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U.S. Development Assistance in an Evolving World Jeffrey Alwang Professor Department of Agricultural and Applied Economics Virginia Tech Objectives • Examine rationale behind providing foreign development assistance • Examine US development assistance program: history and motivations • Discuss some ways that development assistance can be improved Types of foreign aid • Economic development assistance plus military assistance • Bilateral & multilateral • Grants & loans • Programmed & emergency • Components: financial aid, technical assistance, food aid Rationale for Foreign Aid • Humanitarian (moral or ethical) • Compensation for past injustices • Uneven distribution of global resources • Moral obligation to help the poor improve their standards of living • Political (strategic self interest) • Economic self interest • Develop markets • Dispose of surplus Rationale continued • Is foreign development assistance in the best interest of both the donor and recipient? Some issues: • • • • Dependency Substitute for domestic savings Supports public sector (can be a source of inefficiency) Administratively costly • Why is aid needed instead of relying on private commercial capital flows? Overview • Foreign aid is a relatively new phenomenon • Prior to WWII, most foreign aid was bilateral, and formal programs for U.S. aid were limited and ad hoc in nature • Relief and recovery efforts in W. Europe (Marshall Plan) and E. Asia began a flow of development assistance from the U.S. • Following WWII, Point Four in Harry S Truman’s 1949 inaugural address called for: “a bold new program for making the benefits of scientific advances and industrial progress available for the growth of underdeveloped areas.” Overview • Point Four marked a shift in assistance emphasis from reconstructing Europe toward needs of developing countries • Through 1950s and early 1960s, development assistance was almost entirely bilateral and largely from the U.S. • U.S. assistance was focused on infrastructure, institution building and professional staff education. Agriculture and food aid were clear focus Overview • Support for agriculture and, particularly agricultural research, had clear payoffs during the 1960s • Success in agriculture led to focus on “secondgeneration” problems– poverty reduction and rural development– and movement away from infrastructure and institution building • U.S. agricultural aid focused on technology adoption through subsidized credit, especially in Latin America Overview: history • 1980s & 1990s were era of policy reforms • Open economies had better growth performance • More liberal economies led to more efficient resource allocations • Many of the biases due to inappropriate macro economic policies were against agriculture • In many countries, structural adjustment policies did not benefit social spending and agricultural research and extension expenditures were dramatically cut • In Africa, aid shifted to second-generation and then to policy reforms without addressing the first-generation (productivity enhancement) problems Macro trends • Trend toward multilateral aid since 1960 • Decline in assistance for agriculture with increases in human resources and environment • Loss of linkage between technical expertise at land-grant universities and U.S. development assistance • Decline in agricultural specialists in USAID • Movement of technical assistance services away from land-grant universities and toward consulting firms • Movement toward “program support” rather than “project support” • E.g. SWaP currently used by major donors Macro trends • Concentration of U.S. foreign aid in a few countries • U.S., in 2004, dramatically increased its foreign aid to $19 billion, a 14.1% increase in real terms from 2003 • ODA to developing countries increased to $ 78.6 billion in 2004, its highest level ever • But, the donor country average is about .25% of GDP, far below the .7% target agreed to at the UN • US ODA is about .16% of GDP • US is still the world’s largest donor, accounting for about 24% of total ODA Impacts of aid • • • • Capital accumulation Ease budget constraints Provide foreign exchange Transfer technical expertise Effectiveness of foreign aid • Need to distinguish between types of aid: bilateral and multilateral • Foreign aid has been a relatively small share of less-developed country GNP • All aid is not focused on development; it is often delivered for political purposes, disasters, etc. • Even for aid destined for development, there are multiple purposes: • Infrastructure, human resource development, agricultural research • Empowerment-oriented investments in groups Effectiveness of foreign aid • Effectiveness of aid depends on existing policies: • Can help perpetuate ineffective policies • Generally, countries with good policy regimes have benefited, but… • There is no strong evidence that ODA has led to large intercountry differences in growth rates • Sector studies have shown better results: • Infrastructure • Human resource development • Agriculture How can effectiveness of aid be improved? • Improve macroeconomic and sectoral policies in recipient countries • Improved dialogue between donors and recipients • More attention to development goals rather than narrow political interests: • Food aid with a purpose (such as generating rural employment) • Technical assistance and long-term training • Longer-term commitments, particularly support for institution-building and long-term training • Improved coordination and management among multilateral agencies • Learn from mistakes, but don’t throw out the baby with the bath water