Foreign aid plays a significant role in economic transformation, contributing ideas about development to support reform and expansion of public services. The study investigates the historical significance of aid in Bangladesh by using the data since her independence and finds out the relationship between aid and some key macroeconomic indicators. The paper finds that according to the trend of recent macroeconomic indicators, Bangladesh has been able to graduate from a highly aid dependent country. This paper also reveals that corruption is a major factor that is responsible for the existing savings-aid inverse relation in Bangladesh. This paper also opines that foreign aid has little impact in the improvement of social indicators of the country.

Keyword: Aid Attitude, Aid Recipients, Tied Aid, Untied Aid, Aid Conditionalities.

I. Introduction:

Foreign aid is a transfer of capital, goods, or services from one country to another. Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) has defined foreign aid (or foreign assistance) as financial flows, technical assistance, and commodities that are-

Designed to promote economic development and welfare as their main objective (thus excluding aid for military or other non-development purposes); and

Provided as either grants or subsidized loans.

Aid has emerged as a more sophisticated instrument of foreign policy after World War-II, in the form of assistance to war-ravaged countries and newly independent former colonies. Several international organizations were created to facilitate aid distribution and programs (e.g., United Nations Relief and Rehabilitation Administration).

Aid is of two types: concessional and non-concessional. Grants and subsidized loans are referred to as concessional financing, whereas loans that carry market or near-market terms are non-concessional financing (and therefore are not foreign aid). According to the DAC, a loan is counted as aid if it has a ‘grant element’ of 25% or more, meaning that the present value of the loan must be at least 25% below the present value of a comparable loan at market interest rates (usually assumed by the DAC – rather arbitrarily — to be 10% with no grace period). Thus, the grant element is zero for a loan carrying a 10% interest rate, 100% for an outright grant, and something in-between for other loans.

Since independence, Bangladesh received US$48035 million in aid, compared to a commitment of US$58101 million. It is ranked 38th among 76 aid recipient countries using the International Development Association (IDA) Resource Allocation Index. Table-1 presents data on aid flows (commitments and disbursements) into Bangladesh since 2000-01 fiscal years. It can be seen that disbursement as a percentage of commitment ranges between 53% and 164%. The highest percentage was in FY2001-02 (164.05%)), which seems to be an outlier as the commitment of aid was the lowest at US$879 only. In other cases, except for FY2005-06, the percentages were well below the 100% mark. This is an indication of Bangladesh’s failure to collect, or donor’s failure to disburse, the committed aid.

There exists a growing literature on the macroeconomic effects of foreign aid in Bangladesh. Islam (1972) analyzes the relationship between foreign capital (foreign public aid and foreign private investment) and gross domestic savings in the erstwhile East Pakistan and concludes that foreign capital had affected domestic savings negatively in the 1950’s, but positively in the 1960’s. A more rigorous approach is taken by Alamgir (1974) who econometrically investigates the effects of foreign capital on gross domestic savings and growth in East Pakistan during 1960-70. The estimated results show that foreign capital affects gross domestic savings positively, but Gross Domestic Product (GDP) growth negatively.

In an intriguing study of the role of aid in the development dynamics in Bangladesh, Sobhan (1982) concludes that the aid regime has grossly failed in promoting its development agenda. Quite contrary conclusions are drawn by Rahman (1984), which analyzes the effects of aid on domestic resource mobilization in the post-independence Bangladesh. He finds that over the 1972-82 periods, aid has promoted economic growth, and through higher income, aid has also expanded the tax base and raised domestic savings in Bangladesh.

Ahmad (1990) moves beyond the single equation estimation approach and estimates a simultaneous equation model grounded in the framework of two-gap analysis. The estimated results show that over the 1961-80 period, despite reducing domestic savings, foreign capital inflow has raised GDP growth by increasing output in the primary, manufacturing, and tertiary sectors. Islam (1992) estimates several single equation aid-growth models for Bangladesh with 1972-88 data and finds that the effects of aid on GDP growth are barely positive and highly insignificant.