Aid and development in historic perspective

Toaha Muhammad, Zinat Jahan Shanta, Sanjeeda Jinnuraeen Binte Ali, Rawnak Anika and Tajwar Quasem | Published: November 20, 2017 20:55:57 | Updated: November 24, 2017 20:20:31

Aid causes different reactions to different people. On one hand, it is a moral obligation to help poorer countries and people and on the other, there is the concern that financial transfers either do not work very well or even undermine broader development efforts.

This controversy regarding aid is not new. As poorer countries have been able show impressive growth in the last few decades, the developed countries have started to view aid differently. Moreover, a range of new aid-givers have emerged, including governments of emerging economies or major private organisations with varying motivations. Aid has been termed by some as instrumental to religious conversions, pushing unhealthy agendas with ulterior motives. Utilisation of aid has also become a major controversy in many cases, including its politicisation.

The 2007-8 global financial crisis has complicated matters more than ever before. After the crisis, the world has seen a structural shift in macroeconomic environment, fall in oil and commodity prices, political uncertainty and a greater emphasis on climate change resilience. As a result, governments are under increased budgetary constraints in the public sector. Tighter regulations under Basel III have pushed banks to their limits. Greater oversight in financial transactions has made aid flows more difficult. Governments have been forced to conduct quantitative easing (i.e. the use of unconventional monetary policy in which central banks purchase government securities or other securities from the market in order to lower interest rates and increase money supply) which has led to cheap money circulation  but less expenditure in physical and social infrastructure.

HISTORY OF AID: From a definitional point of view, aid is a measure of concessional transfers to developing countries that emanate from governments of donor countries (funded by the taxpayers of those countries). The history of aid can be divided into three eras. The first era was prior to the 1980s, when the main purpose of aid was project funding. Following a slowdown in economic growth in the developing world in the late 1970s due to steep rise in the oil prices, collapsing commodity prices and reduced export earnings, developing country governments sought urgent external grants and cheap loan financing to cover shortfalls in their access to foreign exchange. The second era has been associated with "Structural adjustment lending", so called because the conditions attached to aid were intended to lead to structural changes in recipient economies. The third era started after the Organisation for Economic Cooperation and Development's (OECD's) landmark publication in 1996, "Shaping the 21st Century: The Contribution of Development Co-operation", that set out the principles of country ownership and donor support to national development strategies that would lie at the heart of future aid endeavours.

Governments around the world noticed the changing landscape of aid and tried to make aid more effective. In 2003, governments and civil society groups from around the world met in Rome to agree on guidelines to improve aid mechanisms. Two years later, in March 2005, a second meeting took place, known as the Paris Declaration on Aid Effectiveness. The Paris Declaration crystallised a formal, high-level coalition around an idea that had been building for ten years and was already being practised by some agencies as project aid began to be further criticised. The main issue was: aid effectiveness must increase significantly as well recipient-country efforts to strengthen governance and improve development performance. It recommended a process that emphasised on demonstrating reliable public financial and procurement systems; donors aligning their aid with the priorities set out in the government's development strategy; coordinating their technical assistance with other donors; disbursing aid as committed; untying 100 per cent of aid; putting in place a mutual accountability framework whereby recipients are able to hold donors to account for their commitments. Another round of meetings took place in Busan, South Korea in later 2011 on "The Level Forum on Aid Effectiveness". The Busan meeting maintained the focus on sustainable and accountable state institutions as illustrated by the continued emphasis on the use of country financial management and procurement systems, and country-led approaches to monitoring and mutual accountability processes.

MEASURING AID EFFECTIVENESS: Measuring effectiveness of aid is complicated. Effects can seldom be conclusively attributed to aid flows, given that numerous other variables may have overlapping impacts that are difficult to disentangle. In addition, there is the existence of a macro-micro paradox, which showed that while studies were generally in agreement about positive effects of aid at the micro level, studies in the late 1980s and 1990s (and beyond) found it difficult to show any systematic effect of aid on growth at the macro level.

A number of studies found that aid does contribute to growth in general, albeit modestly. Hadjimichael et al. (1995), and Lensink and White (2001) found aid and growth had a positive linkages. However, the issue of diminishing returns was noted (e.g. Lensink and White 2001; Dalgaard et al. 2004). On the negative side, Boone (1994, 1996), focusing on aid, policies and growth found that aid did not have a positive impact on growth. Rajan and Subramanian (2008) conducted an extensive study of aid and growth to consider the long-run effects of aid (up to 40 years) and found no positive effect of aid across different types of aid and time periods. Clemens et al. (2012) convincingly linked existing disagreements on aid and growth studies to a time lag issue (aid takes time to impact on growth) as well as types of aid.

In the case of social development, almost all scholars find a positive relationship between aid and social development. Arndt et al. (2014) showed in a cross-country study that aid has reduced poverty across a range of social indicators. They found that an annual average aid inflow of 5.0 per cent of Gross Domestic Product (GDP) would be expected to increase growth by 1.5 per cent, reduce poverty by 9.0 per cent, raise schooling by 1.4 per cent, raise life expectancy by four years, and reduce the infant mortality rate by 20 in every 1000 births. Hirano and Otsubo (2014) found that aid in social sectors (education, health, water and sanitation spending) directly and significantly benefits the poorest and aid in economic sectors (transportation, energy and communications, and financial infrastructure) increases the incomes of the poor. Masud and Yontcheva (2005), however, found that bilateral aid does not reduce infant mortality, but that NGO aid does. Kaya et al. (2013) stressed on a significant relationship between agricultural aid and $1/day poverty reduction.

Researchers also found that aid works better under a set of conditions. There seems to be a relationship between aid levels and aid effectiveness as it is likely to have diminishing returns as it grows relative to the size of the economy or government expenditure, even turning negative. It is not a surprise that many researchers emphasised the role of domestic political institutions, political stability and the levels of decentralisation as positively impacting aid effectiveness.

AID IN BANGLADESH: Bangladesh has been supported by many multilateral and bilateral development partners in many social and physical infrastructure programmes and projects. The funds that multilateral agencies have been providing are given in Table 1, where it can be seen that foreign assistance from various multilateral agencies and countries has almost doubled over a period of six years.

In terms of fund utilisation in different sectors, the highest allocation of funds was in physical infrastructure sector followed closely by allocation in social infrastructure. (Table 2)

Table 3 shows the commitment in infrastructure by development partners during FY2015-16. From the table, it can be seen that Japan, ADB and International Development Association (IDA) of the WB had the combined commitment of around USD 2.4 billion. Other notable development partners include Islamic Development Bank (IDB), Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB) with financing of around USD 361 million. The aid in pipeline and utilisation ratios show much room for improvements through combined efforts of GoB and the development partners.

Basharat Hossain (2014) conducted a study on aid effectiveness in Bangladesh and found that foreign aid has positive effect but diminishing return on the economic growth of the country. Aid mobilising and executing institutions of Bangladesh including public administrations have capacity constraints, mainly due to poor structure and planning, corruption and political instability.

IMPROVING AID EFFECTIVENESS IN BANGLADESH: In order to improve aid effectiveness in Bangladesh, the Government of Bangladesh has to increase its absorption capacity to utilise aid. Improving the utilisation ratio would require the government to address time-consuming procurement processes, bureaucratic tangles and a host of other related issues that hamper project performance. The government has set priorities to pursue mega projects for the economic growth of the country and the development partners are showing interest in those projects. Most of the projects handled by the (Public-Private Partnership) PPP Office are related to these mega projects. However, in addition to these mega projects, the government should also pursue medium-sized and small-sized projects related to other modalities of PPP such as O&M contracts, service agreements which do not have higher degrees of complications in the procurement process. Pursuing such projects would create a track record of success for the government.

Bangladesh has recently graduated from a least developed country to a low middle-income country. As the Gross National Income (GNI) of Bangladesh increases, aid commitments and aid disbursements are likely to decrease. The terms and conditions of financing are also likely to become more stringent and the cost of borrowing from bilateral and multilateral development agencies may increase. This may have a negative impact on the economy. To address this, the GoB would have to look for other sources of financing its operations. This would mean increasing its tax earning efforts, broadening the tax base, a comprehensive review and overhauling of the revenue and expenditure policy.



The writers are students of Masters of Development Studies, University of Dhaka.

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