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Abstract
This paper presents an overview of the economics of international aid, highlighting the
historical literature and the contemporary debates. It reviews the “trade-theoretic” and the
“contract-theoretic” analytical literature, and the empirical and institutional literature. It
demonstrates a great degree of continuity in the policy concerns of the aid discourse in
the twentieth century, and shows how the theoretical, empirical and institutional literature
has evolved to address specific policy concerns of each period.
Introduction
“[T]he decade of the 1990s was marked by a strong and lingering case of ‘aid fatigue’ influenced
by the rising fear that foreign assistance was generating aid dependency relationships in poor countries. The
issue of the effectiveness of aid conditionality was also critically debated.” (Thorbecke, 2000, p47).
“Foreign aid programmes for providing economic assistance to less developed countries have
fallen on hard times. The nominal amounts of aid pledged by developed areas have recently been falling
and the real values of economic assistance have fallen even further. This is due in part to the diversion of
attention of the donor countries to other foreign policy issues. It is due partly to their increased preoccupation
with their own domestic problems. There has, however, also been a growing disenchantment
with the potential for development in the poor countries and also with the role which foreign aid can play in
development. Optimistic expectations of rapid growth in less developed countries have given way to
skeptical evaluations of their actual performance. The contribution of foreign aid to development has also
been evaluated more skeptically and its possible disincentive effects are now emphasized.” (Bhagwati and
Eckhaus, 1970, p 7).
“The foreign aid program, as an instrument of United States foreign policy, is now ten years old.
To it has been committed upwards of 70 billion dollars, a sum representing around 25 percent of the
national debt, and the annual appropriations have been a major factor in the recurring budgetary deficits of
the federal government. Despite this massive effort, its success is questionable….In consequence, the
Administration’s budget for foreign aid has met increasing criticism. Congressional support, at one time
overwhelming, has steadily diminished. Disclosures by investigating committees of waste and extravagance
in the administration of the program have added distrust, and it is not surprising that the whole concept of
foreign aid has aroused anxiety among the electorate.” (Groseclose, 1958, p 25).
International aid, or development assistance, is defined by the OECD to “include
grants and loans to developing countries and territories which are: (i) undertaken by the
official sector of the donor country, (ii) with the promotion of economic development and
welfare in the recipient country as the main objective and (iii) at concessional financial
terms (i.e. if a loan, have a grant element of at least 25 percent)” (Hjertholm and White,
2000, p100).1 Whatever the definition, it might surprise the reader to see the similarity in
the three assessments given above of international aid, or “foreign aid,” over a period
spanning four decades. But ever since its modern inception after the Second World War,
international aid has raised a number of constant themes in the policy arena, in particular
its underlying rationale and its actual effectiveness in aiding development in recipient
countries. Moreover, international aid looms larger in public discourse than its magnitude
would seem to justify. An indication of this is that polls in rich countries often show
people to believe foreign aid to be several multiples of its actual level.2
Associated with these policy themes have been a number of recurring analytical
issues that essentially boil down to two basic questions:
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What does a transfer of resources do to the well being of donor and recipient?
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How can and should resource transfer be conditioned to enhance the objective
function of donor and recipient?
These two questions run through this overview of the economics of international aid. The
paper will consider the history of aid and aid making institutions (Section 2), the
theoretical analysis of aid (Section 3) and, the empirical analysis of the impact of aid
(Section 4); Section 5 concludes.
Footnote:
* Paper prepared for the Handbook on “The Economics of Giving, Reciprocity and Altruism,” edited by
Serge Christophe-Kolm and Jean Mercier-Ythier, North-Holland.
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While this definition is generally accepted, there are of course many nuances to these criteria, and analysts
do deviate from them as they need to. Thus Krueger, Michalopoulos and Ruttan (1989) include in their
definition the non-concessional loans by the World Bank, and some include loans from the IMF
(concessional or not) also in this category.
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Raffer and Singer (1996) refer to US polls showing that people believe the share of development
assistance in the federal budget to be of the order of 15 percent, when the actual figure is less than 1
percent.
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