Addressing Global Poverty: The Role of Aid in Achieving Inclusive Growth

Addressing Global Poverty: The Role of Aid in Achieving Inclusive Growth

Professor Thomas Kaydor, Jr.; PhD.

Assistant Professor IBB Graduate School of International Studies University of Liberia &

Adjunct Professor & AME University Graduate School of International Studies

DOI: https://dx.doi.org/10.47772/IJRISS.2024.8100126

Received: 09 October 2024; Accepted: 16 October 2024; Published: 08 November 2024

ABSTRACT

Global poverty got reduced due to the growth achievements made by China and India, but poverty is increasing in Africa and other regions. The COVID-19 pandemic even deepened poverty across all countries. Africa now faces another pandemic, the Mpox. However, amidst the current pandemic, ODA is even more important to help LDCs cope with demands from citizens. Aid positively impacts extreme poverty, though empirical evidence is required to claim causality. However, the ‘fundamental question is not whether aid works, but rather how aid can be made more effective. Fragile states cannot embark on development without stability, and stability cannot be guaranteed amidst widespread poverty. Instability, fragility, and poverty are therefore symbiotic, correlated and must urgently be addressed as a global public good. It was so good that global attention was focused on ending the COVID-19 pandemic so that states could get back on development tracks. Developed countries must now cancel poor countries’ long termed debt that had no quantum impact on national development. Often times, political elites benefit from such assistance more than the poor people. Therefore, countries giving Aid need to provide more aid to assist LICs and MICs achieve strategic pro-poor and inclusive growth to alleviate extreme poverty. The provision of AID does not mean that developing states must rely on ODA. They must be accountable and transparent in handling development assistance. In fact, donors should use their nationals and companies to implement infrastructural projects in receiving states so that the aid does not get misapplied. The receiving states need to supervise project and program implementation. Institutions are one of the deep determinants of growth. Therefore, to alleviate poverty, developing countries must build inclusive and effective institutions that will protect property rights, law, and order, ensure macroeconomic stability, provide public goods and services, and invest in education, health, food security and basic infrastructure to help poor countries achieve growth. Donor and recipient countries must target aid at economic growth corridors to spur economic growth so that the needs of the extreme poor, vulnerable and excluded can be addressed within an inclusive global poverty eradication framework.

Keywords: global poverty, aid effectiveness, developing countries, inclusive growth, global pandemics.

BACKGROUND

This essay critically examines global aid effectiveness and challenges facing Official Development Assistance (ODA) processes. It constitutes the first essay submitted for publication in the maiden edition of the AME University Peer reviewed academic journal. This essay provides a critical analysis of how aid has advanced international, regional, and national development; the challenges facing ODA, and some suggestions on how aid could be made more effective going forward. The essay begins with a definition of what ODA is; the views of some scholars that have debated ODA’s effectiveness and failure; and it offers some suggestions on the future of ODA regarding what donor and recipient states need to do to maximize the positive impact of aid.

DEFINITION OF AID

The fight against global poverty has come a long way. The Millennium Development Goals (MDGs) were part of efforts to combat global poverty (Annan 2000). When the MDGs expired by 2015, a new global development agenda, the Sustainable Development Goals (SDGs) were developed (United Nations 2016). Developed countries continue to provide overseas official development assistance (ODA) or aid to help developing countries overcome extreme poverty. Aid is ‘a total of concessional loans and grants given to poor countries’ (Moyo 2009, p.7). ‘Concessional loans are monies lent at below market interest rates for longer periods than ordinary commercial loans, while grants are monies given for “nothing” in return.’ (p. 7).

Aid is divided into three components. First, humanitarian aid is provided in response to catastrophes and calamities like the ebola virus disease outbreak in West Africa, flus, earthquakes, and tsunamis (Riddle 2014) and the COVID-19 pandemic that is ravaging states. Second, charity-based aid is disbursed through charitable organizations to the needy (Moyo 2009). Last, ‘systematic aid is payments made to recipient countries through bilateral or multilateral channels’ (P.7). Aid also provides a fiscal space for cash transfer programmes that help to reduce extreme poverty (Kaydor 2021).

Aid is a post-World War II phenomena which began with the Marshal Plan aimed at Europe’s reconstruction (OECD 2014). Following the reconstruction of Europe, the Organization for Economic Cooperation and Development (OECD) was founded in 1961 to help newly independent and poor countries undertake development programmes (OECD 2014). Presently, the OECD has 37 member states; however, these traditional donors have been joined by new ones like China, et al. in providing aid to developing countries. This essay examines whether the world has succeeded or failed very badly in the fight against global poverty in terms of aid effectiveness. It argues that the world has not failed so baldly in using aid to fight against global poverty, but that donors and recipient countries need to target aid towards programmes that directly get the extreme poor out of absolute poverty in low-income countries (LICs) and narrow the inequality gap between countries including the middle-income countries (MICs).

RESEARCH METHOD AND QUESTIONS

According to Patricia Leavy (2017), qualitative research is “characterized by inductive approaches to knowledge building aimed at generating meaning” (p.10). Researchers use this approach to examine, explore; robustly investigate and learn about social phenomenon; to unpack the meanings people ascribe to activities, situations, events, et al. Qualitative research gives researchers a depth of understanding about some dimension of social life.

The “values underlying qualitative research include the importance of people’s subjective experiences and meaning-making processes and acquiring” (ibid), Qualitative research is generally appropriate when your primary purpose is to explore, describe, or explain. In view of the foregoing, the qualitative research method was used to undertake this research using secondary sources, mainly books, journals, et al. The key research questions addressed in this essay are a). how has ODA impacted poverty reduction globally? b). Are there areas in which ODA has been effective than others? And c). What improvements could be made to make ODA more effective? This essay attempts to provide answers to these three key questions.

CONTEMPORARY THEORETICAL DEBATES ON AID EFFECTIVENESS

Jeffery Sachs (2005) argues that developing countries are caught in poverty trap, physical geographic trap, landlocked country trap, fiscal trap, governance trap, cultural barriers, geopolitical trap, lack of innovation, and demographic trap. He asserts that ‘poverty itself can be a trap caused by a lack of capital per person’ (p. 56). This means that the poor do not save enough physical and human capital because their entire income is spent on survival. Sachs (2005) concludes that ‘before the poor can get out of the poverty trap, they need a “Big Push” financed by increased foreign aid (p. 246). Although Sachs (2005) recommends increased aid to address global poverty, he downplays concerns about recipient countries’ ability to effectively manage aid. If ODA will be mismanaged and cannot be used to reduce poverty in poor countries, then there should be no need for aid.

Conversely, William Easterly (2006) dismisses the concept of poverty trap arguing that over the last 50 years, GDP per capita in sub-Sahara Africa has increased despite high fluctuations in growth rates. He maintains that poverty traps are not an outcome of zero growth in low-income countries, and that ‘poor countries have experienced positive growth between 1950 and 1970 at 1.9 per cent annually but have failed to utilize said growth for poverty alleviation’ (P.11). Therefor it is not the lack of resources that keeps poor countries poor; weak institutions and corruption do. The ‘stagnation of the poorest countries has more to do with awful government than with a poverty trap’ (pp. 42-43). For instance, countries with high corruption levels grow 1.3 per cent less than those with low corruption levels (Easterly 2006).

The lack of effective socio-political and economic institutions leads to elevated levels of corruption and state failures in poor countries. Poor states must therefore build effective institutions to achieve growth and reduce extreme poverty. Effective institutions will allow the ‘poor people take initiatives without experts telling them what to do’ (Easterly 2009, pp. 77-79). However, home grown initiatives and the innovative ideas of the poor often perish due to the lack of physical capital to start up. Therefore, the poor need more aid to start up and get out of poverty (Sachs 2005).

For his part, Paul Collier (2007) argues that over 980m people are ‘trapped in poverty and are heading towards a black hole’ (pp.6-7). Africa hosts ‘70 per cent of these poor; hence the continent is the core of the problem’ (p.7). The ‘bottom billion are caught in either one of four poverty traps including conflict, lack of natural resources, bad governance and landlocked geography’ (p.5). These countries ‘have had no growth, and poverty cannot become a history unless the bottom billion grow’ (pp.11-12). Collier (2007) agrees with Sachs’ poverty trap scenarios; hence the world needs to focus on helping poor countries develop policies that give the poor and their children voice, hope and the opportunity to gain experience and prosper. However, such help must be effectively provided by developed countries, and efficiently managed by developing countries. This mutual accountability process must be assured if aid must any significant impact on poverty reduction.

Dambisa Moyo (2009) argues that aid “imposes unbearable debts which become a silent killer in poor states, make governments ‘dull’, and increase corruption amongst elites” (p.56). She contends that governments use aid to “fund public sector employment and replace national revenues thereby leading to a ‘vicious cycle of aid whereby recipient countries become dependent, as donors enslave poor countries through foreign debt” (pp. 48-50). Moyo (2009) believes that “aid breeds civil wars, diminishes social capital, undermines the effectiveness of civil society, reduces savings and investments, causes inflation, chokes exports, and provides resources for corruption” (p.52).

The foregoing arguments sound reasonable but tend to ignore the enormous contributions development aid makes to poor states including fragile ones. For example, “38 per cent of ODA was devoted to fragile states while 31 per cent was earmarked for all other countries” (Fragile States 2014, p.24). Moyo’s argument also forgets the quantum role aid plays in humanitarian situations like the Ebola crisis, COVID-19, earthquakes, et al. Cutting aid from fragile states would further drive them into misery and extreme human suffering. Therefore, Moyo’s (2009) argument should not be the basis for cutting aid to poor countries, rather aid should be increased, effectively delivered, efficiently managed, and accounted for by targeting initiatives that directly lift the poor out of poverty. In the words of Carol Lancaster (2007):

“Foreign aid began as one thing and became another. It began as a realist response to the deepening Cold War between East and West. While continuing to be deployed in the service of national interests, aid eventually created the basis for a new norm in relations between states—that better-of-states had an obligation to provide aid to less-well-of- states to better the human condition in the latter. That norm did not exist in the middle of the twentieth century. It was widely accepted and unchallenged by the end of the century. For those of a theoretical bent, foreign aid must be understood through the lenses of both realism and constructivism. No one theory can adequately explain this twentieth-century innovation in relations between states” (P.212).

GLOBAL DEVELOPMENT EFFORTS TO END EXTREME POVERTY

The developed world, the World Bank (WB) and the International Monetary Fund (IMF) have used many strategies to deliver ODA to developing countries. First, the basic needs strategy was adopted in the 1970s-1980s (Haynes 2008). This strategy called for synergies between ‘national development policies, local community development needs, and international development assistance’ (p. 29). It focused on the provision of sufficient food, clean water, adequate shelter, primary health care, and at least elementary education for the poor (Stewart 2006).

This strategy failed because it was subsumed into the Cold War ideological divide which made aid a political tool rather than a developmental one (Thomas 2005), and due to misappropriation of aid by elites in the developing countries (Haynes 2008). Second, the Structural Adjustment Programme (SAP) was adopted in the 1980s-90s (Haynes 2008). It ‘encouraged fiscal and monetary discipline, free trade, free capital flow and economic cooperation among states’ (p.30). Aid was preconditioned on private sector led development, spending cuts on basic services, reduced wages, limited state intervention in markets, and trade liberalization (Haynes 2005). The SAP also failed because ‘it was externally imposed on developing countries, and it has increased poverty in poor states’ (Haynes 2008, p.31).

Third, the ‘Washington Consensus replaced the SAP in the 1990s-2000’ (Thomas & Reader 2001, p.79). It assumed that growth and development are contingent on “good policies” and “good institutions” (Haynes 2008). Good policies meant ‘stable macroeconomic policies, liberal trade and investment, privatization, deregulation of state-owned assets; while good institutions meant democratic governance, secured property rights, independent central banks and transparent cooperate governance’ (P.33).

The Washington Consensus arguably failed because it ignored the strategic role of the state and non-state actors in delivering human development goals (Haynes 2008), though Williamson (2005) argues that this was not a ‘global policy prescription, but rather a measure for Latin American countries that faced economic challenges beginning 1989’ (p.33). Notwithstanding, some components of the Washington Consensus like secured property rights, independent central banks, stable macroeconomic policies, et al. remain relevant to date, but are not mutually exclusive in the domain of development.

The MDGs were the predecessor of the SDGs in terms of efforts to reduce global poverty. In the MDGs, Goal eight called for global partnership for development (WB 2013). The current SDGs has Goal 17 that focuses on global partnership for development. Both in the MDGs and its successor global development agenda (the SDGS), developed countries commit to develop open, rule-based, predictable, non-discriminatory trading and financial system; address special needs of least developed and landlocked countries, and small island states, and deal comprehensively with developing countries debt (Annan 2000; SDGs 2016).  The end of the MDGs, ‘only four targets were met’ (WB 2013, p. 4).

Thus, the successes and failures of the MDGs have sparked controversy. For instance, Munoz (2008) argues that Africa failed to meet the MDGs because it had poor starting conditions including weak institutions, conflict, and inflexible assistance’ (p. 1). This argument sounds good because all regions had distinct levels of socio-economic and political conditions (Easterly 2009); hence, the need arose to have disaggregated set targets based on the reality in regions and states under the SDGs. However, poor starting conditions cannot be an excuse for Africa and other regions doing poorly in meeting the MDGs. Poor countries need to take responsibility of their own development priorities as agreed in the Accra Agenda for Action (2008). Conversely, Poku and Whitman (2011) argue that the MDGs have significantly reduced global poverty.

Those living ‘below US$1 daily fell from 40 per cent in 1981 to 18 per cent in 2004, and US$2 daily fell from 67 to 48 per cent in said period’ (Chen & Ravaillon 2007, p.1). Without the MDGs, the current levels of global poverty reduction would not have been possible (Vandemoortele 2011, Ratzan, S 2010). The SDGs are still being implemented; therefore, one cannot judge their failures or success. However, ‘global poverty has reduced due to growth in China and India, but there were more than 700m people living less than US$1 a day by 2015 (Chen & Ravaillon 2007, p.1-2). The COVID-19 pandemic has even increased global poverty across the globe.

About Eight years ago, US$134.8b of net ODA was spent on developing countries (OECD 2013). This showed a decline in aid to LICs and fragile states and tends to support claims that developed countries exploit poorer countries whereby more resources leave developing countries to support development in rich states. For example, Health Poverty Action (2014) argued that ‘Sub-Saharan Africa receives US$134b each year in aid, but US$192b is the value of resources exploited from Africa; hence, a negative ODA balance of US$58b’ (pp. 5-6).

Most OECD countries have defaulted on the 0.7 per cent of GNI committed to help developing countries (UN Millennium Project 2006). Only Denmark, Luxembourg, the Netherlands, Norway, Sweden, and UK have met the target. The US, Germany, France, Japan, and the rest have defaulted (UN 2013; Santamaria 2014). This raises further questions about the developed countries’ commitment to help their poor counterparts. It has also sparked debate about the relevance of aid among scholars like Jeffry Sachs, William Easterly, Paul Collier, Dambisa Moyo, Roger Riddle, et al. whose views on ODA were discussed earlier.

REVIEW OF ODA EFFECTIVENESS AND CHALLENGES

Aid has some positive impacts in developing countries, though its correlation with poverty reduction still demands more empirical research (Kaydor 2020). First, ODA avails funding to undertake discrete development projects like building of schools, clinics, hospitals, roads, bridges, and provision of electricity and safe drinking water (Riddell 2014). Second, aid is used to support refugees, displaced persons, fight diseases, and address disasters (Riddell 2014). Third, it sometimes funds parts of national budgets thereby bridging funding gaps for development programmes in poor countries.

For example, donors like the US, EU, WB, and IMF provide direct budget support to fund poor countries’ health sector (WHO 2008, p.4). Fourth, ODA helps to build capacity of developing countries. For instance, the Australian Award scholarship trains citizens of developing countries to support their development initiatives (Australia Awards 2019). Fifth, ODA supports developing countries to meet global development targets (MDG Report 20115; SDGs 2016). Sixth, donors support civil society organizations (CSOs) to undertake development projects, and advocate for transparency and accountability (Riddell 2014).

Conversely, Riddle (2014) argues ‘that aid works, but neither reaches nor assists the poorest and most marginalized’ (P. 7). Moyo (2009) argues that donors continue to give aid amidst ODA’s failure arguing that the some “aid monies are being used to pay the salaries of at least 500,000 staff of WB, IMF, UN agencies and registered NGOs” (p.54). Many times, aid monies are wrongly targeted towards priorities unimportant to recipients and therefore sometimes get corrupted (Moyo 2009). This ties in with donors’ preconditions for aid, which compels recipient countries to agree with donor priorities instead of national development goals.

Also, multilateral management of aid undermines recipients’ ability to effectively monitor aid flows and develop national capacity to lead development programmes formulation and implementation (Riddell 2014). This also leads to ‘lack of hard data to measure impact of aid on poverty reduction, hindering evidence to determine whether development outcomes are caused by aid or other factors’ (p. 8). Sometimes too, donors can default on funding pledges and commitments based on their domestic interest (Sachs 2005). Therefore, Carol Lancaster (2007) is right to argue that “aid priorities are mostly dictated by donor countries’ national interests rather than the receiving states” (p.212).

These problems associated with ODA increase the need for effective aid management. Donors themselves have acknowledged some of these challenges and have therefore initiated aid effectiveness strategies as agreed in the Rome Declaration (2003), Paris Declaration (2005), the Accra Agenda for Action (2008), the Busan Partnership Agreement (2011) and the New DEAL for fragile states (UNU 2012). Both donors and recipients agree on the use of country systems and program-based approaches, demand driven capacity development, increased aid predictability and transparency of aid flows, donor harmonization to reduce aid fragmentation, and inclusion of private sector and businesses in aid coordination and delivery.

The CSOs must hold both donors and recipients accountable. However, CSOs themselves need to be accountable for donor monies they receive to fund some of their programmes. Furthermore, to make aid effective, three fundamental issues need to be addressed. First, aid must address current global poverty dynamics. In 1990, about 93 per cent of the world’s poor lived in LICs and one-third lived in fragile states; but by 2010 three-fourth lives in middle income countries (MICs) while only one-third lives in LICs, and 23 per cent in fragile states (Sumner 2010).

These figures have even more troubling now because of COVID-19 that has increased poverty levels in all countries across the globe. These changes challenge the future design of poverty reduction policies and aid delivery. This heterogeneous poverty context demands that ODA is diversified to strategically meet the needs of MICs and LICs. The problems of MICs are not necessarily the lack of resources, but rather the equitable distribution of resources and the inability of governments to undertake pro-poor and inclusive growth, build effective institutions, and capacitate the poor.

Therefore, aid to MICs needs to address social exclusion and inequality to ensure that the benefits of growth are equitably shared amongst all citizens. For LDCs/LICs, aid needs to focus on social safety nets, social protection, and the determinants of growth including education, health, effective institutions, food security or agriculture, technology transfer, export promotion and fiscal as well as monetary policy reforms (Growth Commission 2008).

Second, the emergence of non-traditional donors leads to competition in the aid market. Woods (2008) and Kondoh et al. (2010) argue that these new donors provide more aid alternatives for development. For instance, the Chinese Government sometimes grants aid to countries and ensure that Chinese companies implement the projects. This ensures that the projects are completed in real time. However, Naim (2007) argues that some of the new donors undermine aid effectiveness and promotes bad governance, autocracy, corruption, et al. in developing countries. Accordingly, to Sato et al. (2010), this competition might crowd out old donors, and make aid less effective due to unconditional aid modalities by new donors. However, these arguments are contestable due to the following reasons.

First, no aid is unconditional. For instance, Chinese government aid is said to be unconditional, but it requires recipient countries to sever all ties with Taiwan. Using aid to restrict the sovereign powers of poor countries from recognizing Taiwan is more conditional than making democracy and human rights a prerequisite to aid (Kaydor 2020). Second, while net ODA was US134b from traditional donors in 2013, China’s aid to Sub-Sahara Africa alone was US$ USD210.2b in the same year (Xinhua Global Times 2014).

Most of China’s aid as well as aid from India, Brazil, Russia, and other new donors fund infrastructural projects that traditional donors do not usually fund. Most developing countries therefore favour the new donors who support such infrastructure projects that national budgets cannot undertake. Third, aid is based on moral, economic, and political persuasions; hence no country or group should control the aid environment. The traditional donors must see new ones as partners in development rather than competitors undermining the aid landscape. Both old and new donors need to build synergies and effectively deliver aid to poor countries as agreed under the aid effectiveness modalities. In the view of this researcher, all ODA is conditional.

Additionally, aid to fragile states needs to be used to mitigate humanitarian crisis and simultaneously address causes of fragility. Fragile states’ governments do not have the capacity to deliver core state functions (Fragile States 2014). Many are ‘recovering from conflict and embarking on peace and state building processes, experiencing long term or recurrent conflicts, insecurity, or high levels of criminality and violence’ (p.16). Back in 2014, the OECD reported that about 1.5b people live in fragile states, 70 per cent of which have experienced conflicts since 1989. Presently, the COVID-19 pandemic has worsened the situation by making the entire globe fragile. This fragility undermines the capabilities of donors themselves to presently meet commitments made to developing states. This means global poverty might further increase. This could adversely undermine the achievement of the Sustainable Development Goals (SDGs).

Finally, fragile states lack transparent, and accountable systems to distribute resources, and are forced to institute generous tax exemptions for FDI attraction which affects tax base thereby undermining citizens’ tax payment. They experience distrust in governments, capital flight, prominent levels of corruption, criminal activities, money laundry, illicit drug trade bribery. Stability and development cannot easily obtain amidst such challenges. Therefore, donors and fragile states must focus more on peace building and state building goals, country-led and country owned transitions out of fragility, effective resource management, alignment of aid with development priorities addressing root causes of conflict, building of trust with emphasis on legitimate politics, peace and security, justice, and economic transformation. If these suggestions are soberly considered by donors and aid recipients, the impact of ODA might far exceed what it is currently.

CONCLUSION

Global poverty got reduced due to the growth achievements in China and India (Chen & Ravaillon 2007), but poverty is increasing in Africa and other regions (Collier 2007). The COVID-19 pandemic has even deepened poverty across all countries. However, amidst the current pandemic, ODA is even more important to help LDCs cope with demands from their citizens. Aid positively impacts extreme poverty, though empirical evidence is required to claim causality (Riddell 2014).

However, the ‘fundamental question is not whether aid works, but rather how aid can be made more effective’ (p.17). Although Moyo (2009) and others condemn systematic aid, their deliberate attempt to ignore the significant impact of humanitarian aid undermines such criticisms because there is no fundamental difference between humanitarian and systematic aid. The former addresses emergencies and fragility, while the latter consolidates development initiatives.

Fragile states cannot embark on development without stability, and stability cannot be guaranteed amidst widespread poverty. Instability, fragility, and poverty are therefore symbiotic, correlated and must urgently be addressed as a global public good. It is so urgent now that global attention is focused on ending the COVID-19 pandemic so that states can get back on development tracks. Developed countries must cancel poor countries’ long termed debt that made no quantum impact on national development. They must provide more aid to assist LICs and MICs achieve strategic pro-poor and inclusive growth to alleviate extreme poverty. The provision of AID does not mean that developing states must rely on ODA, corrupt borrowed or AID monies, and go free. They must be accountable and transparent in handling development assistance. In fact, donors should use their nationals and companies to implement infrastructural projects in receiving states so that the aid does not get misapplied.

Institutions are one of the deep determinants of growth (Rodrik 2003, Easterly 2006, and Acemoglu & Robinson 2012). Therefore, to alleviate poverty, developing countries must build inclusive and effective institutions that will protect property rights, law, and order, ensure macroeconomic stability, provide public goods and services, and invest in education, health, food security and basic infrastructure to achieve growth (Kaydor 2020). Effective institutions guarantee freedom for the poor, and freedom helps them achieve their capabilities and functioning (Sen 1999).

Donors must therefore support the building of effective and inclusive institutions in developing countries. Donors must diversify aid delivery to LICs, MICs and fragile states on a need basis. Traditional and new donors must build synergies to effectively deliver aid, while developing countries’ governments must target aid towards projects that directly impact the lives of the extreme poor and marginalized.

Finally, “it is observed that financial and economic resources would be limited if countries do not invest in economic growth opportunities” (Kaydor 2021, p.9). It is therefore strongly recommended that “a combination of social cash transfer and social services provision needs to be backed by sustainable economic growth and development processes so that the resources are made available to alleviate extreme global poverty” (Ibid). Indeed, the world has not failed so terribly in using aid to reduce global poverty, but donor and recipient countries must target aid at economic growth corridors to spur economic growth so that the needs of the extreme poor, vulnerable and excluded can be addressed within an inclusive global poverty eradication framework.

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