U.S. Development Assistance in an Evolving World Jeffrey Alwang Professor Department of Agricultural and Applied Economics Virginia Tech

Objectives Examine rationale behind providing foreign development assistance Examine US development assistance program: history and motivations Discuss some ways that development assistance can be improved

Types of foreign aid Economic development assistance plus military assistance Bilateral & multilateral Grants & loans Programmed & emergency Components: financial aid, technical assistance, food aid

Rationale for Foreign Aid Humanitarian (moral or ethical) Compensation for past injustices Uneven distribution of global resources Moral obligation to help the poor improve their standards of living Political (strategic self interest) Economic self interest Develop markets Dispose of surplus

Rationale continued Is foreign development assistance in the best interest of both the donor and recipient? Some issues: Dependency Substitute for domestic savings Supports public sector (can be a source of inefficiency) Administratively costly Why is aid needed instead of relying on private commercial capital flows?

Overview Foreign aid is a relatively new phenomenon Prior to WWII, most foreign aid was bilateral, and formal programs for U.S. aid were limited and ad hoc in nature Relief and recovery efforts in W. Europe (Marshall Plan) and E. Asia began a flow of development assistance from the U.S. Following WWII, Point Four in Harry S Truman’s 1949 inaugural address called for: “a bold new program for making the benefits of scientific advances and industrial progress available for the growth of underdeveloped areas.”

Overview Point Four marked a shift in assistance emphasis from reconstructing Europe toward needs of developing countries Through 1950s and early 1960s, development assistance was almost entirely bilateral and largely from the U.S. U.S. assistance was focused on infrastructure, institution building and professional staff education. Agriculture and food aid were clear focus

Overview Support for agriculture and, particularly agricultural research, had clear payoffs during the 1960s Success in agriculture led to focus on “second- generation” problems– poverty reduction and rural development– and movement away from infrastructure and institution building U.S. agricultural aid focused on technology adoption through subsidized credit, especially in Latin America

Overview: history 1980s & 1990s were era of policy reforms Open economies had better growth performance More liberal economies led to more efficient resource allocations Many of the biases due to inappropriate macro economic policies were against agriculture In many countries, structural adjustment policies did not benefit social spending and agricultural research and extension expenditures were dramatically cut In Africa, aid shifted to second-generation and then to policy reforms without addressing the first-generation (productivity enhancement) problems

Macro trends Trend toward multilateral aid since 1960 Decline in assistance for agriculture with increases in human resources and environment Loss of linkage between technical expertise at land-grant universities and U.S. development assistance Decline in agricultural specialists in USAID Movement of technical assistance services away from land-grant universities and toward consulting firms Movement toward “program support” rather than “project support” E.g. SWaP currently used by major donors

Macro trends Concentration of U.S. foreign aid in a few countries U.S., in 2004, dramatically increased its foreign aid to $19 billion, a 14.1% increase in real terms from 2003 ODA to developing countries increased to $ 78.6 billion in 2004, its highest level ever But, the donor country average is about.25% of GDP, far below the.7% target agreed to at the UN US ODA is about.16% of GDP US is still the world’s largest donor, accounting for about 24% of total ODA

Impacts of aid Capital accumulation Ease budget constraints Provide foreign exchange Transfer technical expertise

Effectiveness of foreign aid Need to distinguish between types of aid: bilateral and multilateral Foreign aid has been a relatively small share of less-developed country GNP All aid is not focused on development; it is often delivered for political purposes, disasters, etc. Even for aid destined for development, there are multiple purposes: Infrastructure, human resource development, agricultural research Empowerment-oriented investments in groups

Effectiveness of foreign aid Effectiveness of aid depends on existing policies: Can help perpetuate ineffective policies Generally, countries with good policy regimes have benefited, but… There is no strong evidence that ODA has led to large intercountry differences in growth rates Sector studies have shown better results: Infrastructure Human resource development Agriculture

How can effectiveness of aid be improved? Improve macroeconomic and sectoral policies in recipient countries Improved dialogue between donors and recipients More attention to development goals rather than narrow political interests: Food aid with a purpose (such as generating rural employment) Technical assistance and long-term training Longer-term commitments, particularly support for institution-building and long-term training Improved coordination and management among multilateral agencies Learn from mistakes, but don’t throw out the baby with the bath water