Foreign Aid vs. Economic Growth: A critical evaluation of the success/Failure of foreign aid in Africa (Ethiopia)
In this paper, explore the concept of foreign aid and economic development in an African. We focus on a critical evaluation of the success as well as failure of foreign aid in Africa (Ethiopia). What are investigated are the factors that affect growth, the scopes behind foreign aid and reasons for failure. The aim of the study however, is to explore and survey the impact of foreign aid on economic growth and the country as a whole. We then focus on five major objectives. The first one is such as the relationship that exists between foreign aid and a country's economic growth. The second objective is the investigation of the economic impact of foreign aid on consumption and investment. The third objective is the investigation whether recipient government misuse aid as a result of corruption and inefficiency of the governance. The fourth objective is then the investigation of the contribution/failure of aid conditionality in Africa as a result of lack of good domestic policies and institutional capabilities. We then evaluate if African countries really need foreign aid on order to survive as well as achieve economic growth.
Introduction
Financial aid also known as development assistance, or technical assistance or international aid, or overseas aid, or Official Development Assistance (ODA) refers to the assistance that is given by governments and other agencies to support the economic, political, social and environmental, developments of other developing countries. It can be distinguished from humanitarian aid by the fact that it lays much focus on the alleviation and eradication of poverty in the long-term, rather than a short-term response. The term financial aid, which is used, for instance, by the World Health Organization (WHO) expresses the idea that there should be partnership existing between the donor and recipient, instead of the traditional situation in which the relationship was dominated and was under the control of the wealth and specialized knowledge of one side. WHO (2008). Most financial aid comes from the Western industrialized countries but some poorer nations also contribute financial aid. Financial Aid may be bilateral. This is when it comes from one country directly to another; or it may be multilateral when it is given by the donor country to an international organization such as the World Bank or the United Nations Agencies which includes UNDP, UNICEF, UNAIDS among others, which later distributes it to the developing countries. The proportion currently lies at about 70% bilateral and 30% multilateral.
Aproximately between 80-85% of financial aid comes from government sources as official development assistance. The 15-20% that remains comes from privately owned organizations like non-governmental organizations (NGOs), other foundations and other development charities like the Oxfam. On top of that, remittances received from migrants working and residing in the Diaspora also form a considerable amount of international transfer.
Some governments also include military assistance in the notion of foreign aid, despite the fact that numerous NGOs try to disapprove and to oppose this.Privately owned consulting firms, like PricewaterhouseCoopers and Deloitte, are increasingly being contracted by donor agencies to effectively manage and implement elements of their aid program, due to their perceived ability to perform higher quality program management and delivery.
Scope of foreign aid
The aim of foreign aid in the growth process of developing nations in Africa has been a topic of great debate. Foreign aid has become an important topic because of its implications for the alleviation and eradication of poverty in the developing countries.
Recent empirical studies based on foreign aid and economic growth has generated mixed outcomes. For instance, Burnside and Dollar (2000), Papanek (1973), Karras (2006), Gomanee, et al. (2003), Hansen and Tarp (2000),Dowling and Hiemenz (1982), Gupta and Islam (1983), Dalgaard et al. (2004), find evidence for positive impact of foreign aid on growth. Burnside and Dollar (2000) and Brautigam and Knack (2004) find proof for negative effects of foreign aid and growth, while, Mosley, et al. (1987), Boone (1996), Mosley (1980)and Jensen and Paldam (2003) suggests that financial aid has no impact on growth. It should however be noted that, despite the fact that Burnside and Dollar (2000) summarized that foreign aid has got positive results, this summary is applicable only to economies which the foreign aid is combined with superb fiscal, monetary, and trade policies. Recent studies by Doucouliagos and Paldam (2009) stated that the effects of foreign aid on growth estimates differ considerably adding up to a negligible positive, but unimportant, effect on growth.
The main aim of foreign aid in invigorating economic growth is to complement domestic sources of finance like savings, thereby escalating the amount...
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