“Private Investment and Other Financial Flows to Developing
Countries in the 1990s Offset the Decline in Aid.” Think Again. Official aid fell
sharply in the 1990s following the end of the Cold War, then rebounded slightly
during the last few years. According to the World Bank, the amount of private
financial flows to developing countries jumped from $55 billion to $155 billion
between 1990 and 2002. With such a massive increase in private finance, why
should we be concerned about the drop in aid?
Unfortunately, the increase in private cash was concentrated in a relatively
small number of middle-income countries but almost completely bypassed the poorest
ones. In low-income countries—defined by the World Bank as countries with
average incomes below $735 per year—levels of aid (after accounting for
loan payments) held steady between 1990 to 2002 at around $31 billion (though
the real value fell after factoring in inflation and increased population of
recipients). At the same time, non-aid loans from governments dropped from new
loans of $3 billion to net repayments of $6 billion, meaning official financial
assistance fell overall. At the same time, private capital dropped from $14
billion to $9 billion, dealing poorer countries a double whammy.
For
middle-income
countries
such
as
Brazil,
Turkey,
and
Malaysia,
a
different
picture
emerges.
Official
aid
declined
sharply
between
1990
and
2002,
from
$29
billion
to
$9
billion.
But
private
cash
swelled
from
$42
billion
to
$146
billion,
more
than
offsetting
the
decline
in
aid.
This
private
finance
was
enormously
beneficial
to
the
countries
that
received
it,
but
for
most
of
the
world’s
poorest
countries,
it
was
in
short
supply.
There
was
no
privatization
of
capital
flows
to
the
poorest
countries,
only
a
sharp
decline.
“Foreign Aid Has Actually Done Very Little to Help Development.” Wrong.
In
1947,
U.S.
Sen.
Robert
Taft
famously
described
U.S.
support
for
the
International
Monetary
Fund
as
“pouring
money
down
a
rathole.”
Former
U.S.
Sen.
Jesse
Helms
claimed
foreign
aid
only
“lined
the
pockets
of
corrupt
dictators,
while
funding
the
salaries
of
a
growing,
bloated
bureaucracy.”
A
great
deal
of
assistance
has
certainly
been
wasted
over
the
years,
particularly
aid
provided
for
political
rather
than
developmental
purposes.
Corrupt
governments
pocketed
some
of
the
funds,
while
the
United
States
and
the
Soviet
Union
showered
money
on
proxy
states
during
the
Cold
War
with
little
regard
for
how
it
was
spent.
But
aid
has
successfully
supported
development
in
many
other
countries,
such
as
South
Korea,
Taiwan,
Botswana,
and,
more
recently,
Uganda
and
Mozambique.
Although
economists
still
debate
the
evidence,
a
growing
body
of
research
links
increased
aid
with
enhanced
growth.
One
recent
study
found
that
every
dollar
in
growth-oriented
aid
added
$1.64
on
average
to
the
incomes
of
recipient
countries.
Aid has proven particularly effective in boosting health and education, which
improved markedly around the world during the last four decades. In developing
countries, life expectancy at birth increased from 43 to 59 years between 1960
and 2002, and infant mortality rates fell from 147 to 79 per thousand. Although
aid was not the most significant contributor to these trends, many analysts
believe it played a key role. The United States could unquestionably increase
the effectiveness of its aid by reducing bureaucratic overhead, increasing coordination
with other donors, and aiming fewer funds at corrupt or incompetent governments.
Nevertheless, evidence suggests that in most cases, aid has positively contributed
to the well-being of developing countries around the world.
