EFFECT OF FOREIGN AID ON NATIONAL DEVELOPMENT. A CASE STUDY OF EUROPEAN UNION

ABSTRACT

The role of foreign aid in promoting economic growth and improving the social welfare of people has been the subject of much debate among development specialists, researchers, aid donors as well as recipients in general and Cameroon in particular. In spite of this, there are only few empirical studies that investigate the contributions of foreign aid to economic growth and development in Cameroon. This study explores the impact of foreign aid to economic growth and development in Cameroon using descriptive statistics for data that spans from 1980 to 2013. The results show that foreign aid significantly contributes to the current level of economic growth but has no significant contribution to economic development. The findings imply that Cameroon could enhance its economic development by effectively managing funds from aid and by strategically strengthening anti-corruption measures. The rest of the work is organized as follows: Chapter one consist of an introduction, chapter two is the literature review, chapter three constitute the research methodology, chapter four is the data presentation and analyses, chapter five summary of findings, recommendations and conclusions

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Over the last half century, foreign aid has progressively been emerging as a dominant strategy for alleviating poverty in third world countries. There is an economic case for foreign aid best expressed in the establishment of the World Bank in 1946.  The World Bank or the International Bank for Reconstruction and Development as it was then called, was set up to promote the continued expansion of world trade after World War II.  Its purpose was not charity but self-interest (world Bank indicator, 1946).  Rebuilding the war-battered economies of Germany and Japan and helping other much poorer countries climb the economic ladder were seen as fundamental to ensuring global prosperity.  Everyone was expected to benefit from the process:  Rich countries would have ready markets for what they already produced, while poor countries would supply raw materials and eventually move into light manufactures (such as shoes and textiles) as richer countries shifted into more sophisticated products (appliances, electronics, and eventually computers).  The logic of enlightened self-interest also inspired so-called tied aid for capital projects such as roads and power plants, using experts, construction companies, and equipment manufacturers from the donor country. In the late 1970s, the hard-driving president of the World Bank, Robert McNamara, insisted that foreign aid (about $50 billion a year) was a better investment in international security than the $400 billion spent on the arms race (World Bank, 1978). More recently, it has been argued that poverty is the breeding ground for mass migration, disease, and terror, and that we ignore it at our peril.

Tied aid is now out of fashion, as it is particularly wasteful and inefficient, but it dominated international assistance from the 1950s through the 1980s. Foreign aid has remained stagnant over the last 40 years and, measured by what it can buy, it has declined considerably.  Only five countries (Denmark, Luxembourg, the Netherlands, Norway, and Sweden) have met the United Nations’ target of providing 0.7 percent of their gross national income in aid to poor countries.  The United States has never spent more than one quarter of one percent of its national income on foreign aid, and two thirds of that has been devoted to just two countries: Israel and Egypt.  As other regions have become more self-reliant, about half of the world’s aid has been directed to Africa.  A dizzying series of international meetings and task forces, including UK Prime Minister Tony Blair’s Africa Commission Report in March 2005, have called for higher spending, but these appeals have collided with mounting public skepticism about the lasting effects of aid.

Forty years ago, it was easier to demonstrate the benefits of economic development, and by implication foreign aid.  Between 1950 and 1975, life expectancy in poor countries rose by fifteen years   from 35 to 50.  Adult literacy increased from 30 percent to more than 50 percent in some countries (Commission Report, 2005).  Access to health services, schools and clean water also improved. But debt crises in Latin America and poor policies in Africa made the 1980s a “lost decade” for progress in the world, and in Africa the 1990s were also lost. By the end of the century, the most populous countries on earth, China and India, were charging ahead on the strength of domestic demand, strong exports, private investment, and normal borrowing rather than foreign aid.  

In East Asia, smaller countries had demonstrated the power of good economic policies, solid public finances, low inflation, and clear investment rules.  In 1960, South Korea was as poor as Ghana; 30 years later, it was rich enough to offer aid to Africa.  Hong Kong, Malaysia, Singapore, Taiwan, Thailand, and, more gradually, Indonesia joined the group of “newly industrializing” countries.  By the 1980s, it was trade, not aid that was causing these economies to bloom.  While its foreign aid budget was small, the United States was running some of the largest trade deficits in its history and importing 40 percent of what East Asia produced.  Imports of cheap electronic goods, clothing, and other light manufactures kept inflation low in the United States and improved the general standard of living, while creating hundreds of thousands of jobs overseas.  East Asian economies, in turn, became avid markets for high-value US and European exports, such as capital equipment, computer software, luxury goods, and entertainment services.  By 2004, 40 percent of US exports were going to Asia.  This was how the international distribution of labor and capital was expected to function at the time the World Bank and International Monetary Fund were created.

By the end of the twentieth century, the World Bank and the European Union were the two largest sources of foreign aid.  The Bank had also become the main conduit of global knowledge on how to promote economic growth and reduce poverty.  At international aid meetings, including those for individual countries, the Bank and the rest of the international aid community  consisting of 40-50,000 officials in 20 rich countries and the UN system  distilled the lessons of trial and error, introduced and resisted fashions in development lending and tried, usually unsuccessfully, to harmonize their approaches.

As researchers Hamen and Tarp (2000) write “it is neither analytically defensible nor empirically credible to argue from the outset that aid never works”. Indeed a number of studies have shown a positive relationship between foreign aid and economic growth especially in countries which have responsible economic policies regarding trade, inflation and other macroeconomic concerns.

It is interesting to note that in recent years there has been a significant increase in aid flows to developing countries although other types of flows such as foreign direct investment and other private flows are declining. For example, according to the Organization for Economic Corporation and Development (OECD, 2009b), foreign direct investment and other private flows are on the decline, and remittances are expected to drop significantly in 2009. Budgets of many developing countries were hit hard by the rises in food and oil prices in the last two years. Many countries are not in a strong fiscal position to address the current financial crisis. According to the OECD (2009b), in 2008, total net official development assistance (ODA) from members of the OECD’s Development Assistance Committee (DAC) rose by 10.2% in real terms to US$119.8 billion and is expected to rise to US$130 billion by 2010. Africa is the largest recipient of foreign aid. For example, net bilateral ODA from DAC donors to Africa in 2008 totaled US$26 billion, of which US$22.5 billion went to sub-Saharan Africa. Excluding volatile debt relief grants, bilateral aid to Africa and sub-Saharan Africa rose by 10.6% and 10% respectively in real terms.  

Since the 1960s, the amount of foreign Aid to Cameroon has been increasing, but there is controversial argument on whether the major aim of its institution is being achieved. It is however important to note that foreign aid in terms of official development assistance is very important to developing countries especially Cameroon. This is because it contributes to economic growth and Economic growth leads to development. This research work discusses in a straight forward manner their impact of foreign aid on the economic growth of Cameroon.

1.2 Statement of the Problem

Cameroon has been receiving foreign aid for many decades (since its independence in 1960), but was rank high among the 10 poorest countries in the world. It is the second after Sierra Leone, with 490 GDP per capita. It was ranked the 20^th out of 149 countries which receive economic aid in 2006 with the amount of 1.2billion(as publish in the 2006 World fact book of the united states central intelligence’s) but today it is not the case. The GDP growth rate ranges from 7% in 1990s, with a slowdown of 0.5% in 1992 and 6% in 2004(World Development Indicators, 2006). According to the Growth and Employment Strategy Paper created in 2009, the country aims by 2020 to have a growth rate of 5.5% on average. It is expected that the country would be with a reasonable GDP growth rate as it is receiving resources for investment and for import support particularly for capital goods and technology necessary for investment. But contrary this expectation, the country still rank high among the poorest countries of the world, it is highly indebted, aid dependent and with balance of payment problems.

 In Cameroon, following the basic tenets of development like improved standard of living, economic development and human development are still  works in progress, and therefore, all efforts geared at achieving economic growth, what may constitute development relies heavily on infrastructural provision. Beginning in the mid 1980s, there has been a sustained drop in commodity relative prices for Cameroon’s principal exports: oil, cocoa, coffee, and cotton combined with economic mismanagement that has led to perennial battles to wade off recession. The country’s economic history is symptomatic to the challenges across the African continent, and remembered for the historic travails of the 1990s. Real GDP fell by more than 60% from 1986 to 1994 (Entrepreneur Newspaper, 2010). The current account and fiscal deficits widened and foreign debt grew. Therefore, it was imperative then, and valid as now that Cameroon resort to external assistance among other things foreign aid. It was thought that aid in the long run would assist in providing extra resources that could be invested in productive sectors of the economy. Since 1980, Cameroon has been receiving aid amounting to $62.6, $36 and $4.6 billion from France, Japan and UNDP respectively. There are other agencies giving aid to Cameroon through budgetary support to enable the country invest in key sectors of the economy. Despite the flow of aid, and external support from Cameroon’s friends, the economy still faces several problems that range from low disposable incomes to low levels of production in most sectors, unequal distribution of income, lack of incentives for private investment, poor private sector organisation among others things.  These are challenges that constrain the country’s overall economic development (The Entrepreneur Newspaper, 2010).

 Cameroon has been experiencing low and varying domestic savings pattern which has made it unable to meet investment requirement but relied on domestic investment funds, furthermore its reliance on primary export has made it unable to get considerable foreign currency from export earnings. This makes this study worth wide.

1.2 Research Questions

What is the effect of foreign aid on the economic growth of Cameroon?

How does foreign direct investment affect the rate of economic growth in Cameroon?

What impact does net export have on the GDP of Cameroon?