Trucks deliver aid after Haiti's 2010 earthquake. Photo: iStock
Trucks deliver aid after Haiti's 2010 earthquake. Photo: iStock

Foreign investment is rightly viewed as generous rich nations helping poor ones cope with disasters. For example, donating food to war-torn or drought-stricken African nations to prevent mass starvation. But beyond that, not many people are aware that aid is a foreign policy as well as a humanitarian posture.

First, foreign aid is exactly what the term suggests: rich countries donating goods and services to less developed nations. The second aspect, which is perhaps less understood, is that foreign aid does not involve cash transfer payments. For example, when a rich nation donates US$100 million of food to an impoverished African country, it does not send cash, but ships that amount of agricultural products it has purchased from its domestic farmers.

Contrary to what the label suggests,  foreign aid is not free; it comes with “strings”- economic, political and ideological – attached. US foreign aid, for example, is given only if the recipient country adheres to its “universal” values of human rights or democracy, opens its market to US goods and services, gives Washington the right to establish military bases, and meets other conditions that favor America. Chinese foreign aid, such as helping to build roads and railways, to Africa in the 1950s was aimed at gaining their support for replacing Taiwan at the United Nations as the sole representative of China.

Foreign aid: an economics and foreign policy vehicle

Foreign aid is a powerful and effective economics and foreign policy architecture in that it expands influence abroad, helps poor nations to reduce poverty, and spurs economic growth at home. Giving surplus food to countries facing starvation has gained the donor countries considerable goodwill, while at the same time sustaining agricultural production at home. The earned goodwill becomes “priceless” when donor nations “ask” for favors (i.e. open up markets for our goods and services) from the recipient nations.

To that end, it could be argued that foreign aid is a “mixed blessing” for the recipients but highly beneficial for the donors.

But “giving” people “fish” rather than teaching them “how to fish” may not help or encourage development. Indeed, a major reason why Sub-Saharan Africa remains dependent on foreign food aid is because not too many, if any, donor nations are willing to provide the resources and technology to turn dessert or harsh terrain into farmland.

The lack of technical and financial assistance needed to help poor countries develop extends to the manufacturing and services sectors. Instead of investing in underdeveloped countries to build factories and training the local population to make goods, rich and developing nations donate clothing and other consumer goods.

In order to receive more aid, poor countries may encounter an infringement on sovereignty.

Furthermore, the “donation” comes with a price, often more expensive than actually buying the goods and services. In order to receive more aid, poor countries may encounter an infringement on sovereignty, in that they might be prevented from implementing policies that are in the national interest. For example, the Philippines was promised military aid by the US and Japan if the former agreed to side with the latter in containing China in the South China Sea. However, Rodrigo Duterte, the Philippines president, found the US/Japanese aid “too costly,” prompting him to reject the international Court of Permanent Arbitration ruling in favor of bilateral negotiations for settling territorial disputes. This allowed his government to access Chinese investment to develop the Philippines economy.

The flip side is that without foreign aid, the humanitarian situation in crisis-stricken countries tends to be considerably worse. For example, had China, Japan, the West and other donor nations not sent food, medical kits and other aid to Haiti, Nepal and other nations severely affected by natural disasters, the recipient countries’ humanitarian and economic woes would have been far worse.

Donor nations benefit from foreign aid in the form of sustaining production and employment at home. For example, sending an expert to advise a poor country on economic development amounts to employing that person, resulting in a multiplier effect because the expert and his/her family are able to buy other goods and services at home.

Because the donated goods and services were bought with taxpayers’ money, whether foreign aid benefits or costs the donor countries is debatable.

Foreign investment is preferred to aid

Encouraging domestic investors to set up shop in their underdeveloped economies would be a better approach for both the donors and recipients. One, foreign investors would generate economic activity and employment in the host countries. China, for example, would not have grown so big so quickly had it not been for overseas Chinese, Japanese and Western investment. Two, bringing in capital and technology would accelerate industrialization. Canada, for example, might not have become a developed country had it not been for British and American investment in the early days.

Furthermore, investment is more long term in its impact than foreign aid, which is intended as short-term help even when the donor country is “teaching the recipient how to fish.” For example, the 1984 Canadian government-funded Chinese Management Training Center in Chengdu lasted only a few years. The purpose of the project was to send Canadian economics and business management experts to China to teach Chinese government and business officials enterprise and government management methods. It was a noble Canadian effort in which this author was given the opportunity and privilege to participate.

The US, UK, EU and Japan had established and funded similar training centers across China. Like their Canadian counterparts, they too were providing assistance and teaching Chinese cadres about economics and business management. At that time, China was reforming its economy, transforming it from a central planning model to a market one.

The long-haul nature of foreign investment enhances people-to-people exchanges, culminating in the promotion of economic and geopolitical relationships between nations. China and the US is a classic example: they are each other’s biggest trade partners and largest investors, creating millions of jobs in each nation. To maintain and enhance the US-China relationship, successive presidents, including Donald Trump and Xi Jinping,  have established platforms to minimize or prevent conflicts because they are, as  Admiral Harry Harris Jr, head of the US Pacific Command, put it, “bad for business.”

Ken Moak

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.

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