Article

Foreign Aid and Poverty Reduction

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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Aid works well, in general, but the report card on poverty shows mixed results. Developing countries received $51 billion in concessional assistance in 1988, roughly half their net receipts of external capital. Where aid has been well employed, it has benefited the poor through a number of channels: agricultural research and extension; the construction of rural infrastructure, such as farm-to-market roads; the provision of primary education, basic health care, and nutrition programs; and relief from natural and man-made disasters.

Shortcomings

But the contribution of aid to the reduction of poverty has not always come up to its full potential because of a number of reasons.

• Donors, especially bilateral donors, have many different motives—political, strategic, commercial, and humanitarian. Reducing poverty is often not stressed. As a result, about 40 percent of aid still flows to middle- and high-income countries, and there is little relationship between per capita aid allocations and the extent of poverty in individual countries.

• Donors prefer to finance physical capital installations that help their own firms and exporters. They are reluctant to support the operating (or “recurrent”) costs of undertakings financed by aid. But many poverty-related initiatives are in sectors such as health and education that demand a high level of recurrent expenditures.

• Some recipients—including Haiti, Sudan, Tanzania, and Zaïre—have fallen into “aid dependency.” Tanzania, for instance, received $8.6 billion in concessional assistance over 1970-88, but growth declined and poverty increased as a result of inappropriate macroeconomic and sectoral policies. Aid donors are partly to blame for failing to monitor programs carefully or to make assistance commensurate with policy reform.

• Many poverty-oriented projects do not reach the poor because of lack of government commitment to helping poor people, inappropriate sectoral and macroeconomic policies, frequent shifts in donor concerns, insufficient attention to institutional development and local capacity building, and a failure to involve the poor themselves in projects designed to assist them.

Per capita aid receipts, selected countries, 1988(In US dollars)
CountryAid received

per capita
GNP

per capita
Israel282.078,650
Jordan108.951,500
Gambia102.63220
Senegal78.85630
Zambia63.73290
Egypt29.91650
Nepal22.05170
Ethiopia21.05120
Syrian Arab Republic16.341,670
Bangladesh14.62170
Pakistan13.32350
Myanmar111.22
Indonesia9.34430
India2.58330
China1.84330
Nigeria1.09290
Source: Development Assistance Committee of the OECD and the World Bank.

GNP per capita estimated at less than $500.

Indicates data not available.

Source: Development Assistance Committee of the OECD and the World Bank.

GNP per capita estimated at less than $500.

Indicates data not available.

More effective use

Despite these shortcomings, some notable progress has been achieved at both the country and project levels. Aid can, however, be made a more effective instrument of poverty reduction. The main way in which this can be achieved is by linking aid more directly to countries’ overall policies.

Thus, major aid flows should go to countries that are attempting to pursue policies that generate income-earning opportunities and efficiently provide social services for the poor. In such countries, aid can assist the public sector through balance of payments support linked to public expenditure restructuring, “time-slices” or phased release of aid money in support of public expenditure programs, and discrete investment projects. Aid should also increasingly support the private sector in these countries, since this sector is central to growth in labor demand.

Countries that have large numbers of poor people, but where public policies are not conducive to poverty reduction, need to direct limited quantities of aid toward the poorest target groups. The goal is to protect the welfare of the poor as far as possible, while efforts to reform country policies continue. Thus, aid could support health clinics serving poor women and children, immunization programs for children, or well-targeted feeding programs. Much of the work of multilateral and nongovernmental agencies, such as Unicef and Oxfam, in Ethiopia, Kampuchea, Sudan, and elsewhere, is precisely of this kind. The World Bank is also undertaking such work—in Zaïre, for example.

Many countries represent intermediate cases, that is, they are making some effort to help the poor, but could do more. If provision of social services to the poor is lacking in these countries even in the face of income gains, aid might be tailored to efforts to improve social services. In other countries, aid might be directed toward maintaining the stock of physical capital, while efforts are made to encourage growth-oriented policies that increase labor demand.

A convincing case for more aid can be made, but only if more recipient countries seriously try to reduce poverty and aid donors implement the lessons of experience. Aid would increase to $64 billion in the year 2000 if it continues to grow at 2 percent a year in real terms (the projection of the OECD’s Development Assistance Committee), and as high as $144 billion if the widely accepted international target of aid as 0.7 percent of GNP were met by donors currently below it (with those above it maintaining their current proportions).

Robert L. Ayres

Senior Economic Affairs Officer, World Bank

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