Is Aid A Double Edged Sword?

By The Change Lab

Foreign aid is often described as generosity made visible and thus it shocks many to say that foreign aid often hurts, rather than helps, poor people in poor countries. Mark Littlewood, Director-General of the IEA, commented that ‘government foreign aid does not aid development and in many cases hinders it.’ Deaton, an economist at Princeton university, argues that the rich world may actually be corrupting nations’ governments and slowing their growth by providing aid. According to Deaton, much of the $135 billion that the world’s most developed countries spent on official aid in 2014 may not have ended up helping the poor. On the contrary, research also suggests that aid can play a crucial role in enabling the poor to benefit more from globalisation and increase the income of the poor through growth. Thus, the key issue is not whether aid is inherently beneficial or harmful, but under what  condition will it become counterproductive, and under what institutional frameworks will it maximise welfare for the greatest number and achieve its intended objectives. 

The idea of wealthier countries giving away aid blossomed in the late 1960s during the first humanitarian crises: the Biafra War. This conflict, otherwise known as the Nigerian Civil War, was an attempt by the Eastern region to secede from the country and form an independent state called Biafra. An estimated two million civilians of Eastern Nigerian origin perished from the conflict. Americans watched through their TV sets as children starved to death in Biafra and protestors called on the Nixon administration so loudly that they needed to galvanize the largest nonmilitary airlift the world has yet to see. Only a quarter-century after Auschwitz, humanitarian aid seemed to offer the world a new hope for fighting evil without fighting a war. 

There was a strong economic and political argument for helping poor countries too. Economists widely believed in the 20th century that by pumping money into a country’s capital: factories, roads and other infrastructures, will be the key to triggering growth. So in the hopes of spreading the western model of democracy and market based economies globally, the US and Western European powers encouraged foreign aid to smaller and poorer countries that could fall under the communist influence of the Soviet Union and China. 

Ultimately, the level of foreign aid distributed around the world soared from the 1960s, peaking at the end of the Cold War, then dipping before rising once more. The World Bank and advocates of aid aggressively seized on research that claimed foreign aid to be the driver of economic growth in developing countries, but can foreign aid really buy growth?

The answer to this is often not a simple one. Aid can entrench the very inequalities they claim to be alleviating and thus it appears as a confusing mix of lifeline and leash, rather than as clean moral good or harm. In 2014, much of the $135 billion that the world’s most developed countries spent on official aid did not end up helping the poor. Why is this happening?

The answer isn’t immediately clear. Normally, in order to run a country, a government needs to collect taxes from its people and so the people ultimately hold the purse string. They have a certain amount of control over the government and if the leaders don’t deliver the services they promised, the people have the power and choice to remove them. The critique of aid is that an ‘enormous’ amount of aid can weaken this relationship and less enable the people to hold their leaders accountable, whether be that of the congress, parliament or courts. Thus wealth from foreign aid can be a corrupting influence on weak governments, turning healthy political institutions that serve the people to ‘toxic’ ones that harms the people. The wealth from foreign aid can make governments more despotic, and it can also increase the risk of civil war since there’s less power sharing and more lucrative prizes worth fighting for. In order to help the powerless, we first have to hold accountable the powerful. 

Institution matters. If funds are stolen by corrupt officials or used to fuel corrupt behaviour rather than reaching intended beneficiaries, aid will fail. 

On the contrary, when does aid work? One of the ‘greatest economic miracles of the 20th century’ as described by Dr Norman Borlaug was the Green Revolution in the 1960s-1980s. USAID and the Rockefeller Foundation developed new variétés of wheat and rice implemented across India, Mexico and Asia. The programme effectively saved millions of people from starvation and is regarded as ‘the most successful example of foreign aid.’ The South Korea reconstruction from 1952-1980 turned South Korea into an economic success story. These examples show that aid can be successful, but perhaps under certain conditions. The effectiveness of aid heavily depends on the récipient country’s characteristics. Countries with well-functioning institutions see significantly better aid outcomes. Aid must be given in optimal amounts-neither too high nor too low. Aid is not exempt from the law of diminishing returns; beyond a certain level it becomes counterproductive and below certain levels it has too little of an impact on growth. 

Foreign aid's impact ultimately rests on whether it strengthens or substitutes for domestic institutions. Where aid reinforces governmental accountability and is delivered at optimal levels to countries with functioning governance, it can deliver transformative results. However, in weak institutional environments, excessive aid undermines the citizen-state relationship and risks perpetuating dependency. The policy imperative is therefore not to abandon aid, but to ensure it builds rather than bypasses local capacity, serving as a catalyst for self-sustaining development rather than a permanent support mechanism.