Is foreign aid good for Malawi’s development?

Recently our donor partners unanimously agreed to suspend budgetary support worthy $150 million to the government following corruption scam, and the IMF followed suit by withholding $20 million citing the same reason. The decision sent a wave of shock to some quarters considering the consequences of donor aid withdrawal on the economy. Previously, Mutharika administration experienced donor aid freeze after expelling Cochrane Dyet, the former British envoy. The effects were very devastating and detrimental to the economy as the country experienced forex shortage, endless fuel queues, companies retrenched workers, inflation and interest rates skyrocketed, etc, etc.

Foreign aid is the transfer of resources from developed countries to under-developed countries, either through bilateral or multilateral donors. Malawi just like many African countries has been receiving donor aid to eradicate poverty since attaining independence. Donor aid is normally subject to certain conditions, which reflect the motives of the donors as to how much they are sincere to the development and welfare of the developing countries, or pursue their own obvious and clandestine interests.

The President talks to one of the big donors at the fundraising event
The President talks to one of the big donors at the fundraising event

In Africa foreign aid reached its peak between 1960s and 1990s, but it has dried up due to the fact that donor countries are increasingly focusing on former socialist Europe, including the new Commonwealth Independent States (CIS) which has replaced Soviet Union, and due to the fact that the Cold War is over. Western powers, therefore, no longer need to use foreign aid as a tool to counteract the incursions of the Soviet Union in influencing African nations. However, studies have shown that some foreign aid donors have provided aid with the sole objective of having influence on the recipient countries. They refer to this as conditionality-based foreign aid.

According to the World Bank (2003) report which examines foreign aid dispensed to Africa, 11 countries (Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK and USA) have been outlined as principal donors between 1996 and 2001. Over this period only Japan, UK and USA slightly increased their aid flow while the rest of the donor countries diminished their aid dispensation. Aggregately, donor aid declined from 0.25% to 0.22% of the donor countries’ Gross National Product (GNP).

Before World War II, the primary objective of foreign aid was for political and military support. After the war, foreign aid was dispersed to help Western European countries to rebuild their economies which were devastated by war. During the late 1990s, according to David Sogge (2002) most countries changed their primary objectives of giving aid to improvement of the lives of the poor. World Bank and OECD countries identified three basic objectives in giving aid namely: reducing material poverty; promoting good governance and reversing the negative environmental trends.

Malawi has experienced a series of donor aid freeze under different regimes. In 1992 the MCP led government was the first casualty of donor aid suspension. Sequentially, the donor community withheld foreign aid during Mutharika, Muluzi and recently Banda administration for different reasons including poor governance, poor human rights record and corruption.  Many studies have been undertaken to try to assess if aid actually fulfils its main objective of promoting macroeconomic development in developing countries. Generally speaking, economists and researchers who contribute to the anti aid literature advocate that aid has no affect on growth and that it may actually undermine it. Causality tests by Dhakal et al (1996) involving four Asian countries (India, Nepal, Pakistan and Thailand) and four African countries (Botswana, Kenya, Malawi and Tanzania), using data from 1960 to 1990, failed to find any causal relationship between foreign aid and economic growth in any of these countries.

Economists like Friedman (1958) and Bauer (1972) called for an end in aid, arguing that it is not a necessary requirement for the economic growth of a country. They argue that foreign aid to governments is dangerous because it increases the power of the elite in the recipient governments, leads to corruption and hinders economic growth. In particular, Bauer noted that aid discourages the growth of private sector investment, encourages public sector-led growth (since aid is in fact money added to government coffers) thereby limiting growth and inhibiting development.

Sogge (2002) argues that where aid has dominated, pride and ambition have given way to dependence and where it has been targeted, public management and services have either decayed or collapsed, poverty and inequality have worsened, and insecurity has prevailed. Foreign aid has thus financed governments, both authoritarian and democratic, whose policies have been the principal cause of their countries’ impoverishment.

There are several reasons why massive transfers from the developed to the developing world have failed to end poverty. Aid has traditionally been lent to governments, has supported central planning, and has been based on a fundamentally flawed vision of development. With a few exceptions, (Korea, Botswana and Honduras) where aid has had a significant impact on poverty reduction, improved social services and competent public institutions, western aid has played minor role in building efficient public sector and in lifting millions out of poverty. In some cases, states that were major recipients of aid are today collapsed states such as DRC, Sierra Leone, and Somalia.

The inadequacy of government-to-government aid programs has prompted an increased reliance on non-governmental organizations (NGOs). NGOs are said to be more effective at delivering aid and accomplishing development objectives because they are less bureaucratic and more in touch with the on-the ground realities of their clients. In the 1990s a Clinton administration task force conceded that ‘despite decades of foreign assistance, most of Africa and parts of Latin America, Asia and the Middle East are economically worse off today than they were 20 years ago’.

So, does Malawi need foreign aid to develop? Studies show that foreign aid has positive effects on growth in the good policy environment, while it does not work in a distorted environment. Good policy environments, according to Burnside and Dollar (2012), are those that are open to trade, have low inflation rates, good share of the budget surplus in relation to GDP and balanced government consumption in GDP. A country’s progress depends almost entirely on its domestic policies and institutions, not on outside factors such as foreign aid.

As long as the conditions for economic growth do not exist in Malawi, no amount of foreign aid will be able to produce economic growth. Moreover, economic growth in poor countries does not depend on official transfers from outside sources.

The author is a health services administrator based at Kasungu District Hospital. He likes to comment on social and economic issues and is writing in his own capacity.

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