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THE ROLE OF FOREIGN AID IN DEVELOPMENT
 
 
May 1997
 
 
NOTES

All years referred to in the study are fiscal years unless otherwise noted.

All dollar amounts are expressed in 1997 dollars unless otherwise noted.

Numbers in text and tables may not add to totals because of rounding.
 
 
Preface

What role does foreign aid play in promoting the economic development and improving the social welfare of countries in Africa, Asia, and Latin America? That question is difficult to answer and has been the subject of much debate among development specialists as well as Members of Congress and the American public.

At the request of Congressman Lee Hamilton, the Ranking Minority Member of the House Committee on International Relations, and Senator Nancy Kassebaum, then Chairman of the Subcommittee on African Affairs of the Senate Committee on Foreign Relations, the Congressional Budget Office (CBO) has examined the academic and policy literature for insights into the relationships between foreign aid and development. This study identifies the economic, political, and social conditions that appear to favor development. It also highlights the circumstances under which foreign aid promotes or undermines those conditions. In keeping with CBO's mandate to provide objective analysis, the study does not make recommendations about the future of foreign aid.

Eric J. Labs of CBO's National Security Division prepared the study under the general supervision of Cindy Williams and R. William Thomas. Sheila Roquitte provided general assistance and researched the development histories of Botswana and Zambia. R. William Thomas provided critical assistance in evaluating the empirical studies of foreign aid and development discussed in Chapter 3. The author would like to thank Anna Cook, Robert Dennis, Sunita D'Monte, Victoria Greenfield, Ellen Hayes, Kim Kowalewski, Rachel Schmidt, Marvin Smith, Joseph Whitehill, and Christopher Williams of CBO for their assistance. Many officials of the Agency for International Development (AID), the World Bank, the Inter-American Development Bank, the Asian Development Bank, and the Organization for Economic Cooperation and Development also provided information for the study. In particular, the author would like to thank James Fox, Ellen Peterson, Cheryl Warner, and the staff of AID's mission to Honduras. Anne O. Krueger of Stanford University and Nicholas Eberstadt of the American Enterprise Institute and Harvard University provided many helpful comments on earlier drafts of the study. The author and CBO, however, bear full responsibility for the final product.

Sherry Snyder edited the manuscript, and Christian Spoor proofread it. Judith Cromwell produced drafts of the study. Kathryn Quattrone prepared the report for publication.
 

June E. O'Neill
Director
May 1997
 
 

Contents
 

SUMMARY

ONE - INTRODUCTION

TWO - THE FLOW OF FOREIGN AID AND PRIVATE CAPITAL TO DEVELOPING COUNTRIES

THREE - DEVELOPMENT AND THE ROLE OF FOREIGN AID

FOUR - THE CHALLENGE OF DEVELOPMENT: ILLUSTRATIONS FROM EIGHT COUNTRIES

APPENDIXES

A - U.S. Spending on Foreign Aid
B - Economic and Social Indicators of Developing Countries

BIBLIOGRAPHY
 
TABLES
 
1.  Organizations Disbursing U.S. Economic Aid
2.  U.S. Regional Aid as a Share of All Bilateral Aid
3.  U.S. Spending on Foreign Aid by Major Category and Administering Agency
4.  Distribution of Foreign Aid by Income Group
5.  Geographic Distribution of Foreign Aid
6.  Economic Rates of Return in Education
7.  Classification of 41 Developing Economies by Trade Orientation, 1963-1973 and 1973-1985
8.  Selected Studies Examining the Correlation of Aid with National Saving, Capital Formation, and Economic Growth
9.  Rates of Return on Successful Aid Projects Financed by the World Bank, 1968-1989, by Policy Environment of Recipient Countries
10.  Functional Specialties of Major Bilateral Aid Donors
11.  Indicators of Development for Eight Countries
12.  Flows of Foreign Aid and International Private Capital to Eight Countries as a Share of Gross National Product
13.  Transformation of South Korea's Economy Between 1954 and 1982 as a Share of Gross National Product
14.  Standard-of-Living Indicators for the Philippines
15.  Domestic and Foreign Saving in South Korea, 1958-1974
16.  Sectoral Emphasis of Donors in Botswana in 1991
A-1.  Appropriations for Military Aid in 1997
A-2.  Appropriations for Bilateral Development Assistance in 1997
A-3.  Appropriations for Other Development-Related Agencies and Programs in 1997
A-4.  Appropriations for Humanitarian Aid and Programs in 1997
A-5.  Appropriations for Assistance to Eastern Europe and the Former Soviet Union in 1997
A-6.  Appropriations for Multilateral Organizations and Programs in 1997
B-1.  Economic Indicators of Developing Countries
B-2.  Social Indicators of Developing Countries
 
FIGURES
 
S-1.  U.S. Spending on Foreign Aid as a Share of Federal Outlays, 1946-1997
S-2.  Volume of Private Capital and Foreign Aid to All Developing Countries
1.  U.S. Spending on Foreign Aid as a Share of Federal Outlays, 1946-1997
2.  Volume of Official Development Finance Provided by Bilateral and Multilateral Donors
3.  Volume of Private Capital and Foreign Aid to All Developing Countries
4.  Performance of 41 Developing Economies Grouped by Trade Orientation
5.  Foreign Aid to South Korea and the Philippines, 1953-1993
6.  Foreign Aid to Egypt, 1953-1993
7.  Foreign Aid to Costa Rica and Honduras, 1953-1993
 
BOXES
 
1.  What Is Development?
2.  Objectives in the Foreign Assistance Act of 1961, as Amended
3.  Bilateral and Multilateral Donors

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