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FOREIGN AID AND ECONOMIC DEVELOPMENT IN SELECTED NIGERIAN STATES: 1960-1985
1.1 Background of the Study
The concept of international aid or foreign aid, or Official Development Assistance (ODA) is widely used and accepted as a flow of financial resources from developed countries to developing countries on development ground (Todaro, 1989)1. To Uzonwanne Maria (2015), the term “foreign aid” implies a number of varied activities, ranging from humanitarian support in the wake of natural disasters to military assistance and arms donations. It is a voluntary transfer of resources from one country to another.
Over the past fifty years, foreign aid has emerged as a dominant strategy for alleviating poverty in the third world. Not coincidentally, during this period major international institutions, such as the United Nations (UN), International Bank for Reconstruction and Development (IBRD), and International Monetary Fund (IMF) gained prominence in global economic affairs (Hjeertholm and White, 2003). The less developed countries (LDCs) of the world continue to suffer from economic hardship, prompting questions of whether foreign aid is a worthwhile and effective approach to boosting growth and development in recipient economies. Then how does foreign aid affect economic growth and development in recipient countries? This is a question that has attracted intense debate among scholars.
Pedersen (1996), argues that it is not possible to conclude that foreign aid has a positive impact on growth. Morrisey (2001) claimed that aid works well conditional on other variables in the growth regression. Mosley (1980), Mosley et al (1987), Boone (1996), and Jensen and Paldam (2003) found evidence to suggest that aid has no impact on economic growth and development. Many other authors find no evidence that aid affects growth in developing countries. However, the relation between aid and economic development remains inconclusive and is worth being studied further.
The history of foreign aids dates back to international actions that followed the Second World War. Indeed, several institutions have evolved from organizations originally created to contribute to post-war reconstruction. The development work of the UN began with the United Nations Relief and Rehabilitation Agency (UNRRA) founded during the war, and the International Bank for Reconstruction and Development (IBRD), which provided loans for recovering western European nations, making its first loan to a developing country only in 1950 to (Colombia).
The final post-war manifestation of importance was the Marshall plan, whose success was seen as a model for development elsewhere, and whose approach was reaffirmed in the donor coordinated effort of the Colombo Plan for South and South-Eastern Asia. A final feature of the post-war international scene of importance was the first wave of independence from colonial rule, creating a constituency for aid. The first meeting of the non-aligned movement in 1965 gave a focus to this voice, as did the various organs of the UN, notably UNCTAD.
Despite the existence of multilateral programmes, bilateral technical assistance to independent countries and even the emergence of the Soviet aid programme in 1956, the 1950s may be described as a decade of US hegemony in aid distribution, as it alone accounted for two-thirds of total aid in that decade (The Guardian.com,2014). . Although the programme was subject to continued commercial pressures (especially in the use of food aid), the intensification of the cold war gave U.S aid a strongly strategic orientation, which it has retained to this day. International aid was quite consciously used to stop “countries going communist”, and development aid as well as military aid mixed as necessary. In the 1960s, the second wave of independentstates and the troubled financial state of some already independent countries (notably India) prompted the emergence of greater amounts of bilateral programmes.
By 1969, the aid system grew and its channels multiplied and became tangled. There was unnecessary duplication in economic reporting and feasibility studies. Inadequacies of coordination implied a lack of purpose and direction in development assistance. To remedy these deficiencies, the Pearson Commission advocated many changes, among them the strengthening of multilateral agencies. The major multilateral development agencies have grown in number and size over the past fifty years.
The first group, the United Nations and the sister institutions created at BrettonWoods, commenced operations after the Second World War; but it was several years before the UN and the World Bank concentrated seriously on development. The IMF was not then and is not now – a development institution, although its work in many spheres, national and international, has a considerable impact on developing countries. The second group, the regional development banks, began to grow in the late 1950s, from the start, their objectives were developmental. In 1970, UN development agencies accounted for more multilateral Official Development Assistance (ODA) than any other channel. By 1977/73, however, they had been overtaken by the World Bank Group, while the regional development banks, such as the African Development Bank, the Asian Development Bank and the Arab Fund for Social and Economic Development, grew exponentially in their import. Today, approximately 25 percent of international aid is multilateral, while the other 75 percent is bilateral (Singh, 1988).
The author defines foreign aid as flow or transfer of resources (financial or material) from one country or organization to another for the purpose of assisting recipient country or its population meet specific needs, particularly in terms of economic development. According to Wikipedia free encyclopedia (2014), official development assistance is a term coined by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) to measure aid (e.m.wikipedia.org). The DAC2 first used the term in 1969
The flows of foreign resources can be of many types and it is important to know the different elements. Foreign capital flows are generally divided into two broad streams – official and private. The official capital flows are in turn subdivided into bilateral and multilateral flows. Official bilateral flows consist of capital provided by government of donor to government of recipient countries. Multilateral flows consist of flows from multilateral organizations such as the World Bank, the United Nations, The IMF. Both types of the official flow can take the form of grants, loans or grant-like contributions. Grants should be considered as the most desirable type of foreign aid since they represent a net addition to the resources available for development purposes. This is because grants as foreign aid are not expected to be repaid by the recipient country. Grants do not include technical assistance or other forms of financial assistance such as a loan or loan guarantee which are required to be repaid within a stipulated period (Investopedia.com). Some loans are given by the international lending agencies (i.e World Bank) at interest rate which are lower than those in the capital markets. Where the loans are granted to the LDC’s at a concessionary rate for very long periods, say for 40-50 years, the inflows of foreign private investment in the LDCs are not exactly foreign aid because they are made on commercial terms.
Development Assistance Committee (DAC) defines foreign aid as official development assistance (ODA) and technical aid. The ODA flows must satisfy all three of the following criteria:
- their primary objective must be developmental, thus it excludes military aid and private investment,
- they must be concessional,3 that is the terms and conditions of the financial package must be softer than those available on a commercial basis. The DAC defines Official Development Assistance (ODA) as officials flows with a grant element of greater than 25 percent at a 10 percent discount rate.
The flows should come from governmental agencies and go to developing country’s government (OECD, 2014).