Abstract
The chapter traces the evolution of the academic and policy debates on the ‘aid-debt-growth’ nexus, and evaluates the extent to which these debates conducted in macroeconomic terms reveal dynamic interactions in the aid-debt-growth triad and their effects on development. Throughout the chapter, we endeavour to bring ‘aid’ and ‘debt’ literature together to highlight the importance of an integrated treatment of developmental effects of aid and debt in developing countries which have access to concessional windows as part of aid packages. We show that (a) despite abundant micro-level evidences that aid’s contribution to development is context specific, an answer to the question on whether “aid works” has been sought through an investigation of macroeconomic relationships, often with cross-country regression analyses; and (b) how research outputs have been selectively used to rationalise donors’ positions prevailed at times with profound implications for development outcomes of ‘recipient’ countries. It argues that policy conditionality attached to aid and debt relief as practiced through Washington and post-Washington consensus has created an unproductive environment for nurturing mutual trusts necessary for building institutional foundations and technical capacity for making governments truly accountable to domestic stakeholders in policy making and governance. It calls for an overhaul of ‘conditionality’, so that it is based on adherence to universally accepted codes of conduct and norms to basic human rights and governments’ efforts to achieve collectively agreed targets such as the SDGs. It should be acknowledged that successful development depends on long-term processes of institutional development, to which all parties could contribute as an equal partner through development cooperation. The chapter further presents the ways forward to make debt sustainable and aid work for development by designing efficient aid and debt contracts and move away from the austerity-dominated management of debt crisis to the investment-centred management for preventing debt crises from emerging.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Foreign aid can be through humanitarian assistance provided at times of natural- and man-made disasters as well as through development aid. This chapter covers the debates concerning development aid only.
- 2.
Though the debates on effects of aid on development cover wide-ranging issues beyond aggregate relationships, this chapter is limited to dealing with macroeconomic aspects only.
- 3.
UN, the IFIs and other agencies use their own definitions to classify countries into different categories. As countries’ income levels and characteristics evolve over time, their classifications change accordingly. This chapter uses generic terms of low-income countries, which have been historically recipients of foreign aid provided through grants and concessional windows.
- 4.
- 5.
See Chenery and Strout (1966).
- 6.
The assumption of the fixed relationships between parameters is a widely recognised drawback of the earlier aggregate growth models such as the Harrod-Domar model.
- 7.
Chenery and Strout (1966) provide a definition of self-sustaining growth as growth at a given rate with capital inflow limited to a specified ratio to gross national product (GNP), which can be sustained without concessional aid.
- 8.
See Avramovic (1964) for the debt cycle model.
- 9.
- 10.
- 11.
In fact, as shown in Sect. 3, the inter-temporal borrowing model illustrates that increased consumption due to aid flows would be a natural outcome of inter-temporal utility maximisation.
- 12.
The focus of second-generation empirical studies moved onto the aid-investment link from the effects of aid on saving.
- 13.
How this solvency condition is derived is found in Nissanke and Ferrarini (2004).
- 14.
Analyses of time-series data affecting HIPCs’ debt dynamics of the 1980s and 1990s are in Nissanke and Ferrarini (2004).
- 15.
See Sachs (1989) for an analysis on how a coordination failure takes place among creditors.
- 16.
- 17.
In parallel, the donor community had steadily reduced aid to economic infrastructure projects relative to overall aid as well as social infrastructures in SSA in the 1980s and 1990s. For the main reasons behind this trend that has resulted in a significant infrastructure deficit in the region, see Nissanke and Shimomura (2013).
- 18.
See Nissanke and Kuleshov (2013) for a discussion on the negative feedback mechanism of commodity dependence as a persistent macroeconomic condition.
- 19.
The CPIA is a set of subjective scores assigned by World Bank staff. Furthermore, the CPIA scores overlap largely with those included in the extended policy conditionality list under the Washington and post-Washington Consensus.
- 20.
The importance of ownership and partnership was underscored both in the Paris Declaration and in the Accra Agenda for Action Plan, adopted at the high-level Forum of Aid Effectiveness in 2005 and 2008.
- 21.
The group of researchers at UNU-WIDER spearheaded recent efforts in verifying the opposing claims on the macroeconomic impacts of aid. Following the classification made by Hansen and Tarp (2000), Arndt et al. (2010) refer to those studies published up to 2008, inclusive of RS08, as the fourth-generation work, and most recent ones since 2008 as the fifth-generation work, distinguishing from the third-generation work associated with the aid effectiveness debate reviewed above.
- 22.
See Nissanke (2019).
- 23.
See Nissanke (2010c) for discussions on Dutch Disease effects and macroeconomic management to attenuate the effects in the context of commodity booms. Therein references to a large body of literature on the subject are found.
- 24.
- 25.
- 26.
See Nissanke (2010a).
- 27.
See Kraay and Nehru (2006).
- 28.
- 29.
- 30.
DSAs for LICs are now supposed to cover total debt, inclusive domestic and external private debt, as LICs have started issuing domestic debt instruments as well as accessing international capital markets on non-concessional terms.
- 31.
The conclusions drawn from the IMF study are contingent upon the assumptions of the key parameters as well as the construct of the model itself. Further, they are based on the results from the calibration to the historical data series of average figures in SSA over the past 10–20 years.
- 32.
Data requirements for applying a sophisticated model or forecasting technique are overwhelming for many LICs, where the reliability of macroeconomic data is often doubted, and high-frequency data required for forecasting are unavailable.
- 33.
See Wyplosz (2007).
- 34.
- 35.
- 36.
See Chap. 5 by FitzGerald for detailed discussions on public finance management, including the question of the optimal size of the public sector and public debt in an open-economy context.
- 37.
See Nissanke (2019) for our definition of structural transformation of low-income countries.
- 38.
- 39.
- 40.
The non-concessional borrowing policy (NCBP) was enacted in 2006 by the IFIs in fear of ‘free riding’ on the part of non-traditional sovereign lenders such as China. Yet, there were not much concerns openly voiced when LICs and LMICs turned to international capital markets for sovereign bond issues.
- 41.
Ghana, Senegal and Zambia—low-middle-income countries (LMICs)—issued bonds for financing infrastructure in the energy and transport sectors since 2007 and several others, including LICs such as Mozambique, Tanzania and Rwanda, have followed suit.
- 42.
According to an estimate available in October 2018, the African government’s external debt payments doubled just in two years from an average of 5.9% of their revenue in 2015 to 11.8% in 2017 (https://jubileedebt.org.uk/wp/wp-content/uploads/2018/09/Briefing_09.18.pdf). It is estimated that by the end of 2017 African governments’ total external debt was US $417 billion, of which 32% was owed to private creditors, 24% to China and 35% to multilateral institutions and other countries, including Paris Club members. It is worth noting that as of December 2017, 55% and 17% of their external interest payments were made to private creditors and to China respectively.
- 43.
Lending terms of the African Development Fund are a 50-/10-year maturity and grace period with no interest payments, making concessionality at 66%, whilst African Development Bank (AfDB’s) facility offered to blend/gap countries involves a package with a 30-/8-year maturity/grace periods and interest rates of 1%, making concessionality at 41%.
- 44.
- 45.
- 46.
Though detailed information is often lacking, Chinese preferential loans are said to charge on average an interest rate of 3.6%, with a grace period of 4 years and a maturity of 14 years, which amounts to a grant element of less than 25% and hence not classified as official aid according to the OECD-DAC definition. However, the degree of concessional elements is known to be not uniform, with some variations observed across projects.
- 47.
A series of global facilities established at IMF are not well designed to meet the need facing LICs/CDDCs and they have become highly conditional upon accepting pro-cyclical demand management over time. See Maizels (1992) and Nissanke and Kuleshov (2013) for a history of these facilities for CDDCs. Ocampo (2017) also offers a useful history of the IMF’s facilities.
- 48.
Detailed discussions of the second proposal are found in Nissanke and Kuleshov (2013).
- 49.
See Bulow and Rogoff (1989).
- 50.
See Chap. 24 by Inge Kaul on issues related to global public goods provision.
References
Addison, T., & Baliamoune-Lutz, M. (2017). Aid, the real exchange rate and why policy matters: The cases of Morocco and Tunisia. Journal of Development Studies, 53(7), 1104–1121.
Addison, T., Morrissey, O., & Tarp, F. (2017). Macroeconomics of aid: Overview. Journal of Development Studies, 53(7), 987–997.
Aoki, M. (2001). Towards a comparative institutional analysis. Cambridge, MA: The MIT Press.
Aoki, M. (2007). Endogenizing institutions and institutional changes. Journal of Institutional Economics, 3, 1–31.
Arndt, C., Jones, S., & Tarp, F. (2010). Aid, growth, and development: Have we come full circle? Journal of Globalization and Development, 1(2), Article 5.
Arndt, C., Jones, S., & Tarp, F. (2015a). Assessing foreign aid’s long run contribution to growth and development. World Development, 69, 6–18.
Arndt, C., Jones, S., & Tarp, F. (2015b). What is the aggregate economic rate of return to foreign aid? World Bank Economic Review, 30, 446–474.
Avramovic, D. (1964). Economic growth and external debt. Baltimore, MD: Johns Hopkins Press.
Bacha, E. L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development Economics, 32, 279–296.
Berg, A., Portillo, R., Yang, S., & Zanna, L.F., (2012). Public investment in resource-abundant developing countries (IMF working paper 12/274).
Berg, A., Portillo, R., & Zanna, L.-F. (2015). Policy responses to aid surges in countries with limited international capital mobility: The role of the exchange rate regime. World Development, 69, 116–129.
Blanchard, O., Chouraqui, J.-C., Hagemann, R. P., & Sartor, N. (1990). The sustainability of fiscal policy: New answers to an old question. OECD Economic Studies, 15, 7–36.
Boone, P. (1994). The impact of foreign aid on savings and growth. London: London School of Economics.
Bourguignon, F., & Sundberg, M. (2006). Aid effectiveness: Opening the black box. Washington, DC: World Bank.
Buffie, E. F., Berg, A., Pattillo, C., Portillo, R., & Zanna, L. F. (2012). Public investment, growth, and debt sustainability: Putting together the pieces (IMF working paper WP/12/144). Washington, DC: International Monetary Fund.
Buiter, W. (1985). A guide to public debts and deficits. Economic Policy, 1, 13–62.
Bulow, J., & Rogoff, K. (1989). A constant recontracting model of sovereign debt. Journal of Political Economy, 97(1), 155–178.
Burnside, C., & Dollar, D. (1997/2000). Aid, policies and growth (World bank policy research department working paper 1777). Washington, DC: World Bank. Later published in American Economic Review, 90(4), 847–868.
Chenery, H. B., & Strout, A. M. (1966). Foreign assistance and economic development. American Economic Review, 56(4), 679–733.
Claessens, S., & Diwan, I. (1989). Liquidity, debt relief and conditionality. In I. Husain & I. Diwan (Eds.), Dealing with the debt crisis, a World Bank symposium volume. Washington, DC: World Bank.
Cline, W. R. (1995). International debt examined. Washington, DC: Institute for International Economics.
Cohen, D., Djoufelkit-Cottenet, H., Jacquet, P., & Valadier, C. (2008). Lending to the poorest countries: A new counter-cyclical debt instrument (OECD development centre working paper 269). Paris: OECD.
Collier, P. (1998, February). Aid and economic development in Africa (Working paper). Centre for the Study of African Economies, University of Oxford, Oxford.
Collier, P., & Dollar, D. (2001). Can the world cut poverty in half? How policy reform and effective aid can meet the international development goals. World Development, 29(11), 1787–1802.
Collier, P., & Dollar, D. (2002). Aid allocation and poverty reduction. European Economic Review, 46(8), 1475–1500.
Collier, P., & Dollar, D. (2004). Development effectiveness: What have we learnt? The Economic Journal, 114, F244–F271.
Dalgaard, C.-J., & Hansen, H. (2001). On aid, growth and good policies. Journal of Development Studies, 37(6), 17–41.
Dalgaard, C.-J., & Hansen, H. (2017). The return to foreign aid. Journal of Development Studies, 53(7), 98–1018.
Dalgaard, C.-J., Hansen, H., & Tarp, F. (2004). On the empirics of foreign aid and growth. The Economic Journal, 114, F191–F216.
Deaton, A. (1989, April). Saving in developing countries: Theory and review. Paper presented at the first annual World Bank conference on economic development, Washington, DC.
Deaton, A., et al. (2006). An evaluation of World Bank’s research, 1998–2005. World Bank: Washington, DC. Final report available at: http://siteresources.worldbank.org/DEC/Resources/84797-1109362238001/726454-1164121166494/RESEARCH-EVALUATION-2006-Main-Report.pdf
Easterly, W. (1999). How did highly indebted poor countries become highly indebted? Reviewing two decades of debt relief. Washington, DC: World Bank.
Eaton, J. (1993). Sovereign debt: A premier. The World Bank Economic Review, 7(2), 137–172.
Greif, A. (2006). Institutions and the path to the modern economy. Cambridge, UK: Cambridge University Press.
Griffith-Jones, S., & Ocampo, J. A. (2008). Compensatory financing for shocks: What changes are needed? Paper prepared for the United Nations Committee on Development Policy.
Guillaumont, P. (2009, October). Caught in a trap: Identifying the least developed countries. Paris: FERDI, Economica.
Guillaumont, P., & Chauver, L. (2001). Aid and performance: A reassessment. Journal of Development Studies, 37(6), 66–87.
Guillaumont, P., Guillaumont, S., & Wagner, L. (2010, May). Augmenting IDA performance based allocation: The vulnerability issue (Working paper). FERDI/CERDI, Clermont.
Hansen, H., & Tarp, F. (2000). Aid effectiveness disputed. Journal of International Development, 12(3), 375–398.
Hansen, H., & Tarp, F. (2001). Aid and growth regressions. Journal of Development Economics, 64(2), 547–570.
Hernandez-Cata Ernest. (1988, July). Issues in the design of growth exercises (IMF working paper).
IMF-IDA. (2004). Debt sustainability in low-income countries: Proposal for an operational framework and policy implications. Washington, DC: IMF-IDA-World Bank.
Kanbur, R. (2005, November 25–27). Reforming the formula: A modest proposal for introducing development outcomes in IDA allocation procedures. Paper presented at the AFD-EUDN conference, Paris.
Killick, T. (1996). Principals and agents and the limitations of BWI conditionality. The World Economy, 19(2), 211–229.
Killick, T. (1997). Principals, agents and the failings of conditionality. Journal of International Development, 9(4), 483–495.
Kraay, A., & Nehru, V. (2006). When is external debt sustainable? World Bank Economic Review, 20(Bo. 3), 341–365.
Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics, 29(3), 253–268.
Maizels, A. (1968). Review of A. I. MacBain, export instability and economic development. American Economic Review, 58(3), Part 1.
Maizels, A. (1992). Commodities in crisis. Oxford: Clarendon Press for UNU-WIDER.
McDonald, D. C. (1982). Debt capacity and developing country borrowing. IMF Staff Papers, 29, 603–646.
Morrissey, O. (2004). Conditionality and aid effectiveness re-evaluated. The World Economy, 27(2), 153–171.
Morrissey, O. (2015). Aid and government fiscal behavior: Assessing recent evidence. World Development, 69, 98–105.
Mosley, P. (1987). Overseas aid: Its defense and reform. Brighton: Wheatsheaf Books.
Mosley, P. (2015). Fiscal composition and aid effectiveness: A political economy model. World Development, 69, 106–115.
Moyo, D. (2009). Dead aid: Why aid is not working and how there is another way for Africa. London: Allen Lane.
Nissanke, M. (2010a). Reconstructing the aid effectiveness debate. In G. Mavrotas (Ed.), Foreign aid for development: Issues, challenges, and the new agenda. Oxford: Oxford University Press.
Nissanke, M. (2010b, January). Issues and challenges for commodity markets in the global economy, chapter 3. In M. Nissanke & G. Movrotas (Eds.), Commodities, governance and economic development under globalization (pp. 39–64). Basingstoke/New York: Palgrave Macmillan.
Nissanke, M. (2010c, January). Commodity market structures, evolving governance and policy issues, chapter 4. In M. Nissanke & G. Movrotas (Eds.), Commodities, governance and economic development under globalization (pp. 65–97). Basingstoke/New York: Palgrave Macmillan.
Nissanke, M. (2019). Exploring macroeconomic frameworks conducive to structural transformation of sub-Saharan African economies. Structural Change and Economic Dynamics, 48, 103–116. Elsevier, North Holland, available at https://doi.org/10.1016/j.strueco.2018.07.005.
Nissanke, M., & Ferrarini, B. (2004). Debt dynamics and contingency financing theoretical reappraisal of the HIPC initiative. In T. Addison, H. Hansen, & F. Tarp (Eds.), Debt relief in poor countries. Basingstoke: Palgrave Macmillan for UNU-WIDER.
Nissanke, M., & Kuleshov, A. (2013). An agenda for international action on commodities and development: Issues for EU agenda beyond the MDGs. A background paper to The European Report on Development 2013, Brussels. https://ec.europa.eu/europeaid/node/43763_de
Nissanke, M., & Shimomura, Y. (2013). Institutional evolution through development cooperation: An overview, Chapter 1. In M. Nissanke & Y. Shimomura (Eds.), Aid as handmaiden for institution development: A new comparative perspective. Basingstoke: Palgrave Macmillan.
Obstfeld, M., & Rogoff, K. (1996). Foundations of international economics. Cambridge, MA: The MIT Press.
Ocampo, J. A. (2017). Resetting the international monetary (non)system. Oxford/Helsinki: Oxford University Press/UNU-WIDER.
OECD DAC. (2018). OECD DAC blended finance principles: For unlocking commercial finance for the sustainable development goals. Paris: OECD.
Papanek, G. F. (1972). The effect of aid and other resource transfers on savings and growth in less developed countries. Economic Journal, 82, 934–950.
Rajan, R.G., & Subramanian, A. (2005/2008). Aid and growth: What does the cross-country evidence really show? (NBER working paper 11513). Cambridge MA: National Bureau of Economic Research. Its updated version is published in Review of Economics and Statistics, 90(4), 643–665.
Sachs, J. (1989). The debt overhang of developing countries. In J. B. de Macedo & R. Findlay (Eds.), Debt, growth and stabilization: Essay in memory of Carlos F. Diaz Alejandro. Oxford: Basil Blackwell for UNU-WIDER.
Taylor, L. (1988). Varieties of stabilisation experiences. Oxford: Clarendon Press.
Taylor, L. (1991). Foreign resource flows and developing country growth (Research for action no. 8). Helsinki: UNU/WIDER.
White, H., & Morrissey, O. (1997). Conditionality when donor and recipient preferences vary. Journal of International Development, 9(4), 497–505.
World Bank. (1998). Assessing aid: What works, what doesn’t, and why. Washington, DC: World Bank.
World Bank. (2005). The theory and practice of conditionality: A literature review. In Background paper 5 for review of World Bank conditionality. Washington, DC: World Bank.
Wyplosz, C. (2007). Debt sustainability assessment: The IMF approach and alternatives (HEI working paper 3/2007). Geneva: Graduate Institute of International Studies.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Appendix on Inter-temporal Borrowing/Lending Model
Appendix on Inter-temporal Borrowing/Lending Model
The inter-temporal borrowing/lending model is a neoclassical model of inter-temporal utility maximisation with a two-period budget constraint with the given levels of income, y0 and y1, and a two-period utility function U (C0, C1). In Fig. 15.3, an inter-temporal production possibility frontier (PPF) represents a trade-off between outputs in the two periods. Point A represents autarky position, where a country has no access to international borrowing and both producers and consumers face the domestic interest rate r, which exceeds the world interest rate, r*. The slope of the budget line at point A is −(1 + r), whereas that of the budget line at points B and C is −(1 + r*). With opening up to international borrowing, two effects emerge: (i) the country can divert resources to more future production at B, as it responds to the lower interest rate, r* and (ii) the country enjoys higher current consumption at C, as the higher utility indifference curve through point C than the one through point A indicates.
As Obstfeld and Rogoff (1996) show, the model links the current account concept and the domestic investment-saving gap and illustrates the role of international borrowing and lending to fill the gap. Accessing the international capital market allows a country to undertake the extra investment (shown by the horizontal distance between points A and B) as well as to enjoy the extra first period of consumption (shown by the horizontal distance between points A and C). The sum of the two horizontal distances (the distance between B and C) is the first-period current account deficit that reflects its resource gap. At the same time, whilst a move from A to C reflects trade gains due to a smoothing of the time path of consumption, the further trade gains are realised by the change in the economy’s production point from A to B.
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Nissanke, M. (2019). Critical Reappraisal of the Aid-Debt-Growth Debate: Retrospect and Prospects for Low-Income Countries. In: Nissanke, M., Ocampo, J.A. (eds) The Palgrave Handbook of Development Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14000-7_15
Download citation
DOI: https://doi.org/10.1007/978-3-030-14000-7_15
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-13999-5
Online ISBN: 978-3-030-14000-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)