Foreign Aid: Overview.

Introduction

According to World Bank statistics, 25 percent of the world’s population lives in extreme poverty, while another 25 percent lives in moderate poverty. Most of this poverty is concentrated in developing countries. One obstacle to alleviating poverty is the enormous external debt that these countries have incurred, mainly to rich, industrialized nations, commercial banks, and international lending institutions.

The eradication of extreme poverty has become an increasingly well-publicized topic in the twenty-first century, but economists and policymakers are divided on how to approach the problem. Many have focused on relieving debt in developing countries and have noted the link between debt burden and social instability. In the late twentieth century, several strategies were implemented to achieve this goal. Market-based solutions included giving new massive loans to economically troubled countries, based on their willingness to carry out pro-market structural adjustments, in the hopes of stimulating the economies so that the debts could be repaid according to a revised schedule. Other solutions encouraged private commercial banks to implement schemes of debt-buyback and debt forgiveness, which could include offsetting losses with tax revenues.

Critics of organizations like the International Monetary Fund (IMF) and the World Bank Group have argued that, contrary to assisting poor countries, the imposed structural adjustments and lending system have only exacerbated their hardship. Private creditors have also been criticized for undertaking debt relief schemes that benefit them more than the indebted countries. In order for impoverished countries to begin developing sustainable economies and take care of their population’s welfare, critics argue, they must first be freed of debt.

Cancellation of debt, especially for the most heavily indebted poor countries, has thus become a high-profile issue. Supporters argue that these countries have been historically exploited by rich, industrialized countries, emphasizing the moral responsibility to encourage poverty reduction. These measures are, however, controversial. Not only are creditors reluctant to lose money, they argue that cancellation discourages much-needed economic reforms.

Understanding the Discussion

Capital flight: The flow of revenue from a country because of an unstable investment climate and investor fears, or for illegal profit.

Debt: Money or another form of payment that is owed.

Heavily Indebted Poor Countries (HIPCs): A group of countries in Africa, Latin America, and Asia that have incurred high levels of debt to wealthy nations.

International Monetary Fund (IMF): An organization that monitors the international financial system. Its agenda includes the fostering of international trade, poverty reduction, stability in world markets, and sustainable economic growth. Once structural adjustments are undertaken, the IMF frequently provides economically troubled countries with large loans.

Odious debt: Debt incurred by a government during a period of time that the government was not representative of its people. Once the government falls, the debt remains as a burden on the population.

Structural adjustment: Changes made to an economy in order to repay debt.

History

Large-scale foreign aid assistance has its roots in the post–World War II period. Programs such as the European Recovery Plan (also known as the Marshall Plan) were implemented, and institutions such as the IMF and the World Bank were formed. Richer countries also began paying greater attention to the effects of poverty and the means to alleviate it. At this stage, some economists and policymakers believed that such advances would enable rich countries to assist poor countries and make for a more secure world; others foresaw that they would continue the exploitation that began with the colonial era and that the gap between rich and poor countries would enlarge.

The level of foreign debt reached crisis proportions in the 1980s. In the previous decade, markets around the world were shaken by inflation, high-interest rates, falling commodity prices, and a spike in world oil prices; oil-rich countries benefited from the situation while poor and middle-income countries found fewer markets for their exports. These countries, already suffering from varying degrees of economic stagnation, then had to rely more heavily on international loans.

In a contradiction to the traditional wisdom that loans to governments bring dependable returns, Mexico announced to the IMF and the United States in 1982 that, unable to either meet its repayment schedule or take out further loans, it was effectively bankrupt. Other countries followed suit. These crises were not solely caused by international factors, since the countries themselves often bore some responsibility for economic mismanagement. The embezzlement of loans and subsequent capital flight, as well as government misspending on projects that failed to stimulate the economy, were both serious problems.

It was during these crises that the IMF became a central player in international debt financing. In order to secure further loans, the afflicted countries had to submit to structural readjustments of their economies as dictated by the lending organizations. The terms of these arrangements further deepened the crisis, yet the countries had little choice but to accept them; the risks, including causing international isolation and being shunned by loaning agencies in the future, were too high.

Structural adjustments that countries were forced to make included currency devaluation, taxation or blocking of imports, and tax raises. One effect was that richer countries were able to buy up finished products and natural resources at reduced rates, and international markets were glutted with a surplus of products whose value had decreased. Moreover, many government-owned industries in the afflicted countries were privatized, often to foreign investors.

Critics of this method of dealing with debt have noted that it allows rich countries to exert too much influence over poor countries, and not only in the economic sphere. Having to focus on debt repayment, poor countries were forced to make cuts in essential services such as health care, food subsidies, and education, and these policies in turn contributed to the population’s impoverishment.

Another problem came in the form of loans given to countries ruled by totalitarian regimes. Typically, these regimes mishandled the funds, yet when they fell from power, the debt became a burden on the population. The doctrine of odious debts, as delineated in 1927 by legal scholar Alexander Sack, states that such debts should be cancelled because they were not used for the benefit of the population. According to the doctrine, lenders are negligent if they loan to corrupt regimes.

The inability of countries to pay their debts in turn threatened the financial solvency of banks. Since initial strategies were failing to alleviate debt, new ones were worked out in the late 1980s so that the countries could repay their debts through international loaning agencies directly to the banks. Such a strategy has become known as the Brady Plan, named for US treasury secretary Nicholas F. Brady. Its other principles included an insistence on structural adjustments and provisions for a range of options for refinancing. The plan is widely considered as successful for the banks, far less so for the impoverished countries, and creditors were criticized for bearing too little burden for the effects of their bad loans.

Foreign Aid Today

Creditors naturally want returns on their investments. Impoverished countries want financial assistance that does not only benefit creditors; being deeply in debt, they argue, stifles any hope for their economies to recover. In the late 1990s and early 2000s, initiatives to cancel debts without any reciprocal demands on the impoverished countries gained ascendancy. These efforts have been brought to wider public attention by celebrities such as Bono, the lead singer of the band U2.

Debt cancellation, many economists, policymakers, and nongovernmental organizations (NGOs) have argued, is the only way to break the vicious cycle of debt and give the most heavily indebted countries the opportunity to develop economies that can be integrated into the global market on terms amenable to both the countries and the markets. A situation in which impoverished countries pay four times as much in debt repayment as they do in health care, for example, is morally unacceptable according to this viewpoint.

These critics note that creditors should not only shoulder some responsibility for their bad loans, but also take the long view that establishes a link between economic amelioration and social development. In this perspective, it has been suggested that poverty eradication may, in fact, eliminate or at least significantly reduce threats to world security from terrorism and that debt cancellation has a role to play in this scheme. Creditors have expressed reluctance to lose money and are concerned that impoverished countries that mismanage their funds will again request debt cancellation in the future. Proponents of debt cancellation, however, have argued that it would occur only once.

Some creditors have taken up the long view on a larger scale than ever before. In 2005, the G8, a group of eight industrialized countries, pledged to cancel billions of dollars in debt. The IMF approved the move, and the following year Norway cancelled the debt of five countries. Many view these developments as a step toward the eradication of poverty.

In President Barack Obama’s fiscal budget for 2013, approximately 1 percent of all spending, or $56 billion, was set aside for foreign aid. This was a slight improvement from 2012, which allocated $49 billion for foreign aid. This 1 percent, however, did not include military assistance, such as helping Iraq and Afghanistan train their militaries and develop weapons, which accounted for $14 billion of the federal budget. According to data assessed from the 2012 Congressional Research Service Report, African countries received considerable financial aid from the United States. Tanzania received $531 million, Nigeria received $625 million, and Egypt was given $1.5 billion. But countries in the Middle East received the most foreign aid: Iraq with $1.6 billion; Pakistan with $2.1 billion; and Afghanistan with $2.3 billion. Israel was the top recipient with more than $3 billion.

Another major goal of foreign aid in the twenty-first century was targeted to fighting global climate change. Policymakers sought to help developing countries tackle climate change and achieve global economic growth goals in sustainable ways. According to the Center for Global Development, between 2015 and 2019, the US provided $10.5 billion of funding for climate change adaptation activities (those that help populations understand and manage the impacts of climate change) and mitigation activities (those that work to limit emissions levels and thus lessen greenhouse gasses). The majority of that funding was preserved for lower-income countries, with Sub-Saharan Africa receiving the largest share.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

Books Green, Duncan. From Poverty to Power: How Active Citizens and Effective States Can Change the World. 2nd rev. ed. Practical Action, 2012.

Hogan, Tori. Beyond Good Intentions: A Journey into the Realities of International Aid. Seal, 2012.

Sachs, Jeffrey. Common Wealth: Economics for a Crowded Planet. Penguin, 2008.

Stedman Jones, Gareth. An End to Poverty? A Historical Debate. Columbia UP, 2012.

Periodicals Blattman, Christopher. “Show Them the Money.” Foreign Affairs 93.3 (2014): 117–26.

De Rugy, Veronique. “Foreign Aid Is a Failure.” Reason 46.8 (2015): 14. Points of View Reference Center. Web. 10 Nov. 2015.

Dearden, Nick. “All Together Now!” New Internationalist 464 (2013): 24. Points of View Reference Center. Web. 10 Nov. 2015.

Dervis, Kemal. “Sovereignty, Multilateralism, and Reform: International Cooperation in the Post-Crisis World.” Brown Journal of World Affairs. 16.2 (2010): 213–17. Academic Search Complete.

Dietrich, Simone. “Bypass or Engage? Explaining Donor Delivery Tactics in Foreign Aid Allocation.” International Studies Quarterly 57.4 (2013): 698–712. Academic Search Complete. Web. 11 Mar. 2014.

Hoar, William P. “Foreign Handouts: More Harm Than Good.” New American 26.4 (2010): 41–43. Academic Search Complete.

Hobbes, Michael. “How to Save the World.” New Republic 245.19 (2014): 52–61.

Levins, Richard. “Why Programs Fail.” Monthly Review: An Independent Socialist Magazine. Mar. 2010: 43–49. Academic Search Complete.

Mawdsley, Emma, Laura Savage, and Sung-Mi Kim. “A ‘Post-Aid World’? Paradigm Shift in Foreign Aid and Development Cooperation at the 2011 Busan High Level Forum.” Geographical Journal 180.1 (2014): 27–38. Academic Search Complete. Web. 11 Mar. 2014.

Rose, Sarah, and Jocilyn Estes. "The Role of US Aid in Tackling Climate Change: Context and Questions for USAID and MCC." Center for Global Development, 15 July 2021, www.cgdev.org/publication/role-us-aid-tackling-climate-change-context-and-questions-usaid-and-mcc. Accessed 30 May 2024.

Saltmarsh, Matthew. “More Clout at I.M.F. Seen for Developing Economies.” New York Times. 18 Sept. 2010: 8. Academic Search Complete.

Vance, Laurence M. “EXPORTING Welfare.” New American 30.15 (2014): 25. Points of View Reference Center. Web. 10 Nov. 2015.