The Impact of Foreign Aid on National Development: A Case Study of Bangladesh by Mohammad Haroon Submitted in partial fulfillment of the requirements for the degree of Master of Arts in International Development Studies at Saint Mary’s University Halifax, Nova Scotia, Canada October 17, 2003 2003 Mohammad Haroon National Library Bibliothèque nationale 1^1 of Canada du Canada Acquisitions and Acquisisitons et Bibliographic Services services bibliographiques 395 Wellington Street 395, rue Wellington Ottawa ON K1A0N4 Ottawa ON K1A0N4 Canada Canada Your file Votre référence ISBN: 0-612-85662-3 Our file Notre référence ISBN: 0-612-85662-3 The author has granted a non­ L'auteur a accordé une licence non exclusive licence allowing the exclusive permettant à la National Library of Canada to Bibliothèque nationale du Canada de reproduce, loan, distribute or sell reproduire, prêter, distribuer ou copies of this thesis in microform, vendre des copies de cette thèse sous paper or electronic formats. la forme de microfiche/film, de reproduction sur papier ou sur format électronique. 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Canada The Impact of Foreign Aid on National Development: A Case Study of Bangladesh by Mohammad Haroon Submitted in partial fulfillment of the requirements for the degree of Master of Arts in International Development Studies at Saint Mary’s University Halifax, Nova Scotia, Canada October 2003 Mohammad Haroon Signatures of the Examining Committee Supervisor Hènry Véltmeyer, Ph.D. First Reade’' Krishna Ahobja Patel, Ph.D. Second Reader Table of Contents Table o f Contents i List o f Tables ii Acknowledgments iii Dedication iv Abstract v Chapter 1 : Introduction...............................................................................................................1 Chapter 2: Foreign Aid in Theory and Practice: A Review of the Evidence...................... 18 Chapter 3: An Overview of Structural Economic Reforms in Different Regimes and the Aid Scenario...............................................................................44 Chapter 4: Foreign Aid and Structural Adjustment Programme in Bangladesh...............107 Chapter 5: Conclusions............................................................................................................ 148 Bibliography..............................................................................................................................157 List of Tables Table 3.1 81 Table 3.2 82 Table 3.3 84 Table 3.4 85 Table 3.5 86 Table 3.6 87 Table 3.7 89 Table 3.8 90 Table 3.9 90 Table 3.10 92 Table 4.1 121 Table 4.2 126 Table 4.3 129 Table 4.4 134 Table 4.5 138 Table 4.6 143 Table 4.7 144 11 Acknowledgements Faith, like love and honesty, is very personal matter. It cannot be measured or fully explained. Ultimately, our conscience must provide the real assessment. Mine tells me that I owe infinite thanks to Allah for the strength to write this study. A study of this magnitude is never a solo flight. For all their kind efforts in assisting me I am indebted to Annette Wright (IDS- Secretary), David Dzidzomu (Dalhousie University), Alana Rob (International Center SMU), Michelle Fougere (Financial Aid Counsellor, SMU), Victor, Patrick Power Library-SMU, Killam Library-Dalhousie University, CDP(Center for Policy Dialogue, Bangladesh), my colleagues and friends Kevin John Graham Zinck, Ahmed Tareq Rashid and Mark Rushton. I am equally grateful to the IDS -Department and all of its faculty. I am also grateful to Dr. Rafiqul Islam (Killam Chair in Oil and Gas, Dalhousie University) for his encouragement and support. I am truly grateful to Dr.Krishna Ahooja Patel andDr. James Morrisonfor their extremely constructive recommendations and comments. Their support and encouragement are much appreciated. One of the many memorable characteristics of the International Development Studies Program is the opportunity it provides to meet and engage in scholarly work with students from many different parts of the world. Through the programme I have had the great opportunity of meeting different students in this department from different thought and different views and I am truly grateful to all of them for their support and cooperation. This thesis and the completion of the Programme would not have been possible without the endless love and support of my family. I am forevermore thankful to my wife Noor- E-Sifat Samina Haque for her encouragement and strong support. I am truly grateful to my parents whose support made it possible for me to come here in Canada to achieve this higher degree. In the same way, I am grateful and thankful so much to my mother-in law and father-in-law for their constant encouragement. Finally, but certainly not least, I am endlessly thankful to my thesis supervisor.Dr. Henry Veltmeyerfor his constant guidance, patience, and support. Dr. Henry is an educator in every sense of the world and I am absolutely grateful and honored to have had the opportunity of learning from him. Ill Dedication This thesis is dedicated to my wifeNoor-E-Sifat Samina Haque and my mother Badiuz-Zaman whose support and encouragement will be remembered for years to come. IV Abstract The Impact of Foreign Aid on National Development: A Case Study of Bangladesh This study is concerned with the impaet of foreign aid on development in third world countries. It focuses particularly on the negative impact of aid on recipient countries in a ease study of Bangladesh. The Structural Adjustment Programme (SAP) is a part of aid conditionalities and here in this study I trace out the socio-economic impact of the SAP. I review two schools of thought; one that is supportive of aid arguing that aid is a catalyst or driving force for development, and another decidedly critical school that argues that foreign aid is not a c atalystford evelopment butr ather as a catalyst for a ccumulating resources from developing countries and creating a market for the developed world. In this connection I review considerable evidence that suggest that foreign aid is dietated by political and strategic considerations much more than by the eeonomie needs and poliey performance of the recipients. The thesis of this study is that foreign aid, rather than being a means to economic and social development, has largely become a means by which most of the developing countries are being exploited. Bangladesh since its independence in 1971 provides backdrop for the research and analysis involved in this thesis. October17, 2003 Mohammad Haroon Chapter One Introduction The relationship between foreign aid and development dates back to the post-World War II era when a majority of the European states found themselves economically, morally, and physically devastated. Since then, many forms of foreign aid-multilateral, bilateral, private-investment, food-aid, emergency-aid, for example—have been given to foster reconstruction in many different nations. After the European nations recovered, foreign aid no longer went to promote reconstruction, but rather focused on fostering development. The struggle between communism and capitalism not only fueled but also encouraged the use of foreign aid as a foreign policy. Literature on foreign aid and its relationship to the promotion of development in undeveloped nations published during the Cold War displays a democratic slant on development. Many believed that the answer to development was in the adoption of economic, social and political policies embracing democratic ideals. But why has foreign aid helped some countries to develop, while others find themselves worse off than before the aid was accepted? In some cases, foreign aid has not only failed to address the poverty but also increased the poverty situations. Corruption, unproductive consumption and increasing the gap between rich and poor are the consequences of foreign aid in most of the third world countries. For instance, since independence in 1971, Bangladesh’s external aid has exceeded $30 billion. Development economists and aid watchers contend that this aid has had no visible impact on the economic and social development of the country and the benefits of this aid did not reach the poor constituting the vast majority of the population of Bangladesh. Most of it was sucked up by influential interest groups creating in the process a new elite class and hundreds of import-export agencies and consultancy firms. In Africa, after two decades of development planning financed largely by the IMF and World Bank, sub-Saharan Africa today has a lower per-capital income than it did when the aid started. However, the reasons for such a situation may lie in many factors—the status of the country prior to receiving foreign aid, the motives behind