CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

Over the past half century, 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), World Bank (WB), and International Monetary Fund (IMF) gained prominent in global economic affairs (Hjeertholm and White, 2003). Yet it seems that sixty years later, the less developed countries (LDCs) of the world continue to suffer from economic hardship, arising 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 country? This is a question that has attracted intense debate among scholars.

The empirical evidence obtained from these extensive studies have been mixed (Murphy and Tresp, 2006, and Duc, 2006). In between, however, are some others who argue on the role of economic policy in determining the effectiveness of foreign aid in aid recipient countries.  Pedersen (1996), argues that it is not possible to conclude that the 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 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 World Bank, or 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 independence 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)