FOREIGN AID

 

PURPOSE AND MAJOR TRENDS OF FOREIGN AID IN KENYA BETWEEN 2000 AND 2016

 

Student Name

Course Number: Course Name

Due Date

 

Purpose and Major Trends of Foreign Aid in Kenya between 2000 and 2016

Introduction

Foreign aid refers to the number of goods, services, and capital transferred between various countries. The assistance may be in the form of technical aid, transfer of capital, as well as offering training regarding military and civilian aspects. The assistance provided to the recipient country contains specific conditions involving the terms of payment. Other details in the terms include the nature of the financial aid, and whether as a loan or grant[1]. The countries benefiting from such aid, including Kenya, devote the financial aid infrastructural development, healthcare, strengthen democratic institutions, promote economic growth, enhance trade and investment institutions, as well as improve security apparatus.

Kenya began receiving foreign aid in the late 1960s after gaining independence. The additional assistance was important in resettling the majority indigenous citizens in the previously minority-occupied land. The financial aid was also crucial in curbing any post-independence recession. The financial aid provided a cushion for development as it ensured a stable growth rate, with a figure as high as 6.5 percent recorded during the late 1960s. The high growth rate is attributable to the constant amount of financial and technical aid provided by foreign governments to the country. Kenya continued receiving aid through the years until a significant reduction in the late 1990s and early 2000s as foreign governments withdrew their support because of endemic corruption[2].

The years after the Moi regime saw an uptake in the inflow of financial aid as donors took advantage of the regime change arising in 2002, as well as the new government’s commitment to the donor’s conditions to reform. Kenya’s economy has benefited from the various forms of financial aid, which will be the focus of this study, specifically in the periods between 2000 and 2016. Additionally, the study will also analyze the intended purpose as well as the trends witnessed in foreign aid in the same time frame (2000-2016).

Types of Foreign Aid in Kenya

Foreign donors have specific budgets each year aimed at specific goals including strategic and humanitarian endeavors. The country receiving the financial aid such as Kenya strategizes on important initiatives in which to invest the aid, as well as the issues they will address. In Kenya, foreign aid takes various dimensions including;-

 Multinational Companies (MNCs) vs. Transnational Companies (TNCs)

There are various types of corporations providing foreign aid in Kenya, differentiated by their business structure, the services provided, as well as the form of investments offered. Transnational companies and multinational companies two of the forms through which they operate, delivering their services characterized as business entities working in different countries. Both of these entities operate in a specific headquarters based in their home country based, with other operations in other host nations. The enterprises play a crucial role in promoting Kenya’s economic well-being as they provide financial as well as physical capital by plugging any capital shortcomings[3]. Multinational companies have more foreign operations than transnational companies, with their main focus on adapting their services to each country.

Furthermore, Multinational companies also help Kenya in the modernization process in their industries and the general economy as they share technology, skills, and technical ability, as well as providing contact with export markets. Such companies also provide goods and services considerably better than of local companies, thus providing requisite competition.

Transnational companies are more complex than multinational companies are. Their role in Kenya includes the development of the economy, providing research and development assistance, and marketing opportunities for the Kenyan market. A majority of transnational companies in Kenya come from the Petroleum, Information Technology, pharmaceutical, and financial consulting firms.

Loans and Grants

There is a debate whether foreign aid to countries such as Kenya should be in the form of grants and loans. A country’s fiscal conditions depend on the form of aid they receive due to the impact of tax revenues, which in countries such as Kenya varies. Grants are a form of foreign aid that does not require repayment. Therefore, governments can utilize these on expenditure, reduction of revenues, reduction of domestic borrowing or a combination of the three. The benefits of such grants move to the Kenyan private sector, thus improving the business environment. The sources of grants in Kenya is limited to specific friendly countries, and they have a specific purpose attached to their use[4]. Additionally, most grants are refundable if Kenya does not utilize or meet certain conditions.

Foreign aid loans are in the form of money borrowed by Kenya from international financial institutions such as the World Bank and the IMF, while China is currently the biggest bilateral lender. Such loans are payable with interest after a particular term expires. The interest rates on such loans vary depending on the period of maturity. Additionally, Kenya has various sources for such loans, which provides the government with a chance to diversify as well as ease of availability. Currently, Kenya holds loans totaling over 4.6 trillion: an increase of 22 percent from 2016. The loans are from International development banks, Eurobond issue in 2014, as well as syndicated loans[5]. The Kenyan debt situation is currently in crisis as the government embarks on excessive expansionary budget aimed at spurring growth. A subsequent reduction in tax revenues has caused to a growing budget deficit.

Program vs. project Aid

Donors provide aid to Kenya for various purposes, including project aid and program aid. Financial aid in the form of project aid comes in the form of loans and grants directed towards the development of specific projects or infrastructure. Project aid provides Kenya’s donors with opportunities to maintain control and persuasion over which infrastructural projects the country should invest. Such projects have specific durations, as well as defined objectives. Project aid is advantageous to the donors as they are highly visible and straightforward as they mainly involve transplanting technology already available in the financier country. Additionally, the role of the recipient country is minimal as they create autonomous project authorities, for instance, Japan International Cooperation Agency. Projects involved include both small-scale and large-scale industrial investments, rural development projects, projects for women and health projects.

Conversely, program aid entails the provision of general sustenance in the specific sectors, which the Kenyan government and donors are collaborating. The partnerships could be in the agricultural, education, or technological sectors. Additionally, the aid could be in the form of balance of payments backing, or used in general budget support, as well as other non-specific project activities. The goods and services purchased with the funds from the transfer are not part of the negotiations. The focus of program aid in Kenya could be improving the overall capacity of resources in the economy as well as improving the effectiveness of the resources. Program aid also requires agreements on macroeconomic reform plans in coordination with international finance organization.

Tied Aid

Donors provide tied aid to the condition recipients should use the grants or loans in the donor nation, or in other specified countries. Such conditions ensure that the country receiving the donation does not get the requisite value for money for their investments. Tied aid increases the total cost of the investment as items may be of low quality, increased cost of equipment, while the lack of control by the recipient countries may lead to stifled development. Furthermore, numerous unwarranted costs could cause projects to suffer from inadequate liquidity and numerous operational challenges. In the end, the main incentive to the donor is securing economic gain.

In Kenya, projects such as Nzoia Sugar Company in the early 1990s faced problems occurring from French assisted aid. A majority of the equipment in the company including machinery had overpriced costs, with the outsourcing transnational, the French Buyers Credit requiring exorbitant amounts for parts replacement. The high charges were catastrophic as they took up over half of the revenues[6]. Other projects including the newly installed standard gauge railway include reports that a China-based investor coerced Kenya into choosing a Chinese firm to operate the rail, without a competitive process. The investor provided the condition before agreeing to the funding. Through the Chinese Communications Construction Company, Kenya signed the tied aid, which essentially secured profit for the financier.

Purpose of Foreign Aid

Developmental

One of the major aims of receiving foreign aid includes enhancing high growth rates in countries such as Kenya. The result is the generation of extra domestic savings as well as spurring investments. The success of the foreign aid to Kenya is still under review due to the conflicting results, in regards to the direct financial investments. A major disadvantage cited from foreign aid is the negative relationship between the donor and the recipient countries, in the case of tied aid[7].

Notwithstanding the issues highlighted, foreign aid serves as a spur for economic growth due to its effect on supplementing the country’s investments. Foreign investments are beneficial in cases where the recipient countries invest the aid received consistently. Additionally, it is vital for countries such as Kenya to maintain a level of advantage during bargains for aid. In such cases, recipients can ensure the relationship between aid and growth remain productive and in their favor.

The positive relationship between foreign aid and growth varies between each country, but in Kenya, results are visible, through infrastructure projects, better administrative additions as well as other sectors. Furthermore, the impact of foreign aid on the prices of commodities is visible as foreign aid subsidizes the costs of doing business in various sectors. The subsidies occur through government investments in specific sectors. There should be an efficient trade, financial, and fiscal policies to ensure a positive impact of foreign aid on a country.

 

 

Commercial

Various countries including Kenya take part in the foreign aid process in various capacities, as recipients, financiers, and both. Countries use donor funds as a way of following implementing their foreign policy plans. Donor countries sometimes withdraw their financial aid as a way of maintaining their bargaining power. In addition, they also use foreign aid to generate economic adversity for an unfriendly country, while contrariwise they also use foreign aid to remunerate a friendly nation.

In this aspect, donors’ have a primary reason for allocating aid to bolster their foreign policy strategies. The commercial benefits of providing aid include being the driving force during any donor programs. Bilateral financing acts as an incentive for accountability, as well as an avenue to pursue specific interests.

Tying aid also represents a commercial purpose of foreign aid. When the donor provides conditions for grants, which include the purchase of goods and services from their market, the benefit is to their economy. The aim is creating more market opportunities for their own products as well as business interests. Recipient countries are unable to purchase high-quality commodities, hence tilting the value towards the donor nation[8].

Political

The role played by donors in the political scene of a country is evident in situations where they provide political pressure either for reforms or by influencing decisions using aid as a bargaining chip. Foreign aid and politics have a connection in that it affects the political stability of the recipient nations. Donor nations take advantage of instability in countries such as Kenya as they provide resources based on their strategic resources.

Furthermore, a majority of former colonialists act as substantial financiers in their colonies as they use their colonial influence. Former colonial powers exert their political influence as a means of reinforcing useful alliances. For instance, the aid provided by Britain in Kenya is an example of a colonizer maintaining their relationships with a colony. Packages from Britain have become important as is witnessed by the 10-year drought package provided by Britain in 2004. The UK provided over €140 million set to end in 2024, to assist in northern Kenya to feed malnourished people during severe droughts. Additionally, the UK uses its colonial ties to maintain its position in the top five exporters to Kenya. Aid to from the ex-colonizer provided Kenya with opportunities to become one of the fastest growing economies in eastern Africa.

Moreover, Britain has played a crucial role in shaping the political scene, as they promote democracy through funding of elections to the tune of € 30 million. Other programmes promote family planning in Kenya, accountability, as well as providing clean energy to remote areas. Using the UK Aid Match, the country maintains a say in how the funds are spent[9].

                                       Trends in Foreign Aid

Bilateral Versus Multilateral Aid

A majority of donors face demands to justify their grants or loans to the developing countries. More countries are witnessing a variation in their foreign aid budget plateau as they position themselves in positions where they gain from such aid. Their investments in sectors such as global health and food security are a long-term solution to the international problems, which provide a chance for a future advantage. Countries turn limited aid grants, which provides an opportunity to ensure they incentivize the scarce aid resources. Countries such as Britain invest in Kenyan projects, which involve a long-term return, for instance, military aid. Kenyan soldiers take part in missions in collaboration with their UK counterparts where they benefit from training as well as equipment.

Bilateral aid comes to Kenya in the form of official development assistance, which ensures the promotion of economic development. The donors, on the other hand, benefit from investments by their companies in the country as part of the terms and conditions for loans and grants. The cooperation between governments provides a chance to limit charity type aid, while further ensuring that both countries benefit. Countries such as Japan provide aid to Kenya while maintaining the comparative advantage while ensuring that the recipient maintains their self-help efforts. Cooperation between countries also utilizes Kenya’s position as a regional powerhouse, thus creating a spillover effect to neighboring countries.

Through the USAID, Kenya and the US maintain their partnership as they provide assistance in various sectors such as education, healthcare, agriculture, as well as devolution. Bilateral aid also provides donors and recipients to renegotiate programs for instance; countries such as the Netherlands have reassessed their positions in Kenya to ensure they turn into trade partners, in comparison to the previous donor and recipient relationship.

Various governments provide aid collected through agencies and multilateral organizations such as the United Nations, and the World Bank. Multilateral aid is a less political way of funding a country and promoting international cooperation. Such aid reduces the chance of strategic and commercial interests of financiers. Additionally, multilateral aid the pooling of resources by the agencies ensures funding for large programs, in cases where one donor may not have the capacity. The harmonized efforts also reduce the burden for a single donor[10].

Kenya receives multilateral aid totaling over $1 billion each year from the World Bank. The donations go to specific sectors such as devolution, public sector, and infrastructure. Through the private lending divisions of the World Bank, Kenya also receives advisory services on the funds provided to ensure maximum utilization.

From West to Looking East: Emerging Players Such as the Chinese

In the last 15 years, the Kenyan government has moved to seek more cooperation with Asian donors, moving away from the previously dominant donations from countries such as the US and Europe. Countries such as China and India are taking positions as majority donors in Africa, including Kenya. Countries in the East including China are increasingly utilizing foreign aid to attain broader and long-term objectives. By enhancing their ties with African countries such as Kenya, countries such as China continue taking advantage of the resource-rich African countries in which they invest. Over the past 15 years, the Chinese government has changed their strategy from grants to low-cost loans, and investments in infrastructure in exchange for raw materials. A lack of human rights conditionality for the loans provides an easy option for the Kenyan governments, as they do not condemn any activities. The standard gauge railway and the Lamu port are one example of Chinese government investments. Additionally, they also invest in resources such as oil, gas, and coffee. The new relationship between the Kenyan government and China has come under scrutiny, but the economic advantages to Kenya arising from the varying donors is also a highlight.

 

The Magnitude of International Aid in Relation to the Local Economy:

Actual figures between the relationship between the number of foreign donations Kenya receives and the resultant economic growth are minimal. A majority of estimates are only political based on the fact a majority of donors want instant results. Recipient governments tout economic reforms and better policies when arguing the case for more foreign assistance. Long-term economic growth is essential to the foreign aid policy in Kenya, and the government should provide analysis on whether the growth results from the aid or by other internal factors insignificant to the aid. Exogenous variables are the independent factors including the geographical, socio-cultural, political, and institutional factors. Conversely, endogenous factors are those that governments can manipulate to promote economic growth. Endogenous factors including investments, human capital, research and development, and policy decisions ensure the continued self-maintained economic development[11].

In Kenya, a combination of the above factors affects the overall growth. Over the last 15 years, Kenya has taken up huge amounts of aid in the form of loans and grants. An assessment of factors since the Kibaki administration shows that long-term effects of aid include capital formation as well as better economic welfare for the country. Foreign direct investment in endogenous factors in Kenya including human capital through training aid, promotes long-term growth, while stronger policies for institutions support the development.

Additionally, better capital formation and economic welfare from rent-seeking activities promote the collection of taxes, which in turn benefits the country. Despite the apparent growth, blatant corruption, foreign transfers, or unnecessary incentives may reduce the impact of foreign aid on specific sectors. Moreover, the heavy debt accrued in some cases reduces the impact of economic development, as the payment reduce any significant benefits to the country, with Kenya’s debt hitting over 4.5 trillion shillings. The macroeconomic instability from the high foreign debt-to-GDP ratio is evident with the rising inflation and volatile currency[12].

  Domination of Large-scale Infrastructure Projects.

Recently the Kenyan government is investing in Public-Private Partnerships in the creation of large projects that are in contrast to commencing numerous projects, which would later stagnate. One of the most important projects includes opening up of highways in the capital, as well as the northern corridor and bypasses. These projects act as a catalyst to economic zones as they accelerate unification of markets.

Flagship projects implemented by recent administrations in Kenya support various sectors such as steel mills and integrated iron manufactures, which directly create a demand for machines and equipment. Foreign institutions with foreign exchange balance sheets dominate a majority of these projects, while they also have the ability to provide high-level of infrastructure. Kenya’s vision 2030, which is a successor to the Economic Recovery Strategy, implemented in 2003 focus on strengthening specific pillars of the economy through large-scale infrastructure in specific sectors. Although Kenya has suffered poor productivity and development, investments and academic training have influenced overall productivity positively.

Conclusion

The Kenyan economy has progressed from receiving financial aid in the early 1960s and 1970s to creating bilateral and multilateral ties with various parties in the past decade. Countries such as China and India are replacing the UK and the US as the majority donors in Kenya, as the country switches its allegiance to the East. Although a majority of the tied aid received by Kenya may be detrimental, the economic gains from such investments will benefit the country in the long run.

There are various benefits for partnering in foreign for both the donor and the recipient, and they include better international relations, development for both countries albeit disproportionately, political mileage for the donors, as well as a sure market for goods and services. Newer trends in the giving of aid ensure that Kenya has a say in how they invest the funds, while the conditions are also analyzed to ensure they favor the country.

 

Bibliography

Gupta, Sanjeev, Benedict Clements, Alexander Pivovarsky, and Erwin Tiongson. 2006. “Foreign Aid and Revenue Response Does the Composition of Aid Matter?” Working paper. Foreign Aid and Revenue Response Does the Composition of Aid Matter? International Monetary Fund (IMF).

Read, Madeleine. 2017. “A Look at U.S. Foreign Aid in Kenya.” The Borgen Project. January 13. https://borgenproject.org/a-look-at-foreign-aid-in-kenya/.

Cohen, Stephen D. 2007. Multinational Corporations and Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity. Oxford: Oxford University Press.

Ngare, Kariuki. “Foreign Aid: Who Really Benefits? – Daily Nation.” 2014. https://www.nation.co.ke/lifestyle/dn2/US-aid-Africa-World-Bank-foreign-aid-policy-IMF/957860-2404110-rw49t6z/index.html.

Harford, Tim, and Michael Klein. 2005. “Grants or Loans? Development Finance and Incentive Effects.” Handle Proxy. World Bank, Washington, DC. March 1. http://hdl.handle.net/10986/11230.

Jelovac, Izabela, and Frieda Vandeninden. 2008. “How Should Donors Give Foreign Aid? Project Aid Versus Budget Support.” SSRN Electronic Journal. doi:10.2139/ssrn.1139811.

Kordos, Marcel, and Sergej Vojtovic. 2016. “Transnational Corporations in the Global World Economic Environment.” Procedia – Social and Behavioral Sciences 230: 150–58. doi:10.1016/j.sbspro.2016.09.019.

Olotch, Cynthia. 2017. “Public-Private Partnerships: How Does Kenya Fare?” Ppps. February 24. http://blogs.worldbank.org/ppps/public-private-partnerships-how-does-kenya-fare.

 

Tarp, Finn. 2006. Foreign Aid and Development: Lessons Learnt and Directions for the Future. London: Routledge.

Stein, Howard. “A Brief History of Aid in East Africa: The Political …” 2011. Accessed April 15, 2018. https://www.cesifo-group.de/DocDL/forum4-09-focus2.pdf.

 

 

 

[1] Tarp, Finn. 2006. Foreign Aid and Development: Lessons Learnt and Directions for the Future

[2] Howard Stein, “A Brief History of Aid in East Africa: The Political…

[3] Cohen, Stephen D. 2007. Multinational Corporations and Foreign Direct Investment

[4] Read, Madeleine. 2017. “A Look at U.S. Foreign Aid in Kenya

[5] Foreign Aid: Who Really Benefits? – Daily Nation. 2014

[6] Kordos, Marcel, and Sergej Vojtovic. 2016. “Transnational Corporations in the Global World Economic Environment

[7] Tarp, Finn. 2006. Foreign Aid and Development: Lessons Learnt and Directions for the Future

[8] Gupta et al., Working paper. Foreign Aid and Revenue Response Does the Composition of Aid Matter

[9] Read, Madeleine. 2017. “A Look at U.S. and UK Foreign Aid in Kenya.” The Borgen Project.

[10] Read, Madeleine. 2017. “A Look at U.S. Foreign Aid in Kenya.” The Borgen Project.

[11] Jelovac, Izabela, and Frieda Vandeninden. 2008. “How Should Donors Give Foreign Aid? Project Aid Versus Budget Support

[12] Foreign Aid: Who Really Benefits? – Daily Nation

loans and grants