Foreign Aid Pros Cons Essay

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Presumably growth-killing policies benefit the politicians who implement and maintain them; otherwise, they would not exist.

To answer this question, we need to turn to the study of political institutions.

The fifth section concludes with recommendations for both developed and less developed countries.

Foreign Aid and Economic Development Publicly funded foreign aid is offered in two forms: direct grants-in-aid and loans.

In only one country (Israel) has development aid had the intended effects on growth.

Defenders of aid, such as Jeffrey Sachs[5] and Steve Radelet,[6] point to specific successful projects in which aid was a component.Easterly’s argument suffers from the economist’s tendency to exogenize the state, to assume that government actors are beyond the mechanisms of maximization that drive market actors.By contrast, this paper presents a political economy model of foreign aid and argues that both humanitarian aid and multilateral structural adjustment and development assistance through the International Monetary Fund (IMF) and World Bank have actually been designed to fail in their ostensible aims: if they were to be reformed along the lines Easterly suggests, they would lose their political raison d’être.Grants typically address imminent humanitarian needs such as famine and disaster relief, public health, and housing.The IMF and World Bank, which are principally funded by the G-7 developed countries, theoretically have different functions – promoting international financial stability and economic development projects, respectively – but since the collapse of the Bretton-Woods international monetary system in 1973, the IMF has broadened its mandate to cover any kind of assistance for governments trying to reform their economies (what the IMF calls ‘structural adjustment’).Institutions can constrain politicians and provide them the incentives to pursue growth-enhancing policies.Competitive elections generally place a constraint on the most ravenous, destructive kinds of rent-seeking, and Milner and Kubota have found that among developing countries, democracies are more likely than authoritarian regimes, particularly military regimes and personalist dictatorships, to liberalize trade.[32] Barro finds an ‘upside-down U-shaped’ relationship between ‘level of democracy’ and growth and, echoing the concerns of classical liberals such as Lord Acton about universal suffrage, infers that overly inclusive political systems can be bogged down with redistributive interest-group politics.[33] The real issue is whether institutions constrain politicians so that there is a credible commitment to maintaining private property rights and free markets.[34] Political systems that give market-friendly constituencies effective veto power over future policy proposals help to establish credibility, because entrepreneurs then believe that they can make long-term investments without much risk of future expropriation.Branko Milanovic argued that loans through the IMF and World Bank should not be considered ‘aid’ since they have to be repaid,[4] but this argument ignores the fact that these loans are offered at interest rates substantially below market – otherwise, governments would have no reason to accept them, given the policy strings attached (known as ‘conditionality’).Grants-in-aid are largely conducted bilaterally, government-to-government, or through United Nations agencies.According to UN Food and Agriculture Organization Director-General Jacques Diouf, ‘ Most food aid is donated on condition that it be purchased and processed in, and shipped from, donor countries, even when adequate supplies are available in the region where it is needed.’[16] The United States government, for instance, requires that all food aid be transported on U. Additionally, food aid can sometimes harm those it is intended to help, as when UN food giveaways in Mogadishu, Somalia in 1993 went chiefly to the warlords and harmed the destitute and persecuted Rahanweyn farmers, who then could not sell their own produce.[17] The second type of political consideration involved in aid lies in the realm of international diplomacy (‘high politics’). As Bhagwati notes, multinationals attracted by subsidies generally add little value.[26] Studies of American states have shown that tax breaks and subsidies do not generate positive externalities and may not even make a difference in businesses’ location decisions.[27] What can governments in developing countries do, then, to attract FDI and to speed up technological change in domestic industry?The real question is, What should these governments not do?


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