Introduction:

Foreign Aid any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in the balance of payments. Foreign aid is a major means of financing the country's economic development. Economic literature generally classifies foreign aid into four main types. First, the long-term loans are usually repayable by the recipient country in foreign currency over ten or twenty years. Secondly, the soft loans repayable in local currency or in foreign currency but over a much longer period and with very low interest rates. The softest are the straight grants often given to the less developed countries. Sale of surplus products to a country in return for payment in the country's local currency is the third type and finally, the technical assistance given to the developing countries comprises the fourth type of foreign aid.

Foreign aid is more like an investment in a risky market situation. The relative weighting of advantages and disadvantages depends on the planning behind the foreign aid and how well-orchestrated it is. Economic advantages: stimulated economic development in the receiver's country (better infrastructure, more education etc.) leads to economic growth. It can also create jobs as increased investment leads to more employment; this means less needs to be spent on unemployment benefits and more taxes can be collected due to the increase in taxable income.

Humanitarianism and altruism are, nevertheless, significant motivations for the giving of aid. Aid may be given by individuals, private organizations, or governments. Standards delimiting exactly the kinds of transfers that count as aid vary.

Though the principles of a definition are set, it remains difficult to determine the effective flow of aid because aid is fungible: receiving aid may free up funds in the recipient country for use in non-aid projects that could not have been undertaken as aid. For example, receiving food aid may enable a government to divert funds from its own food-support budget to its military budget. In that case the net effect of the aid is military although the aid money might actually be spent on food.

Bangladesh Economy:

Bangladesh is one of the world's poorest and most densely populated countries. Bangladesh has made major strides to meet the food needs of its increasing population, through increased domestic production augmented by imports. The land is devoted mainly to rice and jute cultivation, although wheat production has increased in recent years; the country is largely self-sufficient in rice production. Nonetheless, an estimated 10% to 15% of the population faces serious nutritional risk. Although improving, infrastructure to support transportation, communications, and power supply is poorly developed. Bangladesh is limited in its reserves of coal and oil, and its industrial base is weak. The country's main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas.

Figure 1: Current foreign aid situation:
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In the first six months of the current fiscal year, foreign aid fell by 45 per cent compared to the same period of the previous fiscal year due to a delay by government agencies in implementing foreign-aided projects and curtailed budget support.
As the foreign aid flow fell, the overall balance deficit in the first six months of the current fiscal year was $584 million, which was a $2.16 billion surplus in the same period of the previous fiscal year.
The deficit was also caused by negative growth in remittance this fiscal year. Slight positive trends, however, were apparent in the foreign direct investment and portfolio investment scenarios. In the first five months of the current fiscal year, the net FDI inflow was $320 million which was $285 million in the same period of last fiscal year.

Rationale of foreign aid
Development economists generally agree that the inflow of foreign direct investment (FDI) can play a vital role in the growth dynamics of developing economies. It is generally accepted that the inflow of FDI in developing countries can help fill at least three development gaps – 1. The investment gap by providing capital for domestic investment; 2. The foreign exchange gap by providing foreign currency through initial investments and subsequent export earnings made possible by the initial investments; 3. The tax revenue gap by generating tax revenues through additional economic activities;
The FDI inflow can also create many other benefits for recipient economies. For example, FDI can help generate domestic investment in matching funds, increase local market competition, create modern job opportunities, increase global market access for locally produced export commodities, facilitate transfer of managerial skills and technological knowledge from developed countries, etc. All of which should ultimately contribute to economic growth in host countries. Recognizing the manifold benefits of FDI, developing countries have generally eased restrictions on the inflow of foreign capital since the early 1980s.
Relationship with Foreign Country
Bangladesh pursues a moderate foreign policy that places heavy reliance on multinational diplomacy, especially at the United Nations. The Foreign relations of Bangladesh are the Bangladeshi government's policies in its external relations with the international community. The country pursues a moderate foreign policy that places heavy reliance on multinational diplomacy, especially at the United Nations and WTO. Since independence in 1971, the country has stressed its principle of friendship towards all, malice towards none in dictating its diplomacy. As a member of the Non-Aligned Movement, Bangladesh has tended to not take sides with major powers. Since the end of the Cold War, the country has pursued better relations with regional neighbors.
Participation in Multilateral Organizations

Bangladesh was admitted to the United Nations in 1974 and was elected to a Security Council term in 1978 and again for a 2000-2001 term. Then Foreign Minister served as president of the 41st UN General Assembly in 1986. The government has participated in numerous international conferences, especially those dealing with population, food, development, and women's issues. In 1982-83, Bangladesh played a constructive role as chair of the "Group of 77," an informal association encompassing most of the world's developing nations. It has taken a leading role in the "Group of 48" developing countries and the "Developing-8" group of countries. It is also a participant in the activities of the Non-Aligned Movement.

Bilateral Relations with Other Nations
Bangladesh is bordered on the west, north, and east by a 2,400-kilometer land frontier with India, and on the southeast by a land and water frontier (193 kilometers) with Burma. Bangladesh keeps a warm and friendly bilateral relation with its neighbor countries.

Types and major sources of foreign aid

Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh the standard practice is to treat only the loans received on concessional terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, foreign direct investment and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions and international agencies and organizations. Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are loans and grants, or bilateral aid and multilateral aid, or food aid, commodity aid, project aid and technical assistance.

Hans Morgenthau formulates the types of foreign aid and their purposes

• Humanitarian aid is material or logistical assistance provided for humanitarian purposes, typically in response to humanitarian crises. The primary objective of humanitarian aid is to save lives, alleviate suffering, and maintain human dignity. It may therefore be distinguished from development aid, which seeks to address the underlying socioeconomic factors which may have led to a crisis or emergency

• Subsistence aid is the assistance to needy Veterans grant program provides limited financial assistance to those in need and who have exhausted all other sources of aid. The grants may be used for specified health care and subsistence needs, up to a maximum grant limits. Financial aid may be provided when there is a loss of income due to illness, injury, or natural disaster. Grants are awarded for subsistence aid for a 30-day period, up to a maximum of three months.

• Military aid is aid which is used to assist an ally in its defense efforts, or to assist a poor country in maintaining control over its own territory. Many countries receive military aid to help with counter-insurgency efforts. Or it could be given to rebellions to help fight another country. This aid may be given in the form of credits for foreign militaries to buy weapons and equipment from the donor country. Military aid is often the subject of controversy • Economic development aid is given by governments and other agencies to support the economic, environmental, social and political development of developing countries. It is distinguished from humanitarian aid by focusing on alleviating poverty in the long term, rather than a short term response. The term development cooperation, which is used, for example, by the World Health Organization (WHO) is used to express the idea that a partnership should exist between donor and recipient, rather than the traditional situation in which the relationship was dominated by the wealth and specialized knowledge of one side.

• Agricultural aid is the provision of agricultural products or technology by one nation to another, normally by developed to developing countries. Aid will continue to be required because in many developing countries 4 out of 10 persons are malnourished. Developing countries only grow between 74% and 87% of their own food needs.

• Prestige aid is Federal, state, institutional, and private fund(s) used to assist eligible students in funding their education. Prestige aid can be a combination of scholarships, grants, loans, waivers, and student employment. Scholarships and grants are considered “free money” and the student is not required to repay; however, loans and student employment are considered self-help aid and most loans require repayment when a student becomes enrolled less than half time or graduates. Student employment includes both work-study positions and part-time employment positions, either on- or off- campus.

Table 1: Year wise sources and their participation in total Aid

|Year |Food aid as percentage of total aid|Commodity aid as percentage of |Project aid percentage of total aid|
| | |total aid | |
|1971/72 |47.9% |50.8% |1.3% |
|1977/78 |21.3% |45.6% |33% |
|1984/85 |19.5% |34% |46.5% |
|1989/90 |10.4% |25.2% |64.4% |
|1994/95 |7.9% |19.1% |73% |
|1999/2000 |9% |17.8% |73.2% |
|2005/2006 |6.2% |0% |93.8% |

Source: ERD, Ministry Of Finance, 2007

Figure 2: Year wise aid and its contribution to total aid

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Sources of foreign aid

External assistance has played a vital role in the economic development of Bangladesh, assisting in bridging the internal gap (savings-investment gap) and external gap (export-import gap). The costs, risks and maturity structure related to external debt management analysis are important. The cost of external debt is low as the most of the foreign loans received are through the concessional window of IDA, ADB and Japan. The structure of maturity of the external debt of Bangladesh is composed of medium and long-term debt with an average grace period of 10 years and a repayment period of 20 years. Aid is received from both multilateral and bilateral sources. The multilateral sources include-

• World Bank (WB),

• Asian Development Bank (ADB),

• United Nations Development Programs (UNDP) and

• UN organizations.

World Bank (WB :) The World Bank is the largest as well as the most influential lender to the country. It is the coordinator of aid donors in Bangladesh. Since Independence, it has lent $12.5 billion to the country and played a critical role in shaping the country’s institutions and policies. For these reasons, the role of the World Bank is singularly important in any discussion of aid effectiveness in Bangladesh.

Asian Development Bank (ADB): The Asian Development Bank is the second largest lender to Bangladesh after the World Bank. Between 1973 and end of 2008, its total lending to the country amounted to about $10 billion, covering many sectors of the economy. However, the principal focus of ADB lending was in agriculture, energy, transport and education. In many ways, the findings from ADB’s evaluation of its country assistance program are similar to those of the World Bank.

The bilateral donors include individual countries and organizations. Since independence, Bangladesh has received highest amount of bilateral aid from Japan in terms of cumulative disbursement followed by USA. International Development Association (IDA) is the largest amongst the multilateral development institutions followed by the Asian Development Bank. IDA contributed 26.68% of the total aid disbursed between 2001 and 2007, followed by ADB.

Table 2: Donor wise disbursement of foreign aid to Bangladesh

Donor |FY 01 |FY 02 |FY 03 |FY 04 |FY 05 |FY 06 |Total FY 01-06 |% of Total | |IDA |298.82 |323.39 |560.88 |225.22 |696.34 |635.33 |2739.98 |32.27 | |Japan |316.15 |287.43 |243.36 |79.38 |45.08 |31.05 |1002.45 |11.81 | |ADB |235.68 |182.01 |207.12 |171.97 |208.28 |264.56 |1269.62 |14.95 | |USA |39.28 |19.49 |34.7 |12 |7.75 |3.95 |117.17 |1.38 | |UN Agency |23.01 |51.88 |37.59 |36.45 |33.93 |111.15 |294.01 |3.46 | |UK |53.29 |17.57 |40.46 |93.81 |85.21 |156.8 |447.14 |5.27 | |EU |32.3 |80.18 |19.28 |21.17 |7.87 |72.65 |233.45 |2.75 | |Unicef |49.22 |46.38 |38.69 |29.3 |25.19 |18.09 |207.2 |2.44 | |Total |1368.43 |1434.99 |1585.03 |1026.9 |1507.23 |1567.64 |8490.22 |100 | |Source: Bangladesh economic review 2007

Figure 3:

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Impact of foreign aid

It is argued that while aid has helped to sustain the present levels of per capita national output, it has been relatively ineffective in inducing the qualitative changes needed for achieving significant increases in production and improvement in income distribution. Findings imply that donors have responded as a group to changes in Bangladesh’s development requirements but major donors have also responded both to the country’s development requirements as well as their own interests. Donors’ own interests hamper aid effectiveness in the country’s development endeavors. The thesis investigates whether aid to Bangladesh has exerted any impact on the country’s economic growth. Following recent literature, the thesis examines whether the impact of aid on growth is conditional upon measures of policy and governance. This has not been attempted intensely in the past aid effectiveness literature. There is little evidence that foreign aid alone has contributed to economic growth in a country. But there is some evidence that aid can be effective at increasing growth while a country has good governance and macroeconomic policy environment in place. Given that Bangladesh suffers from high incidence of poverty and that there is a large incidence of inequality and differences in well-being, the thesis studies the mix of donor policies aimed at promoting economic growth with the poverty situation in the country. Growth in Bangladesh has never been pro-poor, and the high level of inequality that prevails is likely to reduce the impact of growth on poverty. Findings indicate that the sectoral allocation of foreign aid to Bangladesh has been broadly consistent with a strategy to effectively reduce poverty and increase human well-being.

Impact on humanitarian:
Alleviate suffering, maintain human dignity and uphold rights through the provision of life saving support for the most vulnerable people in times of acute need are the purpose of humanitarian assistance. Effective humanitarian assistance lays the foundation for recovery and sustainable development. It cannot and should not substitute, however, for the diplomatic engagement required to create peace and stability. Humanitarian crises present a moral challenge to the developed nations. Humanitarian emergencies should be an obligation and a foreign policy priority. Humanitarian assistance should have clearly stated goals for its operation, established principles for how assistance should be administered, and priorities that help identify where assistance and protection are most needed.
Economic growth:
Foreign aid has a strong positive impact on economic growth in developing countries like Bangladesh. Moreover, foreign aid negatively affects the domestic savings rate whereas per capita income, country’s size and exports positively affect. Different types of aid have different impacts on growth. i) Project aid displaces public savings, impact of program aid is almost neutral while technical assistance and food aid increase public savings, and ii) Project aid and to a lesser extent, program aid, worsen the foreign dependence while technical assistance and food aid reduce the gap.
Foreign aid has positive and strong effects on growth when state intervention is not included. Aid works well in the good-policy environment, which has important policy implications for donors community, multilateral aid agencies and policymakers in recipient countries. Developing countries with sound policies and high-quality public institutions have grown faster than those without them.

Poverty reduction:
The effectiveness of Foreign aid is concerned exclusively with official development aid. By NGOs foreign aid has intensified significantly during the last two decades.
Their number has grown exponentially; the size of some of them makes them significant players in social welfare and employment markets at the national level; the funding they attract has increased enormously; and their visibility to the general public has never been higher. NGOs are perceived as having two distinctive features that differentiate them from other donors. First, they are advocates of the most vulnerable populations and their motivation is widely perceived as mainly altruistic. Second, their actions at the grassroots level are seen as conducted at private-sector levels of cost control and efficiency, while they achieve development objectives and serve the needs of many people.
Rural sector impact:
There is a strong case for greater assistance to rural areas especially given the importance of agriculture to developing economies, the fact that the majority of the region's poor live in rural areas and the vulnerability of the sector to price shocks and environmental disasters. Foreign aid helps developing countries to grant loan facilities to rural areas to improve productivity in agricultural sector.

Measurement of impact of aid
The choice of measure matters for aid effectiveness. Under current practice, the implicit metric the international community uses is some measure of recipient countries’ policies and institutions. The World Bank, for example, allocates aid largely on the basis of its country policy and institutional assessment index, which is grouped into 4 categories: i) Macroeconomic policies, ii) Structural policies, iii) Public sector management, and iv) Social inclusion
These are all indirect and convoluted ways of viewing aid effectiveness, which should instead be measured directly on the basis of economic outcomes. Indeed, many development practitioners have come to this conclusion in recent years and an intellectual shift in favor of outcome-based conditionality rather than policy-based conditionality is under way. Under outcome-based conditionality, donors focus on impacts and outcomes rather than on inputs, activities, and outputs.

The main arguments advanced in favor of policy-based conditionality, rather than outcome-based conditionality, are that policy changes are easier to observe and monitor and have greater incentive effects. Policies are more directly controllable by governments than outcomes and their implementation can be monitored more easily.
The main argument put forward for outcome-based conditionality is that it promotes greater ownership and accountability. There is an argument that the current practice of donors undertaking detailed assessments of a country’s entire policy environment is unnecessary and tends to undermine ownership. The main argument against policy-based conditionality is that it is imperfect in the sense that it will not be able to achieve a first-best outcome. There are three reasons for this. 1. Government policies are imperfectly observable. 2. Results are not fully determined by policies but are also influenced by luck. 3. Governments have varying degrees of competence that cannot readily be distinguished In addition, a good deal of uncertainty—as well as lack of knowledge—surrounds the “results chain” that tracks the causation of a development intervention from inputs and activities to outputs, outcomes, and impacts.
At the same time, outcome-based conditionality is also fraught with practical difficulties. The indicators commonly suggested for outcome monitoring are GDP growth, changes in poverty, and changes in child mortality, but unlike for growth rates, current data on poverty and mortality are not always readily available. In addition, as most outcome indicators are likely to change only gradually, any meaningful impact assessment can only be undertaken after a number of years, plus such assessments may reward or punish a current government for the actions of a previous government.
Ways to increase efficacy of foreign aid
The current donor approach to foreign aid, which is based on the principles of ownership and selectivity, is an improvement over the past. Nevertheless, as the foregoing section highlighted, there are some generic issues with the current approach to foreign aid which need to be addressed to make aid more effective. The preceding section discussed some of those issues and argued for an approach that embodies greater flexibility in the delivery of aid, provides recipient countries with more policy space, and emphasizes results. It is recommended to decentralize the aid flows in recipient countries. Money aid is important but idea aid is even more important. Aid can be the midwife of good policy in recipient countries. In poor-policy countries, idea aid is especially more essential than money aid. This implies that in a good-policy environment, aid increases growth via the investment channel whereas in a poor-policy environment, it nurtures the reforms through policymakers training or knowledge and technology transfer. These non-money effects are believed even more important and viable than the money value of aid. Aid works much better where the reform is initiated or internalized by local government rather than when it is imposed by outsiders. Therefore, aid is normally more effective when it facilitates efficiently and timely reforms triggered by the local authority. Foreign aid could be used more effectively if we take into consideration various factors which are discussed below:

(i) Conditionality is limiting the policy autonomy of the government: Multilateral aid is not always based on pure economic considerations. It is usually delivered with a wider variety of conditionality that constricts the policy autonomy of the government.
(ii) The donors have a disproportionate influence on policies: While the significance of aid in relation to the macro economy of the country has been on the decline for some time, the influence of donors in shaping and determining the policy agenda seems be on the increase. These disconnect between the financial contributions and the policy influence of donors creates to a policy agenda that does not reflect the priorities and aspirations of the citizenry and is at odds with the broader requirements of the macro economy. (iii) The disjunction between the benefits of adjustment loans and the costs of adjustment acts as a disincentive to implement reforms: Adjustment loans have an inherent incentive-compatibility problem. There is an incentive for the government to contract a policy loan as it provides relatively easy budget support. However, the costs of policy-adjustments are borne by sector ministries, which are not the direct beneficiaries of the augmented foreign assistance; consequently, there is often a lack of enthusiasm in the sector- ministries to implement the stipulated reforms.
(iv)The reforms should be home-grown and vetted by parliament: Currently, most reforms are exogenous and superimposed as part of the aid package, a process which explains their lack of ownership of reforms in the country. To foster ownership, the reforms should be generated endogenously within the country; such reform ideas can emerge from within the respective ministries or by independent commissions invested with the responsibility of proposing reforms. Such reform ideas could subsequently be discussed by the broader civil society and vetted by parliament.
(v) Donors have had little impact on poverty reduction in the country: The donors have made little direct contribution to poverty alleviation in the country. Except for Food-for-Works, all successful programs with a direct bearing on poverty reduction were home-grown. However, the donors have often assisted the process of poverty reduction by not radically trimming down social expenditures under adjustment programs.
(vi)There should be more aid to higher education: A country like Bangladesh which is poised to move to the next higher stage of economic development requires foreign assistance in higher education for enhancing skill-formation and promoting innovations. However, this is one area where donors’ priority and assistance has been conspicuously lacking.
(vii) Reforms are not owned because they are imposed: Bangladesh, like many other developing economies at a similar stage of economic development, requires foreign assistance both for budgetary support as well as for infrastructure development. Given the dire need for additional resources, the country accepts any offer of assistance without much discrimination, even with dire conditionality. This explains the lack of ownership of many reforms as well as the absence of enthusiasm in their implementation.
(viii) The PRSP is a poor substitute for planning. The PRSP has virtually replaced the long-established planning process that used to the practice in the country. It is an inadequate substitute for the overall planning of the economy envisaged in traditional five-year or long-term planning documents. The PRSP has emerged as virtual a wish list.
(ix) Donor policies are inappropriate: While some policies advocated by donors are good in theory, they are often formulated in the abstract without considering the political-economic realities of the country. As a consequence, it is difficult to implement these policies because they are not easily acceptable by society. Thus, even if the first-best policies are considered the most desirable, the second-best policies are the only ones that are feasible in practice.

Conclusion:
Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh the standard practice is to treat only the loans received on concessional terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, foreign direct investment and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions and international agencies and organizations.
Bangladesh aspires to become a middle-income country by the middle of the next decade if it can accelerate its pace of growth to 7.5 percent. Although the pace of economic development has accelerated in recent years, its effort to further accelerate the growth rate has been hampered by infrastructure bottlenecks which are the inability to create a conducive policy environment that can spur rapid business growth and the absence of an equitable, transparent, and accountable governance structure.
However, one hopes that given the tremendous political pressures that the government faces at the moment from the general public regarding various types of infrastructure bottlenecks—particularly, electricity, the government will be catapulted to action to redress these problems with aids. If this forces the government to start paying attention to the various types of governance issues that thwart industrial progress that may usher in a new beginning. In that changed context, foreign aid can be an enormous catalyst for economic development and poverty reduction.
References

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