The Roles of Aid in Politics Putting China in Perspective

This study observed behavioral changes over time in actual aid flows toward what appear to be more optimal allocations across countries. Specifically, the roles of poverty and countries’ policy and institutional environment increased while the effects of small size and the debt burden diminished. Most of these changes occurred in the 1990s and intensified in the more recent period.

While these changes likely relate in part to reforms of the international aid architecture, it is unclear which institutional changes at the international or bilateral level have driven the changes in behavior. Long-standing multilateral financial institutions—such as the International Monetary Fund, World Bank, Paris Club, and consultative group meetings—have introduced many changes, which likely have affected the behavior of bilateral aid flows. More attention has also been paid to aid allocation beginning in the late 1990s, in part due to research begun in the mid-1990s. And changes such as the HIPC Debt Initiative and the Poverty Reduction Strategy Papers process diminished the influence of debt on donor flows and increased donor selectivity. While these and numerous other changes all likely influenced aid flows, studies, including this one, have not been able to document specific evidence of their impacts.

Further precision in the institutional factors driving changes in behavior is important for understanding how to make the international aid system work better for developing countries. The constraint is the lack of good measures of changes in such factors as financial policies, transparency, and coordination at the donor country and international level. Work on documenting institutional changes in a rigorous and quantitative way may help identify the most influential changes. However, this study observes—as other have—large remaining differences among donors in revealed selectivity that appear to be related to donors’ institutional environments. This suggests that reforms will have to be multifaceted and include further changes to the political economy and accountability in donor countries as well. It would be desirable for future research to take into account the policy and institutional environment not only in recipient countries, but also in donor countries, and to consider how this affects selectivity.

Clarke, D. P. (1991), “Trade Versus Aid: Distributions of Third World Developmental Assistance,” in Economic Development and Cultural Change, Vol. 39, No. 4, pp. 829–837.

This study measures and compares the degrees of GSP [Generalized System of Preferences – scheme proposed at the first UN conferences on Trade and Development (UNCTAD) in 1964] trade and foreign aid concentration among beneficiaries under programs offered by Japan and the United States. Although tariff preferences are advanced as a means of encouraging economic development through “trade” rather than “aid,” the two forms of development assistance are distributed quite differently across countries displaying disparate levels of economic well-being. The GSP trade is found to be concentrated among the higher-income beneficiaries, more so under the U.S. scheme than under Japan’s. The ODA tends to be focused more on the lower-income beneficiaries, particularly in the Japanese case. This does not mean that issues of equity dominate foreign aid disbursement decisions. Economic or strategic self-interest of each donor appears to play a major role in the allocation of bilateral ODA. Modifications of GSP schemes must be undertaken in conjunction with developing country initiatives to improve their utilization of the GSP.

This study measures and compares the degree of ODA aid concentration among recipients under schemes offered by eighteen DAC donors and multilateral agencies. Only the US bilateral ODA pattern is found to display pronounced “middle-income” bias. ODA flows of individual DAC donors are much more concentrated among the poorer recipients than are ODA flows under the bilateral US aid scheme. This does not mean that issues of equity dominate any of the bilateral aid disbursement programs. Economic and strategic self-interests of individual donors influence the allocation of bilateral aid. ODA flows from multilateral agencies are found to be distributed in a more equitable manner than bilateral ODA disbursements from major DAC donors. This finding suggests multilateral aid should be assigned a greater role in economic development assistance.

Although aid may be allocated coherently, it is allocated inefficiently with respect to poverty reduction. At present, aid is allocated partly as an inducement to policy reform and partly for a variety of historical and strategic reasons. This produces a pattern in which aid is targeted to weak policy environments and to countries which do not have severe poverty problems. The diversion of aid from poverty reduction to policy improvement would be justifiable were there evidence that the offer of finance is effective in inducing policy improvement. However, the evidence suggests that finance is ineffective in inducing either policy reform or growth in a bad policy environment.

Even with the current inefficiencies, we estimate that in our sample of countries the present allocation of aid lifts 10 million people permanently out of poverty each year. With a poverty-efficient allocation this would increase to 19 million per year. Hence, the attempt over the past decades to use aid to induce policy reform has come at a large cost.

Collier, Paul and Dollar, David (2002), “Aid Allocation and Poverty Reduction,” in European Economic Review, Vol. 26, No. 8, pp. 1475–1500, Elsevier Science B.V.

Poverty reduction – in the world or in a particular region or country – depends primarily on the quality of economic policy. Where we find in the developing world good environments for households and firms to save and invest, we generally observe poverty reduction. Foreign aid can accelerate the process. It can assist the government and society to provide public services, including critical ones needed by poor households to participate in the market economy.

In this paper we developed and estimated a model of efficient aid in which policy and aid interact in several important ways:

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  aid increases the benefits from good policy, while at the same time good policy increases the impact of aid; thus, the combination of good policy and aid produces especially good results in terms of growth and poverty reduction;
  
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  by introducing the concept of marginal utility of poverty reduction to first world taxpayers, we make the volume of aid endogenous; in particular, it increases when policies are improved, because in the better policy environment more aid can be used effectively;
  
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  we assume that policy is determined by developing country political processes and is independent of aid; however, the fact that aid increases the benefits of reform suggests that a high level of aid to strong reformers may increase the likelihood that good policy is sustained (an idea ratified in a number of recent case studies of low-income reformers); to the extent that this is the case, our estimates of the benefit of good aid to good policy countries are low.
  

The curvature of the isoquant results from diminishing returns to aid. Given the current levels of policies in Africa, simply increasing First World concern is not going to have much impact. Intuitively, once aid is allocated efficiently, there remain no great opportunities for effective aid, given the current state of policies. We argue that the best hope for moving to the poverty reduction = 50% isoquant is the combination of policy reform in Africa and growing concern in rich countries. If Africa achieved the same level of policy as South Asia (which seems a realistic target) and First World concern grows at about the same rate as first world income (3% per year), we would just about make it to the international development goal for poverty reduction!

Please do not take the point estimates too seriously. But do take seriously the notion that global poverty reduction requires a partnership in which Third World societies and governments improve economic policy, while First World citizens and governments show concern for poverty and translate concern into effective assistance.

Cooper, Charles and van Themaat, Joan Verloren (1989), “Dutch Aid Determinants, 1973-85: Continuity and Change,” in Stokke, Olav (ed.), Western Middle Powers and Global Poverty: The Determinants of the Aid Policies of Canada, Denmark, the Netherlands, Norway and Sweden, pp. 117-158, Uppsala, Sweden: The Scandinavian Institute of African Studies.

Aid policies are influenced by a multitude of factors. This study has identified a number of those which have given the Netherlands’ aid policies their distinct direction. Several levels of influence have been distinguished. Some specific features of the policies are influenced by specific foreign-policy considerations, such as the Dutch attitude to multilateral-aid agencies, some specific economic considerations and interests, some by the aid bureaucracy itself and some solidarity and human-rights pressure groups. None of these forces is autonomous, however. All of them are in turn influenced by more fundamental shifts and patterns in society. In analyzing why certain changes in the external environment have provoked specific changes in the aid policies of certain countries and not in those of other countries, one has to look to the differences in the domestic aid environment, as well as to the way in a country is affected by external forces. In this conclusion, we attempt to draw up a certain hierarchy of these factors.

To begin with, we believe that the aid policies of the Netherlands, both the stable broad orientations and the recent changes, are most importantly formed by domestic factors and not by foreign-policy considerations. The most important of these are the expectations which the public and the political parties have of the role of the state in domestic affairs. This expectation is transferred to the relations with developing countries. The central place which the transfer of income to low-income countries and groups holds in aid policies and its broad poverty orientations originate from this. The relative absence of directly productive activities in the sector allocation of aid also stems from the domestic welfare-state concept.

To understand why the state is looked upon somewhat differently in Holland than in other countries, one has to trace the specific history of the Dutch state. This factor suggests that a different role of the state in domestic affairs will go hand-in-hand with a different role of the state in aid policies. The more recent criticism of the domestic role tends to support this thesis. It calls for an approach where the aid policy is considered in the setting of domestic politics if the aim is to change the aid policy.

Other domestic factors, especially economic interests, play a minor though distinct role in Dutch aid policies. This is related to the relatively small economic role of the state in domestic affairs and partly to differences of interest within the private sector. This role, however, has been increasing in recent years.

NGOs, although occasionally successful in their lobbying activities vis-á-vis the government, are not a major influence in the shaping of aid policies. This is due to some extent to the financial dependence of the NGOs on the government.

Non-domestic factors also play a role in the shaping of policies. There has been quite a number of instances in which specific foreign-policy considerations have influenced aid policies. This is most clearly expressed in the choice of recipient countries. The fate of Vietnam, Cuba, Egypt, North Yemen and Nicaragua is linked to these considerations, but the importance attached to multilateral organizations is linked to them as well.

International organizations, especially the UN, the DAC and the World Bank, in turn influence aid policies to quite an extent. In particular, the sectoral allocation of aid, targets in the LDCs, instruments such as ‘policy dialogues’, and aid approaches to Africa’s stagnation, are heavily influenced by the policy recommendations of these organizations.

The socio-economic policies of recipient countries plays a certain role in the quantity of aid and the aid package which recipients receive. This role, however, has declined in recent years.

Human rights play only a small and declining role in aid policies. The government uses this criterion mainly in a reactive way, that is if serious violations occur. The clearest case in which this has happened has been the suspension of aid to the ex-colony Surinam after serious violations of human rights in 1982.

The last factor is the role of the aid bureaucracy itself. Its role in the general orientation of aid is not a very strong one. Because of its smallness and lack of professionalism, it can only give a certain direction to the type of projects which are being implemented, their design and the way in which they are executed. However, in the end, it has through this power, quite an effect on the ultimate results and the shaping of aid policies in the Netherlands.

Cox, Daniel G. and Duffin, Diane L. (2008), “Cold War, Public Opinion, and Foreign Policy Spending Decisions: Dynamic Representation by Congress and the President,” in Congress and the Presidency, Vol. 35, No. 1, pp. 29-51.

The results of this study clearly demonstrate that understanding the relationship between public opinion and U.S. foreign policy depends on understanding that neither is monolithic. That the public holds different opinions regarding different aspects of foreign policy is nothing new. That elected lawmakers respond to those expressions of opinion differently is, though. We have shown ongoing congruence between public opinion and defense spending, and an absence of congruence between public opinion and foreign economic aid.

Although our model of defense spending proposals builds directly on the work of others, it reveals some new and important lessons: (1) the congruence between defense spending and public opinion continued into the post-cold war era; (2) institutional actors in American national government accommodate the partisan composition of the Senate in making their defense spending proposals; and (3) no one branch of government or chamber of Congress carries the load of representing public opinion in setting defense spending levels—all are about equally responsive, demonstrating the vitality of dynamic representation in this policy area.

When trying to model the effect of these same political variables on foreign economic assistance, we find that the key variable of interest, public opinion, is entangled with the end of the cold war. Disentangling this knot reveals that the cold war’s end was regarded by the public as an opportunity to curtail foreign aid, but by political institutions as an opportunity to increase it, which they did. The effect of public opinion on foreign economic aid proposals is null, leaving us with the evidence that aid proposals continue to be driven more by geopolitical circumstances—namely, the presence or absence of the cold war and the opportunities and constraints inherent to each—and less by domestic political forces.

The world is changing rapidly – tomorrow’s threats, opportunities and challenges will be different from those of yesterday. Danish assistance for the fight against terrorism must take its point of departure in the urgent problems in the developing countries that we are able to identify now and the problems we can see on the horizon. In this respect, development assistance is an active foreign policy instrument. This applies in particular to the objective of promoting stability, security and the fight against terrorism. The Government will, therefore, increase the development assistance contribution to the fight against global terrorism as part of overall Danish anti-terrorist efforts with the aim of taking counteraction here and now against the current terrorist threat and of making a long-term effort directed at the growing recruitment and sympathy base for the new terrorism.

Through our development assistance, Denmark is already contributing significantly to the fight against international terrorism, especially through comprehensive Danish assistance to Afghanistan and Iraq. In addition, there is the Government’s new Arab initiative, which also includes measures in North Africa. The principles set out here in this document establish the framework and earmark the funds for the forthcoming work of carrying through new, specific efforts in selected developing countries and regions. The commitment and will to promote change - modernisation and development; democracy, human rights and good governance – as well as dialogue, ownership and co-responsibility are some of the fundamental principles governing the action.

While many efforts in terms of development assistance – first and foremost the initiative for conflict prevention and conflict management, human rights, democratisation and good governance - are targeted at some of the underlying causes of terrorism, the principles included in this document focus on the altogether extra efforts which either directly enhance the potential of poor countries to combat international terrorism or are directly targeted at vulnerable groups in countries and areas where developments indicate a noticeable radicalisation of society. The efforts to combat terrorism must be seen as part of the general, much broader development action, which also contributes to promoting a more peaceful and stable world characterised by growth and progress.

With approximately DKK 145 million earmarked for new, specific efforts in the period 2004-2006, Denmark will, also in the special sphere of countering terrorism, endeavour to contribute to making a difference for the better. For the benefit of the societies affected – and our own society.

Diamond, Larry (2008), “Foreign Aid in the National Interest: The Importance of Democracy and Governance,” in Picard, Louis A., Groelsema, Robert and Buss, Terry F. (eds.), Foreign Aid and Foreign Policy: Lessons for the Next Half Century, pp. 61-85, New York: M. E. Sharpe, Inc.

Global democratic progress has slumped in recent years. Many countries that once seemed “in transition” have settled into authoritarian rule. And even many electoral democracies are performing poorly and loosing public confidence. Democracy assistance has achieved uneven results, and in some countries, sizable efforts in some sectors appear to have had little if any impact. None of this is cause for despair. The world has seen striking democratic progress in the past two decades, and most people still want to be governed in democracy and freedom. However, if a broad reversal of democratic progress is to be averted, if development is to be generated where it has been blocked and stalled, and if we are to prevent the collapse of more states into catastrophic cycles of political violence, social chaos, rampant criminality, and humanitarian crisis, we must induce sweeping transformations in the quality of governance.

As described in this chapter, if we can extend and institutionalise the significant innovations of U.S. foreign aid strategy and structure from recent years, designed to induce, support, and reward fundamental governance reforms; if the United States can partner with its fellow donors to coordinate international pressure and incentives for such reforms; and if we can, with patience and adaptive savvy, sustain this approach with appropriate resources for two or three decades, we can help to generate the economic and political transformations that will lift nations, and hundreds of millions of people, out of poverty. This effort should be a higher priority in U.S. foreign policy and, if successful, will enhance the national security of the United States.

Dolan, Michael B. and Tomlin, Brian W. (1980), “First World-Third World Linkages: External Relations and Economic Development,” in International Organization, Vol. 34, No. 1, pp. 41-63.

The recent spate of cross-national, quantitative studies prompted by dependencia explanations of underdevelopment has provided new evidence on the consequences of foreign economic linkages for the economies of developing countries. We argued at the outset of this paper that the findings of these studies are important insofar as they bear upon the general problems addressed in the field of political economy. The subsequent analysis produced results which should be of considerable interest both to those who must endeavor to fashion policies in response to these problems and those attempting to theorize about the causes and consequences of development and underdevelopment.

In the first place, the findings of this study provide virtually no support for the postulates of conventional economic theories concerning the effects of linkages upon economic growth. On the contrary, the conclusions arrived at by Bornschier, et al. concerning the impact of direct foreign investment are corroborated here: direct foreign investment is cumulatively related to decreases in the relative rate of economic growth of countries. Perhaps equally important, however, is our finding that, in the short-term, investment is positively associated, at virtually the same magnitude, with increasing rates of economic growth. The importance of these findings, of course, is in their joint occurrence: any theory of development must explain both the short-term and contrary cumulative effects of investment. Following on a suggestion made by Bornschier, et al., we explored the effects of foreign investment on growth as they vary by economic sector. Previous studies indicated that foreign investment in manufacturing has the largest negative relationship with growth, while the effects of investment in extractive industry are positive.³⁶ Our analysis, however, suggests that various sectoral concentrations of foreign capital do not have statistically significant differential effects on economic growth. These contradictory findings require further analysis on this question, especially in light of the apparent shift toward internationalization of production on the part of multinational corporations.

Beyond investment, the analysis of the remaining types of linkage also failed to support the propositions derived from conventional economics. The effects of both aid and trade on economic growth were minimal. Trade is related to increased sectoral imbalance in the economy of a country; however, distributions of productivity and wealth within countries were found to be unrelated to the other linkage variables. This finding may be due to the use of levels, as opposed to changes in distribution. Any particular distribution of wealth or productivity is likely due to a variety of historical conditions, whereas linkages are more appropriate in accounting for changes in these distributions. In subsequent research, we intend to explore the impact of linkages on changes in the extent of sectoral imbalance in the economy.³⁷

In terms of the general problem of fostering economic growth faced by most underdeveloped countries, this analysis suggests that the role of foreign economic linkages might best be given secondary consideration. A synchronic design will normally leave a large percentage of variance unexplained. However, especially for the poorer countries in our sample, it is clear that a host of other economic, social, and political forces are the primary determinants of economic growth.

The analysis of the effects of the concentration of linkages on economic growth and distribution was included in order that this broad, cross-national study might be more easily related to previous dependence-based analyses which focus on various forms of partner and commodity concentration. Many regional studies of dependence have, not unnaturally, placed primary emphasis upon linkage concentrations in efforts to explain development. Conventional economic theory, however, does not assign importance to market and commodity diversification, or its absence. We find nothing in the results of this analysis to support a refutation of the stance adopted by conventional economics.

The results concerning the differential statistical relationships between investment stocks and flows, and rates of economic growth provide the most suggestive findings of this analysis. Much remains to be done, of course, to establish the causes of these relationships. Nevertheless, the possibility that the long- and short-term effects of direct foreign investment on rates of economic growth are opposite, and nearly equal, is one that ought now to be considered seriously by both policy makers and theorists attempting to deal with the problem of economic growth in the Third World.

Dollar, David, Levin, Victoria, (2006) “The Increasing Selectivity of Foreign Aid, 1984–2003,” in World Development , Vol. 34, No. 12, pp. 2034–2046.

In the past two decades, foreign aid overall has become more selective in the following sense: in the second half of the 1980s, aid was allocated in favor of countries with poor economic governance, as measured by an index of property rights and rule of law. Aid was allocated in favor of democracies, but among low income countries there is not much relationship between democracy and economic governance. Economic governance plays a key role in creating a climate for growth and poverty reduction, and also for aid effectiveness. For countries at the same level of per capita income, aid was channeled to those with weak economic institutions, where it was often not well used. More recently, a clear tendency toward selectivity in terms of economic governance has emerged among multilateral development agencies. For multilateral assistance, significantly more aid is channeled to countries with good economic governance, the opposite of the case in the 1984–89 period. Multilateral aid is more selective than bilateral aid. In the most recent period the latter has a slight relationship to good governance, but one that is not statistically different from zero.