Does foreign aid boost hinder economic development?
In theoretic perspectives, foreign aid should be capable of triggering social and economic growth, mostly in developing nations through financial assistance offered by affluent developed nations. Thereafter, this foreign aid should trigger economic growth by improving infrastructure, introducing modern technologies and innovative ideas, reinforcing fundamental social amenities, for instance, education, health and political structures (Brautigam, Deborah & Stephen, 2004)
In addition, the aid offers humanitarian support in the course of crises, and replenishes the economy after an economic downfall. However, the donors offer the aid on conditional basis. In most cases, only the countries with good governance receive the aid. Latin America shares similar features with Africa in terms of strong presidential features and poor legislature. For this reason, Latin America embraces the aspect of accountability and reshapes their weak institutions by enhancing the rule of law and amplifying democracy (Angelesm & Kyriako, 2009).
In essence, in democratic governance, the top management must have the support from the crucial persons of the ruling party, administration and judicial system prior to implementing their favorable policy. The donor nations concerned in enhancing efficient growth strategies have an obligation of assessing the level of liability before giving out the foreign aid. When the institutions related to political accountability are strong, leaders have high motivations of formulating policies that conforms to the preferences of citizens. Plainly, donors should assess the accountability of each nation individually and provide foreign aid to those countries that are transforming and sticking to accountability principles (Angelesm & Kyriako, 2009).
Positive impact of Foreign Aid on Economic development
U.S plays a larger role in providing foreign aid in both Latin America and the Caribbean nations since the early 1940s. However, considering the political instability and economical upheavals in the two countries, the foreign aid dispensed was low up to the 1960s with the onset of communism (Barro; 1990, Barro; 1991 Barro; 1996). Since then, economic development in both Latin America and Caribbean remained unstable and modest. However, in the 1980s the debt disasters and ruthless growth rates escalated in these two countries as compared to the global world. There were some significant economic changes in the 1990s and at the inception of the 21st century, even though the growth rate was slow, unsteady and subtle (Angelesm & Kyriako, 2009).
In the year 2002, the mean rate of development of GDP per capita was at a better rate in contrast to the past four decades. Presently, the perception for Latin America and the Caribbean indicates some glimpse of promise even in the outset of global depression. However, the growth trends are yet to compare the growth rate levels that were in existence in the 1960s and 1970s. Growth performance in these two countries is yet to reach growth performances present in Asia, Middle East and Eastern Europe.
Furthermore, Latin America and Caribbean faces tremendous high-income disparity. Indeed, this region is famous for having undemocratic system in the entire global world. Barro (1991) asserts that Latin America encounters exorbitantly from capitalism. He accentuates that nations with limited governance, or rather those with poor institutions of liability intends to safeguard property rights and boost investments through certifying a robust devotion to few influential people (Barro; 1990, Barro; 1991 Barro; 1996).
For this reason, economic development can occur through the investments provided by the few influential people. This gives the influential persons a monopolistic advantage and they are capable of exploiting the population by escalating the product prices without any consultation (Barro; 1990, Barro; 1991 Barro; 1996). Further, Capitalism has some depressing effects on income distribution as evidenced these nations income inequity. Poverty is also a major problem encountered in the two nations. In spite of growth trends intended to reduce poverty, 1/3 of the population in Latin America suffers severe economic hardships and living below the poverty lines. Over 17% of Latin America population survives on lower than U.S. $2 per day (Barro; 1990, Barro; 1991 Barro; 1996).
Bolivia, Colombia, Guatemala, Honduras, and Nicaragua population suffers a similar challenge, in that; more than 40% of the entire population survives on approximately U.S. $3 per day. There was also a higher inflation in inflation estimated to reach 8.9%. This was an increase from 6.5% in the year 2007. Regardless of these unwelcoming observations, the donors still offer foreign aid into these regions. The foreign aid provided by the donors, for instance, by the International Monetary Finances (IMF) is currently at their optimum level. From the 2009 and 2010 economic research of Latin America and Caribbean, the findings indicated some positive patterns. This means that foreign aid boosts economic development. Most of the literature on foreign aid based on growth relationships illustrates some conflicting outcome, with the negative foreign aid dominating the phenomenon (Barro, 1996).
However, this research study seeks to identify the factors that necessitate the provision of foreign aid to the developing countries. The study on the factors that determines economic developments is enormous. However, the effect of foreign aid on economic development is less rampant but rather substantial (Barro, 1996). On the other hand, numerous studies are unable to generate conclusive proof of direct affiliation between foreign aid and economic development. Some authors affirm that foreign aid provides a positive contribution to development. Others contrast with this viewpoint and maintain that there exists a negative affiliation amid the foreign aid and economic development (Barro; 1990, Barro; 1991 Barro; 1996).
However, it is apparent that public principles and financial institutions directly affect the scale of economic development. From the research study conducted by Barro (1991), nations that maintain good economical, financial and trade standards are the best in converting the foreign aid into economic development. The author explained good principles as moderate inflation, budget with low deficits, a flexible fiscal sector, and a private organization with close link with the government (Barro; 1990, Barro; 1991 Barro; 1996).
As illustrated in the introductory part, it is very imperative to offer foreign aid based on the conditions. This strategy ensures that developing countries maintains necessary public policies. In essence, the conditions attached on foreign aid ascertain the efficiency of the foreign aid. Moreover, the aid has a follow-up and this signifies that the allocation of the resources is equitably distributed. In a similar vein, Angelesm & Kyriako (2009) discovered that the conditions placed on dispensing foreign aids are statistically vital when involving extensive explanatory variables. Brautigam, Deborah & Stephen (2004) examine the link between foreign aid economic growths in actual GDP per capital by studying the relationship with recognized economic growth determinants (Barro, 1996).
From their findings, they empathize that foreign aid is less effective in boosting the growth rate. However, these authors base their views on other aspects and not on effective policy as indicated by Angelesm & Kyriako (2009). Barro (1990) reinforces Brautigam, Deborah & Stephen (2004) by claiming that there is diminishing return to foreign aid, in a broader sense, Barro confirms that the impact of additional aid decreases as foreign aid goes on developing. Furthermore, Barro (1996) in his survey illustrated that the estimated efficiency of foreign aid is dependent on the statistical method applied and the availability of the control variables.
Even though from some authors, it is evident that foreign aid boost economic development, Barro, (1990) refuted that phenomenon and cited that foreign does not entirely liberate economic by far, rather it is a very crucial factor in formulating policies and developing viable institutional atmospheres significant to growth. On the contrary, another evaluation looking at the types of economic developed supported by the foreign aid reported a positive and statistically imperative link between the foreign aid and segments that experiences economic development (Angelesm & Kyriako, 2009).
The affiliation amid foreign aid and economic growth only exists if the provision of the aid is on conditional basis. However, the value of the aid proves ineffective when linked with financial policy index variable developed 3 years ago (Brautigam, Deborah & Stephen, 2004). Angelesm & Kyriako (2009) evaluated the impact of foreign aid on economic growth and this helps understand the phenomenon of economic development within these two countries.
As part of their empirical evidence, they gathered about thirteen countries in Asian continent that are receiving a substantial quantity of foreign aid. After regulating the impact of several variables, for instance, trade, fiscal and political intervention. They conclude that there exists a negative connection between the aid and economic growth (Angelesm & Kyriako, 2009).
Similarly, using the same study and examining whether foreign aid supports economic development in an inequitable sub-Saharan African country, the author found out that foreign aid has a positive relationship with economic development. It is essential to note that, the first empirical evidence comprised of developed countries and thus foreign aid is less significant in boosting the economy, while as the second one comprised of developing nations and thus foreign aid assists in building up the economy (Barro; 1990, Barro; 1991 Barro; 1996).