Inadequacy of foreign aid

The former principal motivations for foreign aid – altruism and national security – are no longer seen as sufficient by most donor countries. Many are faced with increasing internal problems, many are simply increasingly preoccupied with domestic issues. At the same time, many recipient countries are seen to be handicapped by regional conflicts, uncontrollable population growth and bad government, thus further decreasing political political support for foreign aid.

Official development assistance (ODA), or foreign aid, has traditionally accounted for only a small portion of development resources in most Third World countries. In recent years, however, the dependence of the 36 least developed countries on these external aid flows has risen dramatically, to the point where it now accounts for a large portion of their net external receipts. For all of these nations, foreign aid is a vital source of foreign exchange and investment capital for development purposes. Particularly dependent on foreign aid are the low-income nations of Sub-Saharan Africa, which make up the majority of the least developed group of countries. Aid flows to this area are generally equivalent to half or more of aggregate investment.

During the 1970s these countries experienced reduced rates of growth in production, exports and imports when compared to the 1960s, but higher rates of population growth. Agricultural production per capita actually declined over the decade, partly due to droughts. These factors, combined with the impact of the world recession, have generated severe per capita income and import volume declines, and payments crises which, though small relative to those of others, are even more painful to the countries concerned. An increasing number of African countries are in arrears on normal trade and suppliers' credits, and have had to negotiate with the IMF for balance of payments support. Often these negotiations have been protracted and acrimonious, as governments have balked at the nature of the IMF's deflationary medicine.

Since the least developed countries benefited little from the rapid growth of private bank financing during the 1970s (they were too poor to be creditworthy), they are not affected directly by the drying up of private bank funds. They are hit severely, however, by the inadequate growth of aid flows and by the funding crisis confronting multilateral financial institutions. These countries also face the prospect of competing for limited aid funds with richer developing countries no longer able to rely on commercial finance.

The quality of external development assistance programmes deteriorated in the 1980s in the wake of the declining flow of concessional assistance and increased conditionalities. Official development assistance (ODA) by members of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) rose during the period 1982-1988 at an annual rate of about 2.3% in real terms, an increase that roughly matched their GNP growth. DAC countries' aid effort – measured by the ratio of ODA to GNP – remained virtually constant in the 1980s at a level of 0.32%, slightly less than half the internationally agreed target of 0.7%. Looking at a longer period, DAC's aid performance in the 1980s was very similar to that of the 1970s, but much weaker when compared to the aid effort of the 1960s (0.50%).

Trends in the individual performance of donor countries are mixed. Denmark, Netherlands, Norway, Sweden and Finland continue to donate the largest share of their economic output, with aid as a share of GNP averaging 0.92%. The ODA/GNP ratio of the USA was 0.31% in the early 1970s. In 1988, it was 0.21%, and in 1989 0.15%, the lowest ratio in the group. In 1992 total US aid appropriations was 0.20%, in the OECD group greater only than Irish aid. Aid from Japan has increased more rapidly in the 1980s than the DAC average but not faster than its GNP. Thus, Japan's ODA/GNP ratio has hardly improved since the early 1980s and is still below the DAC average, at 0.32%.

Outside the OECD, concessional flows from OPEC countries declined sharply during the 1980s, from over $10 billion before 1981 to about $2 billion in 1988. The largest donors were Saudi Arabia and Kuwait, which provided, respectively, 3.3% and 0.8% of their GNP in official development aid in 1988. Assistance reported by the USSR rose from 1% of GNP in 1976-1980 to 1.4% in 1988.

In the 1990s, the world's richest 30 countries still represented 78% of global gross domestic product, with the remaining 22% divided among the 150 poorer countries. On average the wealthy countries spent 0.29% of their national income on official development aid in the 1990s.