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13Ziyoda ASATULLAEVA
University of world economy and diplomacy
THE EFFECTIVENESS OF FOREIGN AID
Foreign aid is often used as a key instrument for economic development. Ever since the Post War Two era, and the great success in Europe indebted to the successful implementation of European Recovery Program (ERP) in 1948 this topic has become an integral component of the economics' development. The broad definition of the foreign aid or Official development assistance (ODA) is stated by the Organization of economic cooperation and development. OECD defines foreign aid as those flows to countries and territories on the Development assistance committee's list of ODA eligible countries and to multilateral development institutions which are:
1) provided by official agencies, including state and local governments, or by their executive agencies;
2) each transaction is administered with the promotion of the economic development and welfare of developing countries as its main objective;
3) each transaction is concessional in character and conveys a grant element of at least 25 per cent" [1]
It is worth noting that ever since the success of Marshal plan a broad empirical literature has emerged with a view to investigating the actual and potential impacts of such aids on economic development. This substantial and growing body of scholastic researches has evaluated the aid effectiveness at both the micro- and macroeconomic levels, relying on both cross-country and single-country studies. They have been using surveys of qualitative and multi-disciplinary analysis as well as empirical analytical studies.
Early theoretical research in the 1950s, influenced by the success of the Marshall Plan, was optimistic with regards to the impact of aid on economic growth. Development theorists, such as W. A. Lewis and R. Solow stressed the importance of capital formation and large-scale investment, which could help economies achieve self-sustained growth, without closely examining the relationship between aid flows and economic development [2]. R. Nurske also stressed the importance of savings and capital formation in economic development in his "theory of the big push," and argued that developing countries remain poor because of a vicious circle of poverty [3].
Later on in the 1960s, the gap models appeared. The first and most well-known model was the Harrod-Domar model, which underlined the necessity of aid to fill in the savings gap of developing countries and thus increase investment. The Harrod-Domar growth model links output growth
to aggregate investment in a linear function. This model was extended in 1966 to add a foreign exchange constraint into the Chenery-Strout two-gap model. The potential impact of aid on growth is simply seen as an increment to the stock of physical capital. A third gap was later introduced by Bacha and Taylor, who argued that the governments of many developing countries lack the revenue raising capacity for investment and thus, aid can again fill in this gap. All of the gap models stress the importance of foreign aid in supplementing savings, foreign exchange, and domestic revenue, which leads to higher investment and thus, higher growth rates.
If during the period from 1960's till 2000s research on aid impact remained quite modest, since the early 2000's the number of researches devoted to the assessment of the effectiveness of foreign aid has increased drastically. This is perhaps related to the adoption of the Millennium Developments Goals (MDGs) and the responsibility of foreign aid in achieving the mentioned targets. The MDG has provided a clear set of objectives for mobilizing the international development community, notably in the area of development finance, thus stating the emerging importance of assessing methods of enhancing aid effectiveness.
These studies are ongoing until present and can be literally divided into four groups based on their outcomes and relative success. The first group of studies are those confirming positive-success. They find evidence that there is a positive impact of foreign assistance on economic growth, poverty reduction, investment and other macroeconomic indicators [4].
The second group of studies are those suggesting no-success. They find evidence that the foreign aids are ineffective, mainly due to fact that funds are allocated based on geostrategic interest of donor country or historical ties between recipient and donor countries, aid fund eligibility, corruption and etc. [5]. This in fact means that foreign aid is received by not the countries in need or with preferable conditions. Thus, this group of scholars suggests that main cause of ineffectiveness of the foreign aid is its ineffective allocation among recipients. One of the first studies to conclude that aid had no impact on economic growth was published by Peter Boone in 1996. His analysis of the politics and effectiveness of foreign aid found that while aid was responsible for increasing government size, it had no impact on investment, economic growth, or human development indicators. Boone finds evidence of aid fungibility: aid increases government consumption, but does not increase investment nor does it help the poor.
The third group belongs to those who are emphasizing on the conditional-success of the aid effectiveness. These group of researchers suggest that aid can be effective in some cases and ineffective in others. For instances, one of the most influential paper by Burnside C. and Dollar D. effectiveness of foreign aid depends on policy environment of the receiving
country. Results of their empirical investigation indicate that aid has positive impact on economic growth given that recipient country has sound fiscal, monetary and trade policy. Moreover, according to the Svensson J. the condition of the aid effectiveness is the quality of institutions of recipient country [6]. According to the authors Dalgaard C.-J., Hansen H., Tarp F. aid has been effective in spurring growth, but the magnitude of the effect depends on climate-related circumstances.
The fourth group of studies are those that conclude insignificant-success. They find evidence that the effect of foreign aids on economic growth is mainly insignificant [7]. Therefore, it interestingly apparent that despite the intuitive logic behind the usefulness of the foreign aids, being a plausible solution for under-developed economies to come of the poverty trap, and despite the vast number of studies devoted to verify this issue, there has been no consensus on if and how foreign aid could precisely impact the processes of growth or development.
REFERENCES
1) OECD. http://www.oecd.org/development/financing-sustainable development/development-finance
standards/officialdevelopmentassistancedefinitionandcoverage.html
2) Rajan, Raghuram G. and Arvind Subramanian. 2005 "Aid and Growth: What Does the Cross-Country Evidence Really Show?" IMF Working Paper 05/127, Washington D.C.
3) Dalgaard, Carl-Johan, H. Hansen and F. Tarp. 2004"0n the Empirics of Foreign Aid and Growth," The Economic Journal, Vol. 114.
4) Arndt, C., Jones, S. & Tarp, F. 2015. Assessing foreign aid's long-run contribution to growth and development. World Development, 69, 6-18.
5) Bräutigam, D. A. & Knack, S. 2004. Foreign aid, institutions, and governance in sub-Saharan Africa. Economic Development and Cultural Change, 52, 255-285.
6) Svensson, J. 1999. Aid, growth and democracy. Economics and Politics, 11, 275-297.
7) Young, A. T. & Sheehan, K. M. 2014. Foreign aid, institutional quality, and growth. European Journal of Political Economy, 36, 195-208.
8) Хайдаров М.М. Институциональные ловушки и их преодоление в Республике Узбекистан // Экономика и финансы (Узбекистан). 2020 №4. С.11-17
9) Ёвкочев Ш.Ш. Хал^аро молия институтлари фаолиятининг замонавий хусусиятлари // Экономика и финансы (Узбекистан). 2020 №1. Б.72-85
