The United Nations recommends that developed countries should spend 0.7% of their gross national product on supporting less-developed countries to improve well-being and institutional development (Roodman, 2004). Accordingly, foreign aid has been considered as one of the most important policy tools of rich countries with regards to poor countries (Qian, 2015). In recipient economies such as Taiwan, South Korea, and Botswana in the past, or Malaysia and Indonesia more recently, it has made significant contributions to economic growth and poverty reduction (Riddell, 2008). The rationale of foreign aid is that poor countries lack financial resources to invest in development projects and programs and can fall into a ‘poverty trap’ (Sachs, 2005). Therefore, foreign aid aims to help these countries escape the vicious cycle of poverty and start to grow by itself by funding basic services such as healthcare, education, infrastructure, and other opportunities that they would not have without aid funds. Sachs (2005) notes that if developed countries decide to cut international aid, more than 6 million Africans may die each year due to preventable and treatable causes. Stiglitz (2002) also supports the fact that increasing foreign aid could be effective in breaking out of extreme poverty.
However, foreign aid also has negative effects on recipient countries (e.g., Easterly & William, 2014; Moyo, 2010). According to this view, it can (1) foster corruption, (2) increase foreign debt, and (3) create dependencies. First, foreign aid provides fuel to corruption in these countries because of poor governance and lack of accountability. Corrupt regimes will often undermine civil societies and restrict civil liberties by increasing the burden of government and reducing individual rights, making both foreign and domestic investment in poor countries unattractive. Second, foreign debt of recipient countries is also increased by aid investments from developed countries. This raises some seriously financial problems and further exacerbates poverty because governments tend to increase taxes in order to repay these debts. Third, less-developed countries are dependent on developed countries both economically and politically when receiving international aid. Most assistance packages are provided with many attached conditions while recipient countries tend to perform less well economically than countries without receiving foreign aid (Moyo, 2010). In addition to the above-mentioned issues, foreign aid investments also lead to conflicts as well as other social problems in many less-developed countries in the world.
All in all, foreign aid can be a solution for many poor countries but not all countries. There should be prerequisites for a country to better utilize aid in order to avoid overdependence, corruption, and negative impacts on future generations. By comparing African countries that refused aid and other countries that depended on aid, Moyo (2010) also clarifies the fact that pouring billions of dollars into Africa has left many African nations in a terrifying trap: over-reliance on foreign aid, rampant corruption, market distortions, and aggravation of poverty situation. Moyo (2010) also proposes a new roadmap for development assistance programs for the poorest countries in the world – a roadmap that ensures significant economic growth and poverty reduction without making these countries dependent on foreign aid. However, the future of development assistance depends dramatically on the efforts and political will of donor governments and their aid agencies to address negative impacts of aid packages. If providing international aid or other inputs do not contribute to the advancement in “know-how”, they would not change into improvement in productivity. In this case, an aid recipient country would not be able to improve its economic development despite receiving more aid. As a result, it would be essential to examine incentives and abilities to effectively utilize resources.
Easterly & William. (2014). The Tyranny of Experts: Economists, Dictators, and The Forgotten Rights of the Poor. Basic Books
Moyo, D. (2010). Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for Africa. Penguin.
Qian, N. (2015). Making Progress on Foreign Aid. Annu. Rev. Econ., 7(1), 277-308.
Riddell, R. (2008). Does Foreign Aid Really Work?. Oxford University Press.
Roodman, D. (2004). The Commitment to Development Index, 2004 Edition. Center for Global Development, Washington DC.
Sachs, J. (2005). The End of Poverty: Economic Possibilities for Our Time. New York: Penguin Press.