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7. Impact of Foreign Aid in Developing Countries


August 2, 2011

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

Foreign aid has been accused of not promoting economic growth and development in developing countries.  In fact, many studies have criticized foreign aid, stating that it does not promote what it should, such as investment and less poverty, but what it should not, such as more government (Peter Boone, 1996). Some even argue that it is not promoting democracy because evidence was found that corrupt governments tend to receive more aid than less corrupt governments (Alberto Alesina & Weder, 1999).

Lack of Foreign Aid

But when it comes down to numbers, the OECD countries do not really spend a significant portion of their income helping other countries. The overall impact that this help could have among developing countries is, therefore, very limited. In fact the US, the largest contributor in nominal terms, was spending, back in 2009, 4.7% of its GDP with the military but just 0.2% of its GDP with official development assistance (foreign aid). The health care system in America, costing 17% of the national GDP, represents, alone, almost 100 times the amount of money spent on development assistance.  (World Bank and OECD)

The way assistance (help) is delivered is another essential variable to understand how will it help developing nations. This aspect has to be taken into account when analyzing how effective assistance is. Too often, “expensive”/inefficient ONGs with well-paid foreign workers together with other Western institutions and private companies end up absorbing a very large amount of the budget made available for assistance (William Easterly, 2002). As a result of this, little help ends up getting into the ground and, not surprisingly, research finds that economic development has not occurred.

Still regarding the figures of development assistance, OECD countries have contributed to this cause in 2010 with roughly 129 billion dollars, approximately the same value that was been provided in 2008 (121 billion dollars) at the start of the last world economic crises. Development Assistance is at the same level as it was in 2008, in percentage of the GDP, but only represents about 0.5% of the OECD GDP. Assistance has been relatively small over the last decades and attempts to increase it are most of the times unsuccessful as some countries (such as Italy over the last 6 years) do not resist cutting back on this item to finance domestic expenditures.  (OECD and Bill & Melinda Gates Foundation)

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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