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EFFECTIVENESS OF
FOREIGN AID
Dickens Molo and Yong Zhao
April 29, 2013
Introduction
What is foreign aid?
Type of flows
Delivery of aids
Rationale for aid
Donors
Measurement of aid
Donors and recipients
Aid effectiveness
Case study on Kenya
Conclusion
What is Foreign Aid or Foreign Assistance?
Flows of official financing administered with the
promotion of the economic development and welfare of
developing countries as the main objective, and which are
concessional in character with a grant element of at least
25 percent (using a fixed 10 percent rate of discount)
Cash, technical assistance, and commodities
Grants or subsidized loans.
Statistical Glossary, OECD
Four Broad Economic and Development Objectives
Stimulate economic development through building of
infrastructures, supporting productive sectors.
Strengthen education, health, environmental, or political
systems.
Support subsistence consumption of food and other
commodities, especially during relief operation or
humanitarian crises.
To help stabilize economy following an economic crisis.
Radelet, 2006
Types of Flows
Official Development Assistance (OAD)
Largest, flow to low and middle income countries.
Official Assistance (OA)
Flow to richer countries with per capita income higher than $9,000.
Private Voluntary Assistance
Grants from NGO, religious groups, charities, foundations, and
private companies.
Delivery of Aid
Bilateral
Aid given directly from one country to another
Multilateral
Indirect aid by pooling of resources from different countries.
Major Multilateral Institutions
World Bank, IMF, the African, Asian, and Inter-American
Development Banks, United Nations Development Program
Aid Statistics, Statistics by Region 2013: Aid
Aid Statistics, Statistics by Region 2013: Aid
Rationale for aid
Variety of motivations for providing aid, only a few are directly
related to economic development of recipient country.
Foreign policy and political relationships are the most important
determinant of foreign aid.
Tool of increasing political and economical power over recipient
countries
National-interest motivations
United States motivated by strategic rationales
Aid targeted to poverty, democracy and openness.
France motivations of maintaining a postcolonial sphere of influence in
Africa.
Japans aid is highly correlated with the UN voting patterns.
Countries that vote in tandem with Japan receive more assistance.
Democratic nations
(Alesina and Dollar, 2000)
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Measurement of Aid
Total Dollars
As a share of GDP
Size relative to the whole economy
As a share of Per Capita income
OECD
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Donor Countries
OECD
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OECD
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Effectiveness of Aid
Economic growth as the main indicator of effectiveness of
aid.
Different opinions and empirical results on the
effectiveness of aid.
No simple relationship between aid and growth.
Radelet 2006
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Aid has positive relationship with economic growth.
Morrissey (2001)
Aid increases investment, in both physical and human capital
Aid increases the capacity to import capital goods or technology
McGillivray (2005)
Aid to African countries increases growth and reduces poverty.
Karras (2006)
correlation between foreign aid and growth in per capita GDP
growth is positive, permanent, and statistically significant.
Gomanee, Girma, and Morrissey (2005) Foreign aid has
a significant positive effect on economic growth.
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Aid has no effects, may undermine growth
Jepma 1977
For most part, foreign aid crowds out savings, support public consumption, no
significant positive impact on recipients macroeconomic policies and growth.
Boone 1994, 1996
Aid has no effect on investment and growth
De Waal, 1997
Exaggerate problems to facilitate fund raising.
Svensson, 2000a
Easterly,2006 White Mans Burden
Aid creates incentives for increased rent-seeking behavior
Martens, 2002
Reduces productive exchange, government has no interest in increasing the
productivity of its citizens for more tax.
Incentive is not in its people, rather in other countries.
Moyo, 2009 Dead Aid
Aid causes development failures
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Aid has a conditional relationship with growth.
Burnside and Dollar, 2000
Aid does spur growth, but only in countries with good policies such
as low inflation, low budget deficit and many trade.
Donor Practices
Multilateral aid more effective than bilateral aid
Untied aid better than tied aid
Greater ownership or broader participations.
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Agreements
Aid did help to improve health by supplying essential
medicine and vaccines.
Important vehicle in providing emergency relief following
natural disasters.
Much of aid has been stolen, and adverse effects on
economic incentives.
Marcos regime in Philippines and Duvalier regime in Haiti
Radelet 2006
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The Paris Declaration on Aid Effectiveness
Paris Declaration (2005) lays out a practical, action-
oriented roadmap to improve the quality of aid and its
impact on development. It puts in place a series of
specific implementation measures and establishes a
monitoring system to assess and ensure that donors and
recipients hold each other accountable for their
commitments. It outline 5 fundamentals.
OECD
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The Paris Declaration (cont).
Ownership: Developing countries set their own
strategies for poverty reduction, improve their institutions
and tackle corruption.
Alignment: Donor countries align behind these objectives
set by the recipient country and use local systems
Harmonization: Donor countries coordinate, simplify
procedures and share information to avoid duplication.
Results: Developing countries and donors shift focus to
development results and results get measured.
Mutual accountability: Donors and partners are
accountable for development results
OECD
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The Accra Agenda for Action 2008
Designed to strengthen and deepen implementation of the
Paris Declaration
Sets agendas to accelerate the goals set by Paris
Declaration
Ownership: Developing country governments will take
stronger leadership of their own development policies.
Inclusive partnership: All donors and OECD Development
Assistance Committee and developing countries work
together.
Delivering results: focus on real and measureable impact
on development.
OECD
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Case reference: Agricultural sector in Kenya.
Agriculture in Kenyas economy, currently contributes 26
per cent of the GDP directly and another 25 per cent
indirectly. The sector also accounts for 65 per cent of
Kenyas total exports and provides more than 18 per cent
of formal employment. More than 70 per cent of informal
employment is in the rural areas.
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Foreign Aids: USAID, Its Projects and Impact
United States Agency for International Development
(USAID) was created to bring together several existing
foreign assistance organizations and programs. Foreign
Assistance Act of 1961 (pdf) by Congress
In kenya USAID work support long term
Economic growth; agriculture and trade
Global health;
Democracy, conflict prevention and humanitarian
assistance
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USAID Assistance to Kenya
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Specific project and its economic impact
Mobile Technology Links Rural Potato Farmers To The Urban
Market:
SOKOSHAMBANI (market to farm in Kiswahili), helps smallscale potato farmers access intelligence on market prices;
access micro-finance institutions; order quality seeds and other
inputs; access training materials; and most importantly,
communicate directly with buyers from fast food restaurants. Its
exploits the free communications technology service in Kenya.
1. How does it improve economic status of a farmer? I started
potato farming in year 2000. The difference is that now we
have a ready market and dont suffer like before. We used to
sale a sack of potatoes for $17.00 but now we sell at $53.00
directly to the buyer and dont have to wait for days to receive
payment. says James Radama.
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Kenya Agricultural Biotechnology Support Program :
Is an
outreach extension program educating young
scientists, the general public, policymakers, and
the media about biotechnology and biosafety.
Farmer vocational training programs
complemented by a publicly accessible website
with biotech information, brochures and
information booklets.
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Implementation of the Paris Declaration on aid
effectiveness in Kenya
Kenya being a signatory to Paris declaration, since 2005
embarked on implementing the resolutions agreed. Which
includes:
Joint participation in budgetary process.
Strengthen its systems of public financial management.
Translate core Government policy statements into
coherent medium-term expenditure plans, complete with
sector ceilings and budget allocations.
To enhance ownership and leadership in aid management,
Kenya External Resources Policy (KERP) to articulate the
Governments policy on mobilization of external financing
(Oduor and Khahinga 2009)
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Challenges in implementation of Paris Declaration
and ODA Effectiveness
Conditionality's without consultation
Bureaucratic procurements procedures
Weak linkage between different governments donor-
fund management bodies
Lack of timely accounting for the funds
Low project completion rates: In Kenya its 3%/yr
Diverting external finances: commonly from Capital
expenditure to recurrent expenditure
Borrowing to repay
Lack of monitoring, evaluation and impact assessment
agency
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Lack of aid harmonization of donor policies
Capacity constraints like exchange rate risk due
to fluctuations in the creditors countries
currencies
Lack of programs to maintain and sustain the
funded projects.
Weak institutions
Lack of transmission of knowledge and capacity
Disharmony among donors programmes and
procedures
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Conclusion
The provision of aid has played a major part in
development in many third world countries.
Foreign aid therefore must be viewed positively as a
catalyst for development while still appreciating its
shortcomings. However it must be noted that foreign aid
only yields maximum results if coupled with the necessary
social and political reforms especially political stability and
sound governance and an entrepreneurial spirit on the part
of the citizens.
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References:
Agricultural sector development stratergy 2010-2020.
www.ascu.go.ke/DOCS/ASDS%20Final.pdf
Alesina A. Dollar D. 2000. Who Gives Foregin Aid to Whom and
Why? Journal of Economic Growth, 5: 33-63
Alesina A, Weder B. 1999. Do Corrupt Governments Receive Less
Foreign Aid? National Bureau of Economic Research. Working
Paper 7108.
Burnside C. Dollar D. 2000. Aid, policies, and growth. American
Economic Review 90: 847-868
http://www.oecd.org/dac/effectiveness/
parisdeclarationandaccraagendaforaction.htm
http://kenya.usaid.gov/what-we-do
Radelet, Steven. 2006. A Primer of Foreign Aid. Center for Global
Development. Working Paper Number 92
