The Pros and Cons of Bilateral Versus Multilateral Aid - Term Paper Example

Bilateral Vs Multilateral Aid Question: Assess the differential impact of bilateral vs. multilateral aid. Thesis ment: Although countries adopt both the bilateral and multilateral approaches to aid, multilateral aid is more efficient in enhancing international development. Bilateral aid gives more control to state development policies hence is more effective in national development. However, it involves tied aid hence serving the interests of donor countries and is also susceptible to political pressures. Multilateral aid gives more power to international institutions hence is less prone to tied aid. It also involves many stakeholders hence less susceptible to political pressures and also encompasses a wide range of developmental goals. Finally, research reports reveal that the top ranking agencies in best practice are multilateral donors with World Bank’s International Development Bank (IDA) leading. International Development International development according to the UK department for international development (DFID) is about helping people to fight poverty (DFID 36). For Peet and Hartwick, development is about “making a better life for everyone” (1). This implies having the basic necessities of life such as decent housing, affordable and accessible healthcare, good education, proper water and sanitation and other services as well as being treated with dignity and respect. However, development is a contested concept and highly debatable thus making it difficult to define what it is exactly. Sometimes development is confused with or used in place of economic growth but the two terms mean different things as a country can have economic growth but its people still live in abject poverty and low standards of living. Development encompasses many complex and linked elements involving natural, economic, social, cultural and political conditions. Amartya Sen in his book Development as Freedom (2000) described development as the ways in which society creates its own livelihoods, governs its own affairs and participates in self-government (Peet & Hartwick 3). This shows that development is more than economic growth although it is usually measured in terms of Gross National Income (GNI). GNI in this case is the net income earned by the country’s people and includes total wages, rents, interests, and profit and non-income charges. According to this measure, countries are ranked by World Bank as high income, middle income and low income. Development is also measured as a score on UN’s Human Development Index (HDI) and the needy people are those who live on less than $2 a day and these comprise 50%-90% of world’s people (DFID 7; Peet & Hartwick 7). In other words, 15.7 of world’s people get 80% of global income. This measure includes how countries perform on life expectancy, gross enrolment rates, adult literacy rates and income sufficiency. Most of these countries with low GDP per capita are in Africa, Asia and high ranking countries are Western countries. This necessitates the need for interventions to ensure even development and close the gap between the rich and the poor countries and this means the well developed countries giving aid to developing countries or their former colonies so as to uplift themselves. This assistance can be in form of bilateral, multilateral or humanitarian aid. Theories/Cases/Concepts Before discussing the various types of aid, it is imperative to discuss the various theories that underlie international development as well as define the main concepts. Bilateral aid is grounded in the theory of development economics which stresses the need for tight government intervention or the role of the state in international development. Individuals like Maynard Keynes who were party to the Bretton Wood conference in 1844 that laid the principles of managing international economy had a lot of influence in development of this theory (Harriss 37). Keynes stressed the importance of the state in provision of social security and ensuring economic stability. He argued that direct government intervention was crucial for development. In the 1950s and 1960s therefore, the theme of the period was the state and need for market regulation. The developing states were expected to emulate the West in industrialization hence capital was vital in that process. However, developing countries lack technology to industrialize and the government was to compensate this deficit through intervention (Haslam, Schafer & Beaudet 50). According to the development economics theory, the goal of development was growth through the agency of the state through national economic planning and use of macroeconomic policy instruments such as fiscal and monetary policy. The Keynesians advocated use of fiscal policy while Classical economists advocated monetary policy. Another influential figure of the time was Walt Rostow who introduced the Stages of economic Growth model in 1960 (Harris 39). This offered the perfect route for industrialization by developing countries. The modernization theory also advocated for these stages in the effort to reach end state (Peet & Hartwick 103). This theory is the basis for bilateral aid as it gives more control to state development policies in the belief that the state is the only one that can effect growth effectively. Another important theory concerning aid in aiding international development is neo-liberalism. Liberalism was influenced by the work of Adam Smith who in 1776 wrote The Wealth of Nations where he used the concept of the invisible hand. Smith believed that the market should be left free to allocate its resources efficiently without government intervention (Peet & Hartwick 80). However, neo-liberalists recognized the existence of market failures hence advocated for minimal state intervention. The International Monetary Fund (IMF) and World Bank who act as guardians of developing countries thus were entrusted with economic stabilization through the Structural Adjustment Programs (SAPs and the role of state minimized. This according to Harriss led to a “lost decade” for sub-Saharan Africa (44). It also sparked a lot of debate of whether to have free trade or increased government intervention. Neo-liberalists recognized the important role the government plays hence advocated for its facilitative role thus balancing the market and the state. The role of civil society in development was also recognized especially in enhancing democracy. This thus laid the framework for the approach of multilateral aid in enhancing international development as various agencies and institutions are left free to compete in aiding developing countries achieve the desired growth level. However, development is not all about economic growth hence the human development theory is also crucial in international development. It was a creation of UNDP in the 1990s as a measure of human well being. The Human Development Index is used to determine the countries that need assistance, mostly those whose people live under $2 a day and have low life expectancy, low literacy levels, poor health and other essential services such as water and sanitation. Most items measured by this index are the Millennium Development Goals (MDGs) (Haslam et al. 65). This theory is used for the purpose of both bilateral and multilateral aid as what both seek to attain is human well-being. Concepts It is only plausible to define the important concepts used in this paper so as to understand about aid and international development. Bilateral aid: Masud and Yontchera define bilateral aid as “total official development assistance (ODA) committed to a country in a given year by countries that are part of Development Assistance Committee (DAC)” (18). It is given by a donor directly to recipient countries hence giving more control to state development policies. As per the development statistics of the OECD, the major bilateral assistance providers include: Australia, Belgium, Canada, Denmark, Finland, Netherlands, Norway, UK and U.S among others. The aid may originate from the Ministry of Foreign Affairs, national development agency, Ministry of Justice or combination (OECD, nap). Multilateral Aid: This is assistance channeled through multiple agencies and international organizations such as World Bank and IMF, non-governmental institutions, UN agencies, and the civil society. As such, it gives more power to international institutions as opposed to the state. ODA: The Official Development Assistance disburses loans on concessional terms (net of repayment of principal) and grants by official member of DAC, multilateral institutions and non-DAC countries for economic development and welfare of DAC list members and comprises grant element of 25% (rate of discount 10%) (Lancaster & Ann 4-5). Efficiency: This refers to how aid to developing countries is used effectively to result in development thus creating maximum value for money, and achieving objectives in most cost-efficient manner as possible (DFID 3). Through the Paris Declaration on Aid Effectiveness (2005), the international community agreed on how to make international development effective by formulating five principles: ownership, alignment, harmonization, managing results and mutual accountability (OECD, nap). Ownership is ability of developing countries to develop own development policies and strategies. Alignment involves donors aligning behind these objectives and also use of local systems. Harmonization involves coordination, simplification of procedures and sharing information to avoid duplication. Managing results is developing countries and donors shifting focus to development results while mutual accountability involves accountability of donors and recipients for development results. Need-effectiveness on the other hand, is measured by Human Development Index (HDI). Tied Aid: This is aid tied to trade liberalization or on conditionalities. For example, a donor nation may give condition that the recipient countries spend aid on products and services and also expertise of only the donor country (OECD). The structural adjustment programs given to third world countries by IMF and World Bank such as cutting back on government expenditure, eliminating subsidies and privatization are a form of tied aid. OECD: Organization for Economic Co-operation and Development IMF: International Monetary Fund WB: World Bank MDGs: Millennium Development Goals. Differential Impact of Bilateral and Multilateral Aid The main difference between bilateral and multilateral aid is that one is channeled through the state while multilateral is channeled through various bodies. This has implications for countries growth and well-being of its people as well as international development as a whole. Bilateral aid involves states and national development agencies. The donor country gives aid directly to the developing countries with needs-assistance hence it is an agreement between two countries and responsibility is left on the government to shape development outcomes just like it was envisaged by development economics theory (Hira 45). Bilateral aid is also tied aid as most donors put conditionalities on it as in most cases it is used to serve donor’s interests. The advantage of using this approach is that the government is able to focus its attention to policies in priority areas hence economic growth. Most often the donor and recipient country have a long standing relationship hence well placed to assist. Besides most of them have colonial poor imperialistic attachments hence are able to transfer technical skills to the developing country using existing infrastructure (Sachs 151). It is also easy to coordinate as it involves following already laid down policies and procedures. The disadvantage of this type of aid is that it involves giving something in return; i.e. tied aid. Donor countries since they are serving own interests must demand things of interest to them such as using their products and services in order to justify the giving of aid to such countries to the respective donor parliaments and the citizens. For example, the UK stopped giving aid to low income countries like Niger as it was not cost-effective to operate there due to the small economy (DFID 6). Aid by UK is based on likely effectiveness of assistance and strategic fit with government priorities. Another disadvantage is that some developing countries have corrupt leadership hence aid money ends up in people’s pockets rather than in development (Masud & Yontchera 20). A report by IMF on whether aid reduces poverty found that there was no substitution effect of increased bilateral aid on education expenditure but the presence of IMF-supported program in a country did lead to higher share of education expenditure (Masud & Yontchera 19). They also noted that bilateral aid allocation was not consistent with MDGs. As aid in health expenditure increased, the governments non-aid financed expenditure declined thus cancelling the positive effect of bilateral aid. This only shows that bilateral aid is not that effective in improving human well being. Multilateral aid on the other hand, is channeled through international organizations such as IMF and World Bank, UN, European Commission (EC) and also non-governmental organizations and civil society. This is a bottom-up approach that ensures the people at grassroots have the capability to better their lives. It is a needs based approach hence ensures that MDGs are being met and also specific needs of specific countries at all levels. Moreover, these aid organizations have to compete for funding hence must ensure efficiency (Masud & Yontchera 18-20). The research by IMF on NGO and bilateral aid ability to reduce poverty found that NGO aid helped to reduce infant mortality because it was more effective than government actions in reaching out to grassroots level (20). NGO aid was thus found to be more effective to reaching out to poor and vulnerable populations. The multi-diverse stakeholders in multilateral aid make it less susceptible to corruption and political pressures thereby making it cost-effective. However, just as bilateral aid, multilateral aid is also susceptible to manipulation by donor countries and organizations as they seek to serve own interests. For example, a statistical analysis of U.S influence on WB was found out to be positive; that is, the WB did cater for U.S interests (Fleck & Kilby, nap). Another research on donor influence in multilateral development banks found out that the Asian Development Bank (ADB) was under the influence of Japan and U.S in its distribution of funds (Kilby nap). This donor influence reduces credibility of the aid organizations and consequently development effectiveness. Multilateral agencies are also prone to tied aid as evidenced by IMF and WB structural adjustment programs (SAPs) in developing countries. These SAPS nearly led to the collapse of sub-Saharan countries until they reversed the decision and started offering subsidies to farmers and increasing government spending. An example is Malawi which is now a major food exporter rather than an importer or relying on aid (Lancaster & Ann 126). Compared to bilateral aid, multilateral aid is more effective in enhancing international development. A study by Easterby and Pfutze on best and worst practices in foreign aid found that the multilateral development banks led by WB International Development Association (IDA) ranked top in best practice although UN agencies were at the bottom (nap). The International Aid Transparency Index 2012 also gave high scores to multilateral agencies with exception of UK DFID which performed exceptionally well and is bilateral aid donor. Bilateral agencies on the other hand, were ranked in the poor category. Case The case of DFID in the UK is a good example of how bilateral aid is distributed among needy countries. The aim of DFID as stipulated in its Bilateral Aid Review (BAR) is to achieve MDGs such as clean water, sanitation, health care, education and also prevent and tackle conflict and climate change. Allocation of aid in such a way that these objectives are achieved in a cost-effective manner possible, maximum value for money based on solid understanding of what works and what doesn’t (DFID 3). It utilizes a bottom-up approach whereby needs of countries are assessed and the most needy gets the aid. It allocates funds according to achievable results hence countries are supposed to prepare operational plans outlining their justification for aid. All projects by such countries go rigorous appraisal process before they are approved. Wherever DFID feels it cannot be able to help in bilateral manner, it increases its contribution to multilateral organizations. It uses a need-effectiveness index to allocate aid whereby the need is based on number of people living below $2 a day and the country’s score of HDI. DFID focuses on 5 pillars: wealth creation, direct delivery of MDGs, governance and security, climate change and humanitarian assistance. Its aid effectiveness is measured against targets set in Paris Declaration and Accra Agenda. The countries that score highly in need-assistance include India, Nigeria, Ethiopia, Bangladesh, and Pakistan. The case is related to international development as bilateral aid is a key element of this process. According to this report, there are 500 million fewer people living in poverty today than 25 years ago. Moreover, UK is a key player in export markets in poor countries thus assisting in development. Conclusion Although countries adopt both the bilateral and multilateral approaches to aid, multilateral aid is more efficient in enhancing international development. Bilateral aid is mostly tied aid and this hinders developing countries from achieving capabilities to drive own improvements. It is a top-down approach hence unlikely to reach the grassroots people who are poor and vulnerable but benefit the rich. Multilateral aid is untied aid and applies bottom-up approach allocation of funds hence can reach poor and vulnerable citizens as various research indicates. Besides, competition by the agencies makes them to operate efficiently and ensure high level of development. As such, multilateral aid is recommended as it leads to international development while bilateral aid achieves national development. Works Cited ATI. 2012 Aid Transparency Index. Publish What You Find. N.d. Web. November 6, 2014. www.publishwhatyoufind.org/index/2012-index DFID. Bilateral Aid Review: Technical Report March 2011. www.dfid.gov.uk Easterly, William and Pfutze, Tobias. Where Does the Money Go? Best and Worst Practices in Foreign Aid. Journal of Economic Perspectives, 22.2 (2008). Fleck, Robert K & Kilby, Christopher. World Bank Independence: A Model and Statistical Analysis of U.S Influence. Vassar College Economics Working Paper # 53. June 30, 2005 Harris John. Development Theories. In; Bunice, C., Ravi, K., David, M & Rohinson, M. International Development: Ideas, Experience and Prospects. UK: OUP, 2014. Haslam, Paul Alexander., Schafer, Jessica and Beaudet, Pierre. Introduction to International Development: Approaches, Actors, and Issues. 2nd ed. Oxford Universty Press, 2012. Hira Anil. The State. In: Haslam, Paul Alexander., Schafer, Jessica and Beaudet, Pierre. Introduction to International Development: Approaches, Actors, and Issues. 2nd ed. Oxford Universty Press, 2012. Kilby, Christopher. Donor Influence in Multilateral Development Banks: The Case of the Asian Development Bank. Vassar College Economics Working Paper # 70. January, 2006. Lancaster, Carol and Ann Van Dusen. Organizing Foreign Aid: Confronting the Challenges of the 21st Century. Brookings Institution Press, 2005. Masud Nadia and Yontchera Boriana. Does Foreign Aid Reduce Poverty? Empirical Evidence from Non-Governmnetal and Bilateral Aid. IMF Working Paper, 2005. OECD. 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