Foreign Aid Effectiveness in the Education Sector: A Case Study of Pakistan

I. Introduction

Poverty and the effectiveness of development aid remains at the centre of attention of the
International community. With more than 1 billion people estimated to be living in less
than US $ 1 per day in 2002, developed countries agreed to increase their development
aid levels to 0.7 % of their GDP by 2015.(Oya and Jan 2008).

The practice of giving and taking aid has fairly long history when after the Second World
War the world was divided along ethnic and ideological grounds. The capitalist states
gathered around the US block while the socialist and communist block gathered around
the USSR. The term satellite states was used for all those smaller states that on the
grounds of political expediency associated themselves with either the US or the USSR.
Both the US and the USSR started giving financial support to its satellite states. All such
financial support used to be in the form of loans or assistance etc. the term aid was used
for all such financial assistance. Since then the world has changed a lot, with the demise
of the USSR the whole political priorities of the aid giving nations has changed. Prior to
the collapse of the USSR most of the aid would be extended for the strengthening the
military might of the satellite states and the humanitarian aspect won’t be that prominent
Although all these times it would always come under the guise, and on the grounds of
humanitarian support. The result was aid ineffectiveness, that is , the purpose for which it
used to be meant, at least apparently, was never achieved.

It is quite recently that aid has started attracting attention of research workers, sociologist,
educationists etc in order to make the process more effective and result oriented. People
have now started defining the term aid in the context of new realities and demands of
times. The fundamental idea of aid is transfer of resources on concessional terms i.e., on
terms more generous or softer than loans obtainable in the world’s capital markets
(Nafziger, 1990). In the modern context the word ‘aid’ and ‘assistance’ for all practical
reasons are used almost synonymously.

The standardized definition so far of the term aid is given by the Development Assistance
Committee (DAC) which is part of the Economic Cooperation and Development
(OECD), defines foreign aid (or its equivalent term, term foreign assistance ) as financial
flows, technical assistance, and commodities that are: (1) designed to promote economic
development and welfare as their main objective( thus excluding aid for military or other
non-developmental purposes); and (2) are provided as either grants or subsidized loans
(Radelet, 2006).

Some writers argue that aid should include all government transfers in the form of
resources from one country to another. But the situation is complicated by the fact that
with all the visible, aid there are also invisible transfers of resources from one country to
another for example the granting of preferential tariffs by developed countries to the

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exports from the developing countries. Such a practice allows less developed countries to
sell their manufactured products in the markets of the developed countries at prices
higher than would otherwise be possible. As a result less developed countries enjoy net
gain which amounts to real resource transfer to them. All this takes place in a disguised
manner and quantifying or documenting such a thing never remains possible. In principle
all such disguised flows should be counted in quantifying actual quantity of foreign aid
flows.

Economists have defined any flow of capital to LDCs as Foreign Aid, (Adelman and
Chenry, 1996; Pack and Pack, 1990, Mosely et. Al., 1995). But later writers do not agree
with this definition as it could include military aid, which is both non-commercial and
concessional. In general military aid is not normally included in International economic
measurements of foreign aid flows (Meir, 1990; Cassen, 1994). However presently
consensus on aid definition has been reached and as a result Foreign Aid includes all
official grants and concessional loans that are broadly aimed at transferring resources
from developed to less developed countries for the purpose of development.

According to the DAC classification aid flows may take three form (i) official
Development assistance (ODA), this constitutes the largest percentage of aid from donor
governments to low-and middle-income countries , (ii) official assistance (OA), is the
from of aid provided by governments to richer countries with per capita incomes higher
than approximately $ 9000 (e.g., Bahamus, Cyprus and Singapore) and to countries ,
which are now treated as independent and sovereign after the fall of the Soviet Union and
its former satellite states. (iii) private voluntary assistance. There are grants from non-
governmental organizations, religious groups, charities, foundations, and private
companies, used for different humanitarian purposes, like flood and earthquake relief
activities.

Grants and subsidized loans are also called as concessional financing, while loans
extended on the basis of market or near market terms are called as non-concessional
financing. According to the DAC criterion, a loan will qualify to be called as aid if it has
a grant element of 25% , which means that the present value of the loan will be at least 25
percent below the present value of a comparable loan at market rates. Going by the mode
of operation of aid, aid has been given as bilateral assistance, flowing directly from one
country to another. Aid is also provided multilaterally as multilateral assistance, in which
case , resources are pooled from many donors and then given to recipient countries. Multi
lateral donors includes institutions like the World Bank, International Monetary Fund
(IMF) , the African, Asian and inter-American Development Banks, and various United
Nations agencies like United Nations Development Programme, the UNDP.

Foreign aid in most of the cases is designed to achieve four broader objectives:
(i)to stimulate economic growth through building infra structure, supporting productive
sectors such as agriculture, or bringing new ideas and technologies, (ii) to strengthen
education, health, environment, or political systems, (iii) to support subsistence
consumption of food and other commodities, especially during relief activities in

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humanitarian crises., (iv) to help stabilize economy following economic shocks.(Radelet,
2006).

With the concept of aid comes the idea of aid effectiveness. This has gained momentum
after the end of Cold War, when the concept of growth and development has come to the
fore front. Prior to this aid mostly was used to be given for military purposes. With the
shift of focus now towards the human development indicators like health, education,
sanitation, housing, GDP etc the international aid effectiveness movement has started
taking shape in the late 1990s. The concept of aid effectiveness has become synonymous
with the aid and nowadays the aid and aid effectiveness goes together. Donor countries
are now continually concerned about the effectiveness of the aid that they give to the
recipient countries. They are constantly engaged in the efforts to judge for themselves
whether the desired results are produced as a result of aid or not. This concern of the
donors’ countries and organizations the aid effectiveness campaign has gained strength
over the last decade. Researchers are now involved in gathering data and monitoring the
effects of aid. Empirical studies are now made and data collected is put into different
statistical tools for analysis in order to judge the real impact of aid.

The aid effectiveness campaign has given rise to a new debate, where one school of
thought says that aid has brought no substantial positive change in the lives of the people
of the recipient countries, as most of the aid amount has gone into lavish government
expenditures on non- developmental subjects, which in turn has resulted in enlargement
of government bureaucracies, enrichment of the elite class in poor countries, and helped
bad government prolong their rule. While the opposite school believes that despite the
fact that aid has not produced the expected results, but it still has supported poverty
reduction and growth in some countries.

The aid effectiveness movement took off in 2002, when International Conference on
Financing for Development was held in Monterrey, Mexico, which established the
Monterrey Consensus. The outcome of this conference was a consensus on the effective
use of aid. Both the Donor and recipient nations agreed on the point that aid should be
used towards the achievement of the Millennium Development Goals MDG. This was a
paradigm shift in the whole donor recipient relationship in the field of aid extension. This
created a partnership relationship between the donor and recipient where both have to
play their roles for the achievement of the objectives for aid is given. In continuation of
these efforts officials from both donor and recipient countries once again gathered in
Rome in 2003, the meeting was convened by the organization for economic Cooperation
and Development the OECD, and it was in this meeting that the donor agencies
committed themselves to work with the developing countries in order to better coordinate
and streamline their activities for achieving best out of aid giving. They further agreed to
meet again in Paris in 2005, in order to evaluate the progress made in terms of aid
effectiveness. The Paris declaration was the result of this meeting, which is a more
comprehensive programme of ways and means for both donor and developing countries
to do business on the principles of partnership.

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The participant countries in the Paris meeting agreed on the point that some progress had
been made in the effective use of aid but much is still to be done. They also concluded
that aid giving was more the result of donors’ priorities rather than the real need of the
recipient countries. They also agreed that aid giving was still uncoordinated,
unpredictable and un-transparent. So more reformative steps are needed to be taken in
order to make the best use of the aid money given to recipient countries for the purpose
of human development.

II. Literature Review

A significant body of literature is available on aid effectiveness both qualitatively and

quantitatively. But the subject being a recent one most of the significant research hardly
goes beyond the decade of 70s. More precisely research produced in the 90s and 2000 is
more significant from the practical angle of the subject. Because empirical studies and the
interest of the donors had increased in the very recent past and is still live. The interest of
international community in the projects of humanitarian aid and the resolve of the
international community to uplift the condition of the poor nations which has resulted the
formulation of Millennium Development Goals has given even more impetus to the
subject of aid effectiveness. While in general quite a significant body of literature is
available but so far as the subject of aid effectiveness in education is concerned it is still
in its infancy. Literature exclusively on aid effectiveness in the education sector is very
scarce. But education being a part of the human development index is treated in most of
the studies in association with other factors like health, sanitation, housing etc.

The research work in the filed of aid effectiveness has produced two schools of thought.
Where one is of the view that “aid has a positive impact on growth in developing
countries with good fiscal policies but has little effect in the presence of poor policies”
(Burnside and Dollar, 2000). The Burnside and Dollar study has got tremendous
popularity among donor agencies because of its value in providing a policy criterion for
allocating aid. Burnside and Dollar has estimated growth equations and had also included
various determinants of growth in their estimation of aid effectiveness. Against the
Burnside and Dollar are the Hansen and Tarp’s (2000) studies whose findings are that aid
promotes growth, which is not necessarily dependent on the quality of policies in the
recipient countries and nations. Interestingly enough there is another study striking the
midway between these two extremes and that is by Eastrely, Levine and Roodman
(2004), they after performing estimations on the Burnside and Dollar sample but with a
new data set have come to the conclusion that economists and policy makers should be
less sanguine about their conclusion that foreign aid will boost growth in countries with
good policies, meaning that to expect a radical change is not possible however some
change will always be there (2004).

Then there is the famous Micro-Macro paradox an outcome of the Paul Mosely study,
which found that to establish any significant correlation between aid and growth rate of
GNP in the developing countries is not possible, however, at a micro level, all donor
agencies regularly report the success of their projects. This is called as the Micro-Macro
Paradox.

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Switching towards the distanced past from the very recent past there have been studies in
the 70s, 80s, then important one sare: Griffin 1070, Griffin and Enos, 1970; Tendulkar,
1971; Rana and Dowling, 1988; Synder, 1990; Richel, 1995; Moseley and Hudson, 1995.
all these mentioned studies are more ideological in nature and there is no empirical
research involved in the sense that real impact factor of aid effectiveness is calculated.
These are the studies which about the broader principles and theoretical determinants of
the subject. However these are important in the sense that these have outlined the
principles of the subject. Their conclusion is that foreign aid has no effect or largely
harmful effect on recipient countries. These studies conclude that it is not only the
opponents but the proponents of aid as well who have been troubled by the fungiblity of
aid. The conclusion of these early studies is that foreign aid has made the poor worse off
and has increased inequalities.

Somewhat the same conclusion is reported by the recent studies as well but in a different
manner, that is, recent studies by Cassen et.al., 1990; Riddle, 1987; Mosely 1987; suggest
that aid has failed to alleviate poverty, despite the fact that it has been pro-poor all the
time. One conclusion after all this debate by both the opponents and proponents of the aid
effectiveness is that aid can be and has remained effective on the micro level and it has
not been effective on the macro level. Due to which the desired result of the uplift of
human condition as whole in the developing world has not changed.

Another important aspect of most these recent studies is that most of these has addressed
the issue of effectiveness of aid from project perspective, that is, they tried to judge that
effectiveness of aid on the basis of individual projects for which aid has been given.
There is an important concern of the donor agencies in this regard and that is, that, nearly
all the amount given in the form aid is not channlised through the fiscal system of the
recipient countries, that is, it never becomes part of the national budgets and hence it
cannot produce the results on macro level. Project based funding ignores the poor at large
while it does help few people in a particular area.

If the macro-economic benefits of foreign aid are less than the sum of its micro-economic
benefits, then people who are not project beneficiaries are probably made worse off
through aid because the macro-economic effects of aid, such as price increase, will
adversely affect the whole population. Unless it is maintained that aid projects yield real
aggregate benefits, the distributional implications of aid inflows may indicate an
insignificant relationship between aid and economic growth,(Pack and Pack, 1990).

Other recent studies by Gomanee (2000) and Ishfaq (2004), have analyzed the effects of
‘Growth’ and ‘Development’, thus drawing a red line between them. Their finding is that
aid contributes towards development and poverty reductions but with out economic
growth. Fielding et.al., (2006), included more diverse development indicators in their
studies, they included measure of health, education, and fertility in their work. Prior to
them the most addressed indicator is the GDP growth, investment and capital etc which
are economic indicators rather human development indicators although they have string
effect on the overall human development growth in a country but there are any countries

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who have impressive economic growth rates but are still very low on their human
development index. as result of aid. Fielding’s studies has reported positive effects of aid
on many development outcomes. Fielding et. Al., (2005) in another important study had
created links between foreign aid with Millennium Development Goals (MDG) targets
including ‘health, wealth and wisdom’. They have explored the extent to which aid
affects MDG related variables. Their finding is that aid to a larger degree can improve
social indicators of development like sanitation, child health, and basic house hold assets
along with schooling. They agree that the result may differ from each others from country
to country. Some other studies by ( Mosely and Hudson, 2001, Verchoor and Kalwilji,
2002 and Gomanee and Morrissey, 2002) have used cross country data with the head
count index, Human Development Index (HDI) and infant mortality as measure of
poverty and well being.

Since the present study is focused on education the literature on education is scarce as no
one has treated the subject exclusively. It has always been taken as one of the indicator of
development along with other ones. The most important study about aid effectiveness in
education is a draft document and working paper by Gillies of the USAID (2008), it is an
exhaustive document which addresses the reasons of education being ignored in the field
of aid effectiveness. It says that a meaningful change in the education sector as a result of
foreign aid will always be based on an empirically based decision-making process and
systematic capacity development. Aid evaluation and monitoring in the education sector
so far globally has been restricted to project activities’ outcomes and to a very little extent
of judging the real impact that has been made. This document has given some very
convincing reasons about the difficulties being faced in evaluating aid impact in the
education sector. For example it states, that education does not lend itself to the standard
evaluation model, which assumes a static and linear process of change, which does not in
turn allows for a clear analysis of dependent and independent variables. This study
further suggest that the analysis of dependent and independent variables is difficult
because education reform or uplift is inherently contextual in nature and decisions most
of the time, especially in the case of countries like Pakistan, are made on political or
bureaucratic reasons, donors can change priorities and individual circumstances dictate a
lot of behavior change. Above all, meaningful education system change, it says, is a long
term endeavor, which is particularly difficult to assess within the short span of a project.

Studies about aid effectiveness in Pakistan are even scarcer and the list hardly goes
beyond the reports by different agencies about their project activities. Two studies having
significance in are by Ishfaq (2004) and Shirazi, Mannap and Ali, (2004) are worth
mentioning. Even these have treated education exclusively and independent of other
indicators but they have treated the Pakistan case in light of aid effectiveness. Their
indicators of development includes GDP growth, poverty alleviation and the HDI, debt
problem and its absorptive capacity etc. both have used analytical satirical tools like
regression analysis, vector error correction model, and Granger Causality etc. the
conclusion in both the cases is a consensus one that is, both have concluded that in case
of Pakistan proper management of foreign aid will surely contribute to uplift of human
development index and hence an overall growth maybe the result. They have come out
with the problem of management rather that with the aid effectiveness itself.

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III. Methodology

Given the difficulties of judging aid effectiveness in general and in the education sector
in particular deciding upon a method which may reveal convincing results is a difficult
one. It is even difficult because of the reason that research work is almost none in the
field. There are project appraisal studies but their research value is little. As project
appraisal studies are not designed to bring about results which will be treated on research
footings. This study will cover twenty years period, data collection will be done through
both primary and secondary data. Primary data will include research works conducted,
reports of the ministry of finance and education, fiscal and budgetary policies along with
educational policies of the government of Pakistan over the years. Secondary data will be
the outcome of surveys reports, interview conducted with experts like educationists,
economists, officers of the ministries of finance and education.

Analysis of the data will be done through descriptive statistical tools will be done.
Results will be graphically represented data will subjected to software analysis like SPSS.
Analytical statistical tools like regression analysis will also be used. The quantity of aid
received will be the independent variable, while growth in education will be the
dependent variable, the growth indicators will be literacy rate, growth in physical
infrastructure, school, and college and university enrollment of students. Change in
policies and government priorities with the change of regimes and natural factors like
floods and earthquake will be the error term.

The nature of study suggest the autoregressive or the Ordinary least square model for
analysis based on dependent and independent variables

The study will conclude on brining into light whether foreign aid has contributed to
growth in education or not. It will outline the reasons of both effectiveness and non-
effectiveness in the education sector in Pakistan.

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References:

Adelman I, and H. Chenrry (1996), “Foreign Aid and Economic Development: the Case
of Greece”, Review of Economics and Statistics, February, 48, 1-19.

Burnside,C., and D. Dollar (2000). “Aid, Policies, and Growth”, American economic
Review, 90(4): 847-68.

Celasun, O and Walliser, J., (2008), “Predictability of Aid”, Journal of the International
bank for Reconstruction and Development and the International monetary Fund.

Easterly, W., R. Levine, and D. Roodman (2004). ‘Aid, Policies and Growth: Comments’,
American Economic Review, 94(3): 774-80.

Fielding, Dvaid et.al., (2006), “ A Wider Approach to Aid Effectiveness: Correlated

Impacts on Health, Wealth, Fertility and Education”, The World Institute for
Development Economic Research of the United Nations University (UNU-WIDER).

Griffin, Keith, and John Enos (1970),” Foreign Assistance, Objectives and
Consequences”, Economic Development and Cultural Change, vol. 39. pp 11-26.
Gillis, John, (2010), “Aid Effectiveness and education System Reform: A System
Approach”, EQUIP 2 Working paper, U.S Agency for international Development.

Gomannee, K, O., Morrissey, P., Mosely and A. Verschoor (2003a), “Aid, pro-poor
government Spending and welfare”, CREDIT Research Paper 03/01, Centre for Research
in economic development and international trade, University of Nottingham, Nottingham.

Ishfaq, Muhammad (2004), “ Aid effectiveness, Debt Capacity, ad Debt Management in

the Economy of Pakistan”, a dissertation submitted for PhD. Degree to Qauid-i-Azam
University Islamabad.

Mosely, and Paul, (1980), “Aid, savings and Growth revisited”, Bulletin of the Oxford
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Mosely, Paul, (1986), “Aid-effectiveness: The Micro-Macro Paradox”, IDS bulletin, April
17, pp. 22-35, Institute of Development studies, University of Sussex.

Mosely Paul, J. Hudson and S. Hornel, (1987), “ Aid the Public Sector and the Market in
Less Developed Countries”, Economic Journal, Vol. 97, pp. 616-642.

Nafziger, E.W. (1990), “ The Economics of Developing Countries”, New Jersey,

Prentice , USA.

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Indonesia” Economic Journal, Vol. 75, pp. 258-265.

Radellet, S. (2006). “ A Primer on Foreign Aid”, CGD Working Paper 92. Washington
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Hansen, H., and F. Tarp (2000). “ Aid Effectiveness Disputed?” Journal of International
Development, 12 (3): 375-98.

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