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Bilateral aid

Bilateral aid

Bilateral aid is official development assistance that flows directly froma donor country government to a recipient country. This is in contrast to multilateral aid, in which many donor governments pool their contributions via intermediary institutions that then disburse aid to recipient countries. Yet another category is private aid that individuals, corporations, and foundations donate voluntarily, often through nongovernmental organizations (NGOs). Typically, bilateral aid accounts for two-thirds to three-quarters of all official aid; estimates of private aid put it at about one-tenth the size of official aid.
Although bilateral aid of one formor another is as old as the nation-state, themodern era of bilateral aid began withU.S. aid to reconstruct Europe under the Marshall Plan following World War II. Over time, governments of other major developed countries joined the United States in providing bilateral aid, sometimes following U.S. pressure to share the burden. In some cases, aid programs developed out of colonial administrations during the 1960s as more and more colonies became independent. In other cases, notably Japan, the bilateral aid program evolved from war reparation payments. A number of developing countries notably China, India, and Venezuela are also aid donors.
Bilateral aid is most often government-to-government, although in some circumstances donors may fund NGOs directly. Many aid donors are members of the Organisation for Economic Cooperation and Development (OECD). The Development AssistanceCommittee (DAC) of theOECD is the international body that sets aid reporting standards, monitors aid flows, and urges donors to improve the quality and quantity of their aid. The DAC’s main focus is on official development assistance (ODA),which it defines as official concessional flows for developmental purposes to low-income countries. This includes grants as well as loans that are at least 25 percent concessional as compared to a commercial alternative (35 percent for ‘‘mixed credits,’’ where aid is used to finance a commercial venture). Over the life of an ODA loan, repayments of principal and interest must be at least 25 percent lower than for a comparable commercial loan.ODA normally excludes grants and loans for military purposes and funds not directed to poor countries. In contrast tomultilateral aid,most bilateral aid is given as grants; Japanese aid is the exception. The DAC’s long-standing goal is for donors to contribute seventenths of 1 percent of gross domestic product (GDP) as ODA, though only a few of the most generous donors attain this target. In general, theUnited States has been the largest donor but among the least generous as a share of GDP. Under the Marshall Plan, U.S. aid was as high as 2 percent of GDP, but it has been one-tenth of that in recent times. France, Germany, and Japan also have been major donors, while the Netherlands and the Scandinavian countries have been the most generous DAC donors relative to their GDPs.
Bilateral aid can fund a specific project (project aid), providemore general budgetary support for the recipient government (programaid), or flowthrough an NGO. Although reconstruction aid to Europe was often program aid, bilateral aid to developing countries has more often been project aid. Since the 1980s, multilateral aid agencies, particularly the World Bank, have become heavily involved in program aid, which aims to promote policy and institutional reform in developing countries; most bilateral donors put less funding into program aid.


Despite its apparent humanitarian nature, aid especially bilateral aid has been heavily criticized as insufficiently humanitarian and relatively ineffective. Critiques begin with the low volume of aid, both relative to the size of donor economies and relative to the need of the recipients. Critics also point to donor behavior that suggests that need can take a backseat to more narrowly defined donor interests such as geopolitics and commercial advantage.The geopolitical imperative is particularly pronounced for theUnited States with top recipients (Israel, Iraq, South Vietnam, South Korea) reflecting U.S.military interests rather than recipient need. For European donors former colony status dominates need,while Japanese aid often flows to countries rich in raw materials that Japan lacks.
The composition of aid also undercuts its development potential, as much bilateral aid is tied to purchases of donor products that are often expensive and inappropriate. Where aid funds projects, researchers have documented a bias toward large import- and capital-intensive undertakings that suit donors’ needs but fail to reflect the relative scarcity of capital and foreign exchange in recipient countries. Aid levels are generally contingent on the donor’s budget position so that aid tends to increasewhen the world economy is doing well. The result for many developing countries is procyclical aid fluctuations that can have the unintended consequence of destabilizing the recipient economy. The multiplicity of donors, each with their own priorities, procedures, and teams of visiting experts, can create a huge operational burden on a developing country government. All of these factors can reduce the development effectiveness of bilateral aid.
In response to the shortcomings of bilateral aid, the DAC and others have pushed for more multilateral aid. But if the main developmental shortcomings of bilateral aid arise from its use as a geopolitical and commercial tool, why would donors be willing to redirect funds frombilateral tomultilateral agencies? One argument is that the greater apparent independence of multilateral agencies makes them more efficient at some tasks (e.g., promoting sensitive institutional changes and providing a credible signal to private capital markets about the investment climate in the recipient country). A second argument is that donor country taxpayers favor developmental rather than geopolitical aid and that the donor government can demonstrate its developmental orientation most clearly through multilateral contributions. Neither argument, however, explains why some donors both contribute to and then work to undermine the independence of multilateral agencies. In any event, supporters of bilateral aid argue that the multiplicity of domestic interests served by bilateral aid helps to maintain a coalition in favor of larger budgets so that the net developmental impact of catering to domestic donor interests may be positive.
A recent trend in aid allocation has been toward selectivity. Research from the World Bank has argued that aid generally fails to promote growth and developmentwhen recipient government policies are poor and also that aid fails to promote policy change. Thus the implication is that more aid should be directed to countries that have already adopted appropriate (i.e., progrowth) policies. The empirical basis for these conclusions has proven weak. The original approach to estimating the link between aid and growth conditional on policy is not robust to small changes in specification or in which countries and years are examined. Other approaches have found a variety of results: aid has no impact regardless of policy; aid has a positive impact regardless of policy; aid has positive but diminishing returns regardless of policy; aid has a positive impact everywhere but the effect is larger when policies are good; and aid has a greater impact when policies are bad. Competing studies use different measures of aid, different approaches to deal with the potential for reverse causation, and different time horizons. The estimated impact of aid ranges from zero to economically substantial (a several percentage point increase in the growth rate of GDP).
Despite this uncertainty, many bilateral donors have increased the country selectivity of their aid programs. In the United States, the Millennium Development Account is a direct application of aid selectivity with 16 indicators of good governance used as criteria for aid eligibility. Other donors, including Scandinavian countries, havemoved toward using governance criteria to reduce the number of countries receiving funds. Although such a policy might seem to abandon poorly governed countries to their fate, advocates of selectivity maintain that incentive effects (the desire to qualify for aid) will induce better governance so that eventually allwould benefit. In the past, however, political changes in donor governments have led to changes in bilateral aid allocation. If developing country governments expect such changes to continue, the incentive effects of current selectivity criteria will be undermined.
Opponents of aid have frequently rallied behind the slogan ‘‘trade not aid,’’ pointing out that protectionist trade policies in donor countries cost developing countries far more than they receive in foreign aid. In addition, they argue that trade is likely to improve the efficiency of developing country economies whereas aid could introduce perverse incentives and promote rent seeking or corruption. Yet the arguments in favor of more trade do not weaken the case for aid as the slogan’s ‘‘either/or’’ dichotomy seems to suggest. The distributional impact of trade is likely very different from that of aid, as the poorest in most need of aid are unlikely to be the main beneficiaries of increased trade. See also aid, international; aid, international, and political economy; HIV/AIDS; nongovernmental organizations (NGOs); political economy of policy reform; regional development banks; World Bank
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