The economic impact of foreign aid flows to Latin America (from 1974 to 1993) is examined empirically. Regressions are run to determine whether aid is invested or consumed and whether the consumption of foreign aid is reflected in indicators of human development (infant mortality, secondary school enrollment and life expectancy). However, no relationship is found between aid and improvements in human capital indicators. It is concluded that if continued aid to Latin America is to have a measurable economic impact a policy of selectivity (in the disbursement of aid) should be adopted. The merits of such a policy were recently acknowledged by the World Bank.
Key Words: Latin America, foreign aid, human development, infant mortality, life expectancy, World Bank.
Simply stated, foreign aid is an international transfer of capital, goods, or services for the benefit of other nations and their citizens. Whether foreign aid should be called a new phenomenon or not depends on one's point of view. In the history of diplomacy, subsidies and tributes have been common, and wartime aid among allies was already given by Britain during the eighteenth century and the Napoleonic wars, but peace-time economic aid among governments is novel. Generally speaking, the West has been involved in the economic development of the rest of the world since the time of the Discoveries. Yet, the use of public funds for the specific purpose of promoting and assisting in the economic development of other sovereign countries has no significant precedent before the Marshall plan. In the early days economic assistance moved a few hundred million dollars. Today, foreign aid is an industry of well over $50 billion a year.
Economic aid in its present form exists, allegedly, because there are great disparities of wealth between countries. But there is no general agreement that the primary objective of aid is the development of poor countries, and in some cases aid programs are supported on the grounds that they further the political and/or economic interests of the aid-- granting countries or groups within these countries
One apparently simple reason for giving aid is promotion of export industries within an Aid-granting country. Developing countries sometimes appear to believe that this is the only reason. It is claimed that aid tied to exports introduces the country's products into new areas and opens new markets. It is sometimes argued that in the long run the prosperity of the rich and the poor countries is linked; that the development of the former depends on the expansion of the markets and production of the latter, and that this can be achieved by giving aid for the development of poor countries. Needless to say, there are important limitations to this line of thought. An increasingly prosperous Third World is obviously in the material interests of the rich nations, but first it needs to be scientifically ascertained that aid contributes to economic and social welfare, rather than merely asserted. As a spokesman for the Overseas Development Institute points out, "clearly the rich countries will benefit to some extent by an increase in the prosperity of the countries which are now poor, but to go on form there to argue that the rich countries, if they are concerned solely with their own prosperity, can promote their interests better by spending money on developing poor countries than by spending it in other ways, seems excessive (OECD, 102)."
The political objectives of aid may also be unconnected with the development of poor countries. Arguments for supporting aid on political grounds are often highly sophisticated. They involve linking of political objectives of donors with the economic development of recipients. Nonetheless, with the closure of the Cold War era the essence of these arguments has less obvious, although politics continues a powerful force in determining who gets aid. Alesina and Dollar (1998) find overwhelming statistical evidence that political and strategic alliances remain important in explaining the distribution of foreign aid across countries. …