The history of foreign aid

Tuesday 17 December 2013 4:56PM
Keri Phillips

Over the past 100 years, foreign aid structures that began with European colonialism have become tied to shifting economic and political interests, as well as a growing humanitarian movement. Keri Phillips investigates the competing motives behind foreign aid, and how emerging global powers are changing the game.


An ideological battle has been playing out for decades over whether foreign aid should be used to facilitate economic growth, or to provide programs that directly meet people’s basic needs. As new global powers emerge as donors, a third 'horizontal' structure is now being discussed, based on mutual self-interest.

Rich countries started giving money to poorer countries in the 19th century, and by the 1920s and '30s countries like Germany, France and Britain were providing regular aid to their colonies in Africa, Latin America and Asia. Colonial powers used their money to build infrastructure—ports, roads, railways—and wealthy American industrialists were also involved in development aid through the Ford and Rockefeller Foundations.

Even after the colonies gained their independence, foreign support continued to focus on economic development, says author and academic Rosalind Eyben.

'There was the idea that countries had to catch up, that Western Europe and countries like Australia, Canada and North America were developed... they were the goal that everybody else had to reach,' says Ms Eyben.

During the Cold War, dramatic shifts in political, economic and moral allegiances emerged.

‘Within a few years the world had split into what were called three worlds: the first world, Western democratic countries; the second world which was the Soviet Union and its Communist satellites; and then what became known as the third world, which were the former colonies and countries that had come under imperial influence, which were now all independent and that formed themselves into the non-aligned movement in the early 1950s,’ Ms Eyben says.

In the post-war decades, the United States became the world’s biggest aid donor, starting with the Marshall Plan to help Europe rebuild. As the Cold War developed, the two super powers and their allies would use aid to encourage political allegiances.

Howard White, executive director of non-profit organisation 3ie, says the assumption during this period was that the old colonial powers would gradually phase out their direct financial aid as colonies became independent and multilateral organisations like the UN, the World Bank and the International Monetary Fund took over development work.

‘It was really through the 1960s that the aid programs started to formulate and take shape and become a more definite commitment. That's where you see the start of the evolution of a 0.7 per cent target of countries giving 0.7 per cent of national income in development assistance,’ says Mr White.

‘The northern European donors like Sweden, which historically hadn't had colonies, so it didn't have the reason to be giving money to ex-colonies in the way that Britain and France did, started to recognise the need for aid on humanitarian grounds and so also adopted these targets and started to develop aid programs in particular focus countries. And it took off from there.’

At the end of the 1960s, ideas about the purpose of aid began to change under the influence of Robert McNamara, who became head of the World Bank in 1968. He promoted the idea of using donor-funded programs to meet people's basic needs in health, education, water and sanitation.

By that time, Ms Eyben says there began to be a feeling that the people had been forgotten about, that there was still massive poverty in aid recipient countries, and that the investment in economic infrastructure was not necessarily making any difference to the lives of the majority.

‘That was a decade where people began to talk about poverty, and they began to talk about why are people poor, and whether it was possible to have economic growth that was more equitable, economic growth that focused on reducing poverty rather than just assuming that if you had growth everybody would ultimately benefit. That discussion about what kind of growth is one that is alive and very well today as well, it's a constant theme in discussions about development,’ says Ms Eyben.

‘In the 1980s basic needs disappeared off the agenda as a result of the global recession that was a result of the oil shock of the 1970s. Many developing countries were heavily indebted as a result of the recession, and donor countries lent them money in order to manage their debts, but on the basis of them having to restructure their economies, and to particularly stop spending so much money on social services. This was called structural adjustment, and it's very similar to what is happening in Europe at the moment with what we are calling austerity programs.’

The collapse of the Soviet Union in 1991 and the end of the Cold War led to a return to democracy in many countries and the increasing participation in development projects by both non-government organisations and wealthy philanthropists like Bill Gates and George Soros during the 1990s. But many poor countries were still staggering under impossible-to-repay debt.

Steve Radelet, an academic and former chief economist for the US Agency for International Development, worked in the US Treasury on international debt relief deals from 1999 through 2002. He says that ironically the first countries that were able to get out from under their debt burdens were the ones that had borrowed from commercial markets, not from aid agencies.

‘Those that had borrowed from Citibank and other commercial banks were able to do deals in the late '80s and early '90s under a program called the Brady bonds where essentially the commercial banks would swap old debt for new debt at 70 per cent of the face value or 50 per cent or 30 per cent, it varied by country,’ says Mr Radelet.

‘The commercial banks pretty quickly figured out that they weren't going to get fully repaid and were willing to go in and do a deal where they would accept a write-down in order to get some things repaid. But for loans that were made by donor governments, and by the World Bank and the IMF, many more years went by until those donors were willing to recognise that they were going to have to write their debts down.’

‘Finally in 1998 the big movement forward happened when the World Bank and the IMF finally decided that it did not make sense for them to demand repayment of these old loans because countries were really stagnating under the weight of the burden of repaying it.’

‘Most of the really poor countries that had built up a lot of debt have now had that debt forgiven. There's really only a few countries remaining with large debt burdens, and they are tough cases. Somalia is one, Sudan is another, Zimbabwe is another, and the progress on debt relief there is frankly waiting for a transition to a government where the donor countries are more willing to move forward with debt relief.’

Over the past decade, more attention has been paid to working out the most effective way to spend aid money. This has included the rise of impact evaluation, a set of methodologies that allows agencies to determine how effective development programs are for the people they are trying to reach.

The shift in global power relations that has occurred over the past 10 years has also been playing out in aid relationships. Some former aid recipient countries have now become important economic and political powers in their own right. These ‘rising powers’ have a different approach to aid, which they describe as development cooperation on the basis of mutual self-interest. One of the most prominent examples of this is the relationship between China and Africa, says Ms Eyben.

‘China provides a lot of economic infrastructure and support for social development, and in return becomes the privileged buyer of African raw materials for China's growing economy,’ she says.

‘On the philosophical side, which is important here because it influences how people think about what they are doing, these new sovereign powers stress that the corporation is horizontal, that it's not the old vertical relationship that the former colonial powers have with their erstwhile colonies who are now aid recipients.’

While this is an attractive philosophical position, a number of observers believe is not much different from what the old donors were doing in the 1960s when they emphasised support for economic development.

‘When development is primarily understood as economic growth, then most of the money will go on supporting the growth of markets, supporting the infrastructure that helps markets work better,’ says Ms Eyben.

‘When the emphasis shifts to development being understood as greater human wellbeing, then donors have been spending more money on supporting the strengthening of civil society, supporting the attainment of gender equality, putting more money into education and health and so on and so forth.’

This is a division, she says, that remains one of the enduring points of contention within governments and NGOs.

‘At any particular moment you will find people in the aid agencies who want the one and not the other. Inside every aid agency you will find ideological arguments going on.’

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Australian Broadcasting Corporation