Foreign aid and economic growth in the developing countries - a  (Page 15/21)

The current patterns of channeling aid through centralized governments in recipient countries may reduce thetimeliness and efficiency of aid. It is found that the aid is more effective if it is delivered directly to the working level localauthorities. Hence, the emerging role of NGO community is widely attracting attention (World Bank, 1998).

The present coordination and cooperation among donors is problematic. Most of donors and aid agencies havetheir own objectives and different plans in providing aid. “Raising flag” is a common phenomenon among donors and aid agencies.Therefore, instead of cooperating, they are normally stepping on each other’s toes by undertaking different approaches. As a result,the overall aid effectiveness on the growth of the nation most of the time fails to succeed, even though many aid projects areassessed effectively. This explains why many countries, such as Zambia, while receive so much aid from different resources, stillstagnate over time. Moreover, it has been found that program aid and technical aid are more effective and sustainable than projectaid (Marvrotas, 2003). Thus, it is better to finance long-term and strategic programs rather than short-term projects. But whatmatters here are the incentives of donors, especially multilateral aid agencies, in disbursement rather than in complianceenforcement. Short-term projects are likely to provide them quicker and more easy-to-achieve results than long-term, large-scaleprograms. Donors have strong incentives to continue lending even though the conditions are not met. For instance, World Bank mustmake loans to remain in operation (Graham and O’Hanlon, 2001).

The results that foreign aid to Sub-Saharan Africa has negative impact on growth (regressions 2 and 8) areconsistent with previous finding of Collier and Gunning (1999). As the matter of fact, the aftermath of colonialism is more serious inAfrica than anywhere else. Sub-Sahara Africa is especially hindered by its tropical location, high prevalence of malaria, small portionof people living near the coast, and low coastal population density (Gallup, Sachs and Mellinger, 1999). Weak institutions, pooreconomic endowment, widespread corruption and various ethnic, political and religious conflicts are holding up this region forlong time. Africa is especially vulnerable to terms of trade shocks, famines, political conflicts, drought and floods (Morrisey,2001). It is found that African nations have aid-to-GNP ratios more than ten times that of Latin America or East Asia, but still sufferinferior economic performance. Problematically, within Africa, countries with poor economic policies have received more aid percapita than those with responsible policies (Graham and O’Hanlon, 2001).

In a distorted environment of Africa, if donors just simply provide aid with the same uniformedconditionality like elsewhere, the failure is inevitable. Figure 2 shows a typical example of Zambia, which has received such a hugeamount of aid, yet the income per capita is only around US$600, not US$20,000 as expected (World Bank, 1998). Nigeria, Tanzania mayalso be examples of failures. Even though there some success stories, namely Botswana, Mauritius, Ghana, Ethiopia, Rwanda, Maliand Uganda, they account for such a small number out of aid recipient countries in the continent. The major cause is thatdonors do not favor good policy countries and penalize the poor performers. Consequently, the aid dependency is getting more andmore serious. Widespread corruption and fungible aid also make the situation worse.