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Foreign Aid: The Plight of Beneficiary Countries

Early this year there was controversy surrounding Trump’s withholding of aid to Ukraine for his own political benefit. There was public outrage surrounding this incident which triggered an impeachment process for Trump. However, half of all foreign aid is tied to conditions in favour of the donor and is often used as leverage against recipients of aid – although granted, it is done in a more subtle and legal way. Some conditions can be in the interest of both countries, such as aid given to post-conflict countries on the condition that human rights violations must be investigated. However, many conditions tied to foreign aid are set for the economic gain of more developed donor countries and can be detrimental to the receiving developing countries. For example, in 2018, while touring Africa, Theresa May said that “Britain’s aid budget would be used to promote British trade and political interests”. This public statement echoes the motivations behind the offering of tied aid by most developed countries.

Aid used to improve trade relations

The most common form of tied aid, often referred to as ‘boomerang aid’, is when aid is given to developing nations on the condition that the money must be spent on goods and services from the donor country. Around 80% of the USAID’s contracts and grants directly benefit American firms. This is because exports from the donor country increase with boomerang aid, improving its trade balance, and domestic firms benefit from contracts where competition is limited to domestic firms. Therefore, tied aid is often used as a protectionist policy. At the same time, however, the recipient country is negatively affected by these conditions. Projects financed by such tied aid become much more expensive, as the country is forced to import supplies and labour that could have been procured at much cheaper rates domestically, while also hurting its trade balance and possibly triggering inflation which can worsen the living conditions of those in poverty. If, instead, developing countries could use local companies for its projects, it would create additional positive effects in the domestic economy, as employment would increase, stimulating sustainable growth.

Aid used as a political tool

Foreign aid is also used to improve geopolitical relations. For example, during the cold war, China used foreign aid as a political tool to improve its diplomatic relations with Africa, and to compete with the United States and the Soviet Union for Africa’s support. By the mid-1980’s China had diplomatic recognition with 44 African countries, and continues to be an important economic partner for Africa. Similarly, studies have found that China and the United States tend to offer aid to countries that support them at the United Nations. This means that aid is allocated based on the geopolitical benefit to donor countries, rather than the need of developing countries. Because developing countries are so dependant on aid from developed countries, it also means that countries like the U.S. can use aid as leverage to force developing nations to support them at forums like the United Nations. This takes away the autonomy of developing countries, and reinforces existing power dynamics where larger, developed nations are in charge of laws and forums that govern all countries.

Aid is also used to serve the political aims of donor countries, while hurting the recipient’s economy. For instance, the success of development projects under the European Union’s EU Trust Fund for Africa were measured in the reduction of migration flows, instead of the benefit to local communities. It was even leveraged to pressure African countries to reduce migration to Europe. This severely restricts the development potential of African countries by restricting the mobility of the African people, while catering to the exclusionary migration politics of the EU.

Aid through loans with interest

Although many countries have moved away from offering loans as foreign aid, one of the world’s largest donors, China, offers almost 80% of its foreign aid as commercial loans. These loans can be extremely harmful to the economy of recipient countries, as national debt piles up, leaving the government in the long run with less money to spend on its citizens, and increasing the tax burden on already economically disempowered citizens. In the long run, high debt causes developing countries to become increasingly dependant on developed nations for financing, instead of becoming self-sufficient.

In addition to gaining financially on the interest charged on loans, donor countries also strategically offer loans to countries that are very likely to default, with natural resources as collateral. Because developing countries are desperate for finance, and usually have low credit ratings, they are very likely to agree to put up its natural resources as collateral. Upon default of the loan, the donor country gets access to the recipient country’s resources (usually oil), and strategic land. For example, in 2006, USD 4 billion in loans allowed Chinese oil companies to gain the exploitation rights to multiple oil blocks in Angola. This allows donor countries to build its resources and become richer, while developing countries are drained of their natural resources that could have been used for their own economic benefit.

Tied aid reduces the autonomy of the recipient

Even when tied aid is given with the interests of the recipient in mind, it ultimately reduces the autonomy of the receiving country. Donor countries/organizations often tie market solutions that seem effective on paper, such as market liberalisation and privatisation. However, these conditions are not always suitable for each country, and therefore can have counter-productive results. Further, countries may measure the success of development projects using the conditions set by the donor country and spend the aid money just to cater to these conditions, instead of using it to benefit local communities. Ultimately, aid achieves more sustainable results when projects are led by the developing country.

Overall, although tied aid may benefit developing countries in the short run, it ultimately leads to unsustainable growth and over-dependency on aid. By definition, tied aid cannot count as official development assistance, as its main purpose is to promote the development and welfare of the donor county, rather than developing nations. It is also an unfair exercise of power over developing countries. Therefore, the Organisation for Economic Co-operation and Development (OECD) should continue to push for increased untied aid, and developed countries should reduce the unethical offering of tied aid.


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