Foreign aid is usually associated with official development assistance, which in turn is a subset of the official development finance, and normally targeted to the poorest countries (World Bank, 1998). Foreign aid represents an important source of finance in most countries in sub-Saharan Africa (SSA), where it supplements low savings, narrow export earnings and thin tax bases. In recent years the donor community has become more stringent about fiscal discipline and good policies, which has led to freezing of donor funds to governments that do not conform with aid conditionalities.
The Kenyan government has experienced such aid cuts in the past. 1. 1 Definition The standard definition of foreign aid comes from the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), which defines foreign aid (or the equivalent term, foreign assistance) as financial flows, technical assistance, and commodities that are (1) designed to promote economic development and welfare as their main objective (thus excluding aid for military or other non-development purposes); and (2) are provided as either grants or subsidized loans.
Foreign aid is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country. It may have other functions as well: it may be given as a signal of diplomatic approval, or to strengthen a military ally, to reward a government for behaviour desired by the donor, to extend the donor’s cultural influence, to provide infrastructure needed by the donor for resource extraction from the recipient country, or to gain other kinds of commercial access.
Humanitarianism and altruism are, nevertheless, significant motivations for the giving of aid. Aid may be given by individuals, private organizations, or governments. Standards delimiting exactly the kinds of transfers that count as aid vary. For example, aid figures may or may not include transfers for military use: to cite one instance, the United States included military assistance in its aid figure until 1957 but no longer does. Another issue is whether to count remittances by expatriate workers to family members in their home countries as aid.
This constitutes a large but difficult to measure international flow of funds. Loans and grants are also forms of foreign aid. Foreign Aid also refers to any money or resources that are transferred from one country to another without expecting full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% or more.
It does not include commercial or non-concessional loans, private foreign direct investment such as inward investment by multilateral corporations, nor does it include preferential tariff reductions offered by MDCs to LDCs enabling them easy access for their exports into the markets of the MDCs. 1. 2 About Foreign Aid Official organizations and those scholars who are primarily concerned with government policy issues frequently include only government-sourced aid in their aid figures, omitting aid from private sources. The most widely used measure of aid, “Official Development Assistance” (ODA) is such a figure.
It is compiled by the Development Assistance Committee of the Organization for Economic Co-operation and Development. The United Nations, the World Bank, and many scholars use the DAC’s ODA figure as their main aid figure because it is easily available and reasonably consistently calculated over time and between countries. The DAC consists of 22 of the wealthiest Western industrialized countries plus the E. U. ; it is a forum in which they coordinate their aid policies. Aid works well in a good policy environment and a poor country with good policy should get more aid, which is not always the case in reality.
A well-designed aid plan can support effective institutions and governance by providing more knowledge and transferring technology and skills. It is recommended to decentralize the aid flows in recipient countries. Money aid is important but idea aid is even more important. Aid can be the midwife of good policy in recipient countries. In poor-policy countries, idea aid is especially more essential than money aid. This implies that in a good-policy environment, aid increases growth via the investment channel whereas in a poor-policy environment, it nurtures the reforms through policymakers training or knowledge and technology transfer.
These non-money effects are believed even more important and viable than the money value of aid. Aid works much better where the reform is initiated or internalized by local government rather than when it is imposed by outsiders. Therefore, aid is normally more effective when it facilitates efficiently and timely reforms triggered by the local authority (World Bank, 1998). Foreign aid or (development assistance) is often regarded as being too much, or wasted on corrupt recipient governments despite any good intentions from donor countries.
In reality, both the quantity and quality of aid have been poor and donor nations have not been held to account. In 1970, the world’s rich countries agreed to give 0. 7% of their gross national income as official international development aid, annually. Since that time, despite billions given each year, rich nations have rarely met their actual promised targets. For example, the US is often the largest donor in dollar terms, but ranks amongst the lowest in terms of meeting the stated 0. 7% target.
Furthermore, aid has often come with a price of its own for the developing nations: • Aid is often wasted on conditions that the recipient must use overpriced goods and services from donor countries • Most aid does not actually go to the poorest who would need it the most • Aid amounts are dwarfed by rich country protectionism that denies market access for poor country products, while rich nations use aid as a lever to open poor country markets to their products • Large projects or massive grand strategies often fail to help the vulnerable; money can often be embezzled away.
Developing countries share the following common characteristics (i) low standards of living, characterized by low incomes, large inequality, poor health, and inadequate education (ii) low levels of productivity (iii) high rate of population growth and dependency burdens (iv) substantial dependence on agricultural production and primary-product export (v) prevalence of imperfect market and limited information and (vi) subordination, dependence nd vulnerability in international relations (Todaro and Smith, 2003). 1. 3 Types of Foreign Aid Aid may be “given” in the form of financial grants or loans, or in the form of materials, labor, or expertise. Aid is often pledged at one point in time, but disbursements (financial transfers) might not arrive until later. Grants and subsidized loans are referred to as concessional financing, whereas loans that carry market or near-market terms (and therefore are not foreign aid) are non-concessional financing. According to the DAC, a loan counts as aid if it has a “grant element” of 25 percent or more, meaning that the present value of the loan must be at least 25 percent below the present value of a comparable loan at market interest rates (usually assumed by the DAC – rather arbitrarily — to be 10 percent with no grace period). Thus, the grant element is zero for a loan carrying a 10 percent interest rate, 100 percent for an outright grant, and something in-between for other loans. 1. 3. 1 Humanitarian aid
Humanitarian aid or emergency aid is rapid assistance given to people in immediate distress by individuals, organizations, or governments to relieve suffering, during and after man-made emergencies (like wars) and natural disasters. The term often carries an international connotation, but this is not always the case. It is often distinguished from development aid by being focused on relieving suffering caused by natural disaster or conflict, rather than removing the root causes of poverty or vulnerability.
The provision of humanitarian aid or humanitarian response consists of the provision of vital services (such as food aid to prevent starvation) by aid agencies, and the provision of funding or in-kind services (like logistics or transport), usually through aid agencies or the government of the affected country. Humanitarian aid is distinguished from humanitarian intervention, which involves armed forces protecting civilians from violent oppression or genocide by state-supported actors. 1. 3. 2 Development Aid Development aid is aid given by developed countries to support development in eneral which can be economic development or social development in developing countries. It is distinguished from humanitarian aid as being aimed at alleviating poverty in the long term, rather than alleviating suffering in the short term. Official Development Assistance (ODA), mentioned above, is a commonly used measure of developmental aid. Development aid is given by governments through individual countries’ international aid agencies and through multilateral institutions such as the World Bank, and by individuals through development charities such as Action Aid, Caritas, Care International or Oxfam. 1. . 3 Specific types • Project aid: Aid is given for a specific purpose e. g. building materials for a new school. • Programme aid: Aid is given for a specific sector e. g. funding of the education sector of a country. •
Budget support: A form of Programme Aid that is directly channeled into the financial system of the recipient country. • Sector-wide Approaches (SWAPs): A combination of Project aid and Programme aid/Budget Support e. g. support for the education sector in a country will include both funding of education projects (like school buildings) and provide funds to maintain them (like school books). Food aid: Food is given to countries in urgent need of food supplies, especially if they have just experienced a natural disaster. Food aid can be provided by importing food from the donor, buying food locally, or providing cash. • Untied Aid: The country receiving the aid can spend the money as they choose. • Tied aid: The aid must be used to purchase products from the country that donated it or a specified group of countries. A considerable amount of foreign aid is tied aid. Here the grants or concessionary loans have conditions laid down by the donor country about how the money should be used.
Tied aid by source means that the recipient country receiving the aid must spend it on the exports of the donor country. Tied aid by project means that the donor country requires the recipient country to spend it on a specific project such a road or a dam. Often this might be to the commercial or economic benefit of the firms in the donor country. For example their engineers might be the designers of the project. • Technical assistance: Educated personnel, such as doctors are moved into developing countries to assist with a program of development.
Can be both programme and project aid. • Bilateral vs. Multilateral: bilateral aid is given by one country directly to another; multilateral aid is given through the intermediacy of an international organization, such as the World Bank, which pools donations from several countries’ governments and then distributes them to the recipients. 1. 4 Who Gives Aid, and Who Receives It? Historically most aid has been given as bilateral assistance directly from one country to another. Donors also provide aid indirectly as multilateral assistance, which pools resources together from many donors.
The major multilateral institutions include the World Bank; the International Monetary Fund; the African, Asian, and Inter-American Development Banks, and various United Nations agencies such as the United Nations Development Programme. Aid is typically measured in one of three ways: total dollars, as a share of GDP, or per capita. Each measure reveals different things. Total dollar amounts clearly are important, but they do not tell the entire story. Aid measured as a share of GDP indicates its size relative to the entire economy, and is perhaps the most common measure.
But it can be misleading since a high ratio can be indicative of low GDP or a large amount of aid. The amount of aid needed to immunize 1 million children can look like a large share of GDP in a poor country and a small share of GDP in a richer country, when the amount per child might be roughly the same. Aid is one of the largest components of foreign capital flows to low-income countries, but not to most middle-income countries, where private capital flows are more important. Aid flows averaged 2. 8 percent of GDP in low-income countries in 2004, but just 0. 2 percent of GDP in upper-middle-income countries.
It is commonly claimed that the decline in aid flows to developing countries in the 1990s was more than offset by a rise in private capital. While this is true for developing countries in aggregate, the rise in private capital flows was heavily concentrated in a handful of middle income countries. In low-income countries, private capital rose much more slowly, and remained significantly smaller than aid. 1. 5Why Receive Foreign Aid Many people see the main rationale for aid as fighting poverty, and although this is less important than political considerations in donor allocation decisions, it still plays an important role.
Donors generally provide their most concessional aid to the poorest countries, and some aid programs are designed explicitly with this objective in mind. Country size matters as well. Large countries, such as Bangladesh, Indonesia, Nigeria, and Pakistan receive relatively small amounts of aid on a per capita basis, even though hundreds of millions of people live in poverty in these countries. By contrast, some small countries receive very large amounts. For political reasons, donors generally want to influence as many countries as possible, which tends to lead to a disproportionate amount of aid going to small countries.
Bilateral aid is often designed at least partially to help support the economic interests of certain firms or sectors in the donor country. Multilateral aid is less prone to these pressures, although by no means immune. Many donors “tie” portions of their aid by requiring that certain goods and services be purchased from firms in the donor’s home country, or that it be used for specific purposes that support groups in the donor countries (such as universities or business consulting firms). Automobiles, airline tickets, and consulting services financed by U.
S. foreign aid in most cases must be purchased from U. S. firms. Tying aid can give it more political support at home, but it can also make it more costly and less effective. If funds must be spent in the donor country, it reduces competition for services so that donors do not always use the least cost provider. 1. 6Objectives of Foreign Aid Most foreign aid is designed to meet one or more of four broad economic and development objectives: (1) To stimulate economic growth through building infrastructure, supporting productive sectors such as agriculture, or ringing new ideas and technologies, (2) To strengthen education, health, environmental, or political systems, (3) To support subsistence consumption of food and other commodities, especially during relief operations or humanitarian crises, (4) To help stabilize an economy following economic shocks. Despite these broader objectives for aid, economic growth has always been the main yardstick used to judge aid’s effectiveness, with more aid expected to lead to faster growth. But at a very broad level, there is no apparent simple relationship between aid and growth, as shown in Figure 2.
Some countries that have received large amounts of aid have recorded rapid growth, while others have recorded slow or even negative growth. At the same time, some countries that have received very little aid have done very well, while others have not. 2. 0 Effects of Foreign Aid in Kenya Though foreign aid has continued to play an important role in developing countries, especially sub-Sahara Africa, it is interesting to note that after half a century of channelling resources to the Third World, little development has taken place.
In almost all of sub-Saharan Africa there is a high degree of indebtedness, high unemployment, absolute poverty and poor economic performance. The average per capita income in the region has fallen since 1970 despite the high aid flows. This scenario has prompted aid donor agencies and experts to revisit the earlier discussions on the effectiveness of foreign aid (Lancaster, 1999). Kenya, having become highly dependent on foreign aid, faces huge foreign debts and cry out for debt relief—and more aid.
Between 1970 and 1999, the flow of donor funds to Kenya averaged about 9% of GDP, accounting for about 20% of the annual government budget and financing slightly over 80% of development expenditures. Though aid flow to Kenya significantly increased over time (from an annual average of US$205 million in 1970s to slightly over US$1 billion in the 1990s before the standoffs with the donor community) the flow has not been smooth. Kenya has experienced two major donor aid freezes, in 1992 and 1997, and a minor aid suspension in 1982. It s interesting to find out how the government responded to these fluctuations in aid flows. 2. 1 Major Donors in Kenya Kenya was, the first Sub-Saharan African country to receive structural adjustment funding from the World Bank. Aid to Kenya has increased steadily since the 1960s, with bilateral donors being the key sources of funding (mainly project aid and technical assistance) in the 1960s and 1970s. The UK was the major source of foreign aid to Kenya until the 1980s, when Germany, the Netherlands, Sweden, Denmark, Japan and others significantly increased their contribution.
Japan has since become a major bilateral donor to Kenya. Since the 1980s, however, multilateral sources have increased in importance with a shift of emphasis from project aid to programme aid. The major donors now include the World Bank, the International Monetary Fund (IMF), European Economic Community (EEC), OECD/DAC among other multilateral sources. The government’s attempts to finance fiscal deficit rely heavily on the budgetary support programme and other loan facilities offered by the multilateral agencies. . 2 Foreign Aid Freeze Despite being among the first African countries to receive structural adjustment funding from the World Bank and later the Enhanced Structural Adjustment Facility (ESAF) loan from the IMF, Kenya has experienced major standoffs with the donor community, which has sometimes led to aid freezes. The disbursement of most foreign aid funds has been short-lived as the donors often find themselves dissatisfied with the way the government implements aid conditionalities.
As early as July 1982, the World Bank withheld the release of the second tranche of US$50 million, citing laxity in policy reforms; the Bank did not resume funding until 1984 when new agreements were drawn. The renewal of disbursements was partly attributable to the humanitarian gesture of providing large volumes of food aid in response to the devastating drought that year. Although major donors withheld their funds to Kenya after November 1991, aid or ongoing projects, technical assistance and emergency relief (humanitarian aid) from other donor agencies continued to flow as before (except the Norway Development Agency, which froze all aid). The flow of foreign aid resumed in late 1993 after a series of meetings with the donor community and serious lobbying with ambassadors of bilateral development partners. After three years of successful implementation of donor conditions, which led to more donor funds being released, the economy registered tremendous economic recovery.
Unfortunately, the government backtracked again on its reform agenda at the end of the fiscal year 1996/97 and a new standoff with the donor community loomed. As a result, at a Consultative Group meeting between officials from the government of Kenya and the IMF/World Bank held in July 1997, the IMF suspended the ESAF programme amounting to about US$200 million. The World Bank and the African Development Bank also withheld their budget support programme loans. This negatively affected the government’s fiscal performance of 1997/98.
The interest rates on Treasury Bills drastically increased, from about 18% to around 27%, as the government increased its domestic borrowing, which resulted in interest payments increasing by 45% compared with the budget estimates. The government implemented fiscal control measures in March 1998 that led to increased revenue receipts from the Kenya Revenue Authority and reduced expenditures on the development estimates. Though development expenditure was reduced by 24. 5%, the recurrent expenditure increased by 16% as a result of the El Nino phenomenon, unplanned salary increases for teachers and increased domestic interest rates. . 0 Conclusion Kenya, foreign assistance accelerated economic growth According to the World Bank’s 1998 report, Assessing Aid, countries with good monetary, fiscal and trade policies (i. e. , good policy environment) registered high positive effects of aid. Such good policy environments depend on the donor or recipient country, however.