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Aid and Development

The ever changing landscape of aid

Zahid Hussain's picture

How has foreign aid changed over the past seven decades?Foreign aid in its modern form originated in the early 1940s. Following the Second World War, Europe faced a critical shortage of capital for physical reconstruction. The response was the commonly known Marshall Plan under which the USA transferred some 2-3% of its national income during the peak years to help reconstruct Europe. The achievements under the Marshall Plan spawned hope about the effectiveness of foreign aid in other contexts. The attention of rich nations turned to the emerging independent developing nations in the 1960s. The multilateralism of aid at the time was seen as more efficient and less political than bilateral aid leading to considerable expansion of the activities of the UN, World Bank, and other multilateral agencies.
 
Historically there have been many who claim that not enough aid is given. The immediate post-War period witnessed large-scale funding through the Marshall Plan and growing aid to developing countries, focusing on technical assistance. In 1951 a UN commission recommended an increase of aid, to about $5 billion a year, to help countries increase economic growth to 2%. The most commonly quoted Partners in Development report argued for an increase in aid to 0.7% percent of Gross National Income of donors and to increase the efficiency of aid.
 
Conditions changed abruptly towards the end of the 1970s with the second oil shock, leading to the international debt crisis. Macroeconomic imbalances became widespread among developing countries. Focus in development strategy and policy shifted to internal policy failure. Achieving external and internal balance was widely perceived as an essential prerequisite for renewed development. Trade, not aid, became the dominant slogan among many leaders and economists. The optimism around 1970 was followed by ‘structural adjustment’ and stabilization of economies, and ‘aid fatigue’. Nevertheless, throughout the 1980s there were calls for increasing aid. The 1990s witnessed sharp reductions in Overseas Development Assistance (ODA) with the end of Cold War and tightening budget constraints in donor countries.
 
A major convergence of economic and political factors around the early 1990s led to a widespread feeling of there being a problem in the field of aid-promoted development policy. Policymakers at a global level faced a new set of problems in the context of a shift arising from the end of the Cold War. Aid could move away from being regarded largely as a geopolitical strategic tool. In addition, the Asian economic crisis and the lackluster performance of sub-Saharan Africa posed serious challenges.

The Quest for Aid Effectiveness

Zahid Hussain's picture

A health checkup in Akbarnagar Community Clinic, Bangladesh. Mahfuzul Hasan Bhuiyan/World BankHas foreign aid been helpful for development? What helps and hinders it? What does the evidence say?

The key challenge facing foreign aid globally is its effectiveness.

Research on aid effectiveness has focused on outcomes such as a country’s economic growth or quality of institutions. These studies came to mixed conclusions over whether aid can effectively promote economic development.

Microeconomic evidence paints a reasonably positive picture. The World Bank’s Independent Evaluation Group (IEG) finds that the average rates of return to aid are generally above 20%. Evidence based on randomized program evaluation techniques is also largely positive, indicating that aid-financed interventions can generate substantial benefits for individuals.