How Foreign Aid Affect Developing Countries: The Case of Ethiopia

Year 2018, Volume: 53 Issue: 1, 7 - 38, 08.05.2018

Ali Mohamed Farah Murat Önder Emrah Ayhan

Abstract

Foreign aid has been an
essential tool for the socio-economic development of developing countries since
1960s. It is described by OECD as the financial, technical assistance and
commodity flow to the countries that are in the list of DAC (Development Assistance
Committee). US’s Marshall Plan is a well-known development
assistance program, which was established between 1948 and 1951 under the European
Recovery Program to support Europe in economic crisis after a war became
successful in reducing poverty while increasing economic growth. By taking the
Marshall plan as a model, developed countries have been supporting the
developing countries since then. Recently, the Millennium Development Goals was
also launched in New York in 2000 to finance economic growth of poor countries.
New actors from other parts of the world took their places in providing
development assistance. Despite receiving more than 600 billion USD in the
context of foreign aid, large part of Africa has still remained underdeveloped
and in an extreme poverty. In this paper, we study the impacts of foreign aid
to socio-economic development to Ethiopia. After
reviewing the development and foreign aid literature from primary and secondary
sources, this study benefited from data gathered from World Bank Database,
Transparency International and Freedom House, and then time series data were evaluated
by regression analysis. Our findings indicate that foreign aids do not have
a major influence on GDP growth; but it has a considerable influence on FDI (foreign
direct investment) and unemployment rate in Ethiopia. However, it is observed
that foreign aid has negatively correlated with democracy and corruption levels
in the country. Although, the amount of foreign aid has been continuously
increasing, Ethiopia has remained one of the most corrupt and authoritarian African
countries according to related indices. Consequently, our study concludes that
foreign aid should be redesigned to encourage and reward receiving countries to
advance their democracy and eliminate corruption within the context of recent
philosophy and principle of collaborative governance for long term development.

Keywords

: foreign aid, development, GDP, unemployment, corruption, democracy, governance

Dış Yardımların Gelişmekte Olan Ülkelere Etkisi: Etiyopya Örneği

Abstract

Dış yardım, 1960'lardan bu yana gelişmekte olan ülkelerin sosyo-ekonomik olarak kalkınmaları için vazgeçilmez bir araç olmuştur. OECD, bu yardımları DAC (The Development Assistance Committee/Kalkınma Yardımı Komitesi) listesinde yer alan ülkelere finansal, teknik yardım ve emtia akışı olarak tanımlanmaktadır. 1948-1951 yılları arasında Avrupa İyileştirme Programı kapsamında uygulamaya koyulan ABD'nin Marshall Planı, Avrupa'daki ekonomik büyümeyi arttırırken, yoksulluğun azaltılmasını sağlamıştır. Marshall planını örnek alan gelişmiş ülkeler, 1960'lardan bu yana gelişmekte olan ülkeleri desteklemektedirler. Buna ek olarak, yoksul ülkelerin ekonomik büyümesini finanse etmek amacıyla 2000 yılında New York'ta Milenyum Kalkınma Hedefleri ortaya çıkmıştır. Afrika’ya yapılan dış yardım miktarının 600 milyar doları aşmasına rağmen, bu kıtadaki ülkelerin büyük kısmı az gelişmiş ve aşırı derecede fakir kalmıştır. Bu çalışmada, dış yardımın Etiyopya'ya olan sosyo-ekonomik
etkileri incelenmiştir. Kalkınma yardımları ve dış yardım türlerine dair
literatür incelendikten sonra, Dünya Bankası Veri tabanı, Şeffaflık Örgütü ve
Özgürlük Evi gibi resmî kurumlardan edinilen veriler incelenmiş ve daha sonra
bu zaman serisi verileri regresyon analizi yöntemi ile değerlendirilmiştir.
Araştırma bulgularımız, dış yardımın GSYİH üzerinde önemli bir etkisi
olmadığını göstermektedir; ancak dış yardım Etiyopya'da doğrudan yabancı
yatırımlar (FDI) ve işsizlik oranı üzerinde önemli bir etkiye sahiptir. Ancak,
ülkedeki demokrasi ve yolsuzluk seviyeleri ile dış yardımlar arasında anlamlı
bir negatif ilişki olduğu görülmektedir. Her ne kadar dış yardımların miktarı sürekli
artsa da ilgili endekslerde Etiyopya en yozlaşmış ve en otoriter Afrika ülkelerinden birisi olarak kalmaya
devam etmiştir. Bu nedenle, dış yardımın alıcı ülkelerin demokrasilerini
geliştirmelerini ve yolsuzluğu ortadan kaldırmalarını teşvik eden bir ödül olarak
görülmesi gerekmektedir.

Keywords

dış yardım, gelişme, GSYİH, işsizlik, yolsuzluk, demokrasi, yönetişim

References

• Addison, Tony, Georga Mavrotas and Marc Mcgillivray. “AID TO AFRICA: AN UNFINISHED AGENDA”, Journal of International Development, No.1001, 2005, pp. 989–1001. http://doi.org/10.1002/jid.1255
• Alesina, Alberto and Beatrice Weder. “Do corrupt governments receive less foreign aid”, American Economic Review, Vol. 5, No. 4, 2002, pp. 1126–1137.
• Alesina, Alberto and David Dollar. “Who Gives Foreign Aid to Whom and Why?”, Journal of Economic Growth, Vol. 5, No. 1, 2000, pp. 33–63. http://doi.org/10.1023/a:1009874203400
• Altunbaş, Yener and John Thornton. “The (small) blessing of foreign aid: further evidence on aid’s impact on democracy”, Applied Economics, Vol. 46, No. 32, 2014, pp. 3922-3930. http://doi.org/10.1080/00036846.2014.946186
• Andrews, Nathan. “Foreign aid and development in Africa: What the literature says and what the reality is”, Journal of African Studies and Development, Vol. 1, No. 1, 2009, pp. 8–15.
• Arvin, B. M. and F. Barillas. “Foreign aid, poverty reduction and democracy”, Applied Economics, No. 34, 2002, pp. 2151-2156. http://doi.org/10.1080/0003684021013671
• Asiedu, Elizabeth and Yi Jin. “Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment”, Working Paper, No. 785, 2008, pp. 1-37. http://dx.doi.org/10.2139/ssrn.1352389
• Ayhan, Emrah ve Murat Önder. “Yeni Kamu Hizmeti Yaklaşımı: Yönetişime Açılan Bir Kapı”, Gazi İktisat ve İşletme Dergisi, Vol. 3, No. 2, 2017, pp. 19-48.
• Ayhan, Emrah and Murat Önder. “Democratic Rights of Turkish Immigrants in Germany: Enduring Discrepancy of Theory and Practice”, IOSR Journal of Humanities And Social Science, Vol. 21, No. 12, 2016, Ver. 1, pp. 26-36.
• Ayhan, Emrah, Muhsin Tan and Mahmut Baydaş. “Neo-Liberal Globalization and Turkey”, The Journal of MacroTrends in Social Science, Vol. 2, No. 1, 2016, pp. 62-76.
• Ayhan, Emrah and Murat Önder. “Turkish Regional Development Policy Framework: Is There A Paradigm Shift?”, 3. International Regional Development Conference Proceedings Book, 15-16 October 2015, pp. 843-858.
• Bauer Peter. Equality, the Third World and Economic Delusion, Harvard University Press, Cambridge, Massachusetts, 1981
• Bardhan, Pranab. “American Economic Association”, Journal of Economic Literature, Vol. 35, No. 3, pp. 1320–1346.
• Bermeo, Sarah Blodgett. “Foreign Aid and Regime Change: A Role for Donor Intent”, World Development, Vol. 39, No. 11, 2011, pp. 2021–2031. http://doi.org/10.1016/j.worlddev.2011.07.019
• Bingöl, Yılmaz. Yirmi Birinci Yüzyılda Demokrasi Tartışmaları, Umuttepe Yayınları, İstanbul, 2011, s. 11.
• Boone, Peter. “Politics and the Effectiveness of Foreign Aid”, European Economic Review, Vol. 40, No. 2, 1996, pp. 289–329. http://doi.org/10.1016/0014-2921(95)00127-1
• Brautigam, Deborah A. and Stephen Knack. “Foreign Aid, Institutions, and Governance in Sub‐Saharan Africa”, Economic Development and Cultural Change, Vol. 52, No. 2, 2004, pp. 255–285. http://doi.org/10.1086/380592
• Brown, Stephen. “Foreign Aid and Democracy Promotion: Lessons from Africa”, The European Journal of Development Research, Vol. 17, No. 2, 2005, pp. 179–198. http://doi.org/10.1080/09578810500130799
• Burnside, Craig and David Dollar. “Aid, Policies and Growth”, The World Bank, June 1997.
• CIDA (Canada Internatıonal Development Agency). “Canada Is Making A Difference in the Developing World”, 2002. https://lop.parl.ca/Content/LOP/ResearchPublications/prb0907-e.htm; access: 13.09.2017.
• Collier, Paul and David Dollar. “Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet International Development Goals”, Econ Papers, Vol. 29, No. 11, 2001, pp. 1878-1802.
• Cornell, Agnes. “Does Regime Type Matter for the Impact of Democracy Aid on Democracy?”, Democratization, Vol. 20, No. 4 2013, pp. 642–667. http://doi.org/10.1080/13510347.2012.659021
• Dalgaard, Carl Johan, Henrik Hansen and Finn Tarp. “On the Empirics of Foreign Aid and Growth”, Economic Journal, Vol. 114, No. 496, 2004, pp. 191-216. http://doi.org/10.1111/j.1468-0297.2004.00219.x
• Dedu, Vasile, Gabriel Staicu and Dan Costion Nitescu. “A Critical Examination of Foreign Aid Policy: Why It Fails to Eradicate Poverty?”, Theoretical and Applied Economics, Vol. 18, No. 4, 2011, pp. 37–48. Retrieved from http://www.ectap.ro/?ver=en\nhttp://search.ebscohost.com/login.aspx?direct=true&db=ecn&AN=1241365&site=eds-live&authtype=ip,uid; access: 13.09.2017.
• Djankov, Simeon, Jose G. Montalvo and Marta Reynal-Querol, “The curse of aid”, Journal of Economic Growth, Vol.13, No.3 (2008), pp.169–194. http://doi.org/10.1007/s10887-008-9032-8
• Easterly, William and Tobias Pfutze. “Where Does the Money Go? Best and Worst Practices in Foreign Aid”, Journal of Economic Perspectives, Vol.22, No.2 (2008), pp.29–52. http://doi.org/10.1257/jep.22.2.29
• Easterly, William. “Can Foreign Aid Buy Growth?”, Journal of Economic Perspectives, Vol.17, No.3 (2003), pp.23–48. http://doi.org/10.1257/089533003769204344
• Eroğlu, Ömer and Ali Yavuz. “The Role of Foreign Aid in Economic Development of Developing Countries”, Economic Development and Cultural Change, No.18 (2009), pp.144–158.
• Freedom House Report on Ethiopia, https://freedomhouse.org/report/freedom-world/2014/ethiopia; access: 08.09.2017.
• Gazni, Azmat. “Governance and Foreign Aid in Pacific Island Countries”, Journal of Internatinal Development, No. 21, 2009, p. 122. http://doi.org/10.1002/jid
• Gomanee, Karuna, Sourafel Girma and Oliver Morrissey. “Aid and Growth in Sub-Saharan Africa: Accounting For Transmission Mechanisms”, Journal of International Development, Vol. 17, No. 8, 2005, pp. 1055–1075. http://doi.org/10.1002/jid.1259
• Hansen, Henrik and Finn Tarp. “Aid and growth regressions,” Swedish Economic Policy Review, No. 13, 2006, pp. 9–61.
• Hansen, Henrik and Finn Tarp. “Policy Arena, Aid Effectiveness Disputed”, Journal of International Development, Vol. 12, 2000, pp. 375-398.
• Hofstede, Geert. Culture’s Consequences: International Differences in Work-Related Values, Sage Publications, London, 1980. Islam, Muhammed N. “Regime Changes, Economic Policies and the Effect of Aid on Growth”, The Journal of Development Studies, Vol. 41, No. 8, 2005, pp. 1467–1492. http://doi.org/10.1080/00220380500187828
• Kalyvitis, Sarantis and Irene Vlachaki. “When does more aid imply less democracy? An empirical examination”, European Journal of Political Economy, Vol. 28, No. 1, 2012, pp. 143-144. http://doi.org/10.1016/j.ejpoleco.2011.06.010
• Karras, Gitaru. “Foreign Aid and Long-Run Economic Growth: Empirical Evidence for a Panel of Developing Countries”, Journal of International Development, Vol. 18, No. 1, 2006, pp. 15–28. http://doi.org/10.1002/jid.1187
• Knack, Stephen. “Does Foreign Aid Promote Democracy?”, International Studies Quarterly, Vol. 48, No. 1, 2004, pp. 251–266. http://www.jstor.org/stable/3693571; access: 14.09.2017.
• Meernik, James, Eric Krueger and Steven C. Poe, “Testing Models of U. S. Foreign Policy: Foreign Aid during and after the Cold War”, The Journal of Politics, Vol. 60, No. 1, 1998, pp. 63–85.
• Moreira, S. B. “Evaluating the Impact of Foreign Aid on Economic Growth: A Cross-Country Study”, Journal of Economic Development, Vol. 30, No. 2, 2005, pp. 25–49.
• Morrissey, Oliver. “Does aid increase growth?”, Progress in Development Studies, Vol.1, No. 1, 2001, pp. 37–50.
• Mosley, Paul, John Hudson and Arjan Verschoor. “Aid, poverty reduction and the new conditionality”, Economic Journal, Vol. 114, No. 496, 2004, pp. 217–244. http://doi.org/10.1111/j.1468-0297.2004.00220.x
• Moyo, Dambisa. “Why Foreign Aid Is Hurting Africa”, The Wall Street Journal, 2009, pp. 1–5.
• OECD. “Official development assistance – definition and coverage”, Retrieved May 19, 2015, from http://www.oecd.org/dac/stats/officialdevelopmentassistancedefinitionandcoverage.htm; access: 12.09.2017.
• Okada, Keisuke and Sovannroeun Samreth. “The effect of foreign aid on corruption: A quantile regression approach”, Economics Letters, Vol. 115, No. 2, 2012, pp. 240–243.
• Önder, Murat and Şevki Mert Barış. “Kalkınma İşbirliğinde Etkinlik Arayışları ve Yeni Aktörler”, ICPESS (International Congress on Politic, Economic and Social Studies), No. 2, 2017.
• Önder, Murat and Fatih Ulaşan. “The Impact of Public Administration on Economic Growth: The Case of South Korea”, International Journal of Leadership Education and Management Studies, Year. 1, Vol. 1, 2016, pp. 23-43.
• Önder, Murat. “A Preliminary Cross-National Test Of Competing Theories Of Nonprofits: Does Culture Matter?”, International Review of Public Administration, Vol. 16, No. 1, 2011, pp. 71-90.
• Önder, Murat. How Local Conditions Affect the Existence and Capacity of the Nonprofit Sector: A Test of Competing Theories, PhD Thesis, Florida State University, 2006. http://diginole.lib.fsu.edu/islandora/object/fsu:180507/datastream/PDF/view; access: 13.09.2017.
• Powell, Benjamin and Matt E. Rya. “Does Development Aid Lead to Economic Freedom?”, Journal of Private Enterprise, Vol. 22, No. 1, 2006, pp. 11-21. http://www.matteryan.com/pdf/Does_Development_Aid.pdf; access: 13.09.2017.
• Qayyum, Unbreen, Musleh-ud Din ve Adnan Haider. “Foreign aid, external debt and governance”, Economic Modelling, Vol. 37, No. C, 2014, pp. 41–52. http://doi.org/10.1016/j.econmod.2013.08.045
• Qian, Nancy. “Making Progress on Foreign Aid”, Annual Review of Economics, Vol. 7, 2014, pp. 277-308. http://doi.org/10.1146/annurev-economics-080614-115553
• Radelet, Steven. “A Premier on Foreign Aid”, Centre for Global Development, Working Paper 92, July 2006, p. 7.
• Reinsberg, Bernhard. “Foregin Aid Responses to Democratic Transitions”, World Development, Vol. 75, 2014, p. 46-61. http://doi.org/10.1016/j.worlddev.2014.11.006
• Sachs, Jeffrey D. The end of Poverty: Economic Possibilities of Our Time, The Penguin Press, New York, 2005.
• Savun, Burcu and Daniel C. Tirone. “Foreign Aid, Democratization, and Civil Conflict: How Does Democracy Aid Affect Civil Conflict?”, American Journal of Political
• Science, Vol. 55, No. 2, 2011, pp. 243. http://doi.org/10.1111/j.1540-5907.2010.00501.x
• Schraeder, Peter J., Steven W. Hook and Bruce Taylor. “Clarifying the Foreign Aid Puzzle. A Comparison of American, Japanese, French and Swedish Aid Flows”, World Politics, Vol. 50, No. 2, 1998, pp. 294–23. https://pdfs.semanticscholar.org/d104/a17b8ac935779b3665cc9c30abeaee037dbc.pdf;access: 14.09.2017.
• Schudel, Carl Jan Willem. “Corruption and Bilateral Aid a Dyadic Approach”, Journal of Conflict Resolution, Vol. 52, No. 4, 2008, pp. 507–526. https://doi.org/10.1177/0022002708316646
• Scott, Jammes M. and Carie A. Steele. “Sponsoring Democracy: The United States and Democracy Aid to the Developing World, 1988-2001”, International Studies Quarterly, Vol. 55, No. 1, 2011, pp. 47–69. http://doi.org/10.1111/j.1468-2478.2010.00635.x
• Svensson, Jakob. “Foreign Aid and Rent-seeking”, Journal of International Economics, Vol. 52, No. 2, 2000, pp. 437–461. http://doi.org/10.1016/S0022-1996(99)00014-8
• Tarp, Finn. “Aid and development”, Swedish Economic Policy Review, No. 13, 2006, pp. 20.
• UNDP - United Nations Development Program, Human Development Report, 2014. http://hdr.undp.org/en/content/human-development-report-2014; access: 12.09.2017.
• UNDP - United Nations Development Program. Human Development Report, (2005), p.5http://hdr.undp.org/sites/default/files/reports/266/hdr05_complete.pdf; access: 12.09.2017.
• White, Howard. "Aid and Government: A Dynamic Model of Aid, Income and Fiscal Behavior", Journal of International Development, No. 5, 1993, pp. 305-312.
• World Bank. “Building a Concensus For Development Assistance: A Case for Aid”, introduced by James D Wolfensohn, 2002.
• World Bank. “Convention: Establishing the Multilateral Investment Guarantee Agency”, 1988. http://documents.worldbank.org/curated/en/755331468319524941/Multilateral-
• Investment-Guarantee-Agency-MIGA-Council-of-Governors-resolution-no-32-membership-of-Turkmenistan; access: 13.09.2017.
• Young, Andrew and Kathleen M. Sheehan. “Foreign aid, institutional quality, and growth”, European Journal of Political Economy, Vol. 36, 2014, pp. 195–208. http://doi.org/10.1016/j.ejpoleco.2014.08.003