What is Foreign Aid?
According to Development Assistance Committee of the organization for Economic cooperation and Development Foreign Aid is a financial flows, technical assistance, and commodities that are designed to promote economic development and welfare as their main objective are provided through grants in which a Government given a certain amount of money for a particular or a specific purpose or subsidized loans in which a foreigner by given a certain amount of money Government should contribute a part of project cost. Grants and subsidized loans are referred to as confessional financing in a sense that it consider a sense of humanity, environment or a situation of a society while loans that carry market or near-market terms are non-confessional financing because that kind of loan should be specific, timely and it has a limitation in refunding as it based to discount and interest. For instance; we have a case study of a Granted loan which have been given to Tanzanian in 1995, that loan was not timely reimbursed as a result in 2005 World Bank reported that a Government of Tanzania has to reimburse the loan with interest which required all Tanzania to pay the loan with interest schedules.
Reefers to Development Assistance Committee (DAC), classify Aid flows into three broad categories. Starting with Official Development Assistance (ODA); this is consisting of all Aid provided by donor’s government to low- and middle-income countries. The Second category is Official assistance
(OA), this is a kind of Aid provided by governments to richer countries with
per capital incomes higher than approximately $9,000, and lastly is Private voluntary assistance which includes grants from non-government organizations, religious groups, charities, foundations, and private companies.
Who Gives Aid, and Who Receives It?
Historically most aid has been given as Bilateral Assistance directly from one country to another or multilateral assistance which pools resources together from many donors. The major multilateral institutions include the World Bank; the International Monetary Fund; the African, Asian, and Inter-American Development Banks, and various United Nations agencies such as the United Nations Development Program.
Why do Donors Give Aid?
Donors have a variety of motivations for providing aid, only some of which are directly related to economic development. There is little question that foreign policy and political relationships are the most important determinants of aid flows. During the Cold War, both the United States and the Soviet Union used aid to vie for the support of developing countries with little regard as to whether the aid actually was used to support development. Many donors provide significant aid to their former colonies as a means of retaining some political influence (Alesina and
Dollar, 2000). Most foreign aid is designed to meet one or more of four
broad economic and development objectives: (1) to stimulate economic growth through building infrastructure, supporting productive sectors such as agriculture, or bringing new ideas and technologies, (2) to strengthen education, health, environmental, or political systems, (3) to support subsistence consumption of food and other commodities, especially during relief operations or humanitarian crises, or (4) to help stabilize an economy following economic shocks.
FOREIGN AID AND ITS IMPACT ON ECONOMIC GROWTH:
Some researchers claimed that Foreign Aid has enlarged government bureaucracies, perpetuated bad governments, enriched the elite in poor countries or just wasted. Other argued that although aid has sometimes failed, it has supported poverty reduction and growth in some countries and prevented worse performance in others. Economic growth has been the main yardstick used to judge aid effectiveness, with more aid expected to lead to faster growth. But at a very broad level, there is no apparent simple relationship between aid and growth; some countries that have received large amounts of aid have recorded rapid growth, while others have recorded slow or even negative growth. At the same time countries that have received very little aid have done very well, while others have not.
Andrew Mwenda, a political editor of the Daily Monitor in Kampala wrote about how Foreign Aid Weakening of Democratic Accountability in Uganda, He said that Foreign Aid makes up 50% of Ugandan
Government’s Budget. That allows the government to avoid accountability to Ugandan’s citizens. Foreign aid enables the government to pay its bill without having to undertake further necessary economic reforms. Debt relief to Uganda has enabled the government to borrow still more money and remain highly indebted by significantly increasing its level of absolute debt. He detailed that most of Africa’s problems are internal, not external and concern domestic policies and institutions. Foreign aid is important in Uganda because it finances free primary education, free basic health care, and infrastructure rehabilitation and maintenance. He also pointed out that the problem in many African countries is that governments look for revenue not in the domestic economy but in the pockets of international donors. It encourages a dependence mentality among politicians and bureaucrats so that every time there is fiscal shortage, they are inclined to look for aid rather than for policies and institutions that favor economic growth. Debt cancellation leads to more government borrowing example immediately after Uganda’s debts were forgiven, the government bough a private jet for the president at a cost of US $ 35million. On the flip side, the World Bank argued that Uganda needed debt relief because its debt burden was unsustainable and not only was going to undermine future economic growth but was going to put economy reform in jeopardy.
Debt cancellation can lead to moral hazard. One government may borrow and work hard to pay but another one can also borrow but allow politicians and bureaucrats to steal and misuse the money. When it fails to
repay international donors forgive it. Such an approach penalizes good performers and rewards corrupt and incompetent borrowers. In case of Uganda debt relief served as a license for government to borrow even more. An average of US $ 593 Million per year was in the six year before HIPC compare to average of US $ 783 Million per year six year after HIPC.
Uganda does not need more foreign aid rather it needs to improve its tax administration by investing in better staff and motivating them with better pay and better facilities. He concludes that, alternatively, governments can rely on debt forgiveness and increased aid to provide cheap resources needed to sustain corrupt and incompetent regimes in power. When that happens, both economic development and freedom take a beating. Foreign aid and debt cancellation undermine Africa’s democratization and economic recovery. They should be discontinued.
In Tanzania we have a case study being a hostile country for instant, in 1995 – 2007 July when Tanzania was a hosting country to about half million Huts and Hutus refugees who running away from their country and cross the border to Tanzania from Rwanda in due case of intertribal civil war.
Reffers to Bartholomew Nyagetera, examining the impact of foreign aid in Tanzania on economic growth it is assumed that high aid inflow since independence would resulting high investment rates and generate high rates of economic growth. The poor rates of economic growth in Tanzania
have by all accounts been phenomenal suggesting that foreign aid quite possible either has a negative effect or no effect on economic growth in Tanzania. Mjema (1994) found a positive but weak relationship between foreign capital inflows and the growth rate in national income in Tanzania.
Conclusively, Foreign Aid is playing a big roll in fostering Tanzania Development projects this is due to the fact that; many projects has been funded by USA-Aid, Canadian, Japanese ,German (GTZ) which bases in Humanitarian assistance as it designed to avert immediate disaster through Public Law 480 and Development Aid which purposely attempt to promote a long run growth of the Less Development countries, all this are potential to Tanzanian survival so without Foreign Aid those projects will end up un done as result no Development.