THEORETICAL LITERATURE REVIEW OF THE IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA

Economic growth refers to sustained increase in gross domestic product of a country with a view to reducing poverty, inequality and unemployment (Todaro, 1982). The challenges of economic growth in a country are better appreciated if we ask the question about what has been happening to poverty, inequality and unemployment? In Seers’ view (Seers, 1969) if all the three have been reducing, some real development has taken place. If otherwise, no development has taken place even if per capita income doubles.
According to One world a United Kingdom based agency saddled with the responsibilities of monitoring sustainable development and human rights issues, as at June 2008 about 10million hunger related deaths were recorded every year, with half of them being children. The implication from this is that the world has might be
failing to achieve food security. Also about 850million people remain entrapped in the spiral of hardship that hunger imposes. The level of worry about the above figures is better appreciated if considered against the backdrop that they are recorded amidst the riches of the 21st century. In fact, the recent doubling of world food prices has transformed food insecurity from a difficult developmental challenge into an emergency.
Heller and Gupta (2002) express worry about the call by international community that to enable developing countries to achieve the MDGs by 2015, there should be increase in foreign aid to 0.7 percent of industrialized countries’ GNP from 0.24 percent of GNP at present. Nevertheless, they argue that a large increase in aid flows could pose a number of challenges for the poorest countries. For example, if the industrial world is to be successful in meeting its ODA targets, financial aid will increase to about $175 billion, slightly more than three times current levels. To ensure that enhanced ODA is used efficiently in the fight against global poverty, they argue that donors need to examine closely the different possible approaches it could take in deciding how to allocate aid, both among countries and among complementary global poverty reduction programmes.

Tchané, (2005) argue that making significant progress toward achieving the MDGs remains a major focus of the international community, and larger and more effective aid flows will be a critical component in reaching the MDGs. This suggests that controversy exists on the objectives of aid, most notably the urgency of reducing poverty. However, for both donors and macroeconomic policymakers in the aid-receiving countries these objectives raise a number of critical questions on the macroeconomic management of aid.

          The impact of foreign aid on poverty in Nigeria seems to be a litmus test to determine whether after so many years of self-rule with inflow aid, the various social unrest, hunger, diseases and sickness prevalent in the country are indicators of ineffective foreign aid. Abiola and Olofin (2008) noted that the major characteristic of foreign aid to Nigeria is that it is not paid into the federal account. This is unlike other countries notably Ghana, where all foreign aid is paid into a consolidated fund and disbursed centrally. They argue that this makes aid not to be part of government revenue, with no direct impact on government expenditure and thus not used to address national need. Furthermore, they noted that all three levels of government in Nigeria are allowed to receive foreign aid and donors determine the areas where they like to intervene without recognition of the national need. Thus the maximization of benefit from foreign aid suffers.

          Howell and Pearce (2000) pointed out that apart from the question of neutrality, which services to mask the distribution of power, there is also the large question of the morality of interventionism. Is donor support to civil society another manifestation of neo-colonialism in the Post-Cold War era aimed at controlling the nature of political regimes and extending global markets? Do donors have the right, let alone the capacity, to shape other civil societies? By projecting their own visions and understanding of civil society, do they not undermine the ability of local organizations to set their own priorities and agendas, to vocalize their own imaginations of social and political change?

          Benjamin (1997) stated that aid appears to have established as a property the importance of influencing domestic policy in the recipient countries. This was reaffirmed by Shah (2010) that one of the root causes of poverty lies in the powerful nations that have formulated most of the trade and aid policies today, which are more to do with maintaining dependency on industrialized nations, providing sources of cheap labour and cheaper goods for populations back home and increasing personal wealth, and maintaining power over others in various ways such as the so-called lending and development schemes called structural adjustment, which has done little to help poorer nations progress.

          Njehu (2008) also pointed out that money being doled out to Africa to fight HIV/AIDS is also a form of tied aid. She said Washington is insisting that the continent’s governments purchase anti-AIDS drugs from the United States instead of buying cheaper generic products from South Africa, India or Brazil. As a result, she said, US brand name drugs are costing up to 15,000 dollars a year compared with 350 dollars annually for generics. Deen (2004), further noted that almost half of all foreign aid can be considered “phantom aid” which does not help fight poverty, and is based on a broader definition of foreign aid that allows double counting and other problems to occur. Furthermore, some 50% of all technical assistance is said to be wasted because of inappropriate usage on expensive consultants, their living expenses and training. 

          In determining the synergy between official development assistance (ODA) and investment in Africa, the OECD distinguishes between “meso” level interventions – those dealing with the regulatory framework, infrastructure and government – and “micro” level interventions – such as investment promotion and facilitation and the development of local businesses. While improvements to the “meso” enabling environment help, in themselves they are not enough to maximise the investment potential in developing countries. Strategies are consequently also required to promote appropriate “micro” or supply-side responses to increase the capacity of local firms to take up the opportunities that arise from an improved investment climate and greater international linkages (OECD, 2004b).

          Sewel (2005) emphasized that the power imbalance between providers and users of ODA remain great, and users remain in a weak bargaining position over conditions and uses. Furthermore, the burden for weak governments of managing multiple donors remains high. Just as the multiplicity of donors means there is no way to determine when a country is getting too little ODA, and when it is getting too much. When is a reforming country committed to ending poverty getting to little aid to support reforms? And when is too much ODA diluting incentives to reform? He went further to note that a number of studies of aid and growth show that there can be diminishing returns from increase aid.

          With the record of corruption within impoverished countries people will question giving them money. That can be handled by giving them the industry directly, not the money. To build a balanced economy, provide consumer buying power, and develop arteries of commerce that will absorb the production of these industries, contractors and labour in those countries should be used. Legitimacy and security of contracts is the basis of any sound economy. Engineers know what those costs should be and, if cost overruns start coming in, the contractor who has proven incapable should be replaced- just as any good contract would require… when provided the industry, as opposed to the money to build industry, those people will have physical capital. The only profits to be made then are in production; there is no development money to intercept and send to a Swiss bank account (Smith, 2002).

          William Easterly (2006) criticised foreign aid for not having achieved much, despite its grand promises. He laments that a tragedy of the world’s poor has been that the West spend $2.3 trillion of foreign aid over the last 5 decades and still has not managed to get twelve per cent medicines to children to prevent half of all malaria death. The west spends $2.3 trillion and still not managed to get $3 to each new mother to prevent five million deaths. Moreso, the expressed disgust that a global society has evolved a highly inefficient way to get entertainment to rich adults and children while it can’t get twelve percent medicines to dying poor children.

          Reviews have shown that Nigeria’s economic performance has been strong since 2005, yet poverty remains high are about 55 percent of the population (IMF, 2008). Hauser E.M. (2009) noted that poverty is extremely prevalent in rural areas where subsistence farmers are entirely dependent on weather conditions and these farmers are often isolated in villages because of poor transportation infrastructure and lack of irrigation systems, fertilizers, technology and equipment.
          Aigbokhan (2000) noted that consumption poverty as measured by the head-count index is, respectively, 0.38, 0.43 and 0.47 in 1985, 1992 and 1996. In other words, 38%, 43% and 47% of the population was living in absolute poverty as defined by local cost of living. Thus, while the level of poverty increased between 1985/86 and 1992/93 by 13%, it increased by 93%between 1992/93 and 1996/97. The corresponding figures for urban areas are 38%, 35% and 37%, while for the rural areas the figures are 41%, 49% and 51%. One important observation is that, in general, rural poverty is higher than urban poverty.

          Ogwumike (2005) analyzed poverty based on the geopolitical zones and noted that in 1998, 38%, 36% and 32% of the people in the north west, north east, and central lived below moderate poverty line respectively. The southern part of the country was relatively less affected by poverty in 1980 as about 13% of the people in the south east, and south-south lived below the poverty line. By 1985, poverty became pervasive in all the zones with the northern zones still maintaining a higher share of poverty. Headcount indexes varied from 30.4% in the south east to 54.9% in the north east. Particularly surprising is the rising level of poverty in the south: south-south (45.7%); south west (38.6%); and south east (30.4%). The distribution of poverty incidence by zone in 1992 showed a mixed pattern. Poverty headcounts remained largely at the same level in the north east zone, but declined from 52% to 37% in the North West, from 51% to 46% in the central. The south east zone experienced a sharp increased in poverty headcounts from about 30% in 1985 to 41% in 1992. In the south-east, it increased slightly from about 39% to 43%, while in the south-south; it declines from about 46% to 41% over the same period. By 1996, poverty not only became intensified but its distribution showed very little variation among the zones. Poverty headcounts varied from 68% in the North West and South East respectively to 67% in each of north east, south west, and south-south. The least was central with 66%.

          Evidence in Nigeria shows that the number of those in poverty has continued to increase. For example, the number of those in poverty increased from 27% in 1980 to 46% in 1985; it declined slightly to 42% in 1992, and increased very sharply to 67% in 1996. By 1999 when the Obasanjo administration came to power, estimates has it that more than 70% of Nigerians lived in poverty. That was why this government declared in November, 1999 that the N470 billion budgets for year 2000 was “to relieve poverty”. Before the National Assembly even passed the 2000 budget, the government got an approval to commit N10 billion to poverty alleviation programme.

          According to Morrisey (2001) aid is found to have a positive impact on economic growth through social mechanisms as (i) aid increases investment (ii) aid increases the capacity to import capital goods or technology (iii) aid does not have an adverse impact on investment and saving (iv) aid measures the capital productivity and promotes endogenous technical change. But Reiffel (2005) noted that Nigeria is a particularly unique case in Sub-Saharan Africa for two reasons:
i.             While it has one of the largest debts in the region, it does not qualify as a heavily indebted poor country (HIPC) and consequently was excluded from the 1996 World Bank Initiative to broaden the number of poor countries involved in lessening the debt burden by granting relief.
ii.            Nigeria receives the least amount of aid per capita in the region.

The largest international aid contributor to Nigeria is the Paris Club, an informal grouping of creditor countries whose mission is to coordinated debt policies in an effort to find sustainable solutions for debtor nations with pragmatic difficulties (Hauser, E.M.) In 1986) Nigeria for the first time went to the Paris club for debt rescheduling which according to creditor member principles requires adherence to IMF reforms and reviews. Debt servicing in 1966 include rescheduling of more than $7 billion in medium and long term debt (Reiffel, 2005). Nigeria was forced to obtain further rescheduling in 1989 and 1991 of $6 billion and $3 billion respectively (Reffel, 2005). Thus, in 1993 when the possibilities of debt rescheduling in any form was zero, the unsustainable previous debts merely increased as debt arrears compounded by expanding interest. During the period from 1993 to 1998 (the Abacha regime) Nigeria started discriminating the debts it repaid and whom it repaid, neglecting the Paris club debts.

          Consequently, debt to these creditors increased from $7 billion in 1985 to $30.4 billion in 2004 (Reiffel, 1005). In total, Nigeria’s 2004 debt equalled $35.9 billion, $30.4 billion fo which was accountable to the Paris club.
          With the establishment democracy in 1999 and a home grown policy known as the National economic Empowerment and Development Strategy, the United Kingdom pushed the Paris club creditor members to back the plan for Nigeria’s debt relief because of its endorsement to aid Africa. Thus $ 18 billion (i.e 60 %) of its $ 30.4 billion debt was written off, leaving the country with $12.4 billion to pay. Taking a critical look at the aid received from the Paris club, we would realise that it did little or nothing to alleviate the poverty situation of the people and compounded the economy with suffocating pressure to service debt which has accumulated interest for greater than the original aid.


READ MORE ON FOREIGN AID

·   PRESENTATION OF REGRESSION RESULTS AND ANALYSIS GOTTEN FROM THE IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA

·   RESEARCH METHODOLOGY OF THE IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA - AFRICA

·   RESEARCH METHODOLOGY OF THE IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA - AFRICA

·   EMPIRICAL LITERATURE OF IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA

·   THEORETICAL LITERATURE REVIEW OF THE IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA

·   IMPACT OF FOREIGN AID ON POVERTY IN NIGERIA

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