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AID DISBURSEMENT TO DEVELOPING COUNTRIES: A STUDY ON BANGLADESH

Mohammad Tayub Chowdhury

Washington, 2001 P-141). It means the country receives less aid comparing with the share of population. Considering the amount of Official Development Assistance with GNP, data show that it has been declining gradually over time. It means aid is becoming more competitive and on the other hand the country is performing better to mobilise domestic resources. Figure-1 shows net disbursement of ODA from all sources for Bangladesh and Pakistan. Figure-1: Net disbursement of ODA from all sources for Bangladesh and Pakistan (in million USD)
Net disbursement of ODA from all sources 2500 in million USD 2000 1500 1000 500 0 Year Year Bangladesh Pakistan

has a land area of 144,000 sq. kms. With a population of 128 million. It is one of the most densely populated countries in the world (more than 900 per sq. km.). It got independence in 1971 from Pakistan. Since independence the country is largely dependent on aid to meet the deficit of balance of payments and the implementation of development projects. A comparison between Bangladesh and Pakistan regarding basic information of the both countries and aid flows to both countries are shown in annexe. BASIC INFORMATION: According to DAC list of aid recipients, Bangladesh is classified as lowincome economy whose per capita GNP was US$ 368 in 2000. Real growth rate GNP/CAP (1983-00) was 2.2%. The current account balances has been continuing negative balances from the very beginning although position has improved during the period. Total external debt was US$ 16.78 billion in 2000. Per capita debt obligation has increased tremendously (more than 17 times), from US$ 6.59 in 1973/74 to US$ 121 in 2000 (DAC, Geographical Distribution of Financial Flows to Aid recipients 1994-98, OECD, Paris, 2001 P-203). The debt obligation comprises mainly public sector debt and most of the debt is owed to multilateral donors. According to recent classification by the World Bank, using present value of total debt services, Bangladesh is at the average of a being severely indebted country. RECEIPTS OF ODA: The country has received 4.9% of total ODA disbursement in 1987-88 and it came down at 2.7% in 1999-00. The figure shows a decreasing trend in ODA receipt. Share in total population was 2.4% in 2000 (World Bank, World Development Finance 2001,

Bangladesh is located in the northeastern part of South Asia. It

AID UTILISATION BY PURPOSE: Proper utilisation of aid is necessary for countrys development. Since independence, so far the country has received US$ 33 billion aid (Daily Ittefaq, Issue-February 11, 2001, Bangle news, Dhaka, Bangladesh). By proper utilisation of aid it could produce better condition in the economy. However, There are so many constraints like, physical, economic, human, social-political constraints have hindered the process. 1) Physical constraints: The population/ land factor probably constitutes the main constrain factor, in average 900 people per square km; in terms of cultivate land however less than 0.1 hectare per person. As a result more than half of the rural population is landless and productive employment opportunities in agriculture are low. A population of 126 million people probably constitutes an absolute maximum. Above all country is prone to regular catastrophes (floods, cyclones, droughts) and constrained

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by a long dry season (October-April), contributing to risk as well as to under utilisation of resources. 2) Economic constraints: External low income, savings and taxation rates cause a serious structural resource constraint, which in turn infringes on both investment and the social sectors. Establishing priorities is difficult in view of the many needs, and frequently lands to spreading scarce resources too thinly, which undermines impact and progress. 3) Human constraints: Despite an enormous resilience, the majority of people are constrained by lack of adequate food intake and a weak health, illiteracy and lack of education, and a highly competitive social environment geared toward survival. 4) Social- political constraints: The main challenge will be to consolidate democracy in a socio-political environment which in characterised by dependency, a centralist view of government supported by a powerful bureaucracy, and widespread vested interests which have come about as a result of a general lack of transparency and accountability. So, those above constraint leads to her dependency to the donor countries like many other developing countries. Due to low levels of domestic savings, a narrow base of exports dominated largely by traditional goods and a preponderance of imports of consumer and intermediate goods. The balance of payments continued to be characterised by saving-investment and export-import gaps. So, external assistance has been critical for the development in order to bridge the savings investment and balance of payments gaps. The flow of external assistance in the form of food, commodity and project aids are helping in order to achieve desired levels of economic growth. FOOD AID: Bangladesh has traditionally been a food deficit country. Although food production increased gradually, the countrys dependence on food aid continues, because of the gap between production and requirement. Growing population always increases the net requirement, frequent natural calamities like floods, cyclones and unfavourable weather conditions. In Bangladesh the need for food aid would continue in order

to meet the requirements of the poorest section of the population as well as food for education program. COMMODITY AID: Commodity aid is important to meet the deficit of balance of payments. Since independence the country has experienced continuous deficit in its balance of payments. Commodity aid extended by donors has been used to meet the balance of payments gaps and also for generation of local currency for financing development projects. PROJECT AID: The largest share of foreign aid comprises project aid. It is given by the donors primarily to finance the projects included in the Annual Development Program (ADP). The ADP is largely aid dependent. The projects include human resource development, infrastructure building and development of social welfare, health and family welfare, power and education sector. In recent years the project aid has been considered as being relatively slow. This was due to delays in project identification, preparation, approval, slow release of funds, management weaknesses, the tied nature of aid and donors rigid conditionally. However, measures have been taken to accelerate the project implementation in recent years. CHANGING PATTERN OF AID: During the period (1971 - 2000) a significant change has been taken place in the total aid package. From loan to grant, bilateral to multilateral. In the year 1971-72 food aid was 47.9% of total aid disbursement. The corresponding figures for commodity aid and project aid were 50.8% and 1.3% respectively. Analysing type wise statistics it is found that 9.5% of total aid was loan element and the rest 90.5% was grant element. Around 14% of total aid came from multilateral sources and 86% came from bilateral sources. In 2000 food aid came down at 3.9% (of total aid), commodity aid and project stood at 20.9% and 75.2% respectively. Considering the share of loan and grant the grant element has declined tremendously and stood at 62.2%. On the other hand loan element has increased and stood at 37.8%. Source wise data depict that aid from multilateral sources has increased gradually (14.3% to 45%) and the aid from bilateral sources has decreased (85.7% to 55%) during the period (World

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Bank, World Development Indicators 2001, Washington, 2001, P-176). AID FROM TOP TEN DONORS in 1998: Analysing data by individual donor, it is found that the IDA is the biggest donor amongst sources. IDA disbursed US$ 295.4 million in 2000. Japan is the biggest donor amongst bilateral sources. So far the country has received US$ 230.4 million as aid from Japan. Japan is the major source for commodity aid for the country. However, Netherlands was the second biggest donor amongst bilateral sources disbursed US$ 116.3 million in 2000. USA, UK, Germany, Canada, Denmark, Norway, Switzerland and Sweden were among the top ten donors respectively in 2000. AID CRITIQUE: Bangladesh, like many other developing countries, has a number of development constraints. But foreign aid does not solve the problem. While foreign aid is a political success, it is an economic and social failure. By increasing government power, destroying economic incentives, promoting unprofitable enterprises, and subsidising misguided policies, foreign aid increase third world poverty. In case I can talk about two types of foreign aid: humanitarian and development assistance. Humanitarian assistance- aid designed to avert immediate disaster-mainly takes the form of food aid, widely known as the food for peace program. Food for peace has actually increased hunger abroad in the long run. One problem with food for aid is that the dumping of free food in third world countries depressed prices for local farmers, therefore resulting in less domestic production. A second major problem with food aid is that it encourages the recipient nation to adopt policies that discourage production. In many cases, such as in Bangladesh, food aid leads to the neglect of agricultural production because of the belief that other nations will provide sufficient amounts of free food. So, we can see food for peace in a complete dependence on food aid for many countries. Food aid destroys third world food production, creating a perpetual crisis that requires more aid to avoid famine.

The broadest ill effect of development assistance is that it destroys market signals and incentives. It therefore diverts economic resources from their most productive uses in developing nations. Whenever resources are made available outside of normal market channels, buyers and sellers in related market activities receive inappropriate signals and change their behaviour, reducing locally generated incomes. The resulting distortions may be major or minor, but they always occur. Moreover, the developed donor countries would naturally try to protect their own interests. They would like to export their major products, technological know-how, machine tools, ships, heavy trucks, paper and electronic goods to the recipient countries. On the other side, the donor countries desire to safeguard the inflow of raw materials. Developing countries like Bangladesh are compelled to sell specified raw materials at cheaper rates and have to import finished goods at a price quoted by the donor countries. Moreover, foreign aid often comes with severe imposed conditions. The Structural Adjustment Policies (SAP) and other imposed aid conditions of the International Monetary Fund (IMF) are well known. In the case of project aid, recipients are compelled to purchase goods from certain sources of donor countries. As far as Bangladesh is concerned a study reveals that about 68 percent of the total external aid are spent directly for purchasing donor products. CONCLUSION: Foreign aid is becoming more competitive because of a persistent worldwide economic recession, donors budget constraints and the change of priority due to ease of cold war. Efficient utilisation of aid can help to achieve the desired economic goal in early period. The country should be therefore, be selective in receiving foreign aid and give more priority to that type of aid where grant element is much more than loan. Attention should also be given to countrys indebtedness, which absorbs significant portion of hard earned foreign exchange on account of debt service liability. Measures should be taken to manage aid very efficiently and more emphasise on stabilising macro-economic situation by efficient control of public expenditure and mobilisation of internal resources for investment, which would help to minimise dependence on aid.