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wisely the proceeds of debt forgiveness.” For unauthorized media publication of his views, the World Bank undertook a disciplinary investigation against Easterly (Kahn 2001), who left the Bank for New York University and Washington’s Center for Global Development.

Elliott R. Morss argues that the effectiveness of aid to sub-Saharan Africa declined after 1970, as aid programs placed more burden on scarce local management skills and put less emphasis on recipients’ learning by doing. After 1970, donors switched from program support (for example, to infrastructure or agriculture) to project assistance, which entailed more specific statements of objectives and means of attaining them, more precise monitoring and evaluation, more foreign control over funds, and more local personnel and resources committed to projects. Furthermore, each of the major bilateral, multilateral, and nongovernmental organizations has competing requirements.

Research finds that ODA is not associated with economic growth. Indeed many poor countries, such as Bangladesh, Malawi, and Ethiopia are hampered by a high dependence on aid, defined by Riddell (1996) as the process by which aid makes no significant contribution to self-sustained development. This dependency includes food and commodity aid that competes with domestic production, and, for some LLDCs, aid flows large enough to contribute to an overvalued currency that is biased against exports.

When donors underwrite most of the development budget, they insist on continual, extensive project supervision and review, so that recipient government agencies are more answerable to them than to their own senior policy officials. Donors frequently recommend and supervise poorly conceived projects. But even when well conceived, LDC officials fail to learn how to do something until they have the power to make their own decisions. Morss argues that the proliferation of donors and requirements has resulted in weakened institutions and reduced management capacity. For example, in 1981, Malawi, lacking the indigenous capacity to manage 188 projects from 50 different donors, hired donor country personnel (sometimes with donor salary supplements) to take government line positions to manage projects. However, Malawi did not increase its capacity to run its own affairs and establish its own policies (Morss 1984:465–470).

Tanzania, by contrast, retained its best economic analysts at home in the late 1980s and early 1990s, but “the price of keeping top professionals at home [was] to see them absorbed into the domestic consultancy market, sustained by donor-driven programmes of [technical assistance]” (Sobhan 1996:119). Sobhan (1996:111–245) points out that the opportunity cost of this cooption by the donors was diversion from contributions to teaching and domestic policy debate and initiative. But the cost of aid in reduced domestic initiative and technical learning may be at least as great for other highly vulnerable low-income countries as for Malawi or Tanzania.

However, the problem is not so much the size of aid flows as the manner in which ODA is given and utilized. Aid is likely to be more effective if it strengthens economic policy. UNCTAD (2002b) argues, however, that IMF and World Bank aid conditioned on orthodox structural adjustment policies that are a part of the Washington

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Consensus (Chapter 5) imposed externally is counterproductive. UNCTAD emphasizes national ownership, with policies to reduce poverty domestically formulated and implemented rather than by DC governments, the IMF, and the World Bank. Any conditions set by the donor should be derived from national priorities and oriented toward long-term growth strategies.

Moreover, aid flows to poor countries are complicated by high conditionality, and “are both volatile and unpredictable” (FitzGerald 2002:76). Aid agencies should not emphasize stand-alone projects but donor coordination reflecting long-term program coherence and an orientation toward increasing productive capacity, providing infrastructure, and reducing poverty and communal inequality. Donors also need to emphasize aid to ruling groups, economic classes, and communities that have strong incentives to increase political integration and improve the living standards of the poor.

Increasing aid effectiveness. DCs can increase aid efficacy if they select recipients with well-developed institutions and policies and oriented toward development and economic reform. Even Easterly wants his criticism to contribute to higher quality programs and a cessation of aid to corrupt or predatory governments rather than to be used by countries, such as the United States, for stinginess. He states: “Rich countries should [not] use the past record as an excuse, because it’s mainly their own fault. If the U.S. had cared whether aid was helping people rather than creating markets it might have performed better” (World Bank Development News, “Commentary on Aid Effectiveness,” March 22, 2002).

I mentioned the need for aid to produce global public goods or build indigenous skills. Other forms of aid are for food and agricultural development (discussed later in the chapter) or as debt relief (Chapter 16). Here I discuss assistance in cushioning the effects of sudden external shocks.

In Africa, an external debt crisis, with declining terms of trade, global credit tightening, and falling debt relief and concessional aid from the West, forced austerity and declining living standards in the 1980s and 1990s, putting additional pressure on African governments and economies.

The IMF uses its compensatory and contingency financing facility to finance a temporary shortfall in export earnings or to bolster IMF-supported adjustment programs. This facility, however, is a drop in the bucket compared to the needs to rescue countries, such as African low-income economies that experience temporary external shocks. Despite limited funding, the EU’s Stabex, which covered 48 primary products from 66 ACP countries from 1975 to 2000, was a more effective program for cushioning external shocks. However, in 2000, the European Union discontinued Stabex, folding it into a general aid program combining support for adjustment, project aid, good governance, and price stabilization (Brown 2000). Discontinuance was wrong, as DCs need to provide a larger share of loans and concessional aid to reduce the vulnerability of LICs to external shocks and their effect on GNI and poverty.

Reasons for the decline in aid. In 1995 the OECD chided the United States for setting a poor example by cutting its aid budget and warned that the move might

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contribute to other OECD countries following suit. In blunt language, the OECD indicated that the U.S.’s “seeming withdrawal from traditional leadership is so grave that it poses a risk of undermining political support for development cooperation” by other donor countries (Greenhouse 1995:4; OECD 1995).

How do we explain what James H. Michel, Chair of the OECD’s (1995:1) Development Assistance Committee, called the “sharp decline in spending by the industrialized democracies for official development assistance.” We can only speculate about the reasons. For the United States, political influence has declined dramatically since 1946, when Europe and Japan were war devastated and few LDCs were independent, so U.S. economic aid has come to have less influence, too. In any event, the post– 1970 U.S. Congress, and at times the president, were increasingly skeptical about aid’s value in strengthening allies, influencing international behavior, improving U.S. access to markets and raw materials, promoting capitalism, maintaining global stability, and building a world order consistent with U.S. preferences. Indeed, Michel suggests that Americans and other DCs lack “a firm conviction . . . that increasing the security of the people who inhabit the developing world is a major and concrete part of meeting . . . threats” to the North’s quality of life. In the United States, even some liberals, churches, and humanitarian organizations traditionally in favor of economic aid stopped supporting it in the 1980s and 1990s because they increasingly perceived it as benefiting large U.S. corporations and conservative countries suppressing human rights.

Moreover, aid levels have fallen with the end of the Cold War and the competition for influence between the West and Russia. Russia substantially reduced its aid to LDCs, with the collapse of socialism and subsequent negative growth in the 1990s. Additionally, DCs have allocated aid to Eastern Europe and the former Soviet Union in their transition to market economies at the expense of the developing countries of Africa, Asia, and Latin America. Germany has shifted its emphasis to reintegrating its eastern states within the federation, and the European Union is focusing more on economic opportunities within Eastern European member states.

Furthermore, the United States and other OECD countries have achieved many of their goals through means other than aid – specifically through their dominant shares in two major international financial institutions, the IMF and World Bank. The conditions set by these lending institutions have spurred LDCs and Eastern Europe to undertake market reforms, stabilization, privatization, and external adjustment that high-income OECD countries want.

Aid to lowand middle-income countries. Real concessional aid to LDCs rose from $31.3 billion in fiscal year 1972–73 to $48.2 billion in 1982–83 to $59.1 billion in 1992–93 before falling to $44.4 billion in 2000–01 (in 1992 prices). The share of low-income countries (LICs) in total aid increased from about half in 1972–73 and 1982–83 to 73 percent in 1992–93 but fell to 30 percent in 2000–01 (see leastdeveloped countries and other low-income countries, Figure 15-5), an indication of an initial allocation away from relatively prosperous middle-income countries (MICs) in the 1980s and early 1990s but a return to them (44 percent in 2000–01)

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Lower Middle-Income Countries	Upper Middle-Income Countries
Other Low-Income Countries	High-Income Countries
Least Developed Countries

FIGURE 15-5. Aid by Income Group (millions of US$, 2000). Note: Aid is gross bilateral ODA. Income groupings are presented according to the DAC List of Aid Recipients (as of January, 2000). Source: OECD 2002b:2.

and high-income countries (HICs 26 percent) recently. A sample of aid recipients includes LICs – Afghanistan, Indonesia, India, Pakistan, Bangladesh, Indonesia, Vietnam, Uganda, Tanzania, Nigeria, and most of the rest of sub-Saharan Africa; MICs – Colombia, Chile, Brazil, Mexico, Peru, Russia, Poland, Hungary, Czech Republic, South Africa, Egypt, Jordan, China, and Philippines; and HICs – Israel, Kuwait, Libya, Singapore, South Korea, Slovenia, and Malta.7 Although international agencies emphasize aid to low-income countries, their share of aid has been low, suggesting that alleviating the poverty of the poorest countries is not a high priority.

In 1992–93, 37 percent of the aid went to sub-Saharan Africa, the region with the largest number of least-developed countries; 27 percent to Asia; 13 percent to Latin America, with only one least-developed country; and 23 percent to the Middle East, with no least-developed countries. In 1999–2000, Europe’s (mostly transitional countries’) share increased to 13 percent, while sub-Saharan Africa had 33 percent, Latin America 21 percent, Asia 26 percent, and the Middle East 7 percent. Lowincome countries listed as top aid recipients in Table 15-2 and Figure 15-4 include only Vietnam, India, Indonesia, and least-developed Bangladesh (OECD 1995; OECD 2002b).

Low-income countries received $10 official development assistance per capita in 2001, and middle-income countries $8. Donors, however, gave only $0.01 aid per capita to China and $0.04 to India, whose populations comprise 44 percent of developing countries. (Donors defend this small figure on the grounds that these two countries could not be given as much as other low-income countries without destroying the effectiveness of the flows to other recipients.) If India and China are excluded from LDCs, per-capita assistance is $17 for low-income countries and $15 for middleincome countries (World Bank 2004c:252–253, 260–261).

Aid to low-income countries (excluding India) was 18 percent of their gross investment and 4.3 percent of GNI in 2002. This percentage of GNI is 11 times as high as the proportions for both India and middle-income countries. For Eritrea, a country of four million, aid was 41 percent of GNI! For Mozambique, a country of 18 million,

7In March 2004, the World Bank celebrated Slovenia’s graduation from recipient to donor (World Bank Development News, March 18, 2004).

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aid was 28 percent of GNI; for Honduras, a country of 7 million, aid was 11 percent of GNI (World Bank 2004f:260–261).

Multilateral aid. In 2001, $18.5 billion, 36 percent of OECD development assistance (and 0.08 percent of GNP), went to multilateral agencies, those involving several donor countries. For the United States, in 1997 20.0 percent of ODA (and 0.02 percent of GNP) went to these agencies (United States Congressional Budget Office 1997; European Union 2004). In 1992, the rank order of concessional aid by major multilateral agencies was the International Development Association (IDA, the World Bank’s concessional window, primarily for low-income countries, which has usually extended credit for 50 years, with a 10-year grace period, no interest charge, and a nominal service charge), $4.8 billion; the Commission of the European Communities (CEC, for aid primarily to the European Community’s former colonies in Africa, the Caribbean, and the Pacific), $4.2 billion; the World Food Program; the U.N. Development Program; the U.N. High Commission for Refugees; the Asian Development Fund; UNICEF (the United Nations Children’s Fund); the IMF soft-loan window; the African Development Fund; and the U.N. Relief and Works Agency (OECD 2002b).

The overwhelming share of IMF resources is for loans at bankers’ standards. However, IMF concessional funds include member contributions (but rarely the United States) for structural adjustment facilities, discussed in Chapter 16, and a trust fund from the sale of IMF gold. Donor countries and agencies often form a funding consortium, frequently under World Bank auspices; a fractional share for concessional aid can soften the overall payment terms of the financial package. Multilateral agencies and consortia generally coordinate technical and financial contributions of individual donor countries with one another and with the recipient’s economic program. Aid administered in this way reduces the amount of bidding donor countries make for favors from recipient countries and softens adverse political reactions if a particular project fails.

Congress members sometimes object to U.S. loss of donor control over aid channeled through multilateral agencies and consortia. Other OECD members, however, perceive the United States as dominant in shaping the Washington consensus (Chapter 5) that establishes policies for multilateral agencies and consortia. The United States, as the largest shareholder, can veto loan or concessional funds from the IMF or World Bank. And, as Chapter 16 indicates, some LDCs think the United States and other DCs use external resources to set conditions for LDC domestic economic policies by requiring an IMF “seal of approval” before OECD countries, their commercial banks, or multilateral agencies will loan, aid, or arrange debt rescheduling and writeoffs.

Food aid. The economist stressing basic-needs attainment is quite interested in food as foreign aid. As indicated in Chapter 7, there is more than enough food produced each year to feed adequately everyone on earth. However, food is so unevenly

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distributed that malnutrition and hunger exist in the same country or region where food is abundant.

During the 1960s, the United States sold a sizable fraction of its agricultural exports under a concessionary Public Law 480, in which LDC recipients could pay for the exports in inconvertible currency over a long period. The U.S. real food aid, as well as food reserves measured in days of world consumption, dropped from the 1960s to the 1970s, 1980s, and early 1990s, partly because U.S. farm interests wanted to reduce surplus grain stocks. In addition, agriculture suffered disproportionately from the decline in LDC aid in the late 1980s and 1990s, as real aid to developing-country agriculture declined from $19 billion in 1986 to $10 billion in 1994 (Pinstrup-Andersen, Pandya-Lorch, and Rosegrant 1997:27).

Food and agricultural aid (including that from the United States) increased in real terms from the late 1960s to the late 1970s and 1980s. However, annual food aid in the 1970s, 1980s, and 1990s was below that of the early 1960s. In the late 1970s, 1980s, and 1990s, food and agricultural aid was one-fourth of worldwide economic aid. Although most of this was to increase LDC food and agricultural production, such aid cannot meet the most urgent short-term needs. Direct food aid is essential for meeting these needs.

In the 1980s and 1990s, about three-quarters of the food aid went to low-income countries; it amounted to about one-third of their cereal imports. Projections in Chapters 7 and 8 indicate that food deficits are likely to increase in the 21st century. Yet, in the 1980s and 1990s, the United States, which provides the bulk of total food aid, reduced its food assistance.

Critics of food aid argue that it increases dependence, promotes waste, does not reach the most needy, and dampens local food production. Nevertheless, food aid has frequently been highly effective. It plays a vital role in saving human lives during famine or crisis and if distributed selectively, reduces malnutrition. Unfortunately, poor transport, storage, administrative services, distribution networks, and overall economic infrastructure hinder the success of food aid programs, but the concept itself is not at fault. Furthermore, dependence on emergency food aid is less than that from continuing commercially imported food (Sewell, Tucker, and contributors 1988:235–240; OECD 1988:7–40).

Yet food aid programs need improvement. A World Bank (1986a) study, which contends that transitory food insecurity is linked to fluctuations in domestic harvests, world prices, and foreign exchange earnings, recommends that international donors emphasize supporting recipient programs safeguarding food security (especially for highly vulnerable people such as lactating women and children under five years), investing in projects that promote growth and directly benefit the poorest people, improving the international trade environment (including food price stabilization), and integrating food aid with other aid programs and national institutions and plans, whereas domestic governments should stress the redistribution of income to relieve afflicted people. The World Bank would not make food self-sufficiency a priority for the recipient LDC but emphasizes preventing substantial food price increases through imports if cheaper.

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Moreover, local recipients should receive food they like. The Bank (1986a) suggests that recipient governments exchange donated food for cash and buy local foods, thus reducing transport costs and waste.

Given the reduction in other aid, the International Food Policy Research Institute (IFPRI) contends that:

The substantial reduction in food aid deliveries . . . has disturbing implications for food security. The need for aid to combat food insecurity has not diminished. . . . Food aid will have an important role for some years, not only in addressing humanitarian emergencies but also in directing resources to many of the world’s most vulnerable food-insecure people to help them permanently escape poverty and assure food security. (Pinstrup-Andersen, Pandya-Lorch, and Rosegrant 1997:26)

In light of these findings, OECD countries, especially the United States, need to restore the real value of food aid to the levels of the 1970s and 1980s (or even those of the 1960s), with a priority to least-developed countries. However, as IFPRI argues, donors should consider “gradually replacing program food aid with increasing cash assistance for commercial food import,” because of the high transactions costs of most food aid (ibid.). Cash aid is fungible, meaning that money going for one purpose frees money for another purpose. The net impact, perhaps unintended, is to increase the recipient’s real resources.

Food aid may disguise export subsidies or may be used to develop export markets or strategic goals, or to alleviate local government efforts at reform and self-sufficiency. Aid, when given in kind, may hurt local producers by lowering prices and changing diets. Moreover, aid agencies that distribute food outside existing indigenous commercial channels, as is usual, undermine these channels and disrupt movement of food from surplus to deficit areas of the local region and may increase future famines (World Bank 2004f:137).

Perhaps even more important than food assistance is a focus on long-term agricultural research and technology in developing countries. Only a small fraction of global agricultural research is spent on these countries. Developing countries need their own agricultural research, as many of their ecological zones (especially the arid and semiarid tropics) are quite different from those of the West. Food grain growth in India, Pakistan, the Philippines, and Mexico would not have exceeded population growth in the 1960s through the 1990s without the investment in improved packages of high-yielding seed varieties, fertilizers, pesticides, irrigation, improved transport, and extension.8 A major priority for reducing long-term food insecurity and vulnerability to emergencies is for rich countries to restore their agricultural technical aid to real levels in the 1970s and 1980s.

8In some regions of these countries, research and development of high-yielding varieties of wheat and rice in the Green Revolution has had negative effects on income distribution, farm labor displacement, rural unemployment, and environmental degradation. However, the overall impact, including the effect on incomes and food supplies, generally has been positive (Nafziger 1997:227–229, 353–354).

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WORKERS’ REMITTANCES

World migration pressure is high and rising, analogous to a pent-up flood, increasing as the tap widens from increasing wage gaps between DCs and LDCs. In 2003, 175 million people were living outside their own country, an increase of 100 million compared to the figure in 1973 (World Bank Development News, January 7, 2004). The foreign-born population comprises a growing share of the population of major DCs, 5.4 percent in the European Economic Area (the European Union, Norway, Iceland, and Lichtenstein) and 10.4 percent in the United States in 2000 (World Bank 2004f:146–162). As indicated in Chapter 17, inflows of unskilled LDC workers to DCs reduces wages for unskilled labor but increases skilled workers’ wages (World Bank 2003f:169–170).

Remittances from nationals working abroad help finance many LDCs’ balance on goods, services, and income deficits. These remittances, from the oil-affluent Persian Gulf, from Latin American migrants to oil-exporting Venezuela, from neighboring countries’ migrants to South Africa, Nigeria, and Gabon, and other LDC emigrations totaled $72.3 billion in 2001 (World Bank 2003e:158). In 1992, remittances as a percentage of merchandise exports were 187 percent in Ethiopia, 178 percent in Egypt, 86 percent in Jordan, 45 percent in Bangladesh, 30 percent in Sudan, 20 percent in Pakistan, 11 percent in India, 25 percent in Portugal, 24 percent in Greece, 89 percent in Benin, 161 percent in El Salvador, 8 percent in Mexico, 20 percent in Turkey, and 54 percent in Morocco. For most of the first seven countries listed, this percentage fell during the oil price slump of the 1980s and early 1990s. The last three countries are vulnerable to European and North American backlash to guest workers. The average propensity to save (saving/income) among Turkish and Pakistani emigrants was several times that of their domestic counterparts. The average propensity to remit (remittances/emigrant income) was still 11 percent for Turkish workers and 50 percent for Pakistanis, and enabled the living standards and investment rates of the emigrants’ families to increase substantially (World Bank 1981i:51; World Bank 1994i:186–195).

Workers’ remittances as a share of total inflows to LDCs were 24.9 percent in 2001, labeled a “brain gain” by the International Organization for Migration. Remittances were smaller than FDI but larger than international capital inflows (for the third year in a row) and, for most of the 1990s, larger than ODA (Figure 15-6). And even when capital inflows peaked, remittances tended to be at least half these inflows, as in the midto late 1990s.

By country income levels, low-income countries (LICs) were the largest recipients of remittances. In LICs, as a percentage of GDP, remittances were 26.5 percent in Lesotho, 16.2 percent in Nicaragua, 16.1 percent in Republic of Yemen, 15.0 percent in Moldova, 8.5 percent in Honduras, and 8.5 percent in Uganda. In 2002, Tajikistan migrant workers to Russia sent back $200–300 million, more than total government revenues. With most Tajiks living in poverty, funds from relatives abroad is vital (Economist 2003j:40). The absolute level of remittances was high in lowincome India, Bangladesh, Pakistan and middle-income Egypt, Jordan, and Lebanon

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FIGURE 15-6. Workers’ Remittances and Other Inflows, 1988–2001. Source: World Bank 2003e:158.

(shown in Figure 15-7), with most from Saudi Arabia, the largest source of remittance payments on a per-capita basis. The major source for Mexico, Central America, and the Philippines was the United States, the largest source of remittances in the world in 2001. The estimated foregone income-tax receipts from emigration of ICT and other professionals from India to the United States in the late 1990s was one-third of Indian income-tax receipts. The European Union was the major source of remittances for Turkey and Morocco. Latin America and the Caribbean was the largest recipient of remittances but relative to GDP, South Asia, with 2.5 percent, was the largest.

Macroeconomic cycles can affect return migration. The Asian financial crisis contributed to a return of temporary labor from Malaysia, South Korea, Thailand, and Hong Kong to their countries of origin. By contrast, falling opportunities for ICT and the professions in the United States and increased opportunities in these fields in India during the first few years of the 21st century contributed to the return migration of skilled talent and entrepreneurs to India, along with FDI inflows (World Bank 2004f:151–161).

Remittances are more stable and less concentrated in LDCs than other sources for financing an external deficit.9 Because of restrictions on legal immigration, illegal migration and trafficking in humans, and spending to combat both, have risen noticeably in the late 1990s and early years of the 21st century (World Bank 2004f:151– 161).

From 1993, when President Fidel Castro legalized the U.S. dollar in Cuba, to 2002, Cuban-American remittances to island residents exceeded several billion dollars, including more than one billion in 2002 alone. Dollar shops for purchases by tourists, together with remittances, netted almost half of Cuba’s foreign exchange of $5 billion in 2002. The London Economist (August 2, 2003, p. 37) contends that “the effect has been to turn Cubans into a nation of hustlers,” because fruits and vegetables are expensive and dollars are virtually essential for cooking oil (a week’s pay for a liter), soap (a day’s wages per bar), and detergent.

9The General Agreement on Trade in Services has adopted Mode 4 to facilitate “temporary movement of individual service suppliers,” making planning more predictable (World Bank 2003a:158–163; World Bank 2004b:168–170).

Top 20 Developing-Country Recipients of Workers’ Remittances, 2001. Source: World Bank

FIGURE 7.-15

2003e:159.

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