The Contradictions of Foreign Aid

Desmond McNeill

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000012347
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1981, this book analyses how development aid works in practice. It presents a critique of the practice of foreign aid, analyses the aid process, who controls it and investigates the exercise of leverage by donors. It examines the interests of the different parties involved, identifies problems and suggests alternatives which may allow the aid process to operate more effectively in the interest of those who need it.

1 INTRODUCTION

Much that is wrong with foreign aid is caused not by incompetence or corruption but by the complex machinery which has been developed to enable aid to be transmitted from donor to recipient. This machinery has been designed and constructed mainly by the donors, with the stated intention of making the aid process more efficient, but it actually causes or exacerbates many of the very problems that aid is meant to alleviate. This is the subject of this book.

My purpose is to present a critique of the practice of foreign aid; to analyse the aid process and who controls it, to investigate the exercise of leverage by donors, to examine the interests of the different parties involved, to identify the problems that result, and to suggest alternatives, based on the foregoing analysis, which may allow the aid process to operate more effectively in the interest of those who need it. I am in favour of aid, in principle, but believe that it can, and must, be improved. The many failures of the system, which are all too familiar to those involved in the ‘aid business’ should more frequently be the subject of open debate. My purpose in this book is to contribute to such a debate – critically, but, I hope, constructively.

Foreign aid consists essentially in the people of one country providing assistance to the people of another country, each being represented by an agency.¹ It is a rather curious phenomenon which can be traced back, in its present form, only 20 or 30 years – to the period of the Cold War and the emergence of a sudden rash of independent nations. As I shall explain in Chapter 4, the reasons why aid is given are numerous and confused. To some extent aid is intended to benefit the people of the donor country rather than the recipients, and the donor exercises leverage so as to induce the recipient to act in certain ways favourable to the donor’s own interest. In addition, the donor country does not always trust the recipient agency to act in the best interests of the people it represents – whether through incompetence or self-seeking – and may therefore try to exercise another form of leverage in order to control or influence the recipient country’s actions.

The nature of the aid process is to a large extent determined by the need of the donor to exercise such leverage. But also of importance, both to the nature and the outcome of the aid process, are the concerns of all the various parties involved: the civil servants and politicians of donor and recipient countries, the contractors, consultants and advisers. The pursuance of their interests may not result in the best outcome for the intended beneficiaries of aid, so that the flow of aid is still further diverted from its optimal path.

In this introductory chapter I will focus attention on two particular issues which exemplify much that is wrong with the present practice. These are so commonplace in the experience of aid donors as to frequently escape mention. Yet they are of crucial significance, and, to the uninitiated, may appear almost incredible. The first is the fact that although the volume of aid provided is manifestly insufficient to make a major impact on development, one of the biggest problems facing donor agencies is how to spend the little money they are allocated. (This is known in the jargon as a problem of ‘absorptive capacity’.) The second, related to the first, is the fact that a major criterion of success of an aid agency is simply its ability to get money spent. These two facts alone should be sufficient to induce aid donors to look very critically at the way in which they give aid, and to wonder whether it can possibly be correct. In view of the importance of these two points I must elaborate further on them.

There is ample evidence that aid agencies find it difficult to spend their budgets. First, there are continual complaints by donors that they cannot identify enough projects; secondly, the projects proposed by recipients are often ‘too small’ for funding agencies; and thirdly, some donors actively encourage recipients to spend money more quickly.

Reports of aid agencies often refer to the problem of absorptive capacity, and various measures are recommended for alleviating it. The Brandt Commission, for example, propose ‘more purposeful technical assistance to identify, prepare and implement projects, and to help operate plants and installations already established’.² To the outsider, however, the very concept is remarkable – that a major problem in development aid is to get the money spent.

Further evidence of the same point is the keen competition which arises.between different aid agencies seeking good projects in the same country. I have witnessed missions representing two bilateral agencies in hot competition for a particularly desirable water supply project. A similar situation arises within the UN system. As the Jackson Report suggests: ‘what exists today is “inter-agency rivalry” for projects”.³

Finally I would refer to the common practice among aid donors of ‘ventriloquising’ aid requests from prospective recipients i.e. encouraging them to ask for specific projects of the donor’s choosing. AgŖin the Jackson Report provides a relevant quotation: ‘At present the greatest difficulty lies in the fact that far too many project requests are drafted by agency salesmen.’⁴

The fact that projects proposed by countries are often regarded as too small is more difficult to document since such views are generally only expressed in the preliminary meeting with aid missions, or exchanges of letters about specific project requests. But in view of the high fixed cost of organising an appraisal mission, writing reports, drafting agreements, etc., not to mention the time involved, it is not surprising that donor agencies often prefer to consider one large project, or at least a ‘project package’ rather than a number of small ones.

The third point, that donors actively encourage recipients to spend money faster, is demonstrated by two facts. The first is that donors such as the World Bank draw up detailed timetables for project implementation, failure to adhere to which can lead to delays in further disbursement of funds. The second is that donors often include technical assistance components in their projects in order to ensure rapid and efficient implementation. The quotation from the Brandt Report confirms this point.

All this is not necessarily foolish, but it certainly appears paradoxical. Such contradictions are indicative of the shortcomings of the present system – which will become more manifest in Chapter 4, which is concerned with the practical problems of aid.

The second issue to which I drew attention is the tendency for aid programmes to be judged largely by their ability to use money quickly. In view of the difficulty of getting funds spent, which I have just described, this is perhaps not surprising. But there is another factor of importance. This is the lack of appropriate criteria for judging performance. How is one to compare the benefits of a project which resulted in the construction of a new road, with another to reduce pest damage to crops, a third which built cattle dips and a fourth which provided educational advisers? In the first case it may be possible to both estimate and evaluate the benefits – although this would not be easy. In the second case one might, perhaps, be able to estimate the number of birds killed and value the crops saved. In the third case the number of dips built could easily be measured – but what if they are not used, or the dip fluid is not available? And in the fourth case the problem of evaluation is insoluble.

In such circumstances it is not surprising that money – the only element that is invariably quantifiable (and also common to all projects) – acquires a disproportionate significance as a measure of performance. Donor agencies, therefore, find that their standards are assessed largely in terms of their ability to spend money, and that one of their biggest problems is to find suitable ways of using the budget they are allocated.

This creates an environment conducive to cynicism and wastage. Yet there are many people involved in aid who are well intentioned and genuinely concerned to improve the lot of the inhabitants of developing countries. These people gradually become disillusioned with aid – not generally because they come to doubt the purity of the motives behind it, nor because they find themselves surrounded by fools and villains, but because however hard they try, and however desirable may be their objectives, the structure within which they operate, and the rules which govern and restrict them, seem to distort and nullify their actions. Some leave the aid business, some remain and enjoy the material benefits that it provides. Most are disenchanted and bemoan the fact that aid so seldom achieves what is expected of it. My hope in this book is that some of those who are disenchanted may be encouraged to look again, more critically and analytically, at what is wrong with aid, and to realise that little can be done without radically changing the way in which the process works.

Notes

1. Unless otherwise stated, and in particular in reference to statistical data, I adopt the definition of aid used by the Developmen Assistance Committee of the OECD:

The word ‘aid’ or ‘asssistance’ refers only to flows which qualify as ‘official development assistance’ (ODA) i.e. grants or loans:

undertaken by the official sector;

with promotion of economic development and welfare as main objectives;

at concessional financial terms (if a loan, at least 25 per cent grant element).

In addition to financial flows, technical co-operation is included in aid. It comprises grants (and a very small volume of loans) to nationals of developing countries receiving education or training at home or abroad, and to defray the costs of teachers, administrators, advisers and similar personnel serving in developing countries.

Development Co-operation, DAC Review 1979 (OECD, Paris, 1979).

2. North-South: A Programme for Survival, Report for the Independent Commission on International Development Issues (Pan Books, London, 1980).

3. United Nations, A Study of the Capacity of the United Nations Development System (UN, Geneva, 1969).

4. Ibid.

2 THE AID PROCESS

Introduction

In this chapter I shall summarise the nature of the aid process as it currently operates, and demonstrate the extent to which the ‘rules of the game’ are determined by the aid donors.

Before beginning, let us consider what the aid process could or should be like. It must be such as to allow resources to flow from one group of people, represented by an agency, to another group of people, also represented by an agency. In such a process there are a number of decisions to be taken which may be summarised as follows: How much aid in total is to be provided, what is to be the share of each recipient country, and to what uses will the resources be put in each case? The aid process should obviously be such as to ensure that the outcome of these decisions leads to an efficient and equitable allocation. What this means in practice is difficult to say since despite the hopes of economists such a judgement is largely subjective.

In some cases the problem of how to assess and compare the relative needs of prospective recipients hardly arises. Where aid is provided as a quid pro quo, the precise use to which it is put is not of major significance to the donor. Ironically, the recipient government is then allowed a fairly free hand in deciding how it will be spent. But what of the aid which is actually intended to benefit the recipients?

It used to be thought that the answer to the allocation problem lay in cost-benefit analysis. Armies of economists would prepare and appraise ‘shelves’ of projects for each sector in every country. All those with high rates of return (above a certain minimum threshold) would be financed. Experience has shown that the necessary armies do not exist, and the shelves are therefore empty. It has also cast doubt on whether such a method would work even if it were applied, since there is more to the effective use of foreign aid than rate of return calculations.

Yet some of the legend lingers on. There is a view that the answer to many of the problems of foreign aid lies simply in increasing sophistication: more and better planning, project preparation and appraisal. Factors other than technical and economic are understood as important – but the solution in all cases is seen as more experts and more studies. Running counter to this is a desire that recipient countries should become more self-sufficient, and that the role of the aid donors should be to support rather than to replace them in their efforts to achieve development. The rather unhappy compromise that has resulted is that recipients have the appearance of taking many of the decisions, while in practice the donors retain considerable control, by means of a complex set of procedures and regulations. It appears that, in the final analysis, donors are not prepared to transfer full control over the allocation of aid resources from themselves to the recipients. They seek to exert influence, as I shall show in Chapter 3, over most stages of the decision-making process.

Obviously the precise nature of the aid process varies between different agencies, and what I shall now describe is not of universal application. In particular, it is important to distinguish between bilateral and multilateral donor agencies in some parts of the process. Apart from this, however, there is sufficient uniformity for the description that follows to be generally applicable.

The first point to note is that aid does not ‘flow’ but rather consists of a number of discrete ‘lumps’. It is sometimes the case that countries receive general budgetary support on a periodic basis, but more commonly resources have to be earmarked for specific programmes or projects. The process of allocating resources to these projects and programmes involves three decisions: what is to be the total volume of aid; how is this to be shared between recipient countries; and to what use will the aid be put?

The Total Volume of Aid

The total volume of aid to be provided is decided by the governments of the donor countries. Their decisions will be influenced mainly by the current state of the economy, the international climate of opinion amongst donors, and the relative power of the ministerresponsible for aid. Prospective recipients, as a group, have little power to increase the amount. The statistics in Appendix 1 show how much different donors give, expressed as a pe...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Preface
• 1. Introduction
• 2. The Aid Process
• 3. Leverage
• 4. Motives and Interests
• 5. The Problems of Foreign Aid
• 6. Alternatives
• 7. Conclusion
• Statistical Appendix
• Index