Understanding Different Types of Foreign Aid

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BY ADMIN ON MAY 26, 2013
WORLD NEWS

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Bilateral development assistance: This is the type of aid that most resembles common
perception. Given to governments or organizations such as the Peace Corps and the
Inter-American Development foundation. These are to assist in long-term projects to
promote democracy, economic growth, stability and development.
Aid to support U.S. Security Objectives: The U.S. reserves a large amount of its foreign aid
to be invested specifically in projects that correlate with American interests and objectives.
Most recently, this has been in promoting stability in the Middle East. Before, during the
cold war, it was supporting emerging Eastern European countries. A savvy investor, the
United States has wisely been operating on the principle that prevention is better than cure.
Humanitarian Assistance:Though this can be confused with bilateral development
assistance, the main difference is that humanitarian assistance is often in response to urgent
short term needs, such as food crises, natural disasters or other major humanitarian
emergencies. Recent examples would be the tsunami in Southeast Asia or the Syrian
conflict.
Military Assistance:As the name suggests, this is when the U.S. allows ally countries
access to American equipment and training. Though it declined somewhat before the War on
Terror began, military training is the most controversial of the types of aid, not only for the
moral implications but also for the inherent dangerous in weaponizing a country.
Multilateral Assistance:In multilateral assistance, the U.S. works with other countries to
pool funds into international organizations such as UNICEF, the UNDP or the World Bank.
Though this sector constitutes a minority of the USs foreign aid, the nations contributions
make up a significant percentage of the donor funds received by the organization.
Farahnaz Mohammed

The Case for Aid

It's become fashionable to argue that
foreign aid doesn't make a difference.
Heres why the critics couldn't be more
wrong.
BY JEFFREY SACHS
Jeffrey Sachs is the director of the Earth Institute at Columbia University.

JANUARY 21, 2014 - 5:04 PM













I have long believed in foreign aid as one tool of economic
development. This is not an easy position to maintain, especially in the
United States, where public misunderstanding, politics, and ideology
all tend to keep aid an object of contempt for many people. Yet the
recent evidence shows that development aid, when properly designed
and delivered, works, saving the lives of the poor and helping to
promote economic growth. Indeed, based on this evidence, Bill and
Melinda Gates released a powerful letter to the public today also
underscoring the importance and efficacy of foreign aid.

As experience demonstrates, it is possible to use our reason,

management know-how, technology, and learning by doing to design
highly effective aid programs that save lives and promote
development. This should be done in global collaboration with
national and local communities, taking local circumstances into
account. The evidence bears out this approach.
Of course, I do not believe that aid is the sole or main driver of
economic development. I do not believe that aid is automatically
effective. Nor should we condone bad governance in Africa or in
Washington, for that matter. Aid is one development tool among
several; it works best in conjunction with sound economic policies,
transparency, good governance, and the effective deployment of new
technologies.
Professor William Easterly of New York University has long been a
vocal opponent of aid, and recently declared that the aid debate was
"over," claiming victory for his theory that large-scale aid projects are
doomed to fail. This blanket claim flies in the face of recent
experience. Prof. Easterly has been proven wrong in both diagnosis
and prescription.
During the past 13 years, the greatest breakthroughs in aid quantity
and quality came from the field of public health (unlike other social
sectors, such as education and sanitation, where aid increases were far
less notable). As a result, the outcomes in public health in poor
countries have also advanced markedly. Not only did aid quantities
for public health improve; new public health institutions, such as the
Global Fund to Fight AIDS, Tuberculosis, and Malaria and the Global
Alliance for Vaccines and Immunization, were created to promote the
effective delivery of the increased aid.
The approach of increased aid that is well targeted through innovative
institutions has been enormously successful in improving public
health in low-income countries. One could cite many examples
ranging from the scale-up of vaccine coverage (largely through GAVI
and UNICEF) to increased treatment coverage for HIV/AIDS and
expanded tuberculosis control (through the Global Fund and the U.S.
PEPFAR program), but I will focus specifically on malaria control,
since Prof. Easterly was particularly pointed in his opposition to the

mass scale-up of malaria control that has proved to be so successful.

Fortunately, the global community did not heed Easterlys erroneous
advice, and followed a path that the public health community strongly
advocated.
At the turn of the new century, malaria was front and center of the
global aid debate. Research by myself and others, and evidence
garnered in the report of the World Health Organization (WHO)
Commission on Macroeconomics and Health that I had the honor to
chair, showed that in addition to being a health catastrophe, malaria
imposes a significant economic burden, particularly in sub-Saharan
Africa. Luckily, though, the world was starting to take notice. In 2000,
the U.N. Millennium Declaration, The African Summit on Malaria,
and the G8 Declaration all addressed the burden of malaria and
committed the world to action. The debate soon turned to the issue of
policy: how could the malaria burden be reduced?
Here we must look at some key details in order to keep aid in careful
perspective. Starting in the late 1990s, malariologists at WHO, in
academia, and in various government agencies around the world,
described how malaria control could be made highly effective. The
malariologists emphasized the ability of insecticide-treated bed nets to
reduce the transmission of the disease. They also emphasized the
urgency of shifting to a new generation of first-line medicines, notably
those using artemisinin (a powerful anti-malaria drug developed by
Chinese scientists) in combination with other medicines, because the
old-line medicines (mainly chloroquine) were losing efficacy to
growing drug resistance. The combination of bed nets and effective
medicines (known in the jargon as "vector control" and "case
management" respectively), supported by rapid diagnosis of
infections, makes for a powerful one-two punch in saving lives and
reducing malaria transmission.
Indeed, epidemiological theory and practical experience strongly
suggested that if bed net coverage could be raised to a sufficiently
high rate (typically around three-quarters, depending on local
conditions), the transmission of malaria would be sharply reduced
even for those not directly protected by their own bed nets. The
"spillover" of protection to the non-users is called a mass-action

effect, similar to the way that high vaccine coverage protects even
unvaccinated people because the disease stops spreading when fewer
people are susceptible to infection. This mass-action phenomenon of
course strongly argued for a malaria control strategy that would lead
to a high level of bed net coverage.
There was one more detail of great policy significance: Not all bed
nets are equal. The high-quality bed nets work not only mechanically
(by covering the body) but also chemically, by a treatment with
insecticide that repels or kills mosquitoes that land on the bed net. A
bed net without insecticide treatment is far less effective than a treated
net. Until the early 2000s, bed nets required frequent retreatment with
insecticide (e.g. by bathing the nets in tubs filled with insecticide) in
order to remain effective. Then, Sumitomo Chemical developed longlasting insecticide-treated nets (LLINs) that were specially engineered
to keep the insecticide intact even when the nets were repeatedly
washed. The new nets could therefore remain effective for around five
years or even more. Other companies, such as Vestergaard and BASF,
also developed their own varieties of LLINs. This was a great
breakthrough, but the new nets were more expensive to manufacture
than the preceding generation of simpler nets. (In the photo above,
South Sudanese children are taught how to use LLINs.)
All of these developments new nets, new medicines, improved
diagnostics, and a surging epidemic were crucial to developing a
successful malaria control policy after the year 2000. Taken together,
they motivated the case for increased donor aid to support the mass
free-distribution of LLINs and free access to the new generation of
artemisinin-based medicines and rapid diagnostic tools. Without
financial support, poor people could not afford either the LLINs or the
new medicines. Attempts to sell the nets at a discount, known as social
marketing, had very little take up, since many poor families simply
lacked any cash income at all. The prospect of achieving "mass
action" protection through social marketing was very small. Moreover,
impoverished households would often scrape together the needed
money only to buy the cheaper but ineffective nets, rather than the
more expensive but more effective LLINs.

Governments of low-income African countries needed donor support

for the scale-up effort since their own domestic tax revenues, even
when amply allocated to public health, could not cover the costs of a
basic primary health system including scaled-up malaria control. The
financial calculations, laid out by the Commission on
Macroeconomics and Health, showed that an impoverished country
with a GDP of around $500 per capita, typical for a poor country in
Africa, may be able to muster around $15 per person per year out of
domestic revenues for primary health (directing 15 percent of
domestic revenues to health, as the Abuja target for health spending
recommends), while the costs of a basic public health system
(measured in 2014 dollars) would be around $50-$60 per person per
year.
Prof. Easterly would have none of it. He took special and early aim at
these recommendations in his 2006 book The White Mans Burden,
claiming that free nets "are often diverted to the black market, become
out of stock in health clinics, or wind up being used as fishing nets or
wedding veils." After this specious claim, he then went on to write
that "a study of a program to hand out free [malaria bed] nets in
Zambia to people found that 70 percent of the recipients didnt use
the nets." Yet this particular study, which was conducted by the
American Red Cross and CORE, actually showed the program was a
success, with high rates of net adoption. Prof. Easterlys claim
misconstrued this and other evidence being developed by the ARC and
others about the mass distribution of nets, which had found that the
free distribution of malaria bed nets was achieving high coverage and
adoption rates.
Prof. Easterlys arguments added to a highly visible narrative against
the needed global action on malaria control. Yet despite this anti-aid
narrative, a global turning point finally came in 2007-08. This turning
point was helped by the early success of Kenya. Kenyas Minister of
Health at the time, Charity Ngilu, led a government effort during
2006-7 to scale up mass bed net distribution based, in part, on the
example of free LLIN distribution in the Sauri Millennium Village.
Kenyas policies led to a sharp drop of malaria nationwide.

Next, WHO swung its powerful weight behind the mass free
distributions of bed nets throughout sub-Saharan Africa. Soon after,
U.N. Secretary-General Ban Ki-moon established the mass free
distribution of bed nets as policy for all U.N. agencies, and called on
the worlds governments and NGOs to support the scale-up effort.
Bans leadership tipped the global scales decisively. Close to 300
million bed nets were freely distributed from 2008-2010, with the
Global Fund to Fight AIDS, Tuberculosis and Malaria and the U.S.
Presidents Malaria Initiative program paying for a substantial share of
the scale-up.
The evidence is overwhelming that malaria declined precipitously as a
result of these bold measures. WHOs latest report finds a stunning 51
percent drop in malaria deaths of African children under the age of
five between the years 2000 and 2012. These results are historic.
Roughly a half-million children, if not more, are being saved each
year that otherwise would have succumbed to malaria. Even more
success is possible, but only if development aid continues to back the
effective control of malaria. The Global Fund is struggling to fill its
request for $5 billion per year of funding, essential to supplement the
health budgets of poor countries. Prof. Easterlys continued
denunciations of aid, and his declarations that large-scale aid has
failed, are injurious to the public support needed for the
replenishment.
Across the board, the post-2000 improvements in public health in subSaharan Africa have been dramatic, strongly supported by scaled-up
aid. Up to 10 million HIV-infected individuals are now receiving lifesaving, anti-retroviral medicines thanks at least in part to aid
programs. Tuberculosis (TB) patients are being treated and cured, with
a global TB mortality rate drop of 45 percent since 1990, and an
estimated 22 million people alive due to TB care and control from
1995-2012, thanks to Global Fund support, which provides the lions
share of donor financing to fight TB. With increased donor support,
antenatal health visits, institutional deliveries, and access to
emergency obstetrical care are all on the increase, contributing to a
decline in sub-Saharan Africas maternal mortality rate (the annual
number of female deaths per 100,000 live births) from 850 in 1990 to

740 in 2000 to 500 in 2010. Deaths of children under five worldwide

have declined from 12.6 million a year in 1990 and 10.8 million in
2000 to 6.5 million in 2012.
These successes demonstrate a key lesson: that well-designed aid
programs with sound operating principles, including clear goals,
metrics, milestones, deliverables, and financing streams, can make an
enormous difference, and that such programs should be devised and
applied on a large scale in order to benefit as many people as possible.
Such quality design needs to be based on the details of best practices,
such as the combination of medicines, bed nets, and diagnostics used
in cutting-edge, community-based malaria control. The economics
profession needs to do a much better job working with experts in other
fields, such as public health, in order to design effective aid
interventions that reflect the nitty-gritty of high-quality systems
delivery. While Prof. Easterly begrudgingly admits that some health
aid programs have worked, for him this contradiction seems to make
no difference to his overarching claim that aid is doomed to fail, for
reasons that are hard to explain. All the evidence and all the
exceptions have not mattered to his rhetoric, or for that matter, to his
harsh attacks on me personally.
The aid successes of the past decade have saved millions of lives, a
worthy use of money (which has totaled just a tiny fraction of rich
world income) on its own. Yet aid has delivered more than lives saved
and improved. Various kinds of aid, including public health outlays,
debt cancellation under the IMF and World Banks Heavily Indebted
Poor Countries initiative (providing debt relief and cancellation for the
poorest countries), and other programmatic and budget support, have
helped to put sub-Saharan Africa on a path of much higher economic
growth and development. For the first time in decades, Africas
poverty rate has come down notably (from 58 percent in 1999 to 48.4
percent in 2010) and the regions economic growth is now around 5
percent per year, making it the region with the second fastest growth
(following Asia).
Of course, aid didnt cause this success by itself, as there are many
factors in play. But aid has helped. Research distinguishing the types
and timing of aid has shown that development aid raises economic

growth, though the effects will differ across countries and depend on
the quality of aid. The malaria example is one of the clearest and most
dramatic examples, but across the continent, aid has helped with
improvements in education, agriculture, sanitation, infrastructure, and
more.
In The White Mans Burden, Prof. Easterly declared, "You just have to
do whatever you discover works with your modest resources to make
a difference in the lives of poor people." Prof. Easterlys emphasis on
"modest resources" mischaracterizes our real global situation. We are
living in a world of great wealth. We need not accept the fallacy
perpetuated by the rich that global resources available are quite so
"modest," when total aid to sub-Saharan Africa in 2012 amounted to
roughly 0.1 percent of the GDP of the donor countries (around $45
billion per year). We can and should mobilize more support. Just
fractions of 1 percent of GDP of the rich countries can make a
profound difference to ending extreme poverty throughout the world.
Of course, we should also certainly agree to focus on what works, and
take effective programs to large scale. The positive evidence since
2000 shows that well-designed aid has made a tremendous impact.
The issue is not "yes" or "no" to aid. Aid is needed, and can be highly
successful. The issue is how to deliver high-quality aid to the worlds
poorest and most vulnerable people.

International Aid as a Cure for Poverty

In 2002, more than fifty Heads of State and over two hundred Ministers of
Finance met in Monterrey, Mexico to participate in the United Nations
International Conference for Financing and Development. The purpose of the
gathering was as follows:
"We the heads of State and Government, gathered in Monterrey, Mexico, on
21 and 22 March 2002, have resolved to address the challenges of financing
for development around the world, particularly in developing
(impoverished) countries. Our goal is to eradicate poverty, achieve
sustained economic growth and promote sustainable development as we
advance to a fully inclusive and equitable global economic system."
-Monterrey Consensus, March 2002

One of the key recommendations of the Consensus was that the rich world
nations (including Western and Northern Europe, Canada, the United States,
Australia and Japan) pledge to donate 0.7% of their annual Gross National
Product (70 cents out of every hundred dollars) to extremely poor countries
as international aid. The Consensus stated:
"Official development assistance (ODA) plays an essential role as a
complement to other sources of financing for development, especially in
those countries with the least capacity to attract private direct
investment...We recognize that a substantial increase in ODA and other
resources will be required if developing countries are to achieve the
internationally agreed development goals and objectives, including those
contained in the Millennium Declaration. In that context, we urge developed
countries that have not done so to make concrete efforts towards the target
of 0.7 per cent of gross national product (GNP) as ODA to developing
countries."
-Monterrey Concensus, March 2002
This was not the first time that a major international panel has recommended
the rich world donate 0.7% of its GNP to extremely poor nations; the history
of the 0.7% pledge can be traced back to the 1969 when Canadian Prime
Minister Lester B Pearson formed the Commission on International
Development, which made the recommendation that rich world nations
donate 0.7% of their GNP as international aid. In 1970, the Canadian
Parliament committed itself to donating this money, asserting that it is our
moral duty to promote health and wellness abroad.
As of 2009, the Canadian government has still not achieved this goal. It
currently donates only 0.34% of its GNP as international aid (roughly half of
what it pledged to donate four decades ago). Canada is not alone; among the
22 rich world countries, only 5 have succeeded in donating this percentage of
their GNP (Netherlands, Luxembourg, Denmark, Norway and Sweden). But
while some call on the government to fulfill its 40 year old promise to
increase aid, many wish to see funding for aid dramatically cut. They argue
that too much aid money is wasted or embezzled by corrupt foreign
governments, and what extremely impoverished nations really need to escape
from extreme poverty is a set of market reforms which champion the private
sector.

So who is correct? Can aid play an essential role in helping eradicate extreme
poverty as the Monterrey Consensus proclaims, or is it simply wasted by
corrupt foreign governance? In this chapter we'll examine the Foreign Aid
Debate between today's leading economists, and attempt to determine how
international aid affects economic development in today's extremely poor
societies.

How Foreign Aid Can Help Earth's Poorest Citizens

"
In 2005, Columbia University economist Jeffrey Sachs released a book
entitled "The End of Poverty", in which he argued that the world could
eradicate extreme poverty in twenty years time if international aid to Africa
was roughly doubled over the course of the next decade. His proposed plan
required the richest countries of the world - nations such as Canada, the
United States, Japan, Australia and the European Union- to donate 0.7% of
their GNP to the extremely impoverished nations of Africa, South America,
Asia and the Caribbean. The book subsequently became the rallying cry for
the "Foreign Aid Movement" promoting more foreign aid to Africa, becoming
a New York Times best-seller and sparking a nationwide political debate.
The book makes strong arguments; as we have explored in the previous
chapters, Ladder Theory of Economic Development suggests that countries
need a sudden boost of wealth to escape from poverty; private citizens and the
nation's government can then invest the new wealth in human health,
education, infrastructure and technology to increase worker productivity and
make the country more attractive to foreign aid, thus creating additional
wealth. The country thereby enters a "Cycle of Prosperity" in which wealth is
generated and invested in the economy, creating a second wave of wealth
which is once more invested in the economy, etc. The cycle continues until the
poor country becomes rich; this has already occurred in South Korea and
Taiwan and is currently happening in China and India, causing these
countries to become rapidly wealthier.

However, as we have witnessed in Chapter Three, extremely impoverished

countries (such as those in Africa) often never get that initial boost in wealth
because they are heavily burdened by several "Poverty Traps", including
prevalent disease, civil conflict, overpopulation, lack of infrastructure, and
terrible governance; these countries never achieve a boom in agricultural
productivity or foreign investment (or they get the boom from natural
resources, which are subsequently used to fund civil conflict), and therefore
never enter the "Cycle of Prosperity". Sachs' argument is relatively simple;
let's just giveextremely impoverished nations the sudden increase in wealth
through foreign aid.

"
Sachs lays out several investments to be made in Africa's economy which
would allow it to enter the cycle of prosperity: for example, the donors of aid
in the rich world could give African citizens fertilizers, tools for small-scale
irrigation, and bio-engineered high-yielding seeds resistant to drought and
pathogens (similar to those developed by the Rockefeller Administration) to
give African farmers a boost in agricultural productivity. Rich world countries
could give them free bed nets to prevent mosquito bites causing Malaria,
treatments for HIV/AIDS, vaccines to cure tuberculosis and other diseases,
and new wells and rainwater-harvesting technology to give Africans sanitary
drinking water; all of these investments could help promote health in Africa,
thus raising worker productivity and saving millions of lives. The rich world
could donate money to build and fund primary schools throughout Africa,
raising literacy rates, teaching students more efficient ways of irrigating their
farms to save on water, and teaching students computer technology skills
(enabling African children to get future jobs in the digital information services

technology sector just like the students of India's IIT universities). Money
could be used to invest in basic infrastructure including paved roads, airports
and seaports, electricity for rural homes (through the use of an electricity
generator), broadband cables to promote internet access, and silos to store
grains so that they can be sold gradually instead of all at once (thereby
allowing the farmers to sell the grain for a higher price).

Sachs argues that by giving African nations these critical tools to help rapidly
increase worker productivity and attract foreign investment, the countries in
sub-Saharan Africa could enter the Cycle of Prosperity and thereby grow into
self-sufficient wealthy regions, just as South Korea and Taiwan had done in
the 1960s. To prove that international aid can successfully trigger entrance
into the Cycle of Prosperity, Sachs founded the Millennium Village Project, an
initiative designed to make small scale investments in human health,
education and infrastructure in small villages throughout Africa; after
receiving enough aid money to make the critical investments, the African
villages achieved dramatic reductions in child mortality rates, greater school
enrollment and a large boost in crop productivity. Donald Ndahiro recently
described the effects this aid had on one small village in Rwanda in a 2009
article to the Huffington Post:
"Farmers across the board are growing 60% more food with some
experiencing 2 and 3-fold increases. This means there's more to eat, sell and
save. The community now stores vital grains annually in a seed bank rather
than relying on hand-outs or humanitarian relief. There is a fullyfunctioning health center run by Rwandans which delivers more than 85%
of the community's babies and provides primary health care. We're proud
that it is considered one of the best in the district. School enrollment has
gone through the roof with more than 95% of children of age in attendance.
Dozens of new cooperatives have taken off and are generating employment
and new products. The community leaders frequently comment that weekly
funerals of children which were once commonplace just two years ago, have
since ceased altogether. In short, the project, which through and through is
community-led, has achieved its goal of sustainably reducing poverty in the
community, and on that foundation of stability, the community has begun
real prosperity-creation projects." (emphasis added)
-Donald Ndahiro, Team Leader, Millennium Villages Project, Rwanda
These small-scale projects have successfully demonstrated that when given
the means to invest in health, education and infrastructure, extremely poor
communities can become self-sufficient; able to pull themselves out of the
Poverty Trap and begin sustainable economic growth.
Sachs believes that these investments can be scaled up to include all of Africa
for the price of 0.7% of rich country GNP (roughly seventy cents out of every

hundred dollars); this is what the rich nations of Europe and North America
had pledged to donate to impoverished countries in 2002 during a world
summit in Monterrey. Such money would be given to the Millennium
Challenge Account, directed at trying to improve life quality in cooperative
impoverished nations. Unfortunately, rich world nations have yet to fulfill this
promise; if they did donate this money, Sachs argues that the vast majority of
extreme poverty could be eradicated in a very short period of time. Problems
Associated with Foreign Aid

"
One year after the release of The End of Poverty, New York University
economist William Easterly released a book entitled White Man's Burden
which criticized Jeffrey Sachs' promotion of more aid to Africa. Easterly
contended that "Sachs' anti-poverty prescriptions rest heavily on the
kindness of some pretty dysfunctional regimes", arguing that large amounts
of international aid are generally wasted or embezzled by corrupt
governments. For example, he points to "studies in Guinea, Cameroon,
Uganda and Tanzania, which estimated that 30 to 70 percent of government
drugs disappeared into the black market rather than reaching the
patients". Further, he also cited studies which contend that aid tends to have
little effect on promoting economic growth even in countries with good
governance.

This may be because foreign aid tends to promote a phenomenon nicknamed

"Dutch Disease". According to a report by Raghuram Rajan of the
International Monetary Fund, when large amounts of foreign aid are sent
overseas, the receiving (impoverished) country's currency tends to rise in
value; this rise in the value of currency makes it more expensive for foreigners
to purchase exports coming out of the poor country, and thus foreign
investment in the impoverished nation is discouraged. In this way, foreign aid
undermines (not promotes) foreign investment.
Easterly also repeatedly mentions that more than $2.3 trillion has already
been given to the developing world over the last 50 years; if aid was truly a
successful means of promoting development, then Easterly argues that
targeted impoverished nations should have already eradicated extreme
poverty by now. Furthermore, he points out that much aid is wasted on
projects whose primary purpose is to glorify the aid organization instead of
helping the impoverished citizens; additional aid is wasted on propping up
dictators supportive of rich world interests or overthrowing communist
regimes.
Other authors have backed up Easterly's position; in 2006, another book
written by World Bank economist Robert Calderasi entitled The Trouble with
Africa concludes that international aid should be cut to Africa, saying that
"Contrary to conventional recommendations, direct foreign aid to most
African countries should be (cut in half), not increased" since corrupt African
governments often use the money wastefully.
In 2009, Zambian economist Dambisa Moyo reinvigorated the foreign aid
debate with the release of her book Dead Aid, in which she calls for the
complete cut off of all aid to Africa over the next five years. She alleges that
"Limitless development assistance to African governments has fostered
dependency, encouraged corruption and ultimately perpetuated poor
governance and poverty." Moyo argues that Africa's only problem is
extensive government corruption and interference in the private market; what
the continent needs is rapid market reforms which promote the private
sector.

"
And yet I remain skeptical of these arguments; for decades, free market
economists from the Western world have simply prescribed greater market
liberalization, decreases in tariff barriers, and widespread deregulation of the
market to combat extreme poverty. Many such economists have pointed to
Africa's extensive government interference (high tariffs on imported goods
and to strict corporate regulation) to explain why Africa remains unable to
attract foreign investment and continues to become poorer. But this argument
doesn't seem to make sense; consider the world map to the left, comparing
several nations' so-called "Index of Economic Freedom" measuring the extent
of a country's government intervention in the private marketplace (for
example, a country with high taxes and strict business regulation by the
government would be not be considered "free" and might be colored orange).
As we can see, the economies of some African nations (the long red line down
the center of Africa) remain crippled by high government inference, but most
of Africa is orange -the same color as China, India and Brazil, which have all
in recent decades experienced a huge boom in foreign investment. So why are
some over-regulated markets experiencing little to no growth, while other
over-regulated markets are experiencing unprecedented growth?
Economic freedom certainly plays a role in changing a country's
competitiveness; as we saw in the last chapter, India's market reforms (which
ended the "License Raj" and rapidly deregulated the market) helped to bring
in foreign investment and generate significant amounts of wealth. But too
much government interference in Africa is only part of the problem; it is not
the only reason why Africa is lagging behind Asia. As mentioned throughout
chapters one and three, Africa is plagued by the perfect storm of high disease
rates (including AIDS and Malaria), low rainfall which hinders agricultural
production and causes repeated famines, and severe ethnic tension which
mixes with extreme poverty and hunger to cause repeated bloody civil wars. It
is often these things, not inferior governance, which prevent African nations
from getting enough wealth to invest in the infrastructure needed to attract
foreign investment. Without the prerequisites of proper health, basic

education and vital infrastructure, private markets have left enormous areas
of the world completely undeveloped; market reform policies are not the only
things needed to bring wealth to Africa.

"
International aid certainly has several setbacks including the creation of
Dutch Disease, which discourages exporting. Yet one must remember that
extensive aid ($4 billion worth) from the United States did not stop Taiwan
from developing into a major exporter during the 1950s; in fact it did just the
opposite, as US aid allowed Taiwanese farmers to buy large amounts of
fertilizer to increase their crop yields, enabling farmers to produce more rice
per hectare of farm than almost any other country in Asia. This enormous
surplus of food was Taiwan's original export-base; if US aid had not been in
place to support this small capitalist economy, it might not have been so
successful in evolving into an export superpower. As noted in Chapter Four,
international aid has also played a key role in the economic development of
both South Korea, which received a 70% export subsidy from the US
government, and India, which achieved a dramatic boost in crop productivity
thanks to bio-engineering from the Rockefeller Foundation.
I also contend that Easterly's statistical analysis -which supposedly proves
that aid tends to have little effect on promoting economic growth even in
countries with good governance- may have been flawed due to lack of variable
adjustment between countries. In a book review of The White Man's Burden,
Nobel Prize-winning economist Amartya Sen criticized the studies saying:

"To arrive at his negative view of economic aid, Easterly draws on largescale cross-sectional statistical analysis, as well as on case studies of
particular plans and programs. Such intercountry comparisons have
become fashionable as a way of isolating solid connections between causes
and effects, but they are seriously compromised by the difficulty of
comparing diverse experiences: countries can differ significantly in
variables other than those that are brought under cross-sectional scrutiny.
Many such studies are also impaired by difficulties in identifying what is
causing what. For example, a country's economic distress may induce
donors to give it more aid -- which may, in terms of associative statistics,
suggest a connection between aid and bad economic performance. But using
such a correlation to prove the bad effects of aid turns the causal connection
on its head. Easterly tries to avoid such pitfalls, but the statistical
associations on which he draws for his comprehensive pessimism about the
effects of aid do not offer a definitive causal picture."
-Nobel Laureate Amartya Sen, Professor of Economics at Harvard
University
Easterly also argued that aid is not a successful means of promoting
development because enormous amounts of aid -$2.3 trillion worth- have
already gone to developing countries without successfully eradicating extreme
poverty. But this assertion is undermined by Easterly's second argument; that
much aid has been spent on destructive activities such as overthrowing
communist regimes instead of trying to help impoverished societies. Had this
aid been spent on activities which bettered African welfare instead of
furthering rich world interests, then arguably it would have been much more
successful at alleviating poverty. Michael Gerson of the New York-based
Council on Foreign Relations criticized similar statements from Dambisa
Moyo (author of Dead Aid) in a recent Op-Ed column in Washington Post:
"Moyo is on firm ground in criticizing decades of direct foreign assistance to
African governments. Such aid has often propped up corrupt elites, shielded
leaders from the consequences of their own incompetence and delayed
reforms necessary for the development of working markets. She is correct in
emphasizing the decisive role of trade, direct foreign investment and local
capital in the development of poor nations -- sources of opportunity that
dwarf aid flows in size and importance. I'd go further. Through most of the
past several decades, the development of Africa has not even been the
purpose of foreign aid. Europeans often provided money to elites in former
colonies to assuage guilt. During the Cold War, Americans often used aid to
reward loyalty...But Moyo does not take sufficient account of the broad
reaction against this kind of direct aid beginning in the 1990s. The United
States started taking a much more targeted and strategic approach. The
Millennium Challenge Account directed new aid to nations willing to work
as responsible partners, dedicated to reform and transparency. Initiatives

on AIDS and Malaria required and achieved measurable outcomes and have
often worked through civil society instead of giving money directly to
African governments...If Moyo's point is that some aid can be bad, then it is
noncontroversial. If her point is that all aid is bad, then it is absurd."
-Michael Gerson, Council on Foreign Relations
Finally, although he certainly agrees that much aid has been wasted, Jeffrey
Sachs still contends that international aid has been quite successful in
bettering the lives of impoverished citizens. In addition to the enormous
success of achieving a major increase in crop productivity throughout Asia,
Sachs points out several revolutionary successes brought about by
international aid, writing:
"Successes include the UNICEF campaigns to expand coverage of
immunization, the eradication of smallpox, the control of onchocerciasis in
Africa, the campaign to eradicate polio, the scaling up of anti-retroviral
medicines, the use of oral rehydration therapy, the global application of
DOTS for tuberculosis, and the expansion of family planning and
contraceptive coverage."
Sachs also notes that in 1967, the plan to eradicate small pox was widely
viewed as impossible and a waste of time due to the challenges of distributing
the drug over vast areas. The resolution to finance the project only narrowly
passed the vote of the World Health Assembly; just one decade later, the last
natural case of smallpox was reported. Now, argues Sachs, "a significant
number of other crippling and killing diseases, including African river
blindness, schistosomiasis, trauchoma, lymphatic filariasis, hookworm,
ascariasis, and trichuriasis, could be brought under control for well
under($700 million per year)." Using history as our guiding light, we must
use international aid to take action against these diseases, helping extremely
poor nations escape from the Poverty Trap.

Summary
In summary, foreign aid certainly has many problems associated with it;
much of it is wasted by corrupt government officials in impoverished nations,
and aid may contribute to "Dutch Disease" and therefore undermine foreign
direct investment. But aid has successfully eradicated many serious illnesses
in developing countries, including polio and small pox, and has played a
critical role in the takeoff of several successful economies, including South
Korea, Taiwan, and India. In addition, small scale experiments with
impoverished African villages (under the Millennium Villages Project) have
proven that African communities can use foreign aid money to achieve selfsustaining economic growth.

Although market reforms obviously play a crucial role in helping to bring

wealth to impoverished nations, vast regions of the world are still extremely
poor not due to terrible governance but rather because they are stuck in
various Poverty Traps which prevent them from generating enough wealth to
enter the Cycle of Prosperity. The private sector is an excellent engine of
wealth only when essential prerequisites such as good health, education, civil
peace and physical infrastructure are in place; foreign aid is one means of
giving impoverished nations those prerequisites.
Foreign aid is therefore not a "Band-Aid Solution" or a form of welfare which
is wasted on those unable to take care of themselves; rather, aid is a form of
economic stimulus which allows a nation to begin ascent up the Ladder of
Development. International aid is one means by which rich nations such as
Canada can help Earth's extremely impoverished societies.

The Dark Side of Foreign Aid

A new book considers the realities of foreign aid to Cambodia, and
its implications for the development of democracy.
By Peter Tan Keo
November 05, 2013

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Foreign aid has a long track record. The biggest upside appears to
be the injection of large sums of money into developing countries
otherwise gripped by poverty, war and conflict. For better or worse,
that money should, in theory, improve lives and raise people out of
poverty, leading to sustainable growth and development. The
unfortunate truth, however, is that foreign aid has often presented
more challenges than opportunities to aid recipients. In the sixtyplus years aid has been mandated by government versus relying
solely on private donations weve seen small improvements across
the globe, from reducing poverty to slowing population growth to
curing and preventing diseases. Progress that otherwise would have
been absent without an outpouring of foreign support.
However, the impact from aid has not been proportionate to the
amount of money donated. Foreign aids biggest downside is that no
clear, effective system has been put in place to hold aid recipients
and their governments accountable for resources illegally taken

from public sector coffers a long-standing, and still very present,

trend from Asia to Africa to Latin America/Caribbean to Europe.
Unfortunately, the absence of that system reinforces social
inequities and perpetuates cycles of political abuse that has led to a
sophisticated new form of authoritarianism one that empowers
the elite few, while keeping a majority of people in abject poverty.
Discussions about foreign aid remind me of James Bovards
nominal 1986 article, The Continuing Failure of Foreign Aid.
Analyzing world events over a period of more than 40 years, Bovard
argues convincingly that the success of foreign aid is often measured
by intentions, not results. Using the U.S. as one example, Bovard
writes, [F]oreign aid has routinely failed to benefit the foreign
poorthe U.S. Agency for International Development [USAID] has
dotted the countryside with "white elephants"the biggestof them
all a growing phalanx of corrupt, meddling, and overpaid
bureaucrats.
This trend is apparent in countries like Cambodia.
Sophal Ear, an assistant professor of national security affairs at the
U.S. Naval Postgraduate School, is among a handful of scholars to
write persuasively about the dark underbelly of foreign aid in
Cambodia. His argument, clearly presented in Aid Dependence in
Cambodia: How Foreign Assistance Undermines Democracy, is
this: [E]ven though aid is meant to encourage development, aid
dependence results in bad governance, stunting development. Two
pages later, he goes on to note, I am convinced that, on balance, the
long-term effects of aid dependence have made it difficult, if not
impossible, for Cambodia to take ownership of its own
development.
Ear takes an important and much-needed step beyond the
traditional practice among Cambodianists, sympathizers and selfproclaimed rebel princesses to apply sweeping statements, if not
judgment calls, about the political and economic challenges of
present-day Cambodia, without providing evidence to substantiate
those lofty claims. For seasoned analysts and scholars, Ears
rigorous analysis is useful and appreciated. However, for the casual
reader, he misses important teachable moments that could raise
greater awareness around the issue. Ear should have taken a more
moderate approach in his writing to appeal to a variety of audiences.

Ear doesnt link the history of foreign aid to present day challenges
in Cambodia. For example, historians have long suggested that
foreign aid has evolved from colonialism with colonizers doling
out loans to local governments and that effort accelerated after
World War II, specifically as U.S.-led efforts to rebuild Europe and
Japan from the ashes of war. During that period, the United
Nations, the World Bank, the International Monetary Fund and
other global institutions were created to assist with development.
Understanding history enables readers to make sense of
contemporary challenges with the hope of identifying practical
solutions for the future.
And because the U.S. has been foreign aids largest benefactor since
the 1940s, it would have been useful to understand Washingtons
role in Cambodias foreign aid dilemma despite not being the
countrys largest aid donor. According to the non-partisan group,
Face the Facts USA, an affiliate of the George Washington
University, the U.S. contributed $38 billion to foreign aid in 2010
alone, and continues to be the worlds largest donor country. China
has also joined the fray, doling out large amounts of unconditional
loans often attractive to post-conflict countries with weak
institutions. Ear could benefit from asking questions like, How
much has Americas efforts in Cambodias aid climate changed over
the years? and, To what extent has Cambodias growing
relationship with China and its dependency on unconditional
loans helped or hindered economic development and democratic
consolidation?
However, Ears take-no-prisoner approach to identifying the root
causes of foreign aids failure in Cambodia was evident.
For example, he takes, perhaps with intentionality, one liner moral
highroad jabs at foreign aid donors and Cambodian government
officials. Those jabs are laced throughout the book and come
randomly at the end of paragraphs. Saying things like, The right
road must be chosen to turn bread and circuses into wealth and
prosperity, in pointing out the superficiality of todays economic
growth, and Perhaps the secret to happiness, then, is to have low
expectations in referencing the state of democracy, without much
of an explanation that follows raises concerns though his
comments arent without merit. It contradicts the larger goal of the

book, which appears to present objective data to identify specific

aid-related challenges in Cambodia. Why, then, rely so heavily on
empirical data?
Taken together, however, Ears book makes an important and
timely contribution to the field. It raises awareness
aroundCambodia, and sheds light on what is otherwise widespread
apathy and complacency. Those two actions, however, are
increasingly called into question, as Ear has done persuasively,
given the role they play in legitimizing illegitimate governments,
whereby a small group of elites dominate the entire country. His
book attempts to remove the veil of ignorance from an issue that
has largely gone ignored, in part because of Cambodias overall
insignificance on the global stage. Theres also reason to believe that
foreign and local stakeholders arent willing to challenge the status
quo of rampant aid failure, in a futile attempt not to rock the
diplomatic boat.
But Ear takes this matter into his hands. And why shouldnt he?

Foreign Aid: The Good And

Bad
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Faced with cutting government spending to reduce record

debt, politicians have found a popular target. After
reviewing respondents reaction to a list of budget
reductions including defense, education, food stamps and
cultural programs ABC News-Washington Post pollsters
found that the only possible federal spending cut a majority
favored was for foreign aid.
But not so fast.
Support to foreign governments has become more strategic
in recent years, and much of it serves important purposes.
As David Rothkopf writes in Foreign Policy, this is just the

moment when aid is most critical on initiative of vital

national security from fighting terror to stabilizing the
Middle East to winning support for the U.S. in regions
where our rivals are spending furiously to tip the scales in
their favor.
more
One of those regions is Africa, where China is trying to make
friends and influence people. The U.S. has spent billions of
dollars the largest single government effort to fight
international disease to help Africans overcome epidemics
of AIDS and malaria. Its the right thing to do in a moral
sense, but it also advances U.S. public diplomacy and
national security. Tens of millions more African orphans
would add to instability on a pivotal continent.
Additionally, economic aid to Afghanistan makes that
troubled nation and erstwhile terrorist launching pad
more secure and ultimately protects U.S. military personnel.
And aid to Haiti helps a neighbor in terrible distress.
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Consider the work of the Millennium Challenge
Corporation, launched with bipartisan support in 2004 and
currently spending about $1 billion a year. The MCCs
mission, according to its fiscal 2012 budget proposal, is to
reduce poverty through investments promoting growth in
poor countries that create and maintain sound policy
environments.
The MCC provides funding for projects in nations that
demonstrate a commitment to such goals as free markets
and a corruption-free bureaucracy. The program has scored
major successes in such countries as Tanzania, where road,

"

water, and sanitation projects have helped 5 million people,

with an estimated economic gain of well over $1 billion.
Some foreign aid, however, is far more questionable. For
instance, why should U.S. taxpayer dollars flow abroad to
projects that are so distasteful at home that they cant get
support here?
An example is a program to spend tens of millions of dollars
in Indonesia to try to reduce the threats of deforestation
and climate change and help to conserve the countrys
tropical forests, wildlife, and ecosystem processes,
according to a White House fact sheet. The program is
backed by such aggressive Green groups as WWF and
Greenpeace, and no wonder.

Cap-and-trade and
similar climate change legislation could not get through the
U.S. Congress for the simple reason that their potential
benefits were outweighed by their significant economic
costs. But the expensive experiment continues, with U.S.
taxpayer funding, in Indonesia. If anything, the costs of such
policies are even higher in Indonesia, where they harm the
livelihoods of poor farmers, than in the United States.
Since 2006, the MCC has provided aid to help Indonesia, the
worlds largest Muslim nation, strengthen its judiciary and
government procurement system and to institute a

nationwide immunization program for five million children.

That sort of aid makes sense. Now, unfortunately, assistance
to the country is being shaped by rejected ideology. This is
precisely the kind of foreign aid that American taxpayers
should be concerned about.
The Indonesia funding is part of a $1 billion pledge, offered
in November by Agriculture Secretary Tom Vilsack, to slow
and reverse deforestation in the tropics. But in Indonesia,
at least, deforestation is often a politically charged term
that means substituting one kind of planting for another.
The bone of contention is that some Indonesia farmers are
converting forested lands to productive agriculture use. That
is a change that helps boost the Indonesian economy, and,
as decades of history have shown, the single most important
factor in an improved environment is a robust economy.
Wealth makes health. In his 2004 book The Real
Environmental Crisis: Why Poverty, Not Affluence, Is the
Environments Number One Enemy, Jack Hollander,
professor emeritus of energy and resources at the University
of California at Berkeley, powerfully demonstrates the link
between poverty and environmental degradation. Its
obvious to anyone who sees charcoal being burned as fuel in
Uganda or dried dung in rural China.
The best kind of U.S. aid, like most of the work of the MCC,
seeks to build economic growth in poor countries by
strengthening health care, education, and governmental and
physical infrastructure. Economic growth in developing
nations helps the United States by increasing stability in
those countries, contributing to more vibrant trade in both
directions and, in fact, producing a cleaner environment.
If, however, programs like the one for Indonesia prevail,
then poor people in the developing world will be subject to
lower economic growth rates and see larger percentages of
their income devoted to energy costs, wrote Niger Innis of

the U.S.-based Congress of Racial Equality last month. This

means they will have less to spend on education, food,
shelter, and other staples.
Washington budget cutters should not slash foreign aid
mindlessly, but they would do well to target for extinction
aid that harms economies and is based on a philosophy that
cant pass muster among the American people.