Foreign Aid

As the gap between the rich and the poor at the global level expands, there is urgent need to consider the increasingly difficult situation developing countries have to face. Rich countries and other organisations like the World Bank, the International Monetary Fund and many NGOs have given considerable attention to developing countries issues and have set numerous targets, plans and policies in order to help those countries come out of poverty. Individuals in developed countries are becoming increasingly active in giving aid for developing countries. Issues arise however, that question the efficiency and motives behind many humanitarian efforts that take place every day. Foreign aid is one of the most criticized aspects of all humanitarian efforts. After half a century of increasing aid of all sorts ranging from financial aid to food aid, lasting results of development in poor countries have been far from proportional to the aid received. Although emergency aid is very helpful and appreciated during times of crisis, the effectiveness of development aid is still to be proven.

In general, foreign aid tends to adversely affect developing countries. This brief aims at analyzing such issues as conditionality, structural adjustment, dependency and ulterior motives on the behalf of donating countries, and why they are some of the many reasons foreign aid often creates more problems than it solves. Everybody is looking out for their best interest. Both rich and poor countries are trying to get the best out of foreign aid but unfortunately developed countries have more means to succeed. Laws and policies are set in such a way that development is not always the most important goal when foreign aid is allocated.

Historical background

The debt crisis some poor countries are going through right now was partly generated by the Cold War. During that era, countries in Asia and Africa received a lot of money from wealthier nations like United States, and organizations such as the World Bank and the IMF. However, little importance was given to how the money was used; The Western countries feared that these developing countries would go to the Communist side; hence, they offered cash as an incentive not to do so. So, as long as they were fighting on the West's side, and purchasing supplies and weapons from the North, they received practically unlimited funds (Ellwood, 2001, p.43). The problem was that most of the time the money ended up in the wrong hands, because most of the poor countries were ruled by corrupt dictators. Subsequently, "once the cold war ended, the debts were smartly called in and, if countries hadn't got the money, they had to borrow again at higher rates" (New Statesman, 2005). While this aid was certainly helping Western countries acquire and secure more allies, the world's developing countries had to pay for it in the end. They were left with huge debts, many of which had to be financed through further borrowing (Ellwood, 2001, p.45). This obviously worsened their debt. Also it is important to mention that official institutions have been created in order to manage and channel aid from the richer countries to the needy countries. The International Monetary Fund (IMF) was created in 1944 by 45 countries with the scope of agreeing on a framework for economic cooperation on an international scale. Country members of the IMF are giving money to the fund in order to help poor countries.

The Cold War example proves a very important point when discussing foreign aid. It shows how donor countries do not always give for the sole purpose of helping the development of poor countries. Northern states and organizations also consider their own benefits and interests before giving out foreign aid. For instance, "soon after the war on terror started in 2001, Pakistan had no trouble getting nearly a third of its debt to the US cancelled" (New Statesman, 2005). Why such an act of generosity from the US? It is no secret that the United States clearly has some motives in relieving Pakistan of a big part of its debt. It is known that the United States' has interests in the region. For instance, Pakistan is in a strategic location; thus, the US can set up bases of operations to check on several Asian countries.

Tied aid

The example of Pakistan leads to the first issue about foreign aid, which is tied aid. Tied aid forces the receiving country to spend the money it receives on importing goods and services from the donor country. The Economic report on Africa 2004: unlocking Africa's potential in the global economy (U.N., 2004), a new study from the Economic and Social Council of the U.N published in 2004, suggests that tied aid is a major concern. The study stipulates that "tied aid reduces the value of aid to the recipient countries by 25 to 40 per cent, by obliging them to purchase uncompetitive priced imports from the richer nations" (U.N., 2004). By giving tied aid, rich countries are making sure that their money is coming back to their country; therefore, boosting their economy.

The Canadian International Development Agency (CIDA) is the Canadian agency responsible for giving out foreign aid. According to them, Canada is the third-highest donor of tied aid; the United States being the first, and Spain the second (CIDA, 2002). While tied aid is beneficial to Canada because it is free to set the price it wants on its goods and services, and the South is required to buy them, the Southern countries are at a disadvantage since they do not have the freedom to look for the best price on the market and choose among alternatives. In other words, they are forced into buying products that could be purchased at a cheaper price from a different supplier. Also, another benefit to Canada is that it is guaranteed a buyer. The CIDA itself realizes other negative impacts this policy can have on less developed countries: "A third, and indeed most important, reason for changing the tied aid policy relates to aid effectiveness principles" (CIDA, 2002). The principles involved here concern CIDA's contracting regulations. Those regulations allow Canadian firms to act as Canadian executing agencies and subcontract other companies to do work in LDCs; however, the "CIDA has not been permitted to contract directly with entities outside Canada"(CIDA, 2002). Therefore, Canada cannot subcontract local companies in the country receiving the aid; it has to hire Canadian companies to do the work. Thus, "this hinders the ability of CIDA to access existing capacity in developing countries and support the strengthening of that capacity"(CIDA, 2002). In other words, money and production garnered from building various infrastructures comes back to the Canadian companies, not the local companies,