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Unintended Consequences of Foreign Aid
posted on March 14, 2014 in Global Development
Bob Lupton, president of the non-profit FCS Urban Ministries, once wrote, “Give once and you elicit appreciation; give twice and you create anticipation; give three times and you create expectation; give four times and it becomes entitlement; give five times and you establish dependency.” This statement speaks to the situation that in many cases around the world foreign aid has engendered.
In a 2005 paper, Erin Lentz, Christopher Barrett, and John Hoddinott categorized dependency as either “positive” or “negative.” By these definitions, positive dependency is exhibited when an individual, household, or community is unable to meet its immediate basic needs without help from outside. In these cases, providing assistance through some form of aid by-and-large produces a wholly desirable outcome.
But the emergence of negative dependency occurs when dependents begin to amend their behavior in response to the availability of aid, which thereby creates disincentives to adopt self-sustaining behavior. Arguments surrounding aid dependency often grapple with these types of unintended consequences, not simply on a case-by-case basis, but as they interfere with the larger democratic process.
In today’s world, writes Barrett in a separate paper, nearly half of the population survives on “$2/day or less, more than 800 million people go to sleep hungry any given night, and a child dies every five seconds due to hunger-related issues.” Though the severity of global poverty is well understood, there remains significant disagreement on how to effectively mitigate such issues, with detractors of foreign aid emphasizing that good intentions do not automatically lead to positive impact.
When examining the impact of foreign aid, one must account for a number of factors: for one, foreign aid can be studied on a national scale (as it will be below) or from a functional angle, as many interventions are thematic. These latter programs target, for example, military, food, health, or education systems on a sub-national, national, or regional level. The time frame selected matters too, as unanticipated consequences can arise immediately and disappear in the long-term, or be nonexistent in the short-term and only begin down the road.
The study of the impact of foreign aid has always been a staple of economic studies due to the fact that the actions of different stakeholders, including governments, corporate bodies, individuals, multi-lateral agencies, and nongovernmental organizations alter the incentives and constraints faced by other decision-makers, leading to feedback through induced behavioral responses. These feedback cycles are often hard to envisage but very real nonetheless.
Says Barrett, “Unintended consequences are not always bad: as Adam Smith argued with his ‘invisible hand,’ self-interested behavior can lead to socially desirable outcomes; or, in the case of ‘crowding-in,’ public investments can induce complementary private investment.” Nevertheless, he finds that by and large when experts and academics explore the unanticipated long-term effects of aid, they focus on those that are detrimental.
Simeon Djankov, Jose Mantalvo, and Marta Reynal-Querol highlight the negative effect that foreign aid in the form of Official Development Aid (ODA) could have on a country’s governance and democracy. Even though aid money is intended to bolster the quality of a democracy directly or indirectly through improvement in health care, human rights etc., there seems to be a correlation between high levels of aid and low levels of democracy. One explanation for this occurrence is that aid money ends up in the hands of government leaders who misappropriate these funds and stifle the establishment of strong democratic institutions by excluding other groups, as we will examine in the case of Tanzania. This in essence produces weaker democratic structures in affected countries.
The Case in Tanzania
Tanzania, a “donor darling,” as James Stewart puts it in an article for the United Nations University, since the late 1980s when it adopted structural adjustment policies, illustrates the dual nature of foreign aid. The second-largest aid recipient in sub-Saharan Africa, Tanzania received about $26.85 billion in aid between 1990 and 2010. This aid to Tanzania has strengthened basic democratic institutions such as civil society and media freedoms, thereby aiding Tanzania’s transition to a relatively stable and resilient democracy.
Having placed a heavy emphasis on civil society since the 1980s, foreign donors have contributed to a stronger NGO landscape in Tanzania. Its independent media sector in particular has benefited, and funding provided by international donors has undoubtedly been crucial to the work of The Media Council of Tanzania and media advocacy groups.
Tanzania’s judiciary, too, has benefited largely from funds coming from Scandinavian donors aiming to enhance human rights-related legal reforms and legal aid projects. Though the judiciary branch still suffers from a considerable degree of corruption, this support has allowed it to wean its dependency on the executive branch steadily since the 1990s.
At the same time, Stewart lays out a convincing case for the argument that this aid may have hurt in other ways. He writes, “The associated inflow of foreign aid have created new mechanism for corrupt governance and dependency that have in many respects deteriorated the quality of the country’s political system.”
For one, much of the aid Tanzania has received has come in the form of general budget support (GBS), as prescribed by the Organization for Economic Co-operation and Development’s Paris Declaration of 2005, which aimed to put “in place a series of specific implementation measures and a monitoring system to assess progress and ensure that donors and recipients hold each other accountable for their commitments.” Instead, this approach has created a situation whereby the oversight of major development initiatives lies in the hands of the government, and the funds are often used to rent political support. This system has shifted power to the president and finance minister, who end up making most of the decisions regarding the use of the unaudited GBS, paving the way for corruption and political finance to flourish.
Prior to 2003, Tanzania operated a complex form of taxation called the “poll tax” also known as the “development levy”. As explained comprehensively by Odd-helge Fjeldstad, This tax has been in place at the local government level since 1983-84, and is the single largest source of tax revenue for district councils in Tanzania. In 1997, revenues from the development levy contributed on average about 30% of total own revenues in rural councils and 19% in urban councils.
Donors welcomed the removal of this tax, whose revenues did not yield the services many expected it to. However, the removal of this tax has led to consequences such as the reduction in revenue received by district councils, thus creating dependence on the central government for needed funds. The distribution of these funds has become largely politicized, and at one time, used by the ruling political party as a means of fostering political witch-hunts of oppositions groups and individuals. Because approximately 95 percent of local government revenue in Tanzania is derived from the either the central government or from foreign donors, this system 1) denies citizens the fundamental right to active participation in local government affairs; and 2) further cements the consolidation of power within the central government, subsequently leaving local governments less accountable to their citizens.
Foreign donors held on to the belief that privatizing projects would divest the state of money-losing enterprises and so continued to underwrite huge losses accumulated by the government. In fact, the subsidization of these inefficient industries by foreign donors has become a highly profitable venture for the ruling elites, wherein there exists a much greater incentive to continue to run inefficient and failing infrastructure than to build quality-focused industries in the long run. This has been the case for the country’s electricity infrastructure, in which the norm is to ration electricity in order to influence voters: Voters are more likely to enjoy uninterrupted power supply during an election year, and then revert back to frequent power cuts once elections conclude.
More often than not, foreign donors fail to consider the potential for unintended consequences due to the fact that monitoring and evaluation methods employed are not designed to factor in these outcomes, thereby, creating new problems while attempting to solve old ones. In the case of Tanzania, stakeholders in a democratic setting, including the judiciary, civil society, political parties, and the media, are all direct beneficiaries of foreign aid. This aid is a double-edged sword, however, that fosters new dynamics that, somewhat paradoxically, make it harder for these very groups to keep the executive arm of their government in check. This problem highlights the need for donors to account for contingent and unintended consequences in addition to the direct and intended impacts of their activities.
The question now before development implementers and practitioners is how to measure these consequences through the regular practice of monitoring and evaluation, and then how to tailor approaches to aid so as to eliminate associated negative outcomes. This is important in order to ensure that aid efforts do not produce a situation like the one in Tanzania, where the executive branch has gained leverage over civil society, local officials, and other branches of the government. Such control ultimately hinders the growth of democracy and fosters aid dependency, both of citizens on their central government, and of the central government on the international community.