling food”, even as rebel forces were using it for to further warfare on Ethiopia.
In another ironic example, notes Maren, the U.S supported World Bank and gave $ 16 million to Sudan to fight hunger while Sudan’s government was starving its own people. Foreign aid, then has been attacked by critics for imperialistically exploiting economics, hurting local farmers and peasants, and consolidating the grip of local elites at the expense of the average Third World resident.
First of all, notes Bauer, foreign aid is not “aid” but a transfer or subsidy. And it is typically not a transfer to the poor and needy but to governments. Thus, the predominant effect of “foreign aid” has always been to enlarge the size and scope of the state, which always ends up impairing prosperity and diminishing the liberty of the people. Worse yet, it leads to the centralization of governmental power, since the transfers are always to the recipient country’s central government.
Since foreign aid goes from one government to another, continues Bauer, it inevitably diverts resource from the activity of production to the activity of “rent seeking” or attempts to acquire governmental funds. It creates agiant patronage machine, in other words, with all the attendant corruption that such things have always entailed. Such corruption often leads to armed conflict over the control of the patronage in many Third World countries. And as more and more resources are devoted to rent seeking instead of production and entrepreneurship, the recipient countries become poorer and poorer. If anything, it is foreign aid that causes a “vicious circle of poverty”
Bauer even found that aid-receiving governments intentionally wrecked their own economies as a strategy for acquiring additional millions in foreign aid. Like all forms of welfare, foreign aid also enforces an attitude among aid recipients that circumstances are beyond their own control, and therefore they must depend on begging from foreigners rather than on entrepreneurship. Foreign aid creates a giant moral hazard problem, in other words.
Bauer further points out that if the aid is in the form of say, farm tractors, then the politicians create for themselves yet another opportunity to buy votes (and solicit campaign contributions) with the tax dollars that are used to pay for the American-made tractors. Thus, politicians and tractor manufacturers become the real beneficiaries of the aid.
Food aid, observes Bauer, has at times been disastrous for countries in Africa and elsewhere. Dumping millions of tons of grain and other foods depresses agricultural prices in the recipient countries, driving many of their farmers into bankruptcy, and creating even more dependence on foreign aid. The farmers then migrate to the cities to find work, driving up food prices more, which is often met with price controls on food, which creates even more food shortage and appeals for even more foreign food aid.
As David Osterfeld (page 150) wrote in prosperity vs. planning: there is little or no concern over whether these subsidized investments will benefit consumers and be profitable. They are viewed as a merely a pork barrel, get-rich-quick opportunity for a small number of politically connected people in the recipient country, period. This, foreign aid has funded such things as “double-deck suspension bridge for non-existent rail roads, giant oil refineries in countries that neither produce nor refine oil, giant crop-storage depots that are not accessible to farmers and numerous other white elephants”.
Family, William Easterly (2003) writing on “can foreign aid Buy Growth?”, observes that the governments of the poor countries, through incentive to raise the production potential of the poor, especially when doing so might endanger political activism that threatens the current political elite.
3. EMPIRICAL LITERATURE REVIEW
3.1. UNITED STATES AID PROGRAM AFTER WORLD WAR II
3.1.1. The Truman Doctrine.
One of the first indications of the role that foreign aid was to play in the cold war came with the announcement of the Truman Doctrine on 12 March 1947 by President Harry S. Truman. The Truman Doctrine was a response to the growing influence of communist parties in Greece and Turkey and included the extension of $ 400 million in economic and military aid to the Greek and Turkish governments.

3.1.2. The Marshall plan
This was launched on 6th June 1947 by U.S. secretary of state, George Marshall. It sought to protect Western Europe from any further worsening of the post-1945 economic and political Crisis. The Marshall plan aimed at preventing or containing the appearance in Europe of governments, or groupings of governments, that would threaten the security interests of the United States.
One of the requirements of Marshall Plan was that the bulk of the aid money was to be used to purchase U.S. exports, which provided an important push to the U.S. economy and bolstered trade linkages that favoured U.S. manufacturers.

3.1.3. The Point Four Program.
This was launched on 20th January 1949 by Truman when he delivered his inaugural address at the start of his second term as president. This was also enacted as the International Development Act.
Point one pledged continuing U.S. support for the United Nations. Point two emphasized U.S. support for the world economic recovery, while point three reiterated the U.S. commitment to supporting “freedom-loving nations.” Point four set out a U.S. commitment to providing American technical and scientific expertise and capital to ”underdeveloped’ nations in an effort to improve their living standards.

3.1.4. USAID
As part of its wider emphasis on foreign aid, the president Kennedy administration set up the USAID in 1961 to coordinate government foreign aid initiatives. Established as a semi-autonomous body operating in the state department, it was responsible for disbursing and administering aid in South Vietnam and around the World. A large percentage of the aid was initially disbursed to the Alliance for progress, another ambitions modernizing initiative that Kennedy administration hoped would contain the “communist threat” to Latin America following the revolution in Cuba in 1959.

3.1.5. New Directions (1970s to the 1990s)
This was launched during Nixon era. This led briefly to an emphasis on both the basic needs of the poor and direct grassroots participation in the process of development. Foreign Assistance Act (1961) was amended between 1973 and 1978 to provide for an increased focus on human rights in the disbursement of foreign aid.
In 1980s USAID’s main focus was the Private Enterprise Initiative (PEI), which promoted private sector development and encouraged market-oriented reform. This also saw percentage of foreign assistance going to development - related programs decline and the amount spent or security-related project rise.
Central America was the object of more American economic and military aid during Reagan’s first term than in the entire period from 1950 to 1980.
The Clinton administration outlined four overall goals for U.S. foreign aid in the post-cold war era. USAID was required to set up programs oriented towards building democratic political institutions. A greater emphasis was placed on humanitarian assistance and sustainable development. Foreign aid was also directed increasingly at the former Soviet bloc, again for security reasons.
In the context of the “war on terrorism” initiated in 2001 and the reorientation and increase in foreign aid that has followed, this pattern appeared set to continue.
The 1997 state Development strategic plan outlined the following goals for foreign aid: creating “institutions that support democracy, free enterprise, the rule of law and strengthening civil society”; providing humanitarian aid; and “protecting the United States from such specific global threats as unchecked population growth, disease, the loss of biodiversity, global warning and narcotics trafficking”.

3.2. OTHER DONORS
3.2.1. Western Donors
The former colonial power – France, United Kingdom, Belgium, Netherlands – not only advance relatively large amounts of aid but offer it on generous terms, as grants or low-interest, long-term loans.
Among the smaller donors, Portugal ranked high because of its aid to its African colonies. Several small donors, including Australia, Canada and the Scandinavian nations give much aid in grants, both bilateral and multilateral.
France, Switzerland, Germany and Japan give relatively little through multilateral channels.
Australia, Germany, Japan and Portugal also stress loans rather than grants and lend at somewhat higher than average interest rates which remain below commercial term and conditions.

3.2.2. Communist donors.
The former Soviet Union, Eastern Europe and China offered aid to other communist countries, such as Cuba, North, Vietnam, North Korea and Mongolia. Most of this aid, were given in the form of loans repayable at 2 or 3 percent interests or in locally produced goods.
Communist countries also offer aid to non-communist countries, particularly in strategic areas such as the Middle East.

3.2.3. Multilateral aid.
The World Bank (began 1946) has two financing affiliates: the International Development Association (IDA), founded in 1960, which makes virtually interest-free long-term loans financed by members contributions and by a subsidy from the World Bank and the International finance Corporation (IFC), founded in 1956, which promotes private investment in underdeveloped countries.
There are also three regional development banks each lending funds to underdeveloped countries in its region. They include Inter-American Development Bank founded in 1959, which lends to Latin American countries; The African Development Bank, founded in 1964; the Asia development Bank, founded in 1965.
European Countries, under European Economic Community, established two institutions for multilateral aid – the economic Development fund and the European Investment Bank. These organs extends loans and grants to overseas countries associated with the common market as well as to Greece and Turkey.
The United Nations finances through grants a number of economic aid programs, both directly through the United Nations technical assistance programs and the U.N. special fund – and through specialized agencies, notably UNESCO, the World Health Organization (WHO), and the Food and Agriculture Organization (FAO).

CONCLUSION
True freedom is attainable only through relations with others, since in an interconnected world one can never be safe until he/she is secure, nor can one person be whole unless others are fulfilled. It is on this ground that the goal of having the high-income people make some kind of transfer to very poor people remains a worthy one, despite the disappointments of the past.
One may hope that in the next half century, either owing to aid, investment, political reform, or some other set of factors, the developing world will have much closer to reaching “decade of development”. But this cannot be possible unless developing countries develop good fiscal, monetary, and trade policies. These goal policies should be accompanied with good governance, accountability and transparence, the device that lack in most Less Developed countries (LDC).


5. REFERENCE:
1. William, Easterly (2003). “Can Foreign Aid Buy Growth?” Journal of Economic Perspectives.
2. BBC News viewpoint: foreign aid (2007). Also available at bbc.co.uk/schools /gcse bitesize.
3. Lancaster, Carol, Aid for Africa: so much to do, so little done. Chicago, 1999.
4. U.S. Department of state, Agency for International development. U.S. Overseas Loans and Grants and Assistance form International organizations Washington, D.C. 1990.
5. Britannica encyclopedia (1974). Publisher Hellen Hemiriguray Beenton, Chicago.
6. Sogge, David (1996). Foreign Aid does it Harm or Help. The Christian Century, Feb 23, 2000, pp 206 – 209.
7. Edwards, Michael. Future Positive: International Cooperation in the 21st century.
8. Ludwig von Misses Institute: A foreign aid Disaster in the making (Article). Contact @ mises-org AOL-IM MainMises Mises.org sitemap.
9. Kimura, Hideni: RIETI Report № 081 April 25, 2007. Analyzing the effects of foreign Aid on FDI gravity – Equation Approach.