Foreign Aid in Economic Development
The United States, Europe, and Japan are the three largest financial donors in the world. In 2023, the U.S. provided up to $34.73 billion in aid to countries like Afghanistan, Ethiopia, South Sudan, Jordan, Tanzania, Nigeria, Kenya, and many others. The EU, as a bloc, also contributes significantly, directing funds to nations such as Turkey and Morocco. Meanwhile, Japan has played a pivotal role as well, ranking as the largest foreign aid donor to India in 2017.
Foreign aid is often seen as a positive force, offering medical, social, and economic assistance to vulnerable groups of people through governments, NGOs, and private organizations. It’s a critical resource for addressing urgent needs and supporting those most at risk. But we must ask: why has foreign aid often failed to deliver on its promise of eradicating poverty and hunger?
One major issue is the lack of transparency and accountability. Donor money is notoriously difficult to track. For instance, according to a study, USAID has been one of the few donors with clear targets and publicly available data that measure progress toward funding goals. Many other donors lack measurable indicators, leaving funds with no clear path to create tangible, positive outcomes. Public donors, in particular, often rely on outdated and generic targets that lack the specificity and structure of SMART goals (specific, measurable, actionable, relevant, and time-bound). Without clear accountability, donor funds risk being wasted or misused.
Before any aid is distributed, it’s crucial to establish governance mechanisms and ensure regular audits by independent, experienced professionals. Otherwise, the funds may end up reinforcing the very systems they are meant to fix. As Valentina Finckenstein noted in her analysis for the LSE, “How International Aid Can Do More Harm than Good: The Case of Lebanon,” donor money sometimes flows to institutions that hinder progress instead of fostering it.
Take Lebanon, for example. After the Civil War (1975–1990), the country received around $170 billion in capital inflows over 20 years—more than the entire Marshall Plan used to rebuild Europe after World War II. The result? Lebanon still struggles with a lack of basic services. In the capital, electricity is available for only six hours a day, and water remains both polluted and scarce. The funds, rather than addressing systemic issues, were often directed to political networks that resist change. True reform requires shaking entrenched power structures; something many of these institutions have no interest in pursuing. Instead, donor aid is often funneled to appease specific voters or groups, offering short-term relief but failing to bring long-term benefits to the broader population.
This dynamic reinforces dependency and stifles self-responsibility. In Lebanon’s case, this is particularly frustrating because the population is highly educated, skilled, and capable of building a strong, competitive economy. Yet the cycle of opaque funding and outdated governance keeps these opportunities out of reach.
Guinea-Bissau offers another example. The country receives substantial grants from European governments like Portugal and France, which combined contributed 3.3 billion FCFA in 2022 for food security and social sector spending, equivalent to 4% of the country’s GDP. However, around 90% of public education spending is used just to cover basic salaries for teachers and staff, leaving little for infrastructure or other critical investments.
Poor operational and financial management further complicates the issue.
Take the 2019 contract between Karpowership, a Turkish floating power plant operator, and Guinea-Bissau’s national water and electricity utility, Electricidade e Aguas da Guiné-Bissau (EAGB). This agreement, which supplies the country with 100% of its electricity, highlights how dependency on external solutions can limit long-term sustainability.
At the end of 2023, Karpowership cut power supplies to Guinea-Bissau’s capital over an unpaid bill of at least $15 million, plunging the city into complete darkness (BBC article). Hospitals, airports, and other critical infrastructure were severely affected by this mismanagement, leaving doctors and other essential professions scrambling for generators to keep electricity flowing. In a city of 400,000 people, where only 58% have access to electricity (and just 33% nationwide), this crisis highlighted the desperate need for affordable, small-scale energy solutions.
Ultimately, the effectiveness of foreign aid depends on how well it is managed and monitored. Without measurable goals, accountability, and a commitment to fostering self-reliance, aid risks doing more harm than good. It’s time to rethink how donations are allocated and ensure they truly benefit the people they’re meant to help.
Yet, the Guinea-Bissau’s structural problems run deeper than power outages. The country’s economic sectors, including its banking system, remain grossly undercapitalized, posing significant fiscal risks to the government. Foreign aid often misses the mark, failing to address root issues like the high volume of non-performing loans (NPLs). The World Bank suggests increasing tax revenue to diversify income streams and reduce reliance on indirect taxes, especially from cashew exports. But here’s the catch: better tax revenue requires trust. Without transparency and without showing citizens exactly how government received funds are spent and how they improve lives, governments struggle to foster collaboration across societal sectors. Public trust is key, and right now, it’s in short supply.
Foreign aid can even do more harm than good when it props up systems of mismanagement. Ministries often redirect funds to serve the voting bases of political factions, turning civil service departments into patronage hubs. Non-transparent tendering processes, inflated costs, and phantom projects are not uncommon. A glaring example? The embezzlement of $30 million in EU funds meant for recycling and compost factories. Instead of promoting sustainability, the project was poorly implemented and caused environmental harm.
This isn’t just a Guinea-Bissau problem. Take the Paris III package of grants and soft loans. Finckenstein (2021) points out that despite only 22% of promised reforms being enacted, donors released over half the pledged funds to the Lebanese government. What message does this send? That “real change” isn’t a prerequisite for financial aid. It teaches recipient countries that superficial reforms and token concessions are enough to secure funding during a crisis.
Follow me for more insights on development economics, business, finance and sustainability.
Bibliography:
- “How International Aid Can Do More Harm Than Good: The Case of Lebanon” By Valentina Finckenstein, LSE, Strategic Update, February 2021
- Economic Update Guinea-Bissau by World Bank Group (2023)
- “Guinea-Bissau capital without power over unpaid bill to Turkey’s Karpowership” by Gloria Aradi & Yūsuf Akínpẹ̀lú on BBC News. 18 October 2023.
- Own insights and experiences
