The Organization for Economic Cooperation and Development (OECD) defines foreign aid as financial flows, technical assistance, and commodities that are transferred from one country to another in order to promote economic development and welfare.Aid can be provided as either grants or subsidized loans. Three common types of aid are humanitarian or emergency aid, charity-based, and systematic aid. Humanitarian or emergency aid is the act of rendering help during periods of disaster and calamity. Charity based aid is aid given by charitable organizations otherwise known as Non-Profit Organisations (NGOs) to institutions or people on the ground, and systematic aid is the aid given as direct payments to governments either through government transfers (which is termed bilateral transfer) or through institutions (which is termed multilateral transfer).

The focus of this research paper is to explore a brief history of foreign aid and the motives of aid assistance. The paper will also look into how aid has been effective in some countries with specific references to the Marshall plan used by European countries as well as Botswana and other African countries. Furthermore, the paper will focus on the ineffectiveness of aid in Africa and why there has being slow growth despite the billions of dollars in aid sent to Africa. The research paper will conclude with a summary of the possible ways of improving and sustaining economic growth in Africa without total dependence on foreign aid.

History of aid

Foreign aid started in the 19th century when the United States transferred food surpluses to new developing markets in Europe. This foreign assistance gave rise to the launch of the Agricultural Adjustment Act for shipment outside of emergency situations. In the aftermath of World War II, aid was used primarily to help rebuild the economies of Western Europe and to help contain Soviet expansion. In 1945, the United States as well as other countries established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (which is part of the World Bank Group) as the two main multilateral institutions that would help with debt relief and economic development. Five years later, the institutions began by giving loans for reconstruction. This marked aid assistance, as the first to be given to a developing nation.

Subsequently, the Marshall Plan was announced in June 1947 by General George C. Marshall, the then United States Secretary of State. The plan sought to provide funds for rebuilding the countries in Europe that were devastated by the war. With foreign aid, the United States helped in rebuilding other countries and contained the Soviet expansion in the 1950s. They attained hegemony over other donors since aid accounted for two-thirds of aid supply during that decade. The intensity of the cold war gave United States aid a strong strategic orientation which it has retained until this date.

In 1950, the United States president Harry Truman launched the aid programme during his “Point Four” speech which was consciously used to stop countries from going into communism. However, some notable economist Milton Friedman criticised the Point Four speech. Friedman argued that since aid is being transferred to governments, any attempt to buy political support would not work because it is more likely to encourage communism than preventing it. However, the Marshall Plan, also known as the European Recovery Program was considered a great success. In the early 1950s, Western and Central Europe, as well as Japan, had undergone revitalization and today Britain, Germany, France, Italy, and Japan are among the top industrial nations in the world. Due to the success of the Marshall Plan, the plan was used as a model for the development of launching the Colombo Plan in South and South-East Asia.

In the 1960s and 1970s, foreign aid spending shifted from Western Europe and Japan to the Middle East, Sub-Saharan Africa, and to poor countries in Asia. The foreign assistance given to these nations was seen as a means of stopping the spread of communism and to promote peace in the Middle East. The Camp David accords of 1979 with Jimmy Carter as president of the United States helped to end hostilities between Israel and Egypt. In this accord, the United States promised to provide economic and military assistance to both Israel and Egypt in order to aid them to purchase American-made weapons.

Motives for Foreign Assistance

There are three main motives for foreign aid assistance to recipient countries from bilateral and multilateral sources. These motives include moral or humanitarian motive, political, military and historical motive, and economic motive. The moral or humanitarian involves redistribution of income for the maximization of total welfare. The source of this type of assistance is not solely from national governments and international organisation. They could also come from voluntary and charitable organizations as well as emergency and disaster relief funds.Political, military and historical factors are also motives for granting assistances due to pre-colonial ties or political strategy. For instance, most US aid programmes were designed to stop the spread of communism, while Britain and France granted aid to ex-colonial territories and for compensation towards colonial neglect. Economic motive involves a situation whereby developed countries invest in developing nations in order to improve their welfare and increase the growth rate of developing countries. The intention is to benefit from each other through international assistance, so that if the rate of interest on loans is higher than the productivity of capital in the donor country and lower than the productivity of capital in the recipient country both countries.

Effects of Aid

Aid has been considered effective in many ways. For instance, foreign aid is well thought-out as a success under the Marshall Plan in Europe as well as in the case of Botswana in Africa. Under the Marshall plan in 1948 to 1952 the United States embarked on an aid programme to fourteen European countries by transferring about 13 billion US dollars throughout the five year of the plan. Among the top five aid recipients were Great Britain, France, Italy, and Germany. They received 24, 20, 11, and 10 percent of the share respectively,

while the remaining 35 percent went to other European countries. The Marshall Plan was successful by bringing Europe back to a strong economic footing and the restoration of broken infrastructure, political stability, and hope to broken lands. One major reason while the Marshall Plan was successful was because most of the recipient countries did not completely rely on aid since they had other resources to fall back to and the aid received was about 2.5 percent of their GDP.'

Sequel to the consequences of the war, Europe was faced with a market crisis which was characterized by imbalance in supply and demand. That is, producers were not supplying goods to the market, while the workers and managers limited their effort devoted to market activity due to political instability, shortages of consumer goods and fears of financial chaos. The Marshall Plan played a significant role in restoring financial stability and liberalization of production and prices. During the five years of the Marshall Plan, industrial output rose by 55 percent in the participating countries while growth ranged from 7 percent in Turkey to 312 percent in Germany as seen from Figure 1 below.

Figure 1: Increase in Industrial output with the Marshall Plan.

Source: The numbers are calculated from Eichengreen, B., Uzan, M., Crafts, N., & Hellwig, M. (1992). The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR. Economic Policy,Vol. 7, No. 14, p. 17.

Furthermore, Botswana is a good example of an African country that used aid to develop their economy. Prior to receiving aid, Botswana was one of the poorest countries in the world at the time of their independence in 1966. Currently, Botswana is listed as one of the countries in the International Development Association Graduates due to its economic success. The novel of her success does not lie on the amount of aid received, but in the way and manner of development programs that they embarked on using the aid. Botswana received foreign assistance mainly from Britain at independence which was half the country's budget. To become financially independent, the country pursued policies that would end grants received from only Britain. They diversified their sources of aid to reduce total dependence from one donor and they attracted private foreign investments.

In the 1970s, the government sought more aid for development programs such as; physical and social infrastructures, mining projects, education and training. Investments in mining projects led to a high growth rate of GNP in the 1970s.The average real per capita economic growth rate increased to about 6.8 percent between 1968 and 2001. This increase in growth rate was not only due to the aid they received, but also based on other macroeconomic policies.

Another effect which aid had on Botswana's economy is the establishment of Primary Education Improvement Project (PEIP) from United States Agency for International Development (USAID). The Primary Education Improvement Project (PEIP) was launched in order to establish a department for primary education that will train teachers for teacher training colleges and training workshops for teachers. The program is considered a success since it is still effective after five years of non-support from USAID, while thousands of teachers and teacher-trainers have being trained as a result of this program.Furthermore, in 1985 the Junior Secondary Education Improvement Project (JSEIP) was launched and has helped in developing a curriculum and instructional materials, strengthening of teachers training and upgrading management capacities at the Ministry of Education in order to improve the quality of community Junior Secondary Schools. With USAID assistance, the Botswana Private Sector Development Project (BPED) was initiated in 1992 and helped in strengthening government policy to private sector; as well as providing technical assistance to small businesses and encouraging international investment. In addition, the Botswana Population Sector Assistance Programme (BOTSPA) helped in setting up effective social marketing campaign for prevention of HIV/AIDS. Overall, the government was able to expand facilities to rural areas and its economic growth rate has outpaced the economic growth rate of the Asian tigers.

A major factor that has helped Botswana to experience economic success is the presence of good institutions which have helped in generating market-oriented investors, protecting property rights of current and future investors and deterred social and political instability. Botswana had a GDP per capital in PPP US$ 13,604 in 2007, more than six times the Sub-Saharan African average of PPP US$ 2,031. These achievements are attributed to the probity of its political institutions. The backbone of a nation's development lies on a strong and stable economic environment with good and reliable political institutions. Economies that are characterized by corruption and economic graft have weak institutions that have proven to be worthless as in the case of most African countries.

Trends in Aid Assistance

Table 1 shows the net Official Development Assistance received in billions of US dollars in 2007 prices and exchange rate on a three year average. For the purpose of explaining the effectiveness of aid received, Botswana and the Democratic Republic of Congo are compared. In 1980- 89 Botswana received 256 billions of US dollars while Congo in that same year received 964 billions of US dollars. This means that Congo received over 70 percent more than Botswana. However, in that same decade Botswana's average GDP went up by 90 percent higher than Congo's as shown from Figure 2. Similarly, in Table 1 in the year 1990-99, Botswana received

151 billions of US dollars while Congo received 400 billions of US dollars. This means that Congo got over 62 percent more aid than Botswana. Figure 2 shows that despite Congo received more aid, she had a negative GDP growth rate.

Table 1: Trends in aid assistance to largest African recipients countries since 1970.










Annual Averages

Annual Amounts










Congo, Dem. Rep.








































































Note: The data of aid received by largest recipients and Botswana is adapted from OECD website: “Development aid at a glance- statistics by region Table 2.2.9, from p.8”.

Figure 2: Average annual GDP growth rate over the years.

Note: The data is obtained from the International Monetary fund, World Economic Outlook Database (2009).

One of the notable areas where foreign aid has been effective in Africa is in fighting diseases. For example, the World Health Organisation (WHO) an agency of the United Nation (UN) was able to tackle smallpox by setting up eradication units to get rid of the disease. In 2002, the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM) together with the US President's Emergency Plan for AIDS Relief (PEPFAR) were able to fight against AIDS by providing antiviral treatment to 50,000 people in Africa and within five years over a million were on antiviral treatment.

Using aid assistance the UNICEF, UN, and Red Cross succeeded in reducing death caused by measles by 91 percent between 2000 and 2006 for nearly 400,000 people per year to 4,000 per year (children). In Malawi, aid assistance helped the national government by providing farmers with fertilizers and seeds to boost food productive. Within two years of implementation, their food production doubled from one tonne per hectare to two tonnes per hectare and Malawi is now actually an aid donor in their region.

Aid ineffectiveness in Africa

Existing records shows that since 1970, more than $300 billion US dollars in aid has been disbursed to Africa countries. However, there is little to show for it in terms of economic growth and human development. Africa's failure to generate any meaningful or sustainable long-term growth from the aid received is based on several factors. These include geographical,

historical, cultural, tribal, and institutional. While these factors vary from one African country to another, in most part African countries still depend mainly on aid for its economic sustainability. Despite the abundance of land and natural resources in Africa, economic success has not been achieved due to misuse of natural wealth. For instance, many African countries have not been able to capitalize on commodity windfalls of the 1970s which has left their economies in a state of despair.

Historical factors such as colonialism have often been put forward as an explanation for Africa's underdevelopment. This idea is described such that, the colonial powers established political structures and bureaucracies that were incompatible with the way of life of the indigenous people. Another contention for Africa's economic failures is the continent's disparate tribal groupings and ethno-linguistic make-up. There are about 1,000 tribes across Sub-Saharan Africa; most of these tribes have their own distinctive languages and customs. For example, Nigeria has an estimated population of 150 million people with about 400 tribes while Botswana with over a million people has at least eight large tribal groupings. This has led to ethnic rivalry causing civil unrest and strife and sometimes civil war as in the case of Nigeria during the Biafra war in 1967-1970 and genocide in Rwanda in the 1990s.As a result of the ethnic disparity, other African countries are also experiencing crises and disturbances. Such countries include Ethiopia, Darfur in Sudan, Jos in Nigeria and Cote d Ivoire. Another factor for Africa's poor economic growth is the absence of strong, transparent and credible public institutions such as civil service, police and judiciary.

Ineffectiveness of Aid

Several factors have contributed to the ineffectiveness of foreign aid in Africa. These factors include corruption, political instability, and savings and investments.


Over the last 30 years, foreign assistance in Africa has increased. The growth rate has declined with a higher incidence of poverty and corruption. It could be said that aid has helped in facilitating corruption in the sense that, it provides usable cash to corrupt government officials since the funds transferred are received by the corrupt government who siphon the money for their own personal gratification. The allocation of government spending by corrupt officials are directed to projects were there are more opportunities for extorting bribes and diverting funds, which leads to lower- quality infrastructures and depleted public services to the detriment of growth. Svensson makes an argument in one of his articles and states that aid increases corruption by reducing public spending that is aid lowers the provision of public goods.

Lack of accountability, check, and balances also provides an avenue for corrupt government officials to use tax revenues as a way of siphoning funds used in financing unproductive activities. In Uganda for example, aid helped in stimulating corruption in the 1990s for where only 20 cents of every US $1 dollar of government spending on education reached the targeted primary school. Moreover, corruption increases in strength wherever the system that ensures accountability is weak. This is the case with many African countries facing this dilemma.

Significantly, corruption contributes to the dissemination of poverty since it weakens the performance of leaders and followers which contributes to the unequal distribution of income and resources.

Political Instability

Furthermore, foreign assistances have not fostered the progress of the middle class in African countries. With aid, African governments are less interested in promoting entrepreneurs and developing their middle class rather they are more concerned about their own financial interest. Without a strong economic voice the middle class is not capable of putting their government to work. A weak economic institution will make the government remain powerful with easy access to cash and is only accountable to its donors. This in turn hinders the growth of the middle class that is necessary for a nation's economic and political success. Foreign aid cut off the link between the middle class and its government since most of the taxes are paid by the middle class in return for governments accountability, but since the governments dependence on its citizens are reduced the government is not accountable to its people.

In view of the weakness of the civil society is weak and underdeveloped with low levels of education, individual rights and obligation cannot be fully exercised and recognised. Similarly, per capital income is ow and with individuals faced with poverty, they tend to be more dependent on those who allocate community resources. Since government controls the terms and conditions, individual capacity to become productive is weak. The unproductive state of the individuals creates continuous uncertainty and instability which puts the nation in an institutionalized corruption.

The ability of aid especially financial aid to increase available government resources has led to the proliferation of NGOs in Africa and the need to pursue their careers in these institutions. This has led to the politicization of the economy due to the increase in political attractiveness of the state especially with ethnically fragmented societies in Africa. Aid tends to accentuate ethnic extensions as every ethnic group strives to enter the state in other to get access to the foreign aid funds. For instance, in the Uganda's budget of 2006/2007 the expected revenue is 2.5 trillion shillings; expected foreign aid is 1.9 trillion shillings; recurrent expenditure that is ongoing expenditure such as wages and salaries, travelling expenses etc is 2.6 trillion shillings and development expenditure is 1.8 trillion shillings. The government seeks to send more than her revenue because of the foreign aid it receives. Hence, the government is not willing to spend its revenue on productive activities such as investment rather they spend their revenue on structure of public expenditure. In the case were public administration receives 690 billion shillings, military 380 billion shillings, agriculture which makes up about 20 percent of the economy's revenue and affects 18 percent of poverty stricken citizens takes 18 billion shillings, health takes 374 billion shillings, education is 636 billion shillings while trade and industry takes 63 billion shillings. The government spends the revenue on unproductive activities (public administration expenditure) because of the extra money from aid. The public administration constitutes about 732 government bodies where most of the revenue for recurrent expenditure is spent, hence making more people seek to work for the government than for the private sector.

Savings and Investment

Foreign aid decreases domestic savings which in turn decreases investment. For instance, money is in the hands of relatively few people, who spend the money on consumption goods rather than savings. As savings diminishes the banks successively have less money to lend for domestic investment. With higher consumption more money is chasing fewer goods which will induce the price of goods to rise thus leading to inflation. Aid can also have an effect in an economy called the Dutch disease. The Dutch disease is a situation whereby money spent on domestic goods would push the price of other resources that are in limited supply domestically. This inflow of aid would strengthen the local currency and hinder manufacturing exports. The end result is a reduction in long-term growth since aid reduces competitiveness, the capability for traded goods sector to generate foreign exchange earnings makes countries more dependent on foreign aid.

Aid leads to a micro-macro paradox. For instance, In Africa, a mosquito net maker who manufactures 500 nets per week and employs ten people and has 15 dependents (relatives) is unable to produce enough for his region to combat the endemic diseases. However, a Hollywood star Enter Vociferous who collected funds and sends 100,000 mosquito nets to the affected regions in Africa has done a good deed but then, the foreign net is sold in the market putting the local mosquito net producer out of business. Subsequently, this would leave the ten employees unemployed and can no longer support their dependent relatives. Over the years the imported mosquito nets are torn, damaged and of no use. Hence, the short term needs has been met, but it is obvious that the overall situation has not improved and is indeed worse in the long run. Most of the time short term aid evaluations give the erroneous impression of aid's success. However, short term evaluations are barely relevant when trying to tackle Africa's long-term problems. Aid effectiveness should be measured based on its contribution to long-term sustainable growth and whether it alleviates of people out of poverty in a sustainable way.

Alternative ways to Reduce Dependency on Aid

Some suggested alternatives that can help to reduce Africa's dependency on aid if implemented efficiently include foreign direct investments, trade remittances, and investing in capital markets.

Foreign Direct Investment

Foreign Direct Investment (FDI) can be another engine for economic growth in Africa. FDI can help in raising revenue to support development initiatives as well as creating jobs, assist in the transfer of new technology, stimulate the formation of capital market, and improve management expertise. Without measurable and sustainable investment, African workers will remain unable to earn competitive wages because of insufficient capital to invest in machinery, buildings and hardware that could make them more productive which in effect affects growth.

A good example is China's investment into Africa. In the 1970s China built a railway that is 1,160 mile for 500 million US dollars, which connects Zambia, through Tanzania to the Indian Ocean. China has helped in constructing roads in Ethiopia, pipelines in Sudan, railways in Nigeria, and power in Ghana. In an effort to improve Africa's development, China pledged to train 15,000 African professionals, build thirty hospitals and 100 rural schools, and increase the number of Chinese government scholarships to African students from 2000 per year to 4,000 per year in 2009. In 2000 China wrote- off 1.2 billion US dollars in African debt and signed a trade deal worth 60 million US dollars.

In the last few years, Chinese FDI to Africa has diversified into various sectors such as textiles, power generation, road construction, tourism, and telecommunication. Chinese commitment to Africa is achieved directly through the government and by encouraging private Chinese enterprise to invest in Africa. Between 2000 and 2005, China's FDI to Africa has totalled about 30 billion US dollars. China has invested billions of US dollars in copper and cobalt, in the Demographic Republic of Congo and Zambia; iron ore and platinum in South Africa; timber in Gabon, Cameroon and Congo-Brazzaville; mines in Zambia, textile factories in Lesotho, railways in Uganda, timber in the Central African Republic and retail developments across several capital cities. On the other hand, Angola has now taken over Saudi Arabia as China's biggest single provider of oil. In 2006, Angola supplied almost 20 percent of oil imports to China, while Sudan's export of 64 percents of her oil to China and other African countries provided roughly 30 percent of China's crude oil imports.


Trade contributes to growth by increasing the amount of actual goods and services that a country sells abroad, thereby increasing the productivity of the workforce. If African countries can trade with each other by having free trade agreements or reducing tariffs on products from other African countries this can help increase trade between themselves. For instance, African countries on average impose a tariff of 34 percent on agricultural products from other African nations and 21 percent on their own products. As a result of the high tariffs, trade makes up 10 percent of their total export. Unlike, North America were 40 percent of trade is with other nations in North America due to free trade, and 63 percent of trade in Western Europe is with other Western European Countries.

Furthermore, trade increases the range of goods available to people, which in turn allows countries to specialize in what they produce most efficiently, hence gaining comparative cost advantage. This can lead to a greater reduction in poverty and wealth creation. Nonetheless, increase in trade between countries can create a demand for better roads and as well provide the wealth to build and maintain them. In other for African countries to acquire more trade opportunities, they need to diversify their products. Although, most African countries produce and export raw materials and not processed goods there is little they can import from each other. For example, in Angola her major export is petroleum and petroleum products which makes up 90 percent of exports to other African countries, while in Seychelles an island east of mainland Africa, exports fresh fish which constitutes 98 percent of her exports. The same primary products tend to dominate Africa's trade with the rest of the world due to limited diversity of products.


Remittances play major roles by helping to finance a country's external balances or helped to pay for imports and repay of external debt. Remittances are more stable than other capital flows. Some countries have used remittances to stabilize their security loans from the international markets by raising overseas financing using future remittances as collateral there by lowering borrowing costs. This explains why the more the remittances, the more money that is deposited in the bank and the more cash the bank to lend to borrowers. For instance, the deposits- to- GDP ratios which is a key indicator of a country's financial development in Latin America increased as a result of high remittances.

A World Bank economists Adams and Page in their article wrote that 10 percent increase in per capita remittances led to a 3.5 percent decline in the proportion of poor people. While in the Philippines for instance, a 10 percent increase in remittances resulted in decreasing the poverty rate by 2.8 percent. Remittances do not only increase the income level of receiving relatives but also spills over to the overall economy. A 10 percent increase as a result of remittance led to 1.7 percent increase in school enrolment, 0.35-hour in child labour per household per week, and a 2 percent increase in new business ventures.

In addition, remittances are not only the transfer of financial funds but also have to do with the transfer of knowledge, technology, and merchandise. For example, most Nigerians overseas send used cars and appliances back to their relatives to sell and in that way they are able to keep their relatives occupied in some sort of trading activity (employment) in doing so they provide financial support to meet the needs of their immediate and extended families.

A good example with the transfer of knowledge is India. In India a large number of the working class were trained and educated in Information Technology (IT) and Software companies in the United States. These IT personnel took their knowledge back home to setup information technology outsourcing industry. Likewise the Chinese, as they did with manufacturing took advantage of the lower cost of labour and exported whole companies and technologies back home to China. They were able to learn business practices, the strengths and weaknesses of the western world and then leverage this knowledge back home to improve their local economies. Africans can do the same too by simply reapplying some of these successful strategies the Asians have used to improve their economies. Remittance in some sense is a form of aid assistance unlike foreign aid, whereby most of the money does not get to the hands of the people who need it. Remittances gets to the main source since the money sent are received directly by the relatives and not in the hands of the corrupt governments which are used for productive activities.

Capital Markets

African countries should look on investing in capital markets so that they can raise finances through issuing of bonds which can be used to finance their development programmes such as infrastructure, education, and healthcare as well as government expenditures such as military, civil service and trade imbalances. For example, South Africa reliance on domestic bond market than international borrowing has been able to raise funds and mobilise capital. In 2005 South Africa have been able to raise a total net amount of R23, 8 billion by issuing primary bonds on Besa and R82, 8 billion of share capital was raised by companies listed on the Johannesburg Stock Exchange (JSE). When combined together it summed almost about 7 percent of their GDP.

The breath of a market is often depicted by the size of the market and by the number of participants. The total value of bonds listed on Besa is over R700 billion which is about 46 percent of GDP in 2005 and in 2006 the market capitalisation of the JSE is about R4,7 trillion. This makes up about three times the size of the GDP in 2005. About 380 companies where listed on the JSE which represents all sectors of the economy. Therefore, investing in domestic bond market is a good strategy for a country's stock market, since issuing debt in a domestic market is cheaper than in a foreign market.


In conclusion, in order for African countries to reduce their reliance on aid, they should get involved with the capital market. The fifteen African countries which have recently acquired credit ratings should follow the lead of Gabon and Ghana in drawing from the capital markets. The focus on strengthening of the institutions to promote transparency and accountability is another key issue they have to work on in other for developmental progress to occur. Trade-oriented commodity driven economies such as Zambia, Kenya and Uganda should look at trading more with China and other emerging nations (Moyo).

Source: Essay UK -

Not what you're looking for?


About this resource

This Economics essay was submitted to us by a student in order to help you with your studies.


No ratings yet!

Word count:

This page has approximately words.



If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Organization for economic cooperation and development. Available from: <> [21-02-19].

More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:

Essay and dissertation help