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Foreign aid as foreign policy tool.

• Clair Apodaca Clair Apodaca Department of Political Science, Virginia Tech
• https://doi.org/10.1093/acrefore/9780190228637.013.332
• Published online: 26 April 2017

The majority of countries around the world are engaged in the foreign aid process, as donors, recipients, or, oftentimes, both. States use foreign aid as a means of pursuing foreign policy objectives. Aid can be withdrawn to create economic hardship or to destabilize an unfriendly or ideologically antagonistic regime. Or, conversely, aid can be provided to bolster and reward a friendly or compliant regime.

Although foreign aid serves several purposes, and not least among them the wish to increase human welfare, the primary reason for aid allocations or aid restrictions is to pursue foreign policy goals. Strategic and commercial interests of donor countries are the driving force behind many aid programs. Not only do target countries respond to the granting of bilateral and multilateral aid as an incentive, but also the threat of aid termination serves as an effective deterrent. Both the granting and the denial of foreign assistance can be a valuable mechanism designed to modify a recipient state’s behavior.

Donors decide which countries will receive aid, the amount of aid provided, the time frame in which aid is given, and the channel of aid delivery. The donor’s intentions and the recipient’s level of governance determine the type or sector of foreign aid. States can choose between bilateral or multilateral methods of disbursing foreign assistance in order to pursue their interests. Although bilateral disbursements allow the donor state to have complete control over the aid donation, the use of multilateral forums has its advantages. Multilateral aid is cheaper, it disperses accountability, and it is often viewed as less politically biased.

Foreign aid, once the exclusive foreign policy instrument of rich powerful states, is now being provided by middle-income countries, too. The motivation for foreign aid allocations by nontraditional donors parallels the motives of traditional Development Assistance Committee (DAC) donors. A main difference between traditional and nontraditional aid donors is that nontraditional aid donors generally do not place conditionalities on their loans.

The issue of fungibility can obstruct the donor government’s purpose behind the allocation of foreign aid. If the preferences of the recipient government are different from those of the donor, the recipient can often divert the aid and use it for other purposes. A recipient government may reallocate its budget after it determines how much aid it is slated to receive. The recipient government will redirect its resources to areas it deems a priority that cannot be funded externally, for example the military or prestige projects.

• foreign aid
• foreign policy
• nontraditional donor
• multilateral trust fund
• fungibility

Introduction

Foreign policy can be defined as a country’s behavior with regard to other states in the international arena, driven by its need to achieve its goals. Although the country’s goals can be economic or ideological, or to solve international problems, security concerns have always dominated the foreign policy agenda. States have several tools they can use to further their foreign policy. Chief among these options are diplomacy, cooperation and association agreements, trade, economic sanctions, military force, and the use of foreign aid. Foreign aid, then, is one of a number of tools that policymakers can use to further their foreign policy goals. Foreign aid also allows the donor state access and influence in the domestic and foreign affairs of other states (Apodaca, 2006 ). Tarnoff and Lawson ( 2016 ) report that U.S. leaders and policymakers view foreign assistance as an “essential instrument of U.S. foreign policy” which has “increasingly been associated with national security policy” (p. 1). Foreign aid is an expedient tool for the diplomat. It helps governments achieve mutual cooperation on a wide range of issues.

The objective of foreign policy is to influence foreign governments and shape international affairs to suit the state. Generally speaking, states have two overarching goals in their dealings with other states in the international system: to maintain and protect the status quo or to change the status quo (Palmer & Morgan, 2006 ). As a tool of foreign policy, foreign aid is provided to a recipient country as either a reward for some behavior or as an inducement to change behavior. The provision of foreign aid is the carrot that influences the recipient’s policy choices or other behaviors. The termination of aid, the stick, can also be used to alter a recipient country’s behavior. Indeed, all foreign aid comes with strings attached, 1 a fact U.S. foreign policy specialists recognize: “Foreign aid is a particularly flexible tool—it can act as both carrot and stick, and is a means of influencing events, solving specific problems, and projecting U.S. values” (Tarnoff & Lawson, 2016 , p. 1). Decisions on how, where, and when to allocate foreign aid is made by political leaders in the donor country. They base these decisions on the government’s perceived national interests, broadly defined. Consequently, foreign aid is used as a means of pursuing foreign policy objectives.

Foreign aid can also be used to complement to military intervention. A study by Kisangani and Pickering ( 2015 ) found that donor-state military interventions have a significant effect on that state’s foreign-aid allocations. During and after an intervention, foreign aid to the target state increases significantly. Foreign aid is a tool used to supplement the use of military force to ensure that foreign policy goals are met and, once met, secured. Foreign aid “demonstrates the benign intentions of the intervention (toward the target populace, if not the target government), and that the military action was undertaken to further ideals shared within the broader international community” (Kisangani & Pickering, 2015 , p. 219). The goals of encouraging good governance and democracy, fostering human rights standards, or alleviating poverty in the target state cannot be achieved with military might alone. They often require the provision of foreign aid.

Academic researchers have studied foreign aid since the establishment of aid giving. Researchers are perplexed as to why and under what circumstances the leaders of one state would provide valuable resources to another state. The continued and increased flow of foreign aid to underdeveloped states is all the more puzzling since because studies have shown that the official reason for aid allocation, economic development, has proven elusive. Is the problem of aid ineffectiveness a result of donor’s motives? Is it due to the channels of aid disbursement? Or perhaps it is about the fungibility of aid itself. The following sections cover several aspects of the relationship between foreign aid and foreign policy, beginning with a general discussion of what political leaders and researchers include as foreign and followed by discussions of the allocation of foreign aid, channels of foreign aid disbursement. an inquiry into who provides foreign aid and why, and, finally, a consideration of the issues related to the fungibility of foreign aid.

What Is Foreign Aid?

The Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) defines foreign aid as resource flows provided by official agencies with the intent to promote economic development. The resources must be given on concessional terms with at least a 25% grant element (OECD, website). The resources can be economic in nature, such as financial contributions, but can also include technical assistance and commodities (such as food aid or agricultural equipment). The costs of humanitarian aid within peacekeeping operations can also be considered foreign assistance. Several states include the gift or sale at concessional rates of military equipment as foreign aid, but the OECD specifically states that official development assistance (ODA) should not include military aid or antiterrorism activities. ODA includes the following sectors of aid allocation as classified and defined by the OECD website ( https://data.oecd.org/development.htm ):

Social Infrastructure and Services, including funding for education, health, and the promotion of civil society. In 2014 , 39.4% of all sector aid was allocated to social infrastructure.

Economic Infrastructure, which funds projects for transportation, energy, communications, and banking and financial services development, 23.4% of aid went to economic infrastructure in 2014 .

Production Sectors, which include funding for agriculture, forestry and fishing, industry, mining and construction. In 2014 , 9.1% of ODA went to the production sectors.

General Budget Support funds, which are contributions to government budgets and support for macroeconomic reforms. Only 1.5% of aid was apportioned to unearmarked 2 contributions, allowing governments to use these funds as they see fit since aid is not tied to a specific project or program.

Humanitarian Assistance, which encompasses emergency response, reconstruction and disaster prevention, and constitutes 10.8% of ODA. Humanitarian Assistance funds are donated to assist in man-made or natural disasters.

Multisector Support funding, which is geared to projects which straddle several sectors but basically include the environment and biodiversity. Multisector support is a recent category of aid and accounted for 10.2% of ODA in 2014 .

Action Relating to Debt, which includes debt swaps, debt forgiveness, and debt relief. A mere 0.43% of ODA is directed to issues of debt relief.

The remainder is unspecified aid. The data on sector aid are taken from the OECD International Development Statistics online CRS Aid Activities dataset ( https://stats.oecd.org/Index.aspx?DataSetCode=CRS1 ).

While aid aimed at economic infrastructure is usually targeted at countries with good governance and mature economic institutions, countries that lack such capacities usually receive aid in the form of social-sector assistance. Social-sector aid allows donors to target the welfare of the people, generally channeling aid through NGOs or multilateral organizations in ways that avoid bad policies of or corruption in recipient governments. Government involvement in education and health is less mandatory than government involvement in trade policy because substitutes for government institutions and procedures may be found in civil society or provided by NGOs and multilateral aid organizations (Bermeo, 2007 ). Typically, as disasters (manmade or natural) overwhelm a government’s ability to respond, foreign aid is directed toward sectors (normally humanitarian assistance) that require less government intervention. Aid directed at general budget funds, meanwhile, is given with the implicit understanding that governments can use these funds as they see fit. Donors become less reliant on good government policies as they move away from economic infrastructure and general budget support to production sector funding, to humanitarian assistance and the social infrastructure sector (Bermeo, 2016 ). Similarly, Akramov ( 2012 ) finds that aid directed at the production sector can be effective at promoting growth even in bad policy environments. Economic infrastructure aid, however, is effective only in countries with medium to high governance ratings. Years of research indicate that the recipient state’s internal capacity to absorb aid matters quite a bit in the donor’s decision on how aid should be allocated. Donors vary the sectorial composition of their aid in response to perceived governmental quality. Countries that are well-governed receive greater shares of their ODA in the budget, economic, and production sectors.

The Many Motives for Foreign Aid

Official governmental rhetoric declares that development and poverty reduction are principal reasons for granting foreign assistance. Foreign aid is given to a recipient country to facilitate economic development, alleviate poverty, and improve human welfare. Aid contributes to global security by tackling threats to human security, such as human rights violations, disease, population growth, environmental degradation, peacemaking, and the growing gap between the rich and the poor. Poverty and extreme inequalities are often causes of social instability and civil unrest, which, in turn, can produce flows of refugees and acts of terrorism. Thus, aid helps build a safer, more peaceful, and more secure world. Foreign aid is provided to many countries but is concentrated in countries reflecting the priorities of the international community and individual donor states. Lumsdaine ( 1993 ), for example, found that humanitarian concerns and moral values were a primary motivation in the allocation of multilateral foreign aid.

Lancaster ( 2007 ) argues that the provision of foreign aid has developed into an international norm. Rich countries provide assistance to poor countries to better the human condition. States are subject to the norms of behavior established by the international community. The allocation of foreign aid has become an accepted and expected standard of behavior among developed states, a standard that is now being recognized among a greater number of middle-income states. Most developed states have established foreign aid agencies, instituted foreign aid mandates, processes and procedures, and joined the DAC. Donor states provide foreign aid to alleviate poverty and foster development in the neediest underdeveloped countries. Lancaster admits, however, that given the number of potential recipients and the ever-expanding need (due to disasters, poverty, or economic crises), donors can also use their aid as incentives or as payments for approved behaviors, or to signal a desire to expand political relationships between donors and recipients.

Consequently, researchers have determined that foreign aid is often provided for interests other than developmental or humanitarian reasons. Bigsten, Platteau, and Tengstan ( 2011 ) estimated that if the European Union countries were to choose to optimize the distribution of foreign aid for the sole motive of reducing poverty, they would need to reallocate $19 billion of the $27 billion of EU aid—that is, over 70% of EU foreign aid—directing it to only the 20 poorest countries. Bigsten et al. ( 2011 ) determined that “the reallocation would lead to a modest increase of poverty among the donor darlings and a large decline in poverty in the orphan countries” (p. 11). However, the EU countries do not wish to optimize their foreign aid because they have economic and political purposes other than poverty reduction when they allocate aid.

Foreign aid is used predominantly to promote geostrategic interests, for the right to build and maintain foreign bases, to strengthen alliances, or to keep allied regimes in power. Foreign aid is also used to maintain friendly relations with foreign governments. Foreign aid facilitates cooperation, and it builds strong alliances. First, foreign aid can be used to maintain nations as allies. By economically or militarily supporting a friendly foreign government, the donor state can prevent the recipient state from falling into the enemy’s camp or from falling to domestic rebels. Second, foreign assistance may be granted in an attempt to gain foreign allies. And third, foreign aid can be used to win the hearts and minds of a population. For example, foreign assistance is viewed as an important instrument in the prevention of terrorist attacks by reducing the appeal of terrorist ideology. There is a general belief that foreign aid could reduce the likelihood of terrorist attacks by averting the causes of terrorism—namely, hopelessness and resentment as the result of extreme poverty, illiteracy, and hunger. Foreign aid would also be used to reduce poverty and inequality in the recipient state, thought to be a source of terrorist activity (Bush, 2002 ). Helping the poor increase their standard of living would also ensure that they would not fall prey to the ideological underpinnings of fundamentalists. Bush believed that “hope was an answer to terror” and that providing people with a positive future would lessen their desire to embrace a radical Islamic ideology. 3

Del Biondo ( 2014 ) concludes that the EU has moved closer to the United States in that its foreign assistance is more explicitly focused on security matters. Providing aid for antiterrorist programs, along with economic growth and development, as well as poverty reduction schemes in developing countries, safeguards European security. The United Kingdom’s Department for International Development ( 2001 ) claims that “many of the problems which affect us, such as war and conflict, international crime, refugees, the trade in illegal drugs and the spread of diseases like HIV and AIDS, are caused or made worse by poverty in developing countries. Getting rid of poverty will make for a better world for everybody.” Poverty and underdevelopment are also the underlying causes of the spread of disease, unwanted migration flows, and human rights violations. Thus, foreign aid is always in the service of foreign policy.

Geopolitical motives for foreign aid allocation have evolved over time and, in turn, affected the levels and direction of aid flows. During the Cold War, foreign aid was a tool Western states used to contain the spread of communism and to keep the power of the Soviet Union in check. In the post-9/11 era, foreign assistance is viewed as an important instrument in preventing terrorist attacks. Security concerns have, and will continue to have, a significant influence on the allocation of aid. Giving aid for geopolitically motivations aid is not an efficient use of aid, however, if purpose of the aid is poverty alleviation in the recipient country. But foreign aid can be successfully used to buy strategic concessions, such as the building of military bases or consolidating military alliances from the recipient government. Foreign aid can be a large component of foreign capital flows for many low-income countries, thus increasing their dependence on donor governments.

Foreign aid can also be used to further the economic interests of the donor state. For instance, it can be used to open foreign markets to multinational corporations headquartered in donor countries, to subsidize the donor’s domestic firms, or to provide employment for the donor’s domestic workers. Recipient countries that provide a favorable climate for foreign investment and trade receive more assistance. Data on the level and distribution of foreign aid reveals that it is mostly directed toward emerging or middle-income economies (those that are recipients of FDI and trade) at the expense of the poorest ones (Bertoli, Cornia, & Manaresi, 2008 ; Dreher, Nunnenkamp, & Thiele, 2011 ). Also, the giving of aid can secure access to vital raw materials (oil, minerals, etc.).

The commercial motive of foreign aid can be seen in the practice of tying aid. Tied aid is when a country binds its aid to the procurement of goods and services from the donor country. Tying aid occurs when, for example, a donor requires that aid recipients purchase the equipment, arms, materials, supplies, parts and services, or other commodities made in the donor country or from the donor’s corporations; use contractors or consultants from the donor country; or that the equipment be shipped via ships or airplanes flagged in the donor country. The intent is to increase market opportunities for the donor’s business interests. Tying aid is a common practice among donor nations. Radelet ( 2006 ) reports that, historically, the United States has tied approximately 75% of its aid, while Greece has tied 70%, and Canada and Austria have tied about 40% of their foreign assistance. In contrast, Norway, Ireland, and the United Kingdom do not tie their aid. Riddell ( 2014 ) reports that, overall, as much as 50% of ODA is tied in some fashion and that the tying of aid reduces its value by 15%–30%. Tying aid can reduce the value of the aid because it prevents the recipient country from buying the best-quality commodities at the lowest prices.

Colonial powers, historically, grant more aid to former colonies (Round & Odedokun, 2004 ). France, Portugal, Spain, and the United Kingdom are substantial donors of foreign assistance to their former colonies. Alesina and Dollar ( 2000 ) have concluded that “an inefficient, economically closed, mismanaged nondemocratic former colony politically friendly to its former colonizer receives more foreign aid than another country with similar levels of poverty, a superior policy stance but without a past as a colony” (p. 33). Aid by ex-colonial powers can help continue or regenerate colonial spheres of influence and reinforce political alliances. The aid provided by France is often cited as an example of a former colonial power wishing to maintain the special relationship with its ex-colonies. Aid provided by the French is used to fund educational training in the French language and culture.

Aid can be given to prevent or offset the effects of global negative externalities that can potentially affect the developed countries (such as infectious diseases, environmental contamination, or debt default). For example, donors will lend more money to countries in debt simply to keep recipient countries from falling into arrears (Birdsall, Claessens, & Diwan, 2003 ) or to provide humanitarian aid to accommodate refugees. Continuing to provide foreign aid to highly indebted countries can be used to reduce the risk that they will default, which could threaten the donor’s economy. And providing aid to countries neighboring a conflict or disaster can stem the flow of refugees seeking asylum in the West.

Foreign aid can also be provided to increase a country’s prestige. Van der Veen’s ( 2011 ) research explains that the Dutch were determined to set a new international level on aid giving in order to project an image of good global citizen, while the Norwegians focused on matching or surpassing other Western nations in the allocation of foreign assistance. States adopt an identity and role in the international community, and some states choose to be viewed as generous global citizens.

If aid were solely motivated by foreign policy objectives and donor self-interest, then how the recipient uses the aid and the importance of the quality of governance in the recipient country should not matter. However, Kilby and Dreher ( 2010 ) show that in practice, states use foreign aid to achieve many overlapping foreign policy goals, including fighting terrorist threats, supporting strategically important countries, fostering relations with countries that maintain large bilateral trade or capital flows, and the championing humanitarian goals of reducing poverty, encouraging democracy, enhancing gender status, and improving human welfare.

Channels of Foreign Aid: Bilateral versus Multilateral versus Trust Funds

When pursuing foreign policy, including foreign aid policy, states can choose between bilateral or multilateral actions. Bilateral aid is resources that flow directly from one country to another. Bilateral aid can be delivered through the public sector, NGOs, or public-private partnerships with the recipient country. Those who advocate the use of foreign aid as a geopolitical foreign policy tool prefer bilateral foreign aid because of the strategic objectives to be gained. With bilateral aid, the donor retains control over the funds and determines who will be favored with aid and under what conditions. Most foreign aid is overseen, and frequently managed, by the donor (Riddell, 2014 ). Donors do not like to give up control of their aid 4 by channeling it through a multilateral agency, unless, of course, they have significant influence over the decision-making operations of the agency. The receipt of bilateral foreign assistance leaves the recipient obligated to the donor.

Aid that is channeled through intergovernmental organizations such as the World Bank or regional development banks; the International Monetary Fund; UN agencies, most notably the United Nation Development Programme; and the OECD is known as multilateral aid. The aid becomes the development asset of the multilateral institution, which it then disperses based on the multilateral institution’s own decision-making process. The donor state cannot earmark or predetermine the aid’s use. Multilateral aid can only be delivered through the multilateral organization. Headey ( 2008 ) suggests that donors tend to channel their anti-poverty, development motivated assistance through multilateral institutions and use their bilateral aid to pursue geopolitical objectives.

The use of multilateral trust funds, or what is often referred to as “multi-bi” assistance, “allow[s] donor governments to cooperate with like-minded donors only, target their aid to specific countries, and development objectives while using the financial and, by and large, the implementation infrastructure of the multilateral organization which hosts them” (Eichenauer & Knack, 2016 , p. 2). Earmarking allows the donor and likeminded countries greater influence in the allocation of multilateral aid decisions by targeting priority issues or economically and politically important countries. In this way, donors can circumvent the multilateral development banks’ allocation of aid based on country performance, institutional capacity, and need. The ability to use the multilateral institutions while maintaining control of their foreign aid is a widespread donor strategy. Reinsberg, Michaelowa, and Eichenauer ( 2015 ) reported that multi-bi aid accounts for 60% of all multilateral aid, and in 2013 , the World Bank was managing over 900 trust fund accounts. The Afghanistan Reconstruction Trust Fund is one of the largest country-specific trust funds. The World Bank benefits from not only the additional fees it collects from donor countries (typically 2% to 5% of the trust fund), but the administration of the multilateral trust funds also allows the bank to increase its staff. The World Bank “holds, invests, and disburses funds,” thereby increasing its power and influence. The Bank’s management of the trust funds “underwrite[s] the Bank’s leadership in responding to international crises” (Independent Evaluation Group, 2011 , p. 9).

Why would states give up control over aid allocation policy by funding multilateral aid programs? Research has established that there are several advantages to using multilateral organizations to manage foreign aid.

Multilateralism is cheaper . Multilateralism is, in the opinion of Thompson and Verdier ( 2014 ), the solution to transaction costs, that is, the costs of negotiating (and renegotiating), monitoring and enforcing an agreement.

Burden sharing . There are 28 donor members of the OECD-DAC and another 29 non-DAC donors. This means that the costs and responsibilities for resolving global issues of poverty or disease eradication are not the burden of one country but based on the ability to pay. Kwon ( 1998 ) explains: “Those who would benefit most from a collective good and have the greatest resources to provide it will bear a disproportionate share of the costs, while “smaller” members of the group will bear a burden that is less than their share of the benefits and resources, behaving as free (or cheap) riders” (p. 39). Small donations can be combined with donations from other countries, amplifying their significance and providing help to recipient countries.

Deniability to the donor state’s own population . Using a multilateral aid agency allows the donor a certain degree of plausible deniability for the resultant outcomes thereby reducing the risk of criticism if the lending fails. Foreign aid does not have strong public support in most countries. But donor governments realize that aid is an important tool of foreign policy. Donors can fund but still distance themselves from politically controversial programs that may upset their domestic constituencies. Providing bilateral aid might not be politically astute if either the donor or the recipient citizenry objects to the funding. In 2013 , North Korea, Iran, and Cuba received a substantial amount of multilateral official development assistance, over $100 million each. Funding these countries, no matter the level of need, would be politically controversial in the United States. But as a major donor to the OECD, the World Bank, and the International Monetary Fund (IMF), the United States is indeed helping to fund programs in unpopular regimes. Donors may direct their aid through multilateral venues when conditions in the recipient country are politically sensitive or fragile, dangerous for staff members, or if the donor simply wants to diffuse accountability.

Multilateral aid is politically neutral and more needs-driven . There is also a perception that multilateralism guarantees uniform treatment and, consequently, is more legitimate and more fair based on need and not politics. This is a particularly important point if the donor’s citizenry believes that bilateral aid is too political and that multilateral aid is more altruistic. Multilateral agencies do hold a degree of autonomy with respect to state control. Thus, it is believed that multilateral aid is less politicized and based more on need and institutional capacity. Bilateral aid, on the other hand, is often controlled by vested interests that direct aid for strategic and political ends (Nunnenkamp & Thiele, 2006 ). However, there is some evidence that multilaterals are not impartial either and can also be easily captured for political and economic gain. A study by Kaja and Werker ( 2010 ) found that membership on the executive board of the World Bank’s International Bank for Reconstruction and Development (IBRD) resulted in approximately double the IBRD funding compared to countries that were not on the board. Favoritism rather than poverty reduction controlled IBRD lending. Similar research has shown that IBRD loans are heavily influenced by a recipient government’s temporary seat on the UN Security Council (Dreher, Sturm, & Vreeland, 2009 ; Kuziemko & Werker, 2006 ). However, Kaja and Werker ( 2010 ) also found that membership on International Development Association (IDA) board had no influence on IDA’s lending decisions. 5

Who Provides Foreign Aid?

Traditional foreign aid donors.

The first and most successful contemporary foreign aid initiative was the European Recovery Program (ERP), popularly known as the Marshall Plan. In 1947 , secretary of state George Marshall announced a United States proposal to rebuild Europe in the aftermath of World War II. World War II had completely destroyed the European economy and infrastructure, and a summer drought and exceptionally frigid winter in 1946–47 killed livestock and ruined crop production. The combination of the man-made disaster of war and the natural disasters of drought and blizzards, resulted in widespread starvation, wretched poverty, unemployment, and housing shortages in Europe. Although the Marshall Plan was motivated by humanitarian concern for the suffering of the European population, the plan also satisfied the strategic self-interests of U.S. foreign policy. United States leadership feared that with the destruction of the European economy and the growing misery of the European people, communism would gain a stronghold. The Marshall Plan proved to be very good for America’s economy, benefiting business, manufacturing, and agricultural interests by increasing U.S. exports and providing jobs to U.S. workers. Over the years, foreign aid has become an indispensable tool of U.S. foreign policy.

In Europe, the provision of foreign aid began with the independence of Europe’s colonies in Africa and Asia. Foreign aid flows to countries where EU donors have historically strong trade relations, investment interests, and colonial ties. Lancaster ( 2007 ) concluded that aid to former colonies has been based on the ex-colonies’ economic need, the desire to preserve the donor’s influence in those countries, and as a means of disengaging while keeping their reputations more or less intact. Aid was also seen as a means to prevent a massive return of settlers and emigrants. Maintaining secure export markets in former colonies is also an important motivation for European foreign assistance. Although these motives remain, the Library of Congress’s ( 2015 ) comparative analysis of foreign aid reports that

the major objective of the foreign aid policy of the EU is the reduction and the eventual elimination of poverty. In pursuing its foreign aid policy, the EU aims to promote human rights, gender equality, democracy, the rule of law, access to justice and civil society, the rights of the child and indigenous people, protection of the environment, and the fight against HIV/AIDS. (p. 10)

Yet issues of security, colonial history, and economic-energy interests redirect the EU’s foreign aid from solely humanitarian need to self-interested practicalities.

Foreign aid priorities vary widely among the individual states.

Lancaster ( 2007 ) states that Japan’s generous aid policy is the result of its reparation payments and its need to secure much-needed raw materials. Japan also used foreign assistance to increase its international reputation and status. Under Article 9 of the Japanese Constitution, Japan was prohibited from maintaining a military (other than for self-defense) and was unable, until recently, to participate in international humanitarian operations. Thus, Japan relied on providing foreign aid to project its power and influence onto the international arena.

During the Cold War, Soviet foreign aid was given to build influence in nonaligned countries and maintain a sphere of influence with poor communist countries (particularly North Korea, North Vietnam, Cuba). In addition, the Soviet Union provided considerable amounts of foreign aid to African states to foster close relations and to secure access to raw materials. After the fall of communism, the Russian Federation became a recipient of foreign assistance. However, in the 21st century , Russia is a “re-emerging donor” of foreign aid ( Guardian , 2011 ). Russian foreign assistance reflects its historical Soviet roots for foreign aid allocations. The largest recipients of Russian aid in 2012 were the Kyrgyz Republic, Tajikistan, Serbia, Mongolia, Cuba, Nicaragua, North Korea, and Syria (OECD, QWIDS, online). Russia’s sectorial focus is on health and food security (Hynes & Trzeciak-Duval, 2015 ).

Growth of Foreign Aid Donors

The highly developed countries in North America, Western Europe, Japan, New Zealand, and Australia, as well as the middle-income countries of China, India, South Korea, Brazil and the oil-rich countries of the Middle East have established foreign aid programs. The importance of foreign aid as a foreign policy tool is substantiated by the fact that foreign aid recipients are also foreign aid donors. In addition to the 28 DAC donors, 6 the OECD identifies 29 non-DAC donors that provide significant amounts of aid annually. Researchers have only recently recognized the importance of nontraditional aid donors in the study of aid as a tool of foreign policy.

More recently developing countries, oftentimes foreign aid recipients themselves, have become foreign aid donors. The motivations for middle-income country foreign aid provisions largely mirror those of traditional donors. Foreign aid by middle-income countries is used to further foreign policy goals, to increase regional power, to advance national interests, and to strengthen commercial ties. Nontraditional (non-DAC) donors have learned that foreign aid can be a useful tool to win allies, garner support in international forums, and advance foreign policy objectives.

Nontraditional donors, it is claimed, have a better understanding of recipient needs and of programs that work (Dreher et al., 2011 ). Accordingly, based on this experience, non-DAC donors are less willing to provide general budget support, aid that allows discretionary use, or outright grants rather than subsidized loans (Davies, 2010 ). As with the DAC donors, much of non-DAC aid is tied (recipients are obligated to purchase goods and services from the donor country). Contrary to the criticism that DAC donors make recipient needs secondary to political, strategic, or commercial interests, it appears that DAC donors are more needs-oriented than non-DAC donors (Dreher et al., 2011 ; Fuchs & Vadlamannati, 2012 ). An empirical study by Dreher et al. ( 2011 ) found that non-DAC donors place less importance on recipient needs than do traditional DAC donors.

The belief that non-DAC donors respond to recipient need is belied by a study by Fuchs and Vadlamannati ( 2012 ). These researchers report that India provides foreign assistance to countries with a higher GDP per capita than India itself, thus underscoring the notion that foreign policy goals rather than human needs motivate the foreign aid allocations of India. Woods ( 2008 ) reports that energy security, increased trade, and new economic partnerships are the primary motivations for most non-DAC donors. Research by Fuchs and Vadlamannati ( 2012 ) confirms that assistance from non-DAC donors is even more self-interested than aid from DAC donors. Given that resources are more dear in poor countries, non-DAC donors require a “return” on the foreign aid investment.

A primary difference between DAC and non-DAC donors, however, is the willingness to provide aid “without Western lectures about governance and human rights” ( Economist , 2010 ). Thus, foreign aid between southern donors and recipients is provided based on mutual benefit, non-interference and respect for sovereignty so that aid is not contingent on human rights protection, the promotion of democracy, or the reduction of corruption (Mawdsley, 2012 ), highly valued conditionalities 7 that traditional donors place on their foreign aid. Funding by nontraditional donors allows countries to reject the conditionality-laden loans of the IMF, the World Bank, and bilateral Western donors (Pehnelt, 2007 ).

China has become one of the major foreign aid donors. 8 China provides aid to countries that accepted it as the legitimate government of the Chinese people. Dreher and Fuchs ( 2011 ) confirm that political concerns drive China’s foreign aid allocations, but no more so than other major donors. China’s aid is free of democratic, good governance, and human rights considerations. China foreign aid is directed towards infrastructure development requiring 50% of the construction contracts to be awarded to Chinese contractors and 50% of the materials to be procured by Chinese business (Kjøllesdal & Welle-Strand, 2010 ).

Many non-DAC Donors provide aid, not only in an attempt to legitimize themselves as regional leaders, but also to assist trade and investment deals. In 2014 , Brazil, China, India, Russia, and South Africa, BRICS Group members, created two new international financial institutions, the New Development Bank (NDB), and the Contingency Reserve Arrangement (CRA). The BRICS set aside $50 billion in initial capital for infrastructure and sustainable development for low-income countries through the NDB, while the CRA had $100 billion in funds for countries in balance of payment difficulties due to short-term liquidity problems (Desai & Vreeland, 2014 ). Mwase ( 2011 ) suggests that BRICS donors allocate foreign aid to countries with weak institutions and poor governance because the World Bank and IMF deny aid to countries they determine to be too risky to finance. Countries who are ineligible for World Bank and IMF loans thus have a source of income provided by BRICS. BRICS have cultivated potential partners and allies from among those World Bank or IMF ineligible countries.

Also in 2014 , China, along with 21 Asia–Pacific nations, established the Asian Infrastructure Investment Bank (AIIB)—with China providing 50% of the initial capital—and the Silk Road Infrastructure Fund (SRIF)—where China is providing $40 billion in startup funds—to help fund infrastructure projects in Central and South Asia (Carsten & Blanchard, 2014 ). China, as a founding member of and the largest contributor to the newly established institutions, plays a significant role in all the new banks’ decisions. Thus, these new funding institutions strengthen China’s political and economic relations with other developing countries. Although the stated purpose of the newly created multilateral, yet regionally focused, development finance institutions (the NDB, CRA, AIIB, and the SRIF) is to complement, not challenge, the established assistance programs, scholars believe that the primary purpose of the banks is to solidify China’s role as regional leader while allowing it to extend its influence among developing countries and providing it with greater access to raw materials (Dixon, 2015 ).

Arab governments have long been major donors of foreign assistance. A report by Rouis ( 2010 ) found that Arab donors, principally Saudi Arabia, Kuwait, and the United Arab Emirates, allocate 1.5% of their gross national income to foreign aid, more than twice the United Nations target of 0.7%. Although Villanger ( 2007 ) reports that Arab aid is used to promote Islam, build Arab solidarity, and is focused on predominantly Muslim countries, Rouis ( 2010 ) acknowledges that Arab aid now extends to a greater number of countries:

At present, Arab ODA covers a wide range of countries, and especially poor countries in sub- Saharan Africa such as Mali, Mauritania, Senegal, Somalia, and Sudan; and in Asia such as Cambodia, Bangladesh, Nepal, Pakistan, Sri Lanka, Tajikistan, and Vietnam. (p. 2)

Like Western donors, Arab donors are strategically motivated in the allocation of foreign aid. Arab donors, however, do not place conditionalities of good governance, democracy, or human rights standards on their aid. But they do closely monitor the projects they fund to prevent corruption (Villanger, 2007 ). The sectorial focus of Arab aid is productive infrastructure.

Two other significant aid donors are also aid recipients: India and Brazil. OECD International Development Statistics ( http://stats.oecd.org/qwids/ ) report that, between the years 2005 and 2009 , Brazil received over $1.47 billion in official development assistance from all donors. Yet the Library of Congress ( 2015 ) writes that Brazil provided $1.8 billion in foreign aid between those same years. The OECD estimates that India furnished $539 million in foreign assistance in 2009 and 2010 and received over $5.3 billion in foreign assistance during that same time period. The Library of Congress also reports that whereas South Africa has “robust and fast-growing foreign aid programs” (p. 222), it still received over $1 billion in 2014 alone. Each of these countries tries to use its aid to influence the policies of the recipient country.

Does Foreign Aid Work as a Foreign Policy Tool? The Issue of Fungibility

Aid fungibility occurs when the recipient uses the aid for purposes other than what the donor intended or when donor aid substitutes for government funding (McGillivray & Morrissey, 2004 ). Fungibility occurs when the recipient government decreases its contribution to a project or program as a result of external funding. If a donor allocates foreign aid to build a hospital, the recipient government can redirect the funds it had intended to use to build that hospital to other projects. Foreign aid, then, frees up government revenue for spending in other sectors, such as the military, nonproductive government consumption for prestige projects, or tax reductions for the wealthy. Collier and Hoeffler ( 2007 ) reported that around 40% of African military spending is financed by OECD aid because of aid fungibility. This does not include outright military aid or aid that is provided to the government for general budget funds. Donors that are concerned about the recipient using the aid for purposes it was not provided for can choose to fund project aid (that is, specific investment loans for funding sanitation infrastructure or building a clinic, for example) 9 over programmatic aid (budgetary support funds, e.g.; Herring & Esman, 2001 ). Morrison ( 2012 ) notes that “there is little doubt that project-based aid is meant to reduce the discretion of recipient countries in terms of how to spend the money” (p. 60). In corrupt, poorly governed, or fragile states, donors will bypass recipient state institutions and disperse their aid through nonstate development partners, reducing the ability of central governments to divert funds (Dietrich, 2013 ). However, Briggs ( 2014 ) suggests that donors may use the fungibility of aid to accomplish foreign policy objectives; for example, if the donor’s citizens would not approve of their government’s support of an authoritarian regime, the donor could “turn a blind eye to fungibility if they wished to support a recipient leader” (p. 195). Indeed, Licht ( 2010 ) shows that donors were more likely to allocate aid to incumbent leaders if they faced an elevated risk of losing power.

For example, the United States’ bilateral economic assistance includes the category of Economic Support Funds (ESF). ESF funding, although officially listed as economic aid, is generally recognized as military assistance since it is used to financially support those countries considered politically and strategically important to the United States’ security interests. The US executive branch favors ESF since, as economic aid, it avoids the public debate and congressional challenges associated with the granting of military aid to authoritarian countries or those that abuse human rights (Ruttan, 1996 ). The ESF program is financial assistance for budget support that allows recipient countries to use their own resources to build up their defense infrastructures. It also includes the sale or grant of U.S. military arms and equipment. According to Tarnoff and Lawson ( 2016 ), 56% of ESF funding went to Egypt, the West Bank, Jordan, Afghanistan, and Pakistan in 2015 .

Conclusions: A Future for Foreign Aid?

In spite of the trillions of dollars provided by foreign aid donors over the past 70 years, global economic inequality persists and countries remain underdeveloped, both economically and politically. Yet though the level of aid transfers varies from year to year, depending on budgetary crises and global need, foreign aid is not going away. An early scholar of foreign aid, speaking about U.S. foreign assistance, wrote over 50 years ago, “Foreign aid as a political instrument of U.S. policy is here to stay because of its usefulness and flexibility” (Montgomery, 1962 , p. 9). These words are just as true in the 21st century . Foreign aid is a tool of foreign policy, not solely an instrument for the economic development of poor countries. However, scholars, such as Diamond ( 2008 ), believe that poverty reduction, the institution of good governance, and the growth of democracy in developing states are in the national interests of donor states. Funding foreign aid with conditionalities can be used to enhance national security, further economic and political interests, and ultimately empower the citizenry of poor countries. However, with the growth of nontraditional donors and their resistance to imposing the conditionalities of democracy and human rights on their lending, foreign aid may be further reduced to the crass, self-interested motivations of commercial or political interests. Given the differences over the motivations for providing foreign aid, it is hardly surprising that questions of whether aid has a future need to be asked and answered.

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1. The recipient of humanitarian and emergency aid is obligated to disburse the donor’s aid in an unbiased, neutral manner. “Humanitarian assistance,” in the words of Duffield et al. ( 2001 ), “has always been a highly political activity” (p. 269). Humanitarian aid has been used to alter conflicts and transform regimes, thus it reflects the foreign policy preferences of donors.

2. Earmarking is when the donor designates its assistance to be used for a particular purpose. The recipient can use foreign aid that is not earmarked for any purpose it desires.

3. The administration’s sentiment was reiterated by James Wolfensohn, the World Bank president (1995–2005), on February 16, 2004, in a speech at the conference “Making Globalization Work for All.”

4. The donor’s desire for oversight and management is not necessarily an unreasonable requirement. Foreign aid is most efficient in democratic countries with good governance, respect for the rule of law, a vibrant private sector, and strong institutions with a competent regulatory system. However, countries in the most need of aid are also the countries short on these same characteristics. Poor countries are often typified as corrupt, lacking accountability, or anocratic or authoritarian governments.

5. The Bank has two major lending agencies. The International Bank for Reconstruction and Development (IBRD) is a branch of the Bank that lends money at market rates to middle-income and creditworthy low-income countries that display principles of good governance but have only sporadic access to private market capital. The International Development Association (IDA) provides loans (credits) and grants to the poorest countries at concessional rates. IDA loans provide money for poverty reduction and human development projects such as primary education, health services, and water and sanitation facilities.

6. The EU as an organization is the 29th DAC member.

7. Conditionalities refer to donors’ demands that the recipient undertake specific structural or systemic level changes, such as adopting economic liberalization policies or demanding more-democratic political procedures. Conditionalities encourage aid recipients to act in accord with the donor’s ideological preferences.

8. China began its foreign aid programs in 1950 with funds provided to North Korea. Later, in 1956, China extended its aid to non-Communist countries. Since that time, China’s aid programs have expanded in size and scope.

9. A reliance on project assistance will not completely solve the problem of fungibility since recipient governments can still skew the projects towards higher income groups.

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Reasons and motives for foreign aid

Generally, reasons for providing foreign aid can relate to humanitarian, political and economic motives (Lancaster, 2007). Humanitarian motive is closely associated with moral or ethical responsibilities of rich individuals and countries to help poor individuals and countries.

Humanitarian motive for providing foreign aid is also associated with the notion of altruism, which stresses the moral obligation of each individual to help other individuals (Moyo, 2009). Moreover, ulitarilism, as an extreme version of altruism dictates that the moral standards of actions are determined by the levels of their capacity to provide benefits to all parties (Lundsgaarde, 2012)

Political motive , on the other hand, can be guided by strategic interests of developed countries in a way that foreign aid is provided in exchange for a support of a particular stand or initiatives. The Marshall Plan initiative can be mentioned to illustrate the case of foreign aid guided by political motive, because this initiative has been developed in order to safeguard European countries from the influence of Communist USSR.

The relevance of political motive to the provision of foreign aid to Uganda in particular can be specified as minimal because this point is barely addressed by media and individual writers and researchers.

The provision of foreign aid as economic self-interests can be facilitated mainly in two forms. Firstly, foreign aid can be provided in order to develop new markets to sell the products of developed countries. The case study of Nestle Cerelac baby food can be mentioned to explain this point.  Specifically, Nestle has been accused of inappropriate marketing practices in Uganda in a way that its Cerelac baby food products have been advertised as being more beneficial to babies compared to breastfeeding (Baby Milk Action, 1997).

Secondly, provision of foreign aid can be used as a means of disposing of surpluses. Developed countries, as well as, many developing countries maintain certain amount of food surpluses to be consumed in times of natural catastrophes, environmental disasters etc. It is a common practice to send these surpluses as foreign aid to poor countries such as Uganda upon the approach of their expiry dates.

The benefits of foreign aids and level of dependency of Uganda on foreign aid

European Recovery Program, also known as The Marshall Plan is considered to be a major force behind the evolution of foreign aid towards its present form. The Marshall Plan involved the donation of up to 3 percent of national income in the USA to restore Europe following The Second World War.

Due to the major positive impact associated with the implementation of The Marshall Plan officials in highly developed countries became convinced that the same strategy could be used to solve extreme poverty and other issues faced by countries in African continent.

The publication of ‘Assessing Aid’ by the World Bank in 1998 also marks an important event in the development of foreign aid practices. These practices mainly consist of providing food or cash or reducing the levels of debts of countries involved.

Supporters of foreign aid to Africa in general, and Uganda in particular point to the developments associated with a range of specific programs and initiatives such as UN Millennium Project, Poverty Eradication Action Plan, Live 8 concerts and others.

Moreover, World Economic Forum (2005), African Development Bank, World Food Programme and International Fund for Agriculture and Development are often credited for assisting in the development of overall infrastructure in Uganda, and promoting economic growth through various aid programmes and a series of debt relief initiatives.

Nevertheless, still Uganda is highly dependent on foreign aid “since the mid-1990s, Uganda has enjoyed an influx of foreign aid amounting to 80 percent of its development expenditures and has been the beneficiary of a number of generous donor initiatives” (Branch, 2011, p.84)

Supporters of providing foreign aid to Uganda argue that  “ever increasing injections of foreign aid have been essential for the long-term rehabilitation of infrastructure, for funding new projects, and for balance of payment support” (Leggett, 2001, p.60)

The UN Millennium Project, introduced by the UN in 2000 is especially praised by various parties for its considerable progress in terms of achieving its declared goals. Specifically, the official eight goals of the UN Millennium Project consist of eradicating extreme hunger and poverty, achieving universal primary education, promoting gender equality and empowering woman, reducing child mortality, improving maternal health, combating HIV/AIDS and other diseases, ensuring environmental sustainability, and developing a global partnership for development (Sumner and Mallett, 2013).

The positive impact of the UN Millennium Project to promote growth in Uganda in particular has been linked with tens of thousands of families using combinations of fertiliser trees, phosphorus, and biomass, construction of emergency obstetric care facilities for women, achieving the coordination of Uganda AIDS Commission with 1000 partner agencies, and addressing the issue of female genital mutilation (UN Millennium Project Report, 2005).

Moreover, UN Millennium Project is credited for the development of financial instruments in order to protect farmers against price fluctuations and natural disasters.

The launch of Commission for Africa in 2005 by then Prime Minister Tony Blair in the UK has been perceived by some as indication of focused approach being adopted by highly developed countries in terms of assisting Africa with its severe problems. Comprising seventeen members in total and nine members from Africa, the Commission for Africa has aimed to propose a coherent package of initiatives to making Africa stronger and more prosperous. Importantly, recommendations proposed by Commission for Africa have been discussed and taken into account in G8 meetings in Glenagles on July 2005.

Global initiatives such as Live 8 charity concert organised by Irish pop star Sir Bob Geldof has involved more than 1000 musicians performing with the broadcasts on 182 television networks and more than 2000 radio networks worldwide. Communicating the message of making poverty a history, the concerts took place on July 2, 2005 in 10 venues in the UK, France, Germany, Italy, USA, Canada, Japan and Russian Federation.

The success of Live 8 is linked to the fact that rather than asking individuals, organisations and countries for financial contribution in a direct manner, the initiative has aimed to increase the level of awareness of people towards the issues of poverty in general.

Provision of food aid to Uganda and its advantages

Provision of food aid to Uganda is associated with a set of conflicting objectives such as the willingness of developed countries to dispose of expiring food surplus at the same time when implementing their foreign policy (Branch, 2011).

The benefits of food aid to Uganda as well as any other poor country in African continent is obvious and they are related to providing resources free of charge, saving many human lives from famine, and a potential for achieving stabilisation of food supply and price.

At the same time, disadvantages of providing food as a foreign aid include formation or increasing level of dependency of receiver to this type of foreign aid and high costs associated with supply of food for donors.

Disadvantages of foreign aid to Uganda: popular sceptical arguments

As it has been discussed above UN Millennium Project is often praised by UN member governments for making substantial contribution in terms of promoting growth in Africa. At the same time, critics of the UN Millennium Project point to the absence of specific and measurable criteria against which the success of the project could be evaluated.

Critics argue that due to the foreign aid Uganda is more indebted today than ever before. It has been assessed that “approximately USD 3,100 million is owed to the multilateral creditors with World Bank, IMF, and African Development Bank being the main creditors” (Kazimbazi and Alexander, 2011, p.29).

In other words, it can be observed that instead of promoting economic growth and providing funds for the government to deal with a range of severe issues the country is faced with, the intervention of World Bank, IMF, African Development Bank and other external organisations with the economy of Uganda have resulted in more debts being accrued.

Aid absorption, defined as “the widening of the current account deficit due to incremental aid” (Schabbel, 2007, p.277) can be mentioned as a stark example of ineffectiveness of foreign aids in Uganda in terms of contributing to economic development.

The negative impact of corruption in Uganda in distribution and utilisation of foreign aid is significant. There are convincing evidences (Barkan, 2011) that in all sectors in general, and in educational sector in particular only a small fraction of foreign aid reaches its intended destination, the major part being unlawfully consumed by corrupt officials.

This problem has escalated to an extent where the World Bank’s county director Kundavi Kadiresan has warned Ugandan President Yoweri Museveni with stopping the aids altogether unless decisive measures are taken to fight with corruption (Ford, 2010)

Interestingly, at the same time, the practice of donors channelling money to non-government organisations in a direct manner via commercial banks is often criticised by various parties, because Central Bank cannot control this money and accordingly, the real amount of aid coming to the country remains unclear.

Moreover, economists argue that substantial amount of cash entering Uganda as aids are increasing the level of demand for products and services, at the same time when the level of output of products and services are not increasing, and this situation is blamed for a very high level of inflation in Uganda (Bilur et al., 2011).

Foreign aid to Uganda has been also blamed for sustaining unfair and corrupt regime of President Yoweri Museveni from a political collapse (Ernst, 2011). In other words, there is an argument that if not for foreign aid the current corrupt regime of Yoweri Museveni would have collapsed due to public discontent in the face of major challenges facing the country and it could be replaced with more competent government.

Alternatively, at least the necessity of economic and political reforms would have been appreciated by the current government of President Yoweri Museveni if it was not subsidised by regular foreign aid.

Some critics remain pessimistic to Tony Blair’s Commission for Africa because of the choice of traditional tools to help Africa selected by the Commission. Specifically, it has been argued that Commission for Africa relies on traditional strategies of endorsing increased foreign aid and writing off debts of African countries, and these strategies have proved to be ineffective and even counter-productive in the past.

Moreover, an institutional practice of debt relief implemented towards Uganda and other countries in African continent in a regular manner can decrease the level of motivation of government officials to make the most effective use of the loans provided. In other words, government officials in Uganda may develop the habit of relying on assumptions that loans being provided are going to be written off  after a certain period of time, and thus they are not going to assume due level of responsibility towards the funds being given.

Interestingly, critics argue that the majority of present day debt of Uganda was not incurred under the violent rule of Idi Amin, however disastrous his regime might have been. On the contrary,  more than 90 per cent of Ugandan debts have been incurred as a result of reforms initiated by IMF and the World Bank starting from 1981 (Mwenda, 2006).

Debt relief as foreign aid at its consequences

Uganda has been presented with debt relief on seven occasions during the period of 1982 – 2006. As a result of series of debt relief initiatives by IMF, the World Bank and MDRI “Uganda’s total debt outstanding declined form its 1992 peak of 102 per cent of GDP to about 12 per cent of GDP in 2007” (Bulir et al., 2011, p.7)

High level of ineffectiveness of the strategy involving debt relief for Uganda is best illustrated by the fact that in one particular occasion “immediately after Uganda’s debts were forgiven, the government bought a private jet for the president at a cost of USD 35 million” (Mwenda, 2006).

Unfortunately, the occasions of debt relief are generally not perceived by government officials in Uganda as opportunities to increase the standard of life through channelling the newly available funds for development purposes. On the contrary, each occasion of debt relief has been traditionally utilised by the government as an opportunity to borrow more funds only to be misused as a result of corruption.

Poverty Eradication Action Plan and its impact on Uganda’s economy

Poverty Eradication Action Plan for Uganda first initiated during the presidential elections by Meseveni and implemented by the Ministry of Finance, Planning, and Economic Development is considered to be an important event that has increased the amount of foreign aid received by the country.

Aiming to reduce the poverty to 10 percent by 2017, the Poverty Eradication Action Plan comprises five major building blocks: a) economic management; b) production, competitiveness, and incomes; c) security, conflict resolution and disaster-management; d) good governance, and e) human development (Ernst, 2011).

The initiative has been highly appraised by a range of developed countries and international organisations.  For example, the World Bank and IMF have referred to the Poverty Eradication Action Plan as a sample document to be devised by other countries as well that aim to attract foreign aid in order to deal with internal challenges.

Alternatives to foreign aid for Uganda

Taking into account negative impacts in various levels foreign aid have had on the economy of Uganda and other countries in Africa, this essay points to a set of alternatives to foreign aid that need to be looked at in order to improve the situation.

Public expenditure reforms in Uganda represent a realistic opportunity of achieving economic development and increasing the standards of life. The practices of recruiting ‘ghost soldiers’ have been revealed in Uganda the salaries of whom are taken by high level army officers (Mwenda, 2006).

There is also a realistic potential for Uganda to increase the level of government revenues through taxes though reforming the country’s taxation system. Under the current system, the corporate tax in Uganda amounts to 42,9 per cent of gross profit which is very high compared to many other countries globally, and this situation can be blamed for encouraging tax evasion practices (Ernst, 2011).

Moreover, top individual income tax totals to 30 per cent which is also high by international standards. The taxation system in Uganda needs to be reformed in a way that the level of taxes need to be reduced at the same time when relevant government agencies need to ensure collection of taxes from all private and organisational entities according to the jurisdiction. In this way there would be more incentives for businesses to pay taxes with positive implications on national economy.

Increasing the level of domestic investment is considered to be one of the most obvious and most effective strategies to decrease the levels of dependency of Uganda on foreign aid. At present “agriculture accounts for about 60% of the GDP, with major export crops including coffee, tea and tobacco. Over 90% of Ugandans are either subsistence farmers or work in agriculture-related fields” (Briggs, 2010, p.27).

Taking into account the high level of popularity of coffee, tea and cotton in global markets and the possibility of harvesting the same products of a high quality in Uganda it can be stated that the standard of life in Uganda can be significantly increased through achieving better deals for its agricultural products in an international market.

The discovery of oil in the Lake Alberta can be interpreted as a signal for potential reserve of natural resources in Uganda that yet to be found and utilised. It has been found that in Lake Alberta alone “the estimated reserves are 2.3 billion barriers, with the potential production estimated to be as high as 200,000 barrels per day” (Barkan, 2011, p.14).

This is a justified reason to believe that further explorations can result in finding additional reserves of oil, gas, coal or other natural resources and this could have highly positive implications on the standard of life in Uganda.

The levels of fiscal responsibility, instead of fiscal dependency of the government of Uganda need to be increased. This can be achieved through imposing fixed conditions associated with the provision of aid. However, it has to be acknowledged that the implementation of this scenario in practice is associated with a set of specific issues. For example, it is difficult to ensure that the fixed conditions mentioned above would not serve foreign politics of developed countries at the same time.

Extremely high levels of inflation in Uganda can be specified as one of the roots of its major economic issues. Accordingly, Central Bank of Uganda and Ministry of Finance, Planning, and Economic Development should work on devising effective fiscal policies at the same time when encouraging the levels of outputs of products and services within the country.

It is important to note that the state of national economy in Uganda has been directly related to the world price for coffee for the last several decades. Specifically, the rise of coffee prices to USD 2,58 per kg in 1995 from USD 0,87 in 1992 has had positive implications on the standard of life of Ugandan people. Similarly, when international price for coffee fell to USD 0.89 in 2005, the negative implications of this change to the standard of life of Ugandan people was stark (Mwenda, 2006).

Accordingly, taking into account the fact that the government of Uganda possesses no instruments to impact the international price for coffee in a direct manner, it needs to decrease the levels of dependency of the national economy on agriculture through supporting other sectors of economy such as manufacturing and services.

It has to be noted that the amounts of foreign aid to Uganda and other countries in Africa have decreased during the last several years as a result of budget constraints in the USA and Europe due to macroeconomic issues being faced by developed countries (Lundsgaarde, 2012). This situation increases the importance of exploring alternatives to foreign aid discussed above in practical levels.

To put it simply, unless internal issues in Uganda are addressed as specified above, the economic situation within the country is most likely to deteriorate due to reductions on the volume of foreign aid the county receives.

Education as solution of problems in Uganda

Major issues today Uganda is faced with are mainly related to lack of competency of government officials and a high level of corruption in all levels of government. Therefore, instead of providing foreign aid in the forms of food, money and debt relief, donors can aim at increasing the level of professional competency of government officials so that greater positive impact can be made.

Various educational grants and work experience opportunities can be provided to Ugandan government officials at various ranks so that the knowledge and experience gained in a developed country can be applied in Uganda in order to achieve economic growth. Upon the implementation of this strategy in practice enhanced focus need to be directed to young professionals in Uganda, because investments in their training and development can provide substantial benefits in long-term perspectives.

Conclusions

International aid to Uganda and other poor countries in Africa can be both, part of the problem or part of the solution for the issues of poverty reduction and achieving economic growth. So far due to a set of specific factors international aid has proved to be part of the problem towards the issues of poverty reduction and achieving economic growth in Uganda.

Specifically, these factors include but not limited to the lack of incentives for government officials to promote economic growth and extremely high levels of corruption within various government ranks

It is evident that despite the massive part of foreign aid being stolen by local authorities, foreign aid can assist Ugandan people to a certain extent. This is because food can be provided to poor people, as well as, schools can be built from a small fraction of foreign aid that eventually reaches the people it was intended for in the first place.

However, the provision of foreign aid in the forms of food, cash and debt relief is only short-sighted approach to the issue, and the solution of problems for long-term perspectives require deep institutional changes.

Today foreign aid in Uganda is found to be subsidising a high level of corruption and incompetence of government officials and thus the provision of foreign aid in its present form needs to be subjected to immediate and comprehensive critical evaluation.

This essay has outlined a set of available opportunities that the government of Uganda can explore in order to decrease the level of dependency to foreign aid. These opportunities have been found to include reforming public expenditures, reforming the country’s taxation system, increasing the levels of domestic investment, and achieving better deals for its agricultural products in an international market. Moreover, the government of Uganda needs to engage in explorations and search for natural resources within its borders, as the discovery of large oil reserve in the Lake Alberta can be interpreted as an indication of the presence of other similar reserves.

Problems in Uganda and many other countries in African continent need to be solved internally, rather than externally. Internal solutions are directly related to modernisation of policies and a wide range of important domestic institutions. The sources of revenues for Ugandan government need to be changed from foreign aid to revenues generated from the private sector. However, in order to achieve this appropriate policy changes need to be introduced and adequate infrastructure needs to be developed for the private sector.

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Bertrand, O., Betschinger, MA. Foreign aid and its unintended consequences. J Int Bus Policy (2024). https://doi.org/10.1057/s42214-024-00192-5

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Introduction

Foreign aid has played a major role in Ethiopia’s development effort since the end of World War II. It has been instrumental in bridging the country’s savings-investment and foreign exchange gaps. Its importance as a source of financing for the development of capacity building (human capital, administrative capacity, institutional building, and policy reforms) is also unquestionable. Thus, increasing efforts were made to mobilize foreign aid in the last two regimes. Following the change in political regime in 1991 and the adoption of the structural adjustment program in 1992/93 in particular, the country has enjoyed a significant amount of aid. A large and growing inflow of concessionary loans and grants has occurred since 2001, following the issuance of the first poverty reduction strategy paper (known as the Sustainable Development Poverty Reduction Program) from 14 multilateral sources—mainly IDA, EC, the Global Fund, and the African Development Fund and more than 30 bilateral sources—mainly the USA, UK, Italy, Canada, Germany, Ireland, Japan, Netherlands, Norway, and Sweden.

Ethiopia has been one of the major recipients of international aid in recent times. According to OECD-DAC statistics, net ODA to Ethiopia amounted to US$1.94 billion in 2006, making it the 7th largest recipient among 169 aid receiving developing countries. In absolute terms, the amount of ODA has risen sharply from an average of $881 million per annum in the second half of the 1990s to over $1574 million per annum for the first half of the 2000s. Over the last seven years (2000-2006), ODA has averaged at $1683 million per year. The average contribution of bilateral donors to ODA over the eight year period was $322.4 million per year accounting for 31 percent of ODA. In the 1990s, some 49 percent of the total net ODA was in the form of multilateral aid. This was slightly reduced to 46 percent for 2000-2006, reflecting the increased importance of non-multilateral sources. Figure 1 presents the recent annual flows of foreign aid to Ethiopia.

As shown, the flow of net ODA actually declined from 1992 to 2000 and sharply increased in 2001 with a modest increase onwards. The main driving force for donors to resume their assistance was the issuance of the Sustainable Development Poverty Reduction Program in 2001/02. Of these significant net ODA flows, the contribution of the World Bank’s support through the soft windows of IDA was tremendous. In 2001 alone it was 38.7 percent of the total net ODA. Since 1993, the Bank has committed a total of $3.1 billion to Ethiopia. Ethiopia receives about $8.0 per capita from IDA. This makes Ethiopia the largest IDA borrower in Africa and the fifth largest in the world. In addition, the Bank has coordinated a consortium of donors to support the economic reform program.

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So far, the U.S. has reacted to the Taliban’s victory – and the collapse of the Afghan central government – by focusing on the plight of the Afghans who did not make it onto a flight headed to the United States during the collapse and of the Afghans who are now threatened by the Taliban due to their direct support of the U.S. during the fight against the Taliban or from their ties to the Afghans who did.

At the same time, the U.S. has taken measures that have affected virtually all of the 37 million Afghans who will remain in Afghanistan. It has suspended the infrastructure projects and other forms of aid granted by the U.S. through USAID, the World Bank, IMF and the Asian Development Bank. It has also frozen the Afghan government’s reserves held in U.S. bank accounts.

The central bank of Afghanistan’s reserve assets are reported to have totaled $9.4 billion as of April 2021, according to the International Monetary Fund. This total equaled roughly one-third of Afghanistan’s annual economic output in April 2021, and some $7 billion were held in the United States when the U.S. government froze the assets. President Biden then signed an executive order creating the possibility of splitting $7 billion in frozen Afghan funds held in the United States to potentially allot half for humanitarian aid to the country while keeping the other half available for possible seizure by victims of the September 11 attacks. 1

The end result is that the U.S. now has frozen aid money in ways that have crippled the Afghan economy and banking system, making the Afghan immediate economic crisis far worse – at a time when the Afghan people face massive needs for emergency aid for food and basic services. Coupled to the actions of other countries and to the Taliban’s lack of progress in creating an effective system of governance, the result is a potential humanitarian disaster that is several orders of magnitude larger than the potential fate of the Afghans still attempting to leave the country.

These immediate challenges, however, are only part of the problem. The most serious challenge is finding some way to create an effective structure of Afghan governance and economic development in the face of some two decades of failure from 2001 to the defeat and collapse of the Afghan central government in August 2021.

Urgent as the immediate humanitarian challenge may be, no amount of humanitarian aid can substitute for the creation of some form of effective government and an Afghan economy that can eventually be self-sustaining, rather than one that is dependent on massive flows of outside aid or the perpetuations of the prolonged suffering of the Afghan people.

The practical problem for the U.S., however, is what level of aid it should provide now that the central government has been decisively defeated by the Taliban, what terms – if any – it can impose on the Taliban for using this aid, and who should administrate the flow of such aid and ensure that proper use is made of U.S. and other funds.

The Immediate Humanitarian Crisis

It is important to stress that the exact scale of the present humanitarian crisis is uncertain, and the estimates published by humanitarian aid groups and media sources are also highly uncertain. The rise of the Taliban from 2004 onwards slowly created a situation where the UN and other aid workers ceased to be able to measure the effectiveness of the Afghan government and the effectiveness of the aid to that government in a steadily growing number of districts from at least 2011 onwards.

The U.S. government and other sources stopped issuing public reporting on the progress in the improvement of governance and development by District around some point in 2014. The UN also stopped public reporting on what areas were safe for aid workers. Both the Afghan government and aid donors never developed effective systems for controlling the flow of aid money, countering waste and corruption, and reporting on the overall effectiveness of aid and development projects in many areas.

The estimates of the present humanitarian crisis have been issued without any public explanation on the sources of data, their credibility and levels of uncertainty, and the areas where there is an adequate outside presence to actually collect and verify the necessary data. They almost certainly are “guesstimates” and have the worst-case bias that is a necessary part of mobilizing adequate aid flows in a crisis.

Most such estimates also grossly oversimplify the problem of estimating and actually allocating such aid. They give a figure for the entire nation, although the actual problems are usually far worse in some areas than others, and/or they have very different impacts on given elements of the population, different sectors of the economy, and different income groups.

Nevertheless, it is clear that the main source of income for the modern sector of the economy was dependent on the flow of aid for some 75% of government funds and possibly accounted for over 40% of the GDP when measured in monetary terms. It is equally clear that the U.S. alone has taken measures that have crippled Afghan institutions like the Afghan central bank.

Moreover, it is clear from a wide variety of media sources that the Taliban has not been able to create the equivalent of a new government at the national, regional, or local level – nor does it have the ability to create a system of efficiently paying its own fighters. 2 On-the-scene media reporting makes it equally clear that many important aspects of the Afghan government like medical services, education, infrastructure projects, banking, and other activities are not being funded, and workers are not being paid. Even Taliban fighters generally receive supplies but do not have a salary, and many government workers have not been paid for weeks or even months.

Respected sources like the UN, USAID, and the Special Inspector General for Afghan Reconstruction (SIGAR) may have to issue estimates that are partly guesses, but they all have years of active presence in Afghanistan – and they warn that there may well be what SIGAR calls a “Tsunami of hunger and the widespread risk of famine in Afghanistan this winter and spring.” Key warnings include: 3

• The United Nations Development Program and the International Monetary Fund estimated the Afghan economy, as measured by GDP, will have contracted by 20–30% in 2021.
• As of December 2021, the UN World Food Program estimated that 22.8 million Afghans face acute malnutrition, 8.7 millions of whom are nearing famine. The World Health Organization estimate that one million Afghan children are at risk of dying from starvation this winter.
• Hospitals nationwide have little to no money for salaries, equipment, medicines, or supplies. According to WHO, only 17% of the Afghanistan’s clinics and health facilities were fully functioning in September 2021. Starting in October and November, USAID and other international donors provided bridge funding in the short term, averting a complete collapse of the public health system. USAID told SIGAR that longer-term solutions are being discussed and will be key for maintaining the health sector achievements of the past 20 years.
• The health-system crisis comes amid a record crisis of food insecurity, with nearly four million Afghans estimated to “need acute malnutrition treatment services in 2021, including one million children under five with severe acute malnutrition, 2.2 million children under five with moderate acute malnutrition, and 700,000 pregnant and lactating women with acute malnutrition.” A November WHO estimate foresaw at least one million children at risk of dying from severe malnutrition if they do not receive immediate treatment.

Over $8 Billion in Immediate Crisis Funding

As might be expected, these problems have also led to calls for massive amounts of new humanitarian aid from the U.S. and other donors at a time when many countries have cut or suspended aid – or even reprogrammed aid funds. SIGAR noted in its January 2022 report that, 4

• The UN’s Office for the Coordination of Humanitarian Affairs reported that donors contributed $1.67 billion for Afghanistan humanitarian assistance programs in 2021. The United States contributed the largest amount, over $425 million. These amounts far exceeded previous years’ humanitarian assistance.
• …On December 22, the Treasury Department broadened the types of activities authorized under U.S. licenses, and the UN Security Council established a UN sanctions exemption to facilitate the delivery of humanitarian and other forms of aid to Afghanistan.
• On January 11, 2022, the White House announced an additional $308 million in U.S. humanitarian aid for Afghanistan. On that same day, the UN launched a $5 billion funding appeal for its 2022 Afghanistan Humanitarian Response Plan, the largest single- country aid appeal in UN history.
• On January 26, the UN announced an additional appeal for $3.6 billion as part of its Transitional Engagement Framework. In total, the framework calls for more than $8 billion in humanitarian and other aid for Afghanistan.

No one can really estimate what is really required at this point or what arrangements the U.S. and other outside powers can make to allocate such aid to the Taliban or any other successor government, but the current outlook of estimates – that are even as high as $8.6 billion – seem to ignore several critical aspects of the financing of the past Afghan central government and the impact of its spending on the Afghan people before it was defeated and collapsed.

• Some 75% of all Afghan government spending came from aid. As SIGAR notes, “prior to the collapse of the Islamic Republic, international aid contributed to around 40% of Afghanistan’s GDP and 75% of public expenditures. 5 Total government spending financed most of the modern sector of the Afghan economy except for hard currency earnings from the export of narcotics.
• For political reasons, much of the economic data on Afghanistan did not include narcotics exports. However, UNDOC estimates that, “the gross output of the Afghan opiate economy was between $1.8 and $2.7 billion in 2021, comprising the equivalent of 9–14% of Afghanistan’s GDP and exceeding the value of all of Afghanistan’s officially recorded licit exports for 2020 (estimated at 9% of GDP). 6
• While military air and spending went to the now defeated and disbanded Afghan National Army and the Afghan Security Forces Fund, this spending still accounted for a large portion of the total money available for salaries, and many civil activities like construction. None of the current estimates of aid requirements seem to take the need to replace a large portion of this spending into account.
• Humanitarian aid is extremely difficult to allocate and manage effectively even when a country had a working structure of governance. Large scale efforts are even harder to control and audit for effectiveness, fairness, and fiscal responsibility than normal government spending.
• Some past sources of outside income are no longer functioning. The World Bank reports that, “As the Afghan economy has struggled to find areas of sustainable economic growth in recent years, the country has increasingly relied on remittances from Afghans working abroad, especially in neighboring Iran. By 2019, remittances accounted for the equivalent of 4.3% of Afghanistan’s annual GDP, an increase from 1.2% in 2014, according to World Bank data.101 However, officials from the UN’s International Organization for Migration estimate this figure could have been as high as 15–20%, given that many remittances are sent through the informal hawala money-transfer system. In 2020, remittances to Afghanistan dropped by 10%... 7

Aside from agriculture, most of the real-world Afghan economy in the modern, urban, and monetary sectors was financed by the equivalent of foreign grant aid. If humanitarian aid is substituted for this past funding, the existing Afghan economy would suffer massive damages – damages made worse by cuts in the past flow of such aid.

And, Aid That Only Buys Time and Fails to Produce Lasting Benefits

Previous aid amounted to vast sums at the best of times, and the Taliban is anything but a popular recipient of aid. Furthermore, there are major problems in actually administering such aid and ensuring it can have any lasting impact.

The Taliban has not yet shown it can actually organize effective governance or administrate such aid, and many countries – including the United States – have already cut or halted their flow of aid or reprogrammed it. The Taliban seems divided over how to proceed in forming a government. Many foreign aid teams have already left Afghanistan, and it is highly unlikely that donors will contribute anything like the levels of humanitarian aid the UN is seeking.

Equally important, most humanitarian aid normally only buys time and deals with immediate humanitarian needs. It assumes that there will either be a natural recovery or additional aid to solve the underlying problems that create the crisis. For example, humanitarian aid might fund a bridge in the case of a famine caused by drought, but it is not intended to develop the economy; it is not intended to be a lasting substitute for adequate economic development; and it is not normally allocated in ways designed to develop an effective structure of governance and support the basic infrastructure of health, education, and vital human services.

Humanitarian aid often relies heavily on foreign staff that normally rotate on a relatively short-term basis. The aid, itself, needs to be rushed into the field or to those who need it. It is hard to manage effectively at the best of times by even the best government, and it is delivered in ways that make its allocation vulnerable to waste and corruption. Moreover, in a deeply divided country like Afghanistan – where the central government never really had unified leadership – success can sometimes depend on shifting resources from the resisting power structure to those affected by a given humanitarian crisis, creating new political challenges in the process.

The Longer-Term Needs Growing Out of Twenty Years of Failed and Corrupt Governance and Development

These are critical issues in a country like Afghanistan that must deal with a very real immediate humanitarian crisis and requires the Taliban to credibly create a new government and sources of foreign support under even the most optimistic assumptions. However, the Taliban and any other successor government – as well as foreign donors – face the additional challenge that some twenty years of efforts in nation building from 2001 to 2021 only made limited nationwide progress in one of the most undeveloped countries in the world. Moreover, the aid attempted to resolve the challenge, not of “reconstruction,” but rather of the need to develop and construct a functioning modern government and economy for the first time.

Twenty Largely Wasted Years

Afghanistan is a country that has not had a stable political structure for half a century, following the collapse of the Afghan monarchy in 1973. It is also a country where the scale of its need for effective development and governance is illustrated by the fact that the U.S. Census Bureau estimates that the population rose from only 13.6 million in 1990 to 22.5 million in 2001 and to 37.5 million in 2021 – nearly three times larger than the estimate in 1990. 8

While there are no reliable data on the changes in the structure of its economy and urbanization, its dependence on a monetary urban sector – and on service and industrial jobs – that probably increased by some 50% during the period between 1990 and 2020 and very well may have doubled. 9 As the Taliban may have to learn the hard way, Afghanistan cannot function by regressing into subsistence agriculture or into a social and economic structure based heavily on an extreme form of religious ideology.

The previous Afghan government failed to come to grips with these challenges during both decades of its existence, as did the Taliban during the period it governed in the late 1990s and the governments sponsored by Russia in the 1970s. In spite of some economic progress in the period between 2001 and 2011, and in selected areas like education and the role of women, the overall economy steadily deteriorated in the face of the growing fighting with the Taliban from at least 2013 onwards.

Failed Governance and Nation Building

The World Bank estimates that the Afghan GDP per capita peaked in 2013 at only $569 constant U.S. dollars in 2015, and it dropped to only $530 in 2020 – before the defeat and collapse of the Afghan central government in 2021. 10 These figures, however, ignore income distribution that became skewed heavily in favor of officials, the military, contractors, and a small group of elites – and as is discussed shortly, extraordinary levels of inadequate civil governance and corruption.

If one ignores the favorable reporting and spin issues by some Afghan and U.S. spokespersons and public affairs officers, there was far too little success in creating a viable Afghan economy. SIGAR reported in January 2022 that, 11

• Annual per capita income is estimated to have fallen from $650 in 2012 to $500 in 2020, and is expected to drop to $350 by 2022.79 According to UNDP, male unemployment in Afghanistan may nearly double from 15.2% in 2019 to 29% by 2022.
• In the worst-case scenario modeled by the Asian Development Bank, unemployment could increase by more than 40% in the short run and household consumption could contract by 44%.
• The devaluation of the afghani has also impacted the Afghan economy and further diminished Afghan households’ ability to purchase food and other necessary items, because much foreign trade was settled in U.S. dol- lars. Since August 2021, the afghani has depreciated against the U.S. dollar, from approximately 77 afghani to the dollar to around 105 as of January 2, 2022.
• UNDP estimates that imports from Pakistan fell by 40% between August and November 2021.117 Total imports may have fallen by almost half ($3.2 billion) by the end of 2021, further exacerbating food and energy shortages. The total value of Afghanistan’s exports is estimated to be one-fifth of the imports total, comprising mostly agricultural goods.

Work, done by SIGAR in analyzing U.S. efforts to aid the civil side of Afghan reconstruction and by a wide range of other sources in evaluating Afghanistan’s real-world economic progress after the new central government was established in 2001-2002, shows that the reconstruction effort and various development plans failed. Far too many efforts failed in the face of a corrupt and incompetent mix of the central government in Kabul and various regional power brokers. The same warnings emerged in the work by the field teams of the World Bank and many other analysts.

The World Bank reported in October 2021, well before the growing scale of the immediate crisis in Afghanistan was fully clear, that, 12

Recent political developments have pushed Afghanistan into economic crisis. In August, the Taliban assumed power in Afghanistan, with immediate repercussions across an economy already facing daunting development challenges. Rapid reduction in international grant support, loss of access to offshore assets, and disruption to financial linkages are expected to lead to a major contraction of the economy, increasing poverty, and macroeconomic instability. Even before the collapse of government, Afghanistan was facing daunting economic and development challenges. Afghanistan’s economic growth was slow up to August 2021, reflecting weak confidence amid a rapidly worsening security situation, and severe drought conditions negatively affecting agricultural production. In addition, Afghanistan experienced a third COVID-19 wave starting in April. Infection rates have reached record highs, with less than five percent of the population fully vaccinated. Output is expected to have contracted sharply since the Taliban takeover due to the combined impacts of a sudden stop in donor and government expenditure, disruptions to trade, and dysfunction of the banking sector. Inflation accelerated gradually over the first half of 2021. Energy prices increased by 12 percent in the first half of the year in line with global trends. Prices for basic household goods, including food and fuel, increased substantially as the Taliban captured border posts and key transit hubs, disrupting supply chains. Inflation further accelerated following the Taliban takeover, reflecting depreciation, hoarding, and disruptions to international trade. Government revenues fell short of budgeted levels throughout 2021, reflecting excessively optimistic revenue targets. Since mid-July, revenue performance worsened as the Taliban captured major border crossings. Budget execution faltered in the context of deteriorating security conditions for project implementation (the development budget execution rate was 28.4 percent at end-July, compared to 32.1 percent in 2020, and slowed sharply thereafter). By early August, the Taliban had gained control of customs points accounting for around 57 percent of total customs collections, equivalent to roughly 27 percent of total government revenue collection. In the Mid-Year Budget Review, government revised down revenue targets by 26 percent and slashed allocations to development projects and other discretionary expenditures by 45 percent (or US$ 0.5 billion). Limited information is available regarding fiscal performance since the Taliban takeover. The interim Taliban government has resumed centralized customs collections, with daily collections equal to around 50-60 percent of the 2020 average. The financial sector, already facing important constraints, has been pushed into crisis. Liquidity of both commercial banks and the central bank were substantially eroded in the lead-up to the Taliban takeover, due to a high volume of cash withdrawals from commercial banks and intensified US dollar auctions. Banks ceased operating immediately following the Taliban takeover, and since reopening have faced major difficulties in processing international transactions due to the central bank's restrictions on capital outflows and reluctance of offshore corresponding banks’ to engage in transactions due to concerns associated with sanctions. Firms and households have been unable to access bank deposits, with strict limits imposed by the central bank on the withdrawal of US dollars and local currency. Constrained ability to process international transactions has undermined formal sector international trade, with firms unable to transfer funds overseas to pay for imports. Severe uncertainty and anticipated lower donor inflows placed pressure on the exchange rate through the first half of 2021 with the Afghani depreciating by around four percent against the US dollar. The central bank responded through increased US dollar interventions leading to a slight depletion of international reserves. Money market fragmentation and sporadic Taliban efforts to control rates offered by traders preclude any accurate assessment of exchange rate movements since the Taliban takeover. The economic and development outlook is stark. Sharp reductions in international aid are driving a collapse in basic health and education services. The sudden loss of public sector activity will have impacts throughout the economy, especially in the service and construction sectors (which account for 58 percent of GDP). Declining grants combined with a loss of access to foreign exchange is expected to result in a balance of payments crisis, with Afghanistan historically reliant on grant inflows to finance its very large trade deficit (28 percent of GDP in 2020). On the current trajectory, Afghanistan is likely to face depreciation of the Afghani, inflation, and shortages of critical household goods, including food and fuel (around 80 percent of electricity, between 20-40 percent of wheat, and nearly all fuel oil is imported). A substantial share of the population is expected to move below the poverty line reflecting negative impacts through employment and price channels. Ten million Afghans are vulnerable to falling into poverty, living with incomes between one and 1.5 times the poverty line (US$0.94 per person per day). The food security situation will also deteriorate, with potential long-term negative impacts given Afghanistan’s young population.

The CIA has not updated the unclassified analysis in its World Factbook to deal with the Taliban’s victory and the collapse of the central government, and its text badly needs updating. Even so, the CIA reported that, 13

… political instability, expiring international financial commitments, and the COVID-19 pandemic have wrought significant adversity on the Afghan economy, with a projected 5% contraction. Current political parties’ power-sharing agreement following the September 2019 presidential elections as well as ongoing Taliban attacks and peace talks have led to Afghan economic instability. This instability, coupled with expiring international grant and assistance, endangers recent fiscal gains and has led to more internally displaced persons. In November 2020, Afghanistan secured $12 billion in additional international aid for 2021-2025, much of which is conditional upon Taliban peace progress. Additionally, Afghanistan continues to experience influxes of repatriating Afghanis, mostly from Iran, significantly straining economic and security institutions. Afghanistan’s trade deficit remains at approximately 31% of GDP and is highly dependent on financing through grants and aid. While Afghan agricultural growth remains consistent, recent industrial and services growth have been enormously impacted by COVID-19 lockdowns and trade cessations. While trade with the People’s Republic of China has rapidly expanded in recent years, Afghanistan still relies heavily upon India and Pakistan as export partners but is more diverse in its import partners. Furthermore, Afghanistan still struggles to effectively enforce business contracts, facilitate easy tax collection, and enable greater international trade for domestic enterprises.

The CIA also reports that Afghanistan maintains one of the lowest real GDP per capita incomes in the world (204th), made little progress in industrial output, maintained one of the world’s highest unemployment rates (23.9%) even in 2017, sustained one of the highest budget deficits, and oversaw a poverty rate than had risen to nearly 55% as early as 2016.

Paying for War Instead of Civil Progress

Work by SIGAR and other analysts shows that far too much of the aid money the U.S. and its partners spent on nation building and in funding the Afghan government – spent under the misnomer of “reconstruction” – was actually spent on operating costs or construction for the first time. It was spent on unrealistic and grossly over-optimistic projects like creating a “new silk road.” As noted earlier, it also had little – if any major – impact on the Afghan economy, military forces, or failed civil efforts like “counternarcotics.”

At the same time, the U.S. and other donors spent far more on Afghan military forces than on even nominal efforts to create a stable Afghanistan and a working economy. SIGAR reporting makes it brutally clear that the U.S. government and other donors totally failed to hold the previous Afghan government accountable for its corruption, theft, and waste.

Once again, SIGAR and other reporting do show that Afghanistan made some progress in limited areas. However, they also show that Afghanistan failed to move toward effective national development.

Figure One shows how little money the U.S. spent on national civil reconstruction efforts after FY2013, and SIGAR reports that DOD’s latest Cost of War Report , dated June 30, 2021, said the cumulative obligations for Afghanistan, including U.S. warfighting and reconstruction, had then reached $839.8 billion. The cumulative civil reconstruction and related obligation spending reported by State, USAID, and other civilian agencies only reached $49.7 billion, or 5.9% of this total.

If one accepts the far higher cost estimates Brown University makes of the fighting – which use a methodology that would also vastly increase the cost of U.S. entitlement programs if it were applied to the entire U.S. budget – the total cost of the Afghan War to the U.S. would have amounted to $2.31 trillion, including Veterans and other out-of-country spending, and this spending on civil reconstruction aid would then only account for $2.2%. 14

The end result was that larger and larger percentages of a steadily dropping U.S. and international civil aid effort before the defeat and collapse of the Afghan central government went to simply keeping the government working or to humanitarian aid – aid that that usually is meant to buy time by relieving immediate human suffering but does nothing to create an effective overall structure of government or a viable and stable economy.

Figure One: The Cost of the Afghan War and Reconstruction: Annual and Cumulative Obligations: FY2002 to FY2021 Q3

A Grim Heritage of Failed and Corrupt Central Governance

As virtually all examinations of how this money was actually spent show, this spending also involved various levels of corruption and waste. Transparency International, the World Bank, SIGAR, and other sources have also shown that far too much of the aid the Afghan central government received between the years of 2001 and 2021 was wasted or stolen by the Afghan government and contractors, or it was spent on creating a large central government apparatus that promised to support development plans that the Karzai and Ghani governments never really executed.

The Transparency International’s Corruption Index for 2021 shows such levels of corruption for the entire decade it covers. It also rates Afghanistan as the seventh most corrupt nation in the world during its last year in 2021. 15 The detailed warnings from the Fund for Peace and its Fragile States Index are equally clear and rank Afghanistan as having the ninth worst government in the world before the defeat and collapse of the Afghan central government by the Taliban. 16 Moreover, at the time the Afghan government collapsed, SIGAR had 65 open investigations into corruption and bribery, procurement and contract fraud, theft, money laundering, and other miscellaneous misuses of aid funds. 17

As for the World Bank, Figure Two shows that its governance indicators warn that the favorable hype issued by the U.S. and other governments effectively lied about the progress being made by the Afghan central government between 2001 and 2022. In practice, aid and development efforts never created a period of effective governance, and such efforts remained dismally corrupt and incompetent, regardless of leader and regime from 1996 onwards.

In contrast, the official managers of the aid efforts failed to either act effectively or honestly address the issues involved. Like many aspects of the reporting on the growing success of the Taliban in the fighting, the U.S. and other donors effectively chose to lie by omission and allowed much of the funding to be stolen or wasted. From the start, however, it is clear that the now defeated Afghan central government was one of the most ineffective and corrupt governments in the world.

In many ways, the Afghan central government was a government whose leader controlled most funds and the central government’s appointments without any effective checks and balances, transparency and public review, or any real supervision by the Afghan legislature. In practice, its president used aid spending to build his own power base and buy the support of local power brokers while tolerating extraordinary levels of corruption.

Moreover, power brokers ruled in many areas outside the capital, and the Taliban effectively controlled a steadily growing number of rural areas and Districts from 2004 onwards. The fact that such local power brokers then took or wasted large amount of money – often focusing the spending on their own power base – meant that the central government was often more the government of “Kabulstan” than the nation. This also applied to the steady increase in the de facto Taliban control of rural areas and Districts.

Figure Two: World Bank Ratings of Key Indicators of Afghan Governance and Corruption 1996-2020 – Part One

Afghanistan: All -Corruption, effectiveness, rule of law, stability and violence, Voice and Accountability, and regulatory quality

Figure Two: World Bank Ratings of Key Indicators of Afghan Governance and Corruption 1996-2020 – Part Two

Hard Choices Between U.S. Strategic Neglect and New Approaches to Aid

The practical question for the U.S. is what can be done to deal with the combined impact of this legacy of urgent humanitarian needs and failed governance and development. It seems unlikely that any credible combination of donors will meet the immediate humanitarian goals described earlier, and it seems equally unlikely that the Taliban will have organized an effective government to use such aid in the coming year and whether its present leaders can at the very least survive, let alone set meaningful goals for both humanitarian aid and development.

At this point in time, there is no way to know when or whether the Taliban can even be as effective as the former Afghan central government, how it will adapt to Afghanistan’s real-world needs, and when or if there will be sufficient aid to support both immediate humanitarian needs and some credible model of development. In practice, it seems likely that Afghanistan will be an unstable crisis state for at least the next two years.

It is equally unclear that any present organization or country exists outside of Afghanistan to manage either humanitarian aid or development – particularly one the Taliban would trust and agree to work alongside. The development plans created by aid agencies and donor conferences during 2001-2021 bordered on being political and economic fantasies in terms of cost, time, and effectiveness – and in dealing with Afghanistan’s deep political, ethnic, sectarian, tribal, and functional divisions and problems in governance and politics.

These are issues that are even more critical now that the more effective elements of the central government and most power broker-dominated elements of regional governance are gone. Worse, they make it even more likely that many forms of humanitarian aid may simply be wasted money, prolonging Afghanistan’s economic and governance problems rather than solving them.

This is especially likely given the fact that there is no clear indication of when or if the Taliban will become an effective government – or what levels of aid and spending will actually take place from 2022 onwards. This makes it all too likely that most near-term aid will have to be spent on helping the Afghan people to survive the country’s structural economic crisis even if there are no further droughts, and that the little money remaining will be spent on any of the development and governance efforts needed to create sustained progress and to support a nation that can fund its own government and economy.

Moreover, one needs to be grimly realistic about the Taliban even if it can gradually form a real national government. It not only is an ideologically extremist movement that seeks to live in a mythical religious past, but it also seems to lack both a strong charismatic leader and the unity necessary to create a more effective and unified replacement.

The history of such revolutionary ideological movements is anything but reassuring. They tend to either come under the leadership of a warlord or authoritarian figure that places staying in power a far higher priority than serving the people, or they divide into a dysfunctional and unstable mess. This seems especially likely, given the fact that the Taliban has effectively inherited the wind from the previous central government.

At the same time, there are severe limits to the role the U.S. can credibly play. The U.S. may have financial leverage, but it has remained the Taliban’s main enemy for two decades, shares none of the Taliban’s more extreme values, has many higher competing strategic priorities, and is unlikely to achieve major domestic political support for any massive aid effort to Afghanistan.

If anything, if the U.S. did attempt to lead an outside aid effort, the end result might well become the equivalent of a “Humpty Dumpty” option. Instead of helping, this effort might only succeed in alienating the Taliban, creating competition with neighboring powers like Russia and China, and failing to sustain a meaningful effort in the face of a lack of support from Congress and the American public. Put bluntly, all the President’s economists and all the President’s men have already proved to be unable to put Afghanistan together again.

Accordingly, the U.S. may well be limited the following real-world options:

• Strategic Neglect: Do what is necessary to expedite the movement of Afghans still in Afghanistan that supported the U.S. government to travel to the United States. Leave the problems in Afghanistan to others – providing limited aid if necessary for political purposes but shifting the bulk of the burden to regional powers that are scarcely America’s strategic partners but that will be forced to act because of the threat posed by Afghanistan’s regional instability in their own neighborhood. Effectively shift responsibility to Russia, China, Iran, and Pakistan. From a purely selfish perspective, this might well be the best U.S. policy option.
• Indirect Support: A more positive option – but one still likely to have limited success – would be to encourage an aid consortium led by a relatively neutral state or body with a strong background in both humanitarian aid and development like Sweden, Switzerland, or an international consortium of donors.

The U.S. could then work with other donor states to try to ensure that outside aid was tied to clear conditions that both required effective humanitarian and development activity as well as limited Taliban domestic extremism – or that set similar conditions on aid to any other emerging government. Such U.S. participation would need to be careful to avoid polarizing aid support in ways that would exclude or appear to threaten Russia, China, Iran, and Pakistan. It would also have to show the U.S. Congress and American people that the U.S. portion of such aid would be affordable and effective, and the U.S. would have to work quietly with other donors to insist on real conditionality without appearing to dominate the effort.

The problem with this option is the difficulty in creating any kind of collective effort that produced an effective impact. Relying on UN and consortium efforts to press hard for effective management, fiscal control, and conditionality has generally proven to be uncertain in the past. The U.S. should only choose such an option if it can decisively avoid the past lack of real-world conditionality and would need to make it clear that the U.S. would not only halt aid under such conditions but would openly and fully explain its reasons for doing so in order to put leverage on both the emerging Afghan government and the managers of the outside aid effort.

• Open Support: Over time, the U.S. could play a more open and larger U.S. role in such a consortium effort while letting other countries take the lead. In theory, this could be more effective, but it is unclear how the Taliban or other successor governments would react, that any aid consortium will take effective action, and that the U.S. would have sufficient domestic political support to increase its role over time.

Grim as it is to say, the previous analysis of the scale of the challenges involved in humanitarian aid, in creating effective governance, and in creating a practical economic development effort all warns that it may well be too late for the U.S. to act in ways that have more than limited effectiveness. The scale and timing of Afghan needs may well be too demanding. Put more simply, the road to hell has already been paved with too many good intentions.

This commentary entitled, Reshaping U.S. Aid to Afghanistan: The Challenge of Lasting Progress , is available for download at https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/220223_Cordesman_Lasting_Aid.pdf?N_7raUY9O4ZLFNyGIFYopKEs.0LNAq2X .

Please consult the PDF for references.

Anthony H. Cordesman holds the Emeritus Chair in Strategy at the Center for Strategic and International Studies in Washington, D.C. He has served as a consultant on Afghanistan to the United States Department of Defense and the United States Department of State.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

Anthony H. Cordesman

Programs & projects.

• Afghanistan
• Lessons of War
• Terrorism and Counterinsurgency
• U.S. Strategic and Defense Efforts

Development co-operation

The OECD designs international standards and guidelines for development co-operation, based on best practices, and monitors their implementation by its members. It works closely with member and partner countries, and other stakeholders (such as the United Nations and other multilateral entities) to help them implement their development commitments. It also invites developing country governments to take an active part in policy dialogue.

• Development Co-operation Report
• Official development assistance (ODA)

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Key messages, charting development co-operation trends and challenges.

The OECD keeps track of key trends and challenges for development co-operation providers and offers practical guidance. It draws from the knowledge and experience of Development Assistance Committee (DAC) members and partners, as well as from independent expertise, with the ultimate goal of advancing reforms in the sector, and achieving impact. Using data, evidence, and peer learning, this work is captured in publications and online tools that are made publicly available.

Making development co-operation more effective and impactful

The OECD works with governments, civil society organisations, multilateral organisations, and others to improve the quality of development co-operation. Through peer reviews and evaluations, it periodically assesses aid programmes and co-operation policies, and offers recommendations to improve their efficiency. The OECD also brings together multiple stakeholders to share good and innovative practices and discuss progress.

Strengthening development co-operation evaluation practices and systems

The OECD helps development co-operation providers evaluate their actions both to better learn from experience and to improve transparency and accountability. Innovative approaches, such as using smart and big data, digital technology and remote sensing, help gather evidence and inform policy decisions. With in-depth analysis and guidance, the Organisation helps providers manage for results by building multi-stakeholder partnerships and adapting to changing contexts and crisis situations. 

Civil society engagement in development co-operation

National and international civil society organisations (CSOs) are key partners in monitoring development co-operation policies and programmes. Development co-operation can also be channelled to or through CSOs: 

Aid is characterized as going to CSOs when it is in the form of core contributions and contributions to programmes, with the funds programmed by the CSOs. 

Aid is characterized as going through CSOs when funds are channeled through these organisations to implement donor-initiated projects. This is also known as earmarked funding.

Development co-operation TIPs - Tools, Insights, Practices

TIPs is a searchable peer learning platform that offers insights into making policies, systems and partnerships more effective. 

Related data

Related publications.

Related policy issues

• Development co-operation evaluation and effectiveness
• Development co-operation in practice
• Development co-operation peer reviews and learning
• Innovation in development co-operation