**2. Concept of foreign aid**

Aid is generally considered as one of the biggest part of the world's development cooperation effort and represents a flow of money from governments in developed countries to develop‐ ing ones. Also known as official development assistance (ODA), this type of aid is mainly discussed in this section. But, as we will see, this is not the only form of financial support the developed countries provide. Even though, much less important than ODA, there are some other forms of assistance, both from government and nongovernment institutions1 .

Since 1961, 23 developed countries (including the European Union) have decided to work under OECD's Development Assistance Committee (DAC) to provide the world's official development assistance. Presently, the DAC members have reached 29, and the number is expected to increase in the next years. At the same time, OECD has the role to monitor and collect data on all development flows from DAC and nonDAC donors, as well as multilateral aid agencies, and other private investment and philanthropy.

<sup>1</sup> The conceptual framework presented below is based on OECD [1].

Referring to ODA, three key elements can be identified:

cannot buy growth" [10]. Moreover, based on his personal experience during his past career at the World Bank, Easterly considers that present aid policies do more harm than good for poor countries [11]. More recently, this perspective which underscores the negative effects of foreign aid is shared by Angus Deaton, a well‐known economist from Princeton University. Deaton argues that aid rarely reaches the poor. Moreover, there is no unquestionable empiri‐

The next section of this chapter analyzes the conceptual framework of foreign aid, who are the donors and international institutions that channel aid to the third world countries. Then, our focus is on testing the effectiveness of aid on improving life conditions of the African people, measured by the Human Development Index. We prefer Human Development Index instead of economic growth because it is a more comprehensive approach, and reflects both quantitative and qualitative improvements in human life conditions. According to the UN, development can be described as the process of enlarging people's choices, which means allowing them to "lead a long and healthy life, to be educated, to enjoy a decent standard of living," as well as "political freedom, other guaranteed human rights and various ingredients of selfrespect" [13]. Therefore, to increase the theoretical and practical relevance of our model, we have opted to integrate other two exogenous variables (economic freedom and political freedom), as important determinants of human development. Economic Freedom Index, pub‐ lished by the Fraser Institute, reflects the quality of economic environment, scoring a country between two extreme regimes: interventionist and free‐market based. Polity score measures the quality of a political environment, the scale moving from authoritarian to a democratic regime. The outcomes of our research might prove helpful for aid agencies to adapt their poli‐ cies in order to increase aid effectiveness. The lessons and policy recommendations are found

Aid is generally considered as one of the biggest part of the world's development cooperation effort and represents a flow of money from governments in developed countries to develop‐ ing ones. Also known as official development assistance (ODA), this type of aid is mainly discussed in this section. But, as we will see, this is not the only form of financial support the developed countries provide. Even though, much less important than ODA, there are some

Since 1961, 23 developed countries (including the European Union) have decided to work under OECD's Development Assistance Committee (DAC) to provide the world's official development assistance. Presently, the DAC members have reached 29, and the number is expected to increase in the next years. At the same time, OECD has the role to monitor and collect data on all development flows from DAC and nonDAC donors, as well as multilateral

.

other forms of assistance, both from government and nongovernment institutions1

aid agencies, and other private investment and philanthropy.

The conceptual framework presented below is based on OECD [1].

cal evidence that aid promotes growth [12].

in the final section.

138 International Development

1

**2. Concept of foreign aid**


According to OECD practice, about 90% of ODA is represented by grants, a financial support that receiving countries would not have to repay. Much of the rest consists of "soft" loans with low interest rate and often with a longer repayment period. Such credit instruments are used in order to bring more financial responsibility and accountability in the recipient countries. This financial support mentioned above is usually planned in advance, preceded by agreements and conditionalities between recipients and donors. Along planned assistance, OECD operates emergency financial assistance also. This type of aid is specifically directed to those developing countries confronted with cataclysms, such as the 2004 Asian tsunami and the 2010 Haiti earthquake.

The donor countries sometimes accept debt forgiveness of borrowers, meaning either deferring loan repayments or canceling them altogether. According to OECD methodology, cancellations are recorded as "grants" in ODA, even though, in effect, no new funding is being provided at the time when the loan is forgiven. Most of the loans forgiven were not aid in the first place; typically, for example, they may have originally been export credits. But loan forgiveness frees the resources for developing countries to use as they wish, and so is counted as ODA [1].

Considering the donors' perspective, only 30% of ODA is multilateral and 70% is bilateral. The money channeled through international aid agencies, according to their own develop‐ ment agenda, represents multilateral assistance. In practice, because the developed countries impose the aid agencies where and how to spend money, this is counted as bilateral aid and not multilateral assistance. **Figure 1** shows the total net official development assistance since 1960 from DAC members. Net ODA represents, in fact, disbursement flows (net of repay‐ ment of principal) of the DAC donors. Ignoring short periods of time, it reflects a continuous increase of the effort of developed countries to help the rest, reaching 2014 more than 137 billion USD. And, according to preliminary OECD data in 2015, net ODA rose by 6.9% in real terms from 2014, which is the highest level of ODA ever achieved.

Another indicator, commonly used in aid literature to illustrate the aid efforts made by the developed countries to help the third world, is the percent of net ODA in gross national income (GNI) of donors as it is shown in **Figure 2**. Basically, it reflects how much of the wealth created in developed countries is transferred (or redistributed) to developing ones. Even though more informal than mandatory for DAC countries, UN has set a target of 0.7% of GNI to be directed to aid.

Another form of foreign aid is technical cooperation. Developed countries might help the poor countries by paying for training of people from recipients, providing study scholarships, etc. A more widely used form involves supplying technical experts (consultants, advisors,

<sup>2</sup> In the case of a loan, this has to have a grant element of at least 25 percent.

**Figure 1.** Net official development assistance, DAC members. (a) Total ODA excludes debt forgiveness of non‐ODA claims in 1990, 1991, and 1992. (b) Preliminary data. Source: Authors' compilation based on 2016 OECD Report [14].

**Figure 2.** Net ODA/GNI, DAC members. Source: Authors' compilation based on 2016 OECD Report [14].

and administrators) to developing countries, but this method is widely criticized. The OECD admits in its official reports that technical cooperation is "perhaps the most controversial type of aid" [15]. And the critics add the attributes of "ineffective" are based on a multitude of negative cases. Some international experts have been accused of introducing technologies and procedures that are inappropriate to developing countries' needs. Also, technical cooperation has been criticized for failing to increase the local theoretical and practical skills. For instance, many students who were trained overseas have opted to stay there, thus fueling a brain drain of local human capital.

Who are the donors? As we mentioned above, a large part of aid is channeled through many mul‐ tilateral agencies, such as the World Bank and United Nations. In one of the latest report, OECD [1] estimates around 200 multilateral donors and agencies involved in development assistance. Considering administrative criteria, these agencies are: (a) national, being run by the governmen‐ tal bodies; (b) regional, such as the European Union's agencies; and (c) international, such as UN.

More significant, from aid perspective, we can divide multilateral agencies into four categories:

