The Economic Impact of Crisis-Based Foreign Aid
By Salah Nawar, Swayam Tripathy and Jacob Weber, 9/7/2020
Case Study I: Syria
Foreign aid is the financial or technical help given by one country’s government to another to assist in social and economic development in response to a disaster in a receiving country. These aid packages address issues such as health, education, infrastructure and humanitarian emergencies.
As population rises due to higher birth rate, poverty increases as governments are unable to sustain citizen welfare programs. Foreign aid has become significant for survival of lesser developed nations, especially war-torn countries. The aim of foreign aid is mainly to improve outcomes so that government, rebel groups and citizens have fewer incentives to return to war.
Consider the Syrian Arab Republic, which has been involved in an escalating civil war for more than nine years. As of April 2020, roughly 5.6 million Syrians have fled the country, and more than 6.2 million people are displaced internally. Almost 400,000 people have lost their lives in these years, a fact which has lowered the rate of Syria’s working population and has left the country’s economic state in a complete tragedy. Many developed nations have sent financial and humanitarian aid to Syria. How far does aid really go to help these nations?
Among many countries, the United States of America is a prominent, if not the preeminent, donor to the Syrian crisis; so far the country has provided more than $923 million in stabilization assistance, of which $343 million has been provided by USAID. Additionally, the United States has raised more than $300 million from coalition donors to support critical U.S.-led stabilization programs. USAID humanitarian assistance reaches more than 4.5 million Syrians every month across all of Syria’s 14 governorates. In addition, USAID food assistance reaches approximately 1.1 million refugees in neighboring countries each month. However, the US is not willing to provide funding for reconstructing the war-torn country until Syria ceases to be a state sponsor of terrorism, surrender all weapons that cause mass destruction, creates condition of the safe return of those to have served in the war or have been displaced to return to their homes.
One of their projects is known as the ‘Supporting Livelihoods in Syria’ (SLS) this is a food security program which aims to improve household-level food security and strengthen economic resilience in targeted communities. This has helped thousands of farmers regarding animal food and vaccinations to help the irrigation system. Recently almost 4,500 farmers have benefited from these services in Syria.
A five-year project known as USAID Essential Services Projects is another project which aims to restore necessities such as water, electricity, improve education, and focusing on improving the local economy in the agriculture and energy sectors. These investments have shown a positive impact in Syria as these are helping them to recover from the shocks of the conflicts and prevent extremist groups to re- emerge.
Countries such as The United Kingdom, Canada, Saudi Arabia, Japan and many more have also provided financial assistance to Syria.
Despite all the positive aspects and influences foreign aid can bring to Syria the future of humanitarian aid is still uncertain. The large amounts which are allocated for helping people in need are often misused. Foreign aid money from the United Kingdom has been used to fund a police organization who has carried out several heinous acts. The aid was initially supposed to be supporting the Free Syrian Police (FSP) which are an unarmed group of police force who would help to restore the safety from the Syrian uprising. In 2014, two women were stoned to death near Sarmin and cash was being handed out to extremist groups. Investigations have also shown that some FSP policemen have reportedly working with courts accused of torture and these executions.
There are, however, drawbacks of foreign aid such as a high proportion of these aid packages come in the form of loans, which increases the debt combined with punishing interest rates; this can cripple Syria even more and can result third world countries such as Syria’s stagnation, dependency on developed nations and long-term social poverty. Aid must be used wisely to rebuild the country and restore the economy so that the Syrian citizens can look forward to a brighter future.
As population rises due to higher birth rate, poverty increases as governments are unable to sustain citizen welfare programs. Foreign aid has become significant for survival of lesser developed nations, especially war-torn countries. The aim of foreign aid is mainly to improve outcomes so that government, rebel groups and citizens have fewer incentives to return to war.
Consider the Syrian Arab Republic, which has been involved in an escalating civil war for more than nine years. As of April 2020, roughly 5.6 million Syrians have fled the country, and more than 6.2 million people are displaced internally. Almost 400,000 people have lost their lives in these years, a fact which has lowered the rate of Syria’s working population and has left the country’s economic state in a complete tragedy. Many developed nations have sent financial and humanitarian aid to Syria. How far does aid really go to help these nations?
Among many countries, the United States of America is a prominent, if not the preeminent, donor to the Syrian crisis; so far the country has provided more than $923 million in stabilization assistance, of which $343 million has been provided by USAID. Additionally, the United States has raised more than $300 million from coalition donors to support critical U.S.-led stabilization programs. USAID humanitarian assistance reaches more than 4.5 million Syrians every month across all of Syria’s 14 governorates. In addition, USAID food assistance reaches approximately 1.1 million refugees in neighboring countries each month. However, the US is not willing to provide funding for reconstructing the war-torn country until Syria ceases to be a state sponsor of terrorism, surrender all weapons that cause mass destruction, creates condition of the safe return of those to have served in the war or have been displaced to return to their homes.
One of their projects is known as the ‘Supporting Livelihoods in Syria’ (SLS) this is a food security program which aims to improve household-level food security and strengthen economic resilience in targeted communities. This has helped thousands of farmers regarding animal food and vaccinations to help the irrigation system. Recently almost 4,500 farmers have benefited from these services in Syria.
A five-year project known as USAID Essential Services Projects is another project which aims to restore necessities such as water, electricity, improve education, and focusing on improving the local economy in the agriculture and energy sectors. These investments have shown a positive impact in Syria as these are helping them to recover from the shocks of the conflicts and prevent extremist groups to re- emerge.
Countries such as The United Kingdom, Canada, Saudi Arabia, Japan and many more have also provided financial assistance to Syria.
Despite all the positive aspects and influences foreign aid can bring to Syria the future of humanitarian aid is still uncertain. The large amounts which are allocated for helping people in need are often misused. Foreign aid money from the United Kingdom has been used to fund a police organization who has carried out several heinous acts. The aid was initially supposed to be supporting the Free Syrian Police (FSP) which are an unarmed group of police force who would help to restore the safety from the Syrian uprising. In 2014, two women were stoned to death near Sarmin and cash was being handed out to extremist groups. Investigations have also shown that some FSP policemen have reportedly working with courts accused of torture and these executions.
There are, however, drawbacks of foreign aid such as a high proportion of these aid packages come in the form of loans, which increases the debt combined with punishing interest rates; this can cripple Syria even more and can result third world countries such as Syria’s stagnation, dependency on developed nations and long-term social poverty. Aid must be used wisely to rebuild the country and restore the economy so that the Syrian citizens can look forward to a brighter future.
Case Study II: Lebanon
Discontent has been brewing for years in Lebanon for years, and the spread of the coronavirus coupled with an economic crisis has brought the country to its knees.
Lebanon’s dire economic situation can be attributed to one factor: The collapse of its currency. Since 1997, the Lebanese Central Bank has artificially pegged to the Lebanese Pound (LP) to the US dollar at the rate of $1 = 1,500LP
The Central Bank managed this feat by borrowing from private banks, which instead depended on depositors attracted by its statistically unprecedented interest rates (up to 14 per cent). Despite widespread political sectarianism, rampant corruption and the rise of Hezbollah in Lebanon the Lebanese economy managed to strut along primarily due to the stability provided to its financial system by the dollar peg.
However, last year the state sponsored pyramid scheme finally came crashing down and, to make up for it the then government proposed new taxing items such as petrol, tobacco and even Whatsapp voice calls. This was met with nationwide protests following which the Western-backed Prime Minister Saad Hariri and his unity government resigned. However the newly appointed government under PM Hassan Diab hasn’t had it much better and he even had to announce that would default on its foreign debt for the first time in its history, saying its foreign currency reserves had hit a "critical and dangerous" level and that those remaining were needed to pay for vital imports. The Pandemic has only made matters worse.
Foreign aid in the forms of loans and humanitarian assistance may be a way out of the abyss for Lebanon, yet they must be taken with a grain of salt. While the results of a research study by the United Nations University on foreign aid indicated that domestic investment, exports, the exchange rate and international reserves have a positive relationship with foreign aid it is important to remember that corruption is still a massive problem in the country. Ensuring the transparent flow of money is pivotal in any form of foreign aid being given to the country.
China may look to extend their influence in the region through low interest loans being given to the government for developmental projects as they have done throughout Africa. Therefore ensuring that yet another nation will fall under its influence. Although aid has had some negative effects on the growth and development of some African countries, research shows that development aid, in particular, actually does have a strong and favorable effect on economic growth and development.
Lebanon’s dire economic situation can be attributed to one factor: The collapse of its currency. Since 1997, the Lebanese Central Bank has artificially pegged to the Lebanese Pound (LP) to the US dollar at the rate of $1 = 1,500LP
The Central Bank managed this feat by borrowing from private banks, which instead depended on depositors attracted by its statistically unprecedented interest rates (up to 14 per cent). Despite widespread political sectarianism, rampant corruption and the rise of Hezbollah in Lebanon the Lebanese economy managed to strut along primarily due to the stability provided to its financial system by the dollar peg.
However, last year the state sponsored pyramid scheme finally came crashing down and, to make up for it the then government proposed new taxing items such as petrol, tobacco and even Whatsapp voice calls. This was met with nationwide protests following which the Western-backed Prime Minister Saad Hariri and his unity government resigned. However the newly appointed government under PM Hassan Diab hasn’t had it much better and he even had to announce that would default on its foreign debt for the first time in its history, saying its foreign currency reserves had hit a "critical and dangerous" level and that those remaining were needed to pay for vital imports. The Pandemic has only made matters worse.
Foreign aid in the forms of loans and humanitarian assistance may be a way out of the abyss for Lebanon, yet they must be taken with a grain of salt. While the results of a research study by the United Nations University on foreign aid indicated that domestic investment, exports, the exchange rate and international reserves have a positive relationship with foreign aid it is important to remember that corruption is still a massive problem in the country. Ensuring the transparent flow of money is pivotal in any form of foreign aid being given to the country.
China may look to extend their influence in the region through low interest loans being given to the government for developmental projects as they have done throughout Africa. Therefore ensuring that yet another nation will fall under its influence. Although aid has had some negative effects on the growth and development of some African countries, research shows that development aid, in particular, actually does have a strong and favorable effect on economic growth and development.
Case Study III: Haiti
In the fallout of Haiti’s devastating 7.0 magnitude earthquake in 2010, the nation was in shambles. Anywhere from 200,000 to 250,000 people were dead, the nation’s capital of Port-Au-Prince was leveled and the already fragile Haitain economy was thrown into disarray. The global community was quick to react, sending billions in both monetary and food aid, as well as sending economic experts to Haiti in order to help put the country back on the path to prosperity. However, much of the aid sent to Haiti has done more harm than good in the decade since the earthquake struck.
The most prominent example of this is the food aid sent to help starving Hatiains, most notably United States rice subsidies. Haiti is a large rice importer, and around 86% of the Haitian population consumes rice as a staple food. Following the earthquake, an indirect subsidy was placed on rice, largely based on the fact that the price of importing rice in Haiti had historically been passed onto consumers. Thus, subsidizing rice imports into the nation would pass the benefits onto consumers, saving them money on rice. At least, this is how it was intended to work. In reality, there was only a short 4-month period in which rice prices dropped for Haitian consumers. Afterwards, the subsidy program began to distort Haiti’s domestic market of imported rice to the point where rice prices had now risen higher than they would have been without the subsidy program. After the failure of the rice subsidy program, the international community tried another tactic to try and get cheap food to Haiti: direct food aid. Instead of a monetary incentive to lower prices, such a subsidy, many nations sent hundreds of tons of food directly. However, this undermined already existing Haitian agriculture. When direct food aid was sent, it deprived Haitian farmers of a need to sell their crop yields and the income they gained from it. Thus, many farmers in Haiti lost some or almost all of their household income, resulting in their need for direct food aid as well, ultimately worsening the problem. This also led to the weakening of Haiti’s economy as a whole, as GDP dropped when farmers were forced to stop producing crops and their lost income was no longer getting spent on goods produced domestically. This disruption in Haiti’s domestic food market had caused so much damage that the Haitian government requested for it to stop in April of 2010, about 4 months after the earthquake. The long term effects of this aid have been devastating for the Haitian agriculture industry. In the past 30 years, Haiti has gone from being almost self-sufficient in its rice production to needing to import around 80% of the rice it consumes, and subsequently prices for Haitian consumers has doubled, making it harder than ever to get what was once a staple food in the Haitian diet.
A major roadblock to any kind of effective crisis-based foreign aid in Haiti is rampant government corruption. Prior to the earthquake, Haiti’s government was already disorganized and facing a corruption issue; this was only amplified by the earthquake. With the National Palace and the capital devastated, many government officials simply didn’t show up to work. Many within the Haitain government, including the nation’s president at the time, René Préval, were struggling to properly organize and distribute aid around the nation, ultimately leading to excessive amounts of wasted aid. Between 2010 and 2014, the American Red Cross raised 500 million dollars of aid to send to Haiti, with little to show for it; reportedly, only six homes were built by the Red Cross using these funds. Additionally, the Red Cross refused to divulge how the rest of the money was used to help build homes in concert with the Haitian government, raising concerns about embezzlement and fraud.
As Haiti struggles to rebuild its economy, the roadblocks created by botched foreign aid efforts have only served to put a damper on the nation’s economic progress. The lessons of Haiti should be considered by the global community in the wake of the next crisis, before money is blindly thrown at any issue.
The most prominent example of this is the food aid sent to help starving Hatiains, most notably United States rice subsidies. Haiti is a large rice importer, and around 86% of the Haitian population consumes rice as a staple food. Following the earthquake, an indirect subsidy was placed on rice, largely based on the fact that the price of importing rice in Haiti had historically been passed onto consumers. Thus, subsidizing rice imports into the nation would pass the benefits onto consumers, saving them money on rice. At least, this is how it was intended to work. In reality, there was only a short 4-month period in which rice prices dropped for Haitian consumers. Afterwards, the subsidy program began to distort Haiti’s domestic market of imported rice to the point where rice prices had now risen higher than they would have been without the subsidy program. After the failure of the rice subsidy program, the international community tried another tactic to try and get cheap food to Haiti: direct food aid. Instead of a monetary incentive to lower prices, such a subsidy, many nations sent hundreds of tons of food directly. However, this undermined already existing Haitian agriculture. When direct food aid was sent, it deprived Haitian farmers of a need to sell their crop yields and the income they gained from it. Thus, many farmers in Haiti lost some or almost all of their household income, resulting in their need for direct food aid as well, ultimately worsening the problem. This also led to the weakening of Haiti’s economy as a whole, as GDP dropped when farmers were forced to stop producing crops and their lost income was no longer getting spent on goods produced domestically. This disruption in Haiti’s domestic food market had caused so much damage that the Haitian government requested for it to stop in April of 2010, about 4 months after the earthquake. The long term effects of this aid have been devastating for the Haitian agriculture industry. In the past 30 years, Haiti has gone from being almost self-sufficient in its rice production to needing to import around 80% of the rice it consumes, and subsequently prices for Haitian consumers has doubled, making it harder than ever to get what was once a staple food in the Haitian diet.
A major roadblock to any kind of effective crisis-based foreign aid in Haiti is rampant government corruption. Prior to the earthquake, Haiti’s government was already disorganized and facing a corruption issue; this was only amplified by the earthquake. With the National Palace and the capital devastated, many government officials simply didn’t show up to work. Many within the Haitain government, including the nation’s president at the time, René Préval, were struggling to properly organize and distribute aid around the nation, ultimately leading to excessive amounts of wasted aid. Between 2010 and 2014, the American Red Cross raised 500 million dollars of aid to send to Haiti, with little to show for it; reportedly, only six homes were built by the Red Cross using these funds. Additionally, the Red Cross refused to divulge how the rest of the money was used to help build homes in concert with the Haitian government, raising concerns about embezzlement and fraud.
As Haiti struggles to rebuild its economy, the roadblocks created by botched foreign aid efforts have only served to put a damper on the nation’s economic progress. The lessons of Haiti should be considered by the global community in the wake of the next crisis, before money is blindly thrown at any issue.