Foreign Aid And Poverty Reduction: Examining Development Theories

South Africa and Foreign Aid

Does Foreign Aid Reduce Poverty?

A good percentage of governments across the globe depend for foreign aid to cater for their citizens. Most of these countries are drawn from the third world as a result of the high levels of poverty and stagnated economic growth. In Africa alone, all the 54 countries depend on foreign aid to fund their sectors and in the end stimulate growth. As most of the nations continue to benefit from foreign aid, there is a growing concern that this habit is not helping countries to stand alone and take the initiative towards self-dependency (Ndambendia & Njoupouognigni, 2010). Policy makers and experts have been inevitably re-examining the role of foreign aid in developing countries, and they seem to be agreeing that foreign aid is a double-edged sword with positives and negatives in equal measure. In the same regard, it is imperative that most countries are grappling from high levels of wastage and corruption directed at aid funds as such, it is high time governments and stakeholders re-defined the role of foreign assistance and act promptly.

South Africa receives substantive foreign aid annually from her key allies notably the United States. According to the latest statistics, the South African Government received a total of $275m from the US government in 2010 (Baldé, 2011).This money was channeled through aid agencies and directed at various projects with the largest portion going to the health sector followed by development. This figure represents a decrease of more than 80% from the previous year (2009).This significant drop has been attributed to the dwindling global economy that culminates in foreign partners scaling down the figures as the economic downturn continues to bite. Going down to the ground, foreign aid has been a target for corruption cartels in South Africa who siphon around 33% of the annual foreign aid. Under such conditions, it is pertinent to reiterate that there is fear and caution among donors. However, South Africa can find solace in the fact that it is one of the largest economies in Africa and foreign aid makes up only 0.5% of the total GDP.

Several development theories have been put across to explain the impact of foreign aid and ultimately determine if it stimulates growth or not. These theories take into account several factors including the key indicators of growth as well as the priorities set by the governments in the process of utilizing aid (Dopfer & Potts, 2015). These theories are founded on the rationale that foreign aid can have a short-term or long-term impact on the economy but cannot alleviate the challenges completely. Therefore, to understand the dynamics and intrigues of foreign aid, it is vital to explore the issue in relation to these theories before reaching to a conclusion. Fundamentally, development theories examine how nations can achieve desirable transformation in the society.

Development Theories

The Dependency theory emerged in the late 1950s when economists at the United Nations Economic Commission embarked on a series of studies to address the growing economic disparity between Western and third world nations. As most countries sought to forge economic and trade partnerships, there was fear that this was only benefiting a cluster of a few nations at the expense of the majority. According to the theory, poor nations would continue to get poorer because they exported their raw materials to the rich countries and then import finished products of the same material (Ferraro, 2008). In the process, powerful economies gave little back to the smaller nations in terms of aid to absolve themselves from any blame. The theorists argued that the impact of foreign aid was small and was not enough to revolutionize societies through economic stimulation and empowerment. Whereas foreign aid channeled through NGOs was seen as an ideal undertaking, the theory argues that this new dependency is running down good governance, responsibility, and accountability in many nations.

The theory admits and refutes in parts the notion that foreign aid can reduce poverty. Regardless of the millions of dollars that are disbursed to African countries from America and other donors, this does not take way the fact that the core problem lies in the inequitable distribution of resources between nations. In this regard, countries that continue to tame the increased consumption of resources by its citizens will continue to depend on foreign aid for sustainable development and improvement of living standards (Thiombiano, 2016). Therefore, when the demand for fundamental services and amenities balloons, the foreign aid will not cushion the people against the extremes of poverty. A recent study by IMF found out that whereas foreign aid to Africa has been growing annually, the poverty index has not responded accordingly. The survey pointed out that aid disbursement is encouraging inefficiencies and wastage among developing nations and the effects trickle down to the people. Most governments are reluctant to seal the loopholes because they anticipate more foreign aid.

The modernization theory argues that a modern society can only exist in the present of robust social and economic structures that bring every citizen at par with the government reserves. The theory asserts that there are a misconception and a disconnection between economic development and poverty, especially in developing nations. It points out that social evolution in many societies is halted by the slow economic take-off and the failure of authorities to offer instant economic interventions (Inglehart & Welzel, 2010). The modernization theory seeks to address the various aspects of a functioning society and the role of the government I securing the socio-economic security of the people. According to the theory, poverty is as a result of internal economic disconnections between people and government but can be solved by reducing dependency on external interventions.

Dependency Theory

Through the modernization theory, it is imperative that foreign aid is one of the hindrances of self-regulation and government responsiveness to the needs of its people. Foreign aid targets empowering communities through education, sanitation and growth opportunities. Whereas it is evident that the society can derive some benefit from there, the larger picture implies the contrary. Most countries that depend on foreign aid to run substantive parts of their budgets have no channels of unleashing the potential laid down by foreign aid. Moreover, this aid comes under stringent provisions and can change the equation as countries tend to donate to nations where they can equally benefit. For example, investment of foreign aid in education by NGOs depends on the regime’s ability to put in place enough infrastructures so that there is continuity. However, most countries are unable to do this, and the progress that foreign aid has initiated is halted.

Amid the growing debate on the connection between poverty and foreign aid, less attention is being given to the nature of poverty that the latter can or cannot alleviate. This theory documents that the persistent levels of poverty in Africa follow a basic pattern because of economic systems that limit their income (Tingley, 2010). The theory asserts that the dynamism of African people is being held back by economically depleted systems that have numerous barriers to growth. Therefore, hardships keep emerging and creating holes that cannot be sealed even in the change of times.

Africans are poor because of the failure of government to put in place systems that can work to reduce poverty. In such a scenario, foreign aid becomes an alternative channel to getting out of poverty but since it is not constant, the “economic holes” keep recurring (Milner, 2013). The structural poverty theory contradicts the individual poverty theory and seeks to dispel the notion that poverty is a personal choice that emanates from being lazy and less innovative. The former points out that people in African nations are hard-working, but they are restrained by bad governance and corruption from prospering. As such, any monetary input is likely to have little impact since the problems are escalating by day.

It is ironical that millions of Africans continue to wallow in poverty while stepping on reserves of precious raw materials. It is even more surprising that more than 75% of the African countries’ budgets rely on foreign aid. As former Senegalese President Abdoulaye Wade put it, “a country can never develop out of aid or credit" (Ayodele., et al, 2005). This is the reality that most African nations have failed to accept. The African scenario is made even more difficult by the absence of policies that embrace the free market approach that has been credited for the growth of countries like Taiwan and Singapore. In fact, a study by CATO in 2015 revealed that the more the foreign aid pumped to Africa, the lower the standards of living. The study pointed out that foreign aid is a recipe for corruption and bureaucracy. A substantive percentage of aid money is lost through wastage and in such countries, there is little or no economic stimulation targeting the core causes of poverty.

Modernization Theory

Another reason for the failure of foreign aid in reducing poverty is the dismal figures of local investment. African nations have failed to lay down enabling policies and markets that can attract domestic investment. Foreign nations have put more investment in African nations, and whereas this promotes economic development, it also culminates in grooming a society that is compounded by persistent poverty. The role of foreign aid is thus submerged in uncertainties occasioned by infiltration of the market by foreigners (Tupy, 2005). Most countries, especially in Africa, have failed to prioritize internal investment over foreign investment. Consequently, a huge chunk of the money that streams in from abroad is used in activities that the government would have funded in the first place by giving access to the market and facilitation through policy making and priority setting. In the same regard, most of the foreign investors disburse the returns to their homeland and the cycle continues as citizens stagnate in poverty.

Foreign aid is also failing because of bureaucracy in African nations that receive huge amounts of foreign aid. The aid channeled by governments through government agencies has become a major casualty of massive bureaucracy and sabotage (Andrews, 2009). States are refusing to baulk to Western pressure to implement reforms so that monitoring and evaluation can be possible. A survey done by IMF in 2010 revealed that only 4% of the countries in Africa can account for more than 80% of the foreign aid allocation. However, much of the funds had been deployed to projects that are likely to take longer to have a desirable impact on communities. For instance one of the countries (Lesotho) was more transparent but the poverty levels had not moved up in a five-year period (Bearce & Tirone, 2010). This is because of the failure of the government to leverage the priorities with the provisions and policies of donor fund. Therefore, the likelihood of the poverty index dropping is almost negligible considering that the key indicators of economic well-being and prosperity send a negative signal that scales down the level of funding in future.

Culture has also been blamed on the slow responsiveness Africa to foreign aid and eventual alleviation of poverty. Economists argue that the poverty that has persisted in Africa over decades is as a result of psychological inferiority that is immune to any stimulation by monetary input (Small., et al, 2010). They argue that whereas most of the nations in the Dark Continent were at par with their counterparts from the East, the present state of economic development is quite different because Africa still thrives in the ancient culture of dependency. Africans consider themselves as less fortunate, and they feel that is the obligation of donor states to pump in millions of dollars so that they can get out of poverty (Winters, 2010). In this context, progress cannot be achieved if the society lives without laying a marker on how to reduce poverty by limiting their dependence on foreign aid. Therefore, despite concerted efforts to safeguard the usage of foreign aid, little progress can be expected unless there is a change of perception.

Structural Poverty Theory

Conclusion

This paper has looked at the link between foreign aid and development in African countries. The study has examined the ability of foreign aid to reduce poverty and spur economic development in African countries. Based on the arguments and in relation to three (3) development theories, it is clear that this debate elicits several reactions. However, it is bold to state that foreign aid is an integral part of many economies in the world. However, there is need for African countries to reduce dependence by embarking on internal policies and programs that will improve the lives of the people.

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