Nepal and the trouble with aid

The recent 7.8 magnitude Nepalese earthquake has seen an outpouring of humanitarian aid flowing into the small, mountainous country. Already over $50m in financial support has been donated worldwide by various countries, as well as countless non-financial aid, such as sleeping stations, food, water and medical equipment. Yet, for the past decade Nepal has received over $6,000,000,000 USD in foreign ‘financial assistance’, accounting for over 5% of their GDP annually, with barely any development in their own economy; the average Nepalese citizen lives off less than $2 USD a day. This has drawn critics of the Nepalese government who believe that the state is self-, providing a minimal amount of aid to people who need it most. With donations making up such a large proportion of Nepalese GDP and other developing countries, it begs the question – is aid a long-term problem for a developing country’s economic growth?

Studies as far as 40 years past have looked at the problem of aid as a potential growth stifler to low-GDP countries. Recently, a study conducted by Dr Bhattarai of University of Western Sydney published in 2005 (along with further contributions made by him) looked to study Nepal pre-2005. He found that aid was used efficiently and contributed to 50% of total development expenditure in the country. It was also noted that without foreign aid, capital accumulation as per the Solow-Swan model would be impossible given their economy’s state and further growth would have been impossible. In this sense, foreign aid was used as a fantastic kick-start to growth. However, the question of corruption comes into play as aid was often used to fund ‘attractive’ projects that transnational companies had a vested interest in, not growth in rural communities and education – donor-interested developments accounted for 60% of investments in the country during the period of study. We see in this example that Nepal has used foreign aid to help accumulate capital but much of this aid is redirected towards projects that donors have a vested interest in.

The countries of Africa, who predominately receive non-financial aid, have also come under scrutiny. Ethiopia received over 256,000 tonnes of ‘cereals’, much of which comprises maize (an important part of their own agricultural economy), in 2013. Yet quarterly imports were only half the level in 2013 as they are in 2015, including cereals imports, which suggests that Ethiopia relied heavily on foreign aid to feed their country. 2013 was an important year as it signalled the end of the devastating 2011-2012 droughts that ravaged Africa. It was thought that an agricultural revival would begin at the start of 2013 and yet we saw a large 3% decrease in agricultural contribution to GDP in 2013 itself. This coincided with the huge food aid packet sent to Ethiopia and raises the question of whether flooding the country’s market with maize, which it planned to produce itself, stifles agricultural production and increases domestic price volatility. It is too soon to make any conclusions about the effect of non-financial aid to developing countries, but we see that there could be a possible negative impact of aid on Ethiopia’s domestic agriculture industry. Of course, Ethiopia lives on less than $1.50 USD a day on average, so short-term humanitarian aid in the form of food is generally important in keeping the nearly one hundred million-strong country fed and alive.

Corruption has been well documented in the case of Vietnam and their use of development aid. Vietnam has ranked 2nd in aid received (around $4,000,000,000 USD in 2013, or a bit more than 2% of GDP) for many consecutive years and yet aid allocation is often noted to go to unscrupulous causes. Take, for example, the funding of orphanages in Vietnam. The US Embassy noted in 2008 that little to no money went to help finding legitimate orphans good homes, but the huge amount of foreign demand for Vietnamese orphans led to hospital kidnappings, blackmailing and mistreatment of biological mothers. This in itself is not the biggest problem, however; the majority of aid going to Vietnam comes from loans that accumulate interest. Bhattarai mentioned that aid must come in the form of genuine development, and that his Nepalese studies showed that financially-constrained (i.e. loaned) aid indeed did stifle growth because many countries have insufficient capital structures to utilise the money given to them. In this sense, foreign aid is used to invest in developed country interests, such as clothing factories and tech, instead of helping the vulnerable (rural communities and impoverished citizens). As such, causes such as orphanage funding is often overlooked as the country has to pay off its own loans and thus invest in high-yield projects, as any other company would need to.

Aid is very important in this day and age as it often acts as a medium of distribution from developed countries to developing countries. Many countries need financial and humanitarian help in times of crisis – the recent earthquakes of Nepal are a prime example, with many news outlets quoting “10 years of economic development lost in 2 days” and putting a figure of $10,000,000,000 on cleanup and recovery. With this being said, there have been many studies done on the equity and growth implications of aid in many developing countries. Countries such as Nepal benefitted in the short-run from financial aid but ultimately gave in to external donor interests. The African nations receive non-monetary aid that may have hindered local industry due to price impacts on food. Finally, the form in which donations come could adversely manipulate equity in countries that are essentially burdened with debt their capital structures can’t handle. It is not clear at the end of the day if aid is good, as there are many negative channels from which foreign money and goods could distort developing economies.