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to stimulate economic growth throughout the developing world, but it is disappointing to find that the effect of aid on growth appears to be little based on the past
experiences and consequences of aid distributions (Doucouliagos and Paldam, 2008).
However, every cloud has a silver ling, so things may not be so terrible. After all, the international community has dedicated so much to the development of poor countries.
It is found that the IMF involvement in assistance may not affect economic growth contemporaneously while there is going to be a positive impact on growth with a lag of up to three years. What's more, the degree of economic growth goes positively with the length of the lag (Fidrmuc and Kostagianni, 2015). So, foreign aid is still a useful means to economic development when its long-term effects are concerned.
It is very often that people make a direct association between the size of foreign aid and economic growth. However, a rapid increase in the amount of aid can be a potential crisis. One of the most prominent features of today's foreign aid, which is different from that in the 1970s, is the proliferation of donors and projects. In the last few decades, aid programs have been done haphazardly without careful consideration and the situation results in many negative side effects (Morss, 1984). Due to this, aid coordination has been hotly discussed in the global aid community. Coordinated aid may help reduce transaction costs and bring about economic growth, but in some cases growth may not be prompted through aid coordination because sometimes the issues of proliferation are caused by the existence of free-riders among donors (Kimura, 2012). Hence, it is necessary to have a careful analysis on the efforts of every individual donor in the future.
2.3 Aid Effectiveness
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One of the key points associated with aid effectiveness is "aid harmonization." When donors do not arrange and coordinate their efforts as well as resources, it will cause fragmented aid and high transaction costs. Aid harmonization is of vital importance since it can not only lower transaction costs but also enhance the efficiency of aid delivery channels for both donors and recipients. In the process, the partner governments also realize how to improve the management quality of their own policies, budget planning, and operating procedures. Then, they will have more chances to enjoy economic growth (Balogun, 2005). Over a long time the wide
varieties of donor requirements and operations have produced unproductive outcomes.
Also, partner countries convey their concerns that donors' practices sometimes do not cater for them. In this background, OECD announced the Rome Declaration on Harmonization in 2003. The main purpose was to call attention to aid alignment and development effectiveness.
The world’s pivot to aid effectiveness has much do with the “Paris Declaration on Aid Effectiveness” (OECD, 2015), which opened a new page in the foreign aid history. It provided guidelines for making aid more effective with a series of implementation measures based on five core values: ownership, alignment, harmonization, results, and mutual accountability. Figure 2.2 illustrates the bilateral relationship between donors and recipients in line with the five principles declared by the Paris Declaration.
Developing countries should be able to take ownership on their own development policies and strategies. Donor countries have to align their efforts while giving support to partner countries, and they need to share information and coordinate with each other for aid harmonization and transparency. It is important to follow up the aid quality and the impact on development, so a monitoring system of assessment must be
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established. Last, donors and recipients have to acknowledge that both of them are accountable for the development outcomes.
Figure 2.2: Five Principles of the Paris Declaration (Source: OECD, 2005)
After examining the database produced by World Bank on foreign aid, Burnside and Dollar in their 2000 publication concluded that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies. That is, good policies are of crucial importance for growth. Riddell (2008) was on the same page while talking about the significance of governance.
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less well in more difficult or inhospitable environment (Riddell, 2008).
In spite of the fact that the U.S. is the pioneer of foreign aid, foreign aid still does not gain its popularity compared to other government programs. Selle (1995), who studied the politics of foreign aid, analyzed the role of foreign aid in the U.S. From his perspective, aid projects can be one of the most ineffective government
expenditures. Despite decades of development assistance across nations in different continents, ranging from Latin America, Asia, the Middle East, to Africa, many of the states are in a worse economic status than they were 20 years ago. He provided a possible reason for why foreign aid keeps a low profile all the way. Most voters do not have an interest in foreign aid, because it seems to be something far away from their daily lives so that for most citizens, foreign aid will not be a decisive subject. As a result, the members of Congress have a greater leeway while handing issues of foreign aid.
There are still some other factors affecting aid efficiency, for instance, the consistency problem. It is recognized that donor governments pursue a number of competing interests through their foreign policies; this can lead to examples of double standards (Crawford, 2001). Similarly, it is not unusual to see political drama featuring foreign aid issues in Taiwan (Tubilewicz, 2015). Different political parties inevitably show different attitudes as they move in and out of power. As a consequence, foreign aid policies may be reduced to an instrumental tool for domestic political purposes and this explains why it is a hard task for a country to have a uniform use of foreign aid.
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Moreover, the role of government and policy choices really matter in the development process due to three prevalent challenges across states (Breuning, 2000). First, donors are inclined to pay much more attention to the quantity rather than the quality of foreign aid since they are keen to win the reputation of being generous. It turns out that donors fail to spend money wisely. Second, recipient states may simply pretend to comply with donors’ conditional requirements before they ensure the funds are
already transferred to their hands. Third, recipient governments are very likely to play the two-level game. On the one hand, they should attract as many potential donors as they can; on the other hand, they must satisfy their domestic audiences to keep their support at home. For the reasons above, sometimes foreign aid may end up being time and money consuming.