Developmental Effects of Debt Relief

So what is the definition of Overseas Aid? Well a simple working definition is “Financial assistance given to poor countries by richer ones in order to aid industrial and economic development.   It’s a big area of expenditure for many developed countries with overseas aid topping 130 billion dollars per year, or around .30% of developed countries national income.

However worryingly, over the last few years the amount of aid has been falling and in some cases quite dramatically.  This is including Debt relief where lenders give either full or partial remission on outstanding debts in lieu of aid.  It is estimated that developing countries owe nearly $5 trillion which in turn leads to enormous debt repayments severely restricting their economies.

However aid isn’t always a good thing, and it relies heavily on a fair and equitable distribution network in specific countries.  Corruption is rife in many developing countries and in some cases aid merely props up corrupt rulers and despotic governments.  Recently countries like Liberia, Malawi and Niger have experienced corruption problems with huge amounts of aid simply being stolen or diverted.  A low level of democracy is usually a huge warning as to whether charitable aid is going to be successful.

Investing or giving charity to a country with little signs of democracy is usually a mistake.  These countries are often heavily policed and free speech restricted, often using internet and traditional surveillance.  Political activists will normally operate undercover and use VPNs to hide their location such as this one called Identity Cloaker.

There has been much debate about the effectiveness of aid in the long term with many economists suggesting that it actually causes more harm than good.    They will suggest that long term aggregate supply actually falls as a result of aid which in term will have the effect of lowering an economy’s potential to produce goods and services itself.    Economic policy cannot be established without first considering the other aspects of a county including it’s government, polices and democratic status.

There is some common sense in this, without law and order for example there will be little protection of private property which means that companies and individuals are unlikely to invest in anything that could simply be stolen from them.  Consider the situation in Zimbabwe where inward investment has practically disappeared for these exact same reasons and lack of protection from the forces of law and order.

Furthermore, aid organisations can influence the effectiveness of their projects by circumnavigating corrupt governments and directing aid directly to the people who need it. In practice, as a recent inquiry suggests, “The Department for International Development ‘has little understanding of what is and is not working’ in its anti-corruption efforts”. DFID has been given “an ‘amber-red’ rating – the second lowest, indicating ‘significant improvements’ were required. The main issue was that DFID had not “‘developed an approach equal to the challenge’ and is not focusing enough on the poor”.

The lists of countries where ‘foreign aid’ has largely failed is extensive but Rwanda, Haiti and Ethiopia are good examples.  All of them have seen negligible improvements in both health and infrastructure despite heavy outside assistance in many different forms including direct aid and debt relief.  All the usual reasons seem to be there, from misdirecting of aid, corruption and other internal problems.  These include the issue that aid seems to deter the growth of an essential business and entrepreneurial class who are always essential in any long term growth and improvement in a countries prospects.

Reading and References

James Collins, BBC iPlayer Ireland, Venus Press:2012

Madhur Gautam, Debt Relief for the Poorest: An OED Review of the HIPC Initiative from an American Address.

Dr Andrea F Presbitero, ‎Dr Marco Arnone : Debt Relief Initiatives: Policy Design and Outcomes

Jeremy Jackson: Debt Relief Studies, Case study and also via vpn here.

By Charles Amo Yartey, Mr. Machiko Narita, The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean

John Callom, BBC USA, Economics reporting and Correspondents