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Foreign Aid: A double Edged Sword?

Whenever a foreign leader publicly tells an institution or individual to “go to hell”, that tends to create a lot of controversy and attention. Malawi’s current President Mutharika has done just that. His comments stem from the recent action taken by the World Bank and 5 other larger donors like Germany who have cut off aid to Malawi after suppression of opposition protests to his rule. The complete withdrawal of aid is a severe blow to Mutharika considering it represents an astounding 40% of the state’s operating budget. This recent event begs not the question whether Mutharika is out of bounds on his comments or political legitimacy but rather shines a light on the true effectiveness of foreign aid. There appears to be an interesting paradox: foreign nations are willing to give millions of dollars to countries in need of help, yet the complex rules in order to procure and maintain funding are in fact making them more dependent on their donors.

Aid sounds promising, as it’s meant to help a country reduce poverty and market imperfections. This reduction is meant to generate GDP growth of the recipient country, which is linked to the improvement of Human Development Indicators such as life expectancy, literacy, gender inequality, malnutrition, etc. But does it really work?

Aid donors also require strong and binding policies in the political and economical domains. Major donors like the World Bank and IMF require that recipients enforce specific conditions “or else” the removal of all aid. But historically, this attitude has lost its credibility as a sort of viscous cycles appears. A donor country or institution such as the case of the World Bank towards Malawi, is likely to pull back funding over a dispute. However, they will most likely reinstate it later because international pressure will force donors to start aid up again and simply reform the conditions, despite the persistence of bad policy. So with this in mind, poor policy decisions, human rights violations, and other continuing imperfections still occur despite donor ‘conditions’.

Here is the double-edged sword of foreign aid: Aid is said to only work if there is a good economic and political policy setting, yet the conditions that enforce this are loosing credibility and thus less incentive to properly reform. Dependence on aid is increasing, yet actual development and growth within the recipient country may be decreasing. Looking back at history, dependence does not equate to growth as it can be argued that Colonialism was a form of dependency on the nations that were occupied such as Malawi with the British.

With Malawi now only having 60% of its original budget, the government will naturally be forced to tighten its fiscal policy. A tightened fiscal policy means decreased government expenditure on various development projects that have been improving GDP growth  (5-7% annually) for the last five years. Schools are closing, agricultural and infrastructure projects are halting, unemployment is increasing, domestic production is decreasing, and imports are increasing with oil becoming more and more scarce due to rising global prices. A reliance on imported food is even more worrisome as the country has experienced sharp currency devaluation to compensate for its economic losses. All of this and it hasn’t even been a full year. Overall, debt is going up and it is the citizens who suffer the most. How is aid good if a country cannot function consistently without it? Politics should not override concerns over the most vulnerable.

If foreign aid donors say that an amount must go towards building a certain number of schools then, in the short-run, the schools are built and the aid donors are content. Celebration starts and the UN claims that Malawi is closer to Millennium Development Goal 2 (universal education) – maybe Malawi will even get more aid for such a success. But what happens to those schools after? Maintenance of the schools is not a condition, teacher training and employment isn’t enforceable and the opportunity cost in some of these villages may be higher by keeping the child at home or sending them to work. Grand political terms and ideals or large sums of money are not enough to solve problems in the long-term.

The unpredictability and time-inconsistency of aid is concerning. When will a developing country be stable enough to function without aid if it represents such a high percentage of its budget? Malawi shows foreign aid is too much of a “short-run and quick fix” approach, only concerned with a good political and economic environment. Aid should create long-term plans and build institutions and governance that are accountable to its citizens, not foreign donors.

 

–  Jackie Rood

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