Foreign Aid: Finding a Global Resolution

We have all heard the old saying: “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” But how much of this holds true when a developed nation comes in with investment for a developing state?

As simple as the analogy goes, it maps out two core problems with developmental aid. First is the need to balance immediate needs and long term growth. 32% of US foreign aid goes towards alleviating areas of extreme poverty, in which sustenance for life is a prerequisite to any other plans. Second, “fishing” cannot be replicated in every place. Finding the right project for a specific region in a developing state is tricky; the complications of bureaucracy and potential corruption also mean that not every plan goes smoothly. The truth is, only around 50% in Africa succeed. Thus, concerns arise on both ends: developed nations do not wish to waste money, and few developing nations genuinely want to stay stuck in poverty. Luckily, not all hope is lost.

Developed Nations: Diversification to find the right path

One factor that is often overlooked in the consideration of aid is the number of paths that have opened up in the last decade. At the turn of the millenium, the majority of aid movement was through government deals that had numerous limitations to the scope and efficiency of foreign aid projects. However, with the creation and growth of finance institutions, foundations, and funds solely for foreign aid, assistance has found its way into developing countries. Aid through these paths are not only more focused on addressing specific issues, but are likely to be better for developing nations. For instance, Cambodia welcomed these types of aid as they had a lower rate of return. In comparison, the threshold rate of return of 12%, set by the Asian Development Bank, posed a barrier to many Cambodian infrastructure projects. This reception of developing nation’s governments result in substantial nominal increase in the inflow of development aid.  Zambia saw aid from non-traditional providers rise from shy of 1 billion dollars to more than 95 billion dollars in the span of ten years. The magnitude of this increase in Zambia’s investment is just as important as the fact that this investment found a channel to enter the developing nation itself.

Developing Nations: Restrained flexibility

Developing nations understand very well that development aid is increasingly becoming a form of investment, rather than charity. Therefore, when setting up a strategy to create a landscape for development aid, it is imperative that these nations not only build a set of priorities, but identify priorities that can create the long-term success. Take Ethiopia for an example. The Parliament takes extensive measures to create a strategy for its nation’s development-based projects, with donating parties being sidelined in the process. This should be seen as a double-edged sword: while aid is focused towards needed regions, it is also potentially exposed  to unnecessary red-tape and bureaucracy. However, more pressing concerns involve aid dependency and debt sustainability. A recent case of Sri Lanka slipping into a debt trap of China is a strong reminder to all developing nations of how quickly developmental debt could get out of control. Within 10 years of President Rajapaksa’s administration, Sri Lanka’s debt increased three-fold, accounting for nearly 80% of Sri Lanka’s GDP. The calculation to take the amount of aid within repayment capability is hard to strike, but it is one of necessity. Developing nations have to be flexible enough to attract new flows of aid, but also cautious enough to not jeopardize their nations’ livelihoods at the mercy of others.

There has been much controversy regarding developed nations not contributing enough in the global fight against extreme poverty. The US spends roughly 0.2% of its GDP on foreign aid, ranking 22nd among the OECD. However, observation of aid quantity, as important as it can get, distracts us from the crux of development-based projects, which aim to improve sustainability and efficiency. Once the money produces its worth, then we can expect nominal changes in the status quo.

Further Resources on Foreign Aid

Foreign Aid in the United States: https://explorer.usaid.gov/aid-dashboard.html

Asian Development Bank Economic Analysis of Projects: https://www.adb.org/sites/default/files/institutional-document/32256/economic-analysis-projects.pdf